Hi I'm Jimmy in this video
I'm looking at the crazy news that
GE could be a fraud.
So here's what happened.
So Harry Markopolos came
out and said that he believes that
GE is a fraud.
He issued a one hundred seventy
five page fraud report
essentially going through everything
that he found.
Now if the name Harry Markopolos
sounds familiar well
that's likely because he was
one of the first whistleblowers
on Bernie Madoff.
So he goes he
researches Bernie Madoff's fund.
He goes to the S.E.C.
a few times tells me that Madoff is
a fraud.
He was ignored.
But turns out obviously that he
was correct.
So clearly him calling out GE
for also being a fraud shouldn't
be taken lightly.
Now in the name of full disclosure I
actually don't own any shares of
GE I'm not long I'm not short.
I don't have any position in this
but I have issued two different
videos on it.
My first video is about a year ago.
There I said stay away from it.
I think the business needs to be
further developed or further.
It has to recover before we get
involved in it.
And that had nothing to do with
fraud. Then a month or two ago
we did another video there we said
it could be a good long term
investment if we're willing to deal
with some volatility.
Again nothing to do with fraud but
just so on the level I have
no interest in whether or not this
thing goes up or down.
That being said it's likely that the
pushback that we're going to hear is
that Markopolos was paid either
before or after you wrote the report
I'm not sure which.
But either way he was paid by a
hedge fund that seems
to be short the stock.
And this could easily be interpreted
as a conflict of interest.
How much was he paid.
Well I have been able to find that
anywhere.
Who was the hedge fund.
Turns out marketplace isn't saying
who was or how much they paid him.
Now personally I don't know what to
make of this whole thing.
GE has come out and said
flat out that none of this is true.
All of the information that they
put out is correct.
And nothing that Marco Polo says
is accurate.
Frankly what else would GE say.
So our question is what do we
believe. Do we believe what GE is
saying or do we believe the GE fraud
report. Well I find this whole thing
a bit tricky to deconstruct.
On one hand many different parts
of market policies.
GE fraud report seem
a bit too promotional for my taste.
Take a peek at this all these slides
I took directly from the report.
OK. So with this particular
one they went with the best buy
looking header not terribly
important I just thought that was
funny. Why do that.
But whatever but this is what I mean
by promotional.
So clearly he's calling GE fraud
but by tying GE's Fraud
to another fraud in Enron.
Well people are naturally going to
jump to the conclusion that it's a
fraud.
Now this alone is likely
enough to get some people to sell
the stock and the
stock right now. Last I saw is down
about 15 percent.
So for any short investors
that's probably that's probably
making them a decent amount of
money. Now we're not even hundred
percent sure that they're actually
short the stock.
I read that they bet against the
stock. So in theory it's possible
that that hedge fund actually bought
put options instead.
So if that is true.
Well this 15 percent drop
would be worth a fortune today.
OK moving on.
Again this is the part that I find
interesting to me
to compare to put a GE logo
next to the face of Bernie Madoff
seems very suspect to me.
And when we read the title
GE fails the Madoff
test returns are too good
to be true.
Well then he goes on to say that
the GE industrial business
revenue weighted average profit
margins are fourteen point seven
percent. They're better than
Madoff's twelve percent returns.
To me that's an insane thing
to include that their profit
margins are fourteen point seven
percent. 3M has profit margins
of 19 percent.
Last year they put up 19 percent.
And they're in a very similar
business as GE industrial business.
Disney has profit margins of 18
percent from rising as has 16
percent profit margins.
So calling it a fraud
and tying the face of Bernie
Madoff next to it feels
like he just wanted a way to include
Bernie Madoff's face into the report
with GE.
So I recognize that it's possible
that they're using these very
dramatic titles and interesting
looking slides just to try to
capture people's attention.
And in theory draw them to
the more important information
because so far a lot of this has
been pretty suspect but there are a
few good points in the report
that are really the centerpiece of
the fraud allegations.
So GE owns a health
care insurance business.
It's long term health
care policies that
GE has sold in the past.
Well this report claims
that GE has understated
the their exposure by
eighteen point five billion dollars.
And this may very well be true.
So the way this type of policy would
work and the way this type of thing
could happen is that
any insurance company is going
to have to make estimates
when they go ahead and they write
the policy.
So maybe they say OK.
The average person is going to live
until they're 75 or 80 years
old or whatever whoever they're
writing the policy for they're going
to pick an age they're going to say
OK they're going to live till the 80
years old and health care costs are
going to cost us X number of dollars
per year.
That's so that's the amount that
they're trying to insure.
Well if the people that they quote
don't live until they're 80 but
instead that they live until they're
90 and we all know that
health care costs have been way
up. So in theory the expense
could be crazy high.
So in theory
GE long term health care exposure
would be way more than what they're
actually quoting now
This GE fraud report says
that its shortfall is about
a eighteen point five billion
dollars which is huge relative
to what they're actually listing.
So if GE is in fact hiding
how much exposure they really have.
Well this could be devastating to
the long term sustainability of
General Electric.
Now if it's fraud or
just clever accounting I'm
not sure and I'm not a hundred
percent sure it really matters
if we did own shares of GE
what would our best move be.
Again this is really tricky to
say. I've been waiting to hear from
GE curious what GE comes out and
says about this.
I'm expecting at some point Larry
Culp the CEO of GE is
going to have to come out and take a
stance and explain things
a bit deeper than they already have.
I think it's very possible that GE
has glossed over their potential
exposure and
that's what the GE fraud report
ultimately says.
It's very possible that they have in
fact glossed it over.
And if that's the case I think that
they're going to have to be more
transparent and I believe that there
needs to be accountability for
anybody who has knowingly
contributed to glossing over the
facts. I think transparency is key
for any company.
Now I do think like I said that some
of the GE Fraud Report was
played up a bit.
Perhaps it was for the hedge fund
that is short the stock or perhaps
it's just to try to grab people's
attention.
But ultimately the question for us
is if we own shares of the stock
do we want to invest in it.
If we're considering investing it.
Is this a buying opportunity.
And I think a lot of that comes down
to a gut check.
I think that if we can stand the
turmoil that's likely to come out
in the next days or weeks or months
and this is likely to drag on for a
while if we
can stand that then by all means
it might make sense to sit here and.
Hold if we think it's unlikely
we're eager enough to draw our own
opinion on that and how important
is the part of our portfolio
to our overall portfolio.
It's going to be different for everybody.
And if we can't deal with the likely
constant flurry of new news that
will come out from this well
it could be smart just to cut our
losses at this point.
Now sometimes for me I think it
makes sense to do something like the
sleep test.
Basically you're gonna lose sleep
over this type of investment.
It's probably makes sense to find
better investments.
But what do you think.
Do you think that GE
is straight up committing fraud here
or are they hiding the truth
in clever accounting.
Or is this fraud report exaggerated
just to try to make anybody who
short selling the stock a bit
richer.
Please let me know what you think in
the comments below.
Hit the thumbs up if you haven't
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button. Thank you for stick with me
all the way into the video.
I'll see in the next video.
Thanks.