Why GE's Announcement troubles me

I just read GE's CFO Keith Sherrin's comments about GE Capital, and how it will continue to be successful this year and how they, "...have enough capital to be able to weather a very adverse set of cases."

Additionally, GE Capital's CEO, Michael Neal told the investors, "Even in the worst case, we’re break-even to slightly profitable and we have no need for outside capital," following up this comment to the shareholders with, "We’ll try to convince you of that today. "

But the case for such profits is weak, and, as I have stated in earlier blogs, I don't understand why these companies won't come clean. Is missing expectations really better than setting lowered expectations?

Michael Neal and Keith Sherrin both make a compelling case for GE Capital's viability. Except that there is no indication that their economic projections have any basis in reality. Much like the Republican's are beating up on Peter Orzag and Barack Obama for what they call, "unrealistically rosy projections of the economy over the next few years", the GE executives are not painting a realistic picture of what they may face in the economy in the near future.

Let's take a look at what was reported by Bloomberg this morning:

"GE Capital’s reaffirmed outlook for 2009 net income of $5 billion in net income is based on a 1.8 percent decline in U.S. GDP. Based on the Fed "base case" scenario, GE Capital would earn $2 billion to $2.5 billion. Under what GE called the estimated Fed "adverse" case, with a 3.3 percent decline in GDP, profit at GE Capital would be zero, according to slides on the company’s Web site. "

That sounds pretty good, right? Even in a Fed "adverse" case, GE Capital would still be breaking even.

Only one problem:

The US Economic GDP decline last quarter? It was 6.2%. There's no tangible sign that this abysmal number has gotten much better in the months since. So if they were making $2-2.5 Billion in the "base case" scenario, and breaking even in the 3.3% declining GDP scenario (the "adverse" case), can we extrapolate that they would be LOSING about $2-3 Billion in what I would call the "reality" stress test scenario?

Honestly, this whole analysis looks like a smoke screen, and it troubles me three significant ways.

First, I don't think this story is being honest with the American people. John Stewart (whether you agree with him or not), made this point very well. People, including investors, rely on services like Bloomberg, Yahoo, CNBC, and others, to inform them of the goings on in the marketplace. a story like this would lead an investor, or casual reader, to believe that GE is sound, based upon certain assumptions. But doesn't really challenge any of the assumptions, and is therefore worse than uninformative. It is possibly misleading.

Second, I am concerned that GE would not be more honest with themselves, and their shareholders, in their stress test of the business, using more "unreasonable" assumptions than the lame scenarios that were presented here in this piece.

Third, if these are the stress test scenarios that Geithner is proposing, in his tests of the financial services giants, then we are all doomed. I have defended this guy, thinking that he has done the things he has needed to, in order to keep things afloat over there in Treasury. But if he stress tests these banks with "Adverse" case scenarios that are twice as rosy as the ACTUAL last quarter was, then what hope do we have that he will find issues at these banks and institutions?

This was like when General Motors said they needed a loan, because in their "worst case" scenarios, the US market would drop in 2009 to 10.5M autos sold, which was only a 20-30% decline from 2008 numbers. Did anyone really think that there was NO POSSIBILITY that they could fall further than that? Sure enough, in January, GM sales were down in the 40-50% range, and GM simply said "we didn't expect it would fall that much". Really? Why didn't you? Everyone with two eyes and a brain in this country could see that sales had fallen off a cliff. If GM couldn't see the same thing, they probably didn't deserve more funding.

And if GE and Bloomberg can't see that these break even scenarios for GE CAP are...well...GE CRAP, then they really do take us all for suckers...