In James Grant’s book Minding Mr. Market, in an article titled “Hot Light On GE” that was originally published September 14, 1990, Grant highlights a curious thought experiment (emphasis ours):
“In the time saved by not visiting GE headquarters in Stamford, Connecticut, Jay Diamond, our associate publisher, compiled a fascinating historical table. The information describes the parent company’s consolidated finances in a succession of business downturns, starting with 1932, which happens to be the year in which the forerunner to GECC was started. It ends in what may or may not prove to be a recession year, pending statistical revisions, 1989. Evolution has meant more leverage, thinner coverages, lower returns on assets, and rising contributions to consolidated income by financial activity.
“Interestingly, GE’s debt rating hasn’t changed in the past fifty-eight years, even though its financial profile has. At the bottom of the Great Depression, long-term debt was negligible, interest coverage was massively redundant, and the current ratio was better than 2:1. In 1989, a non-depression year, long-term debt constituted 77 percent of equity, interest coverage was less than 2:1 (surely a remarkably low reading) and the current ration was less than 1:1. (Grant, James. Minding Mr. Market. Times Book, Random House. 1993. page 362).”
Grant goes on to explore the various rationales given by ratings agencies as to why GE could maintain a AAA rating in spite of their deteriorating financial position. What was the outcome of this erosion of financial security while holding on to a AAA rating?
GE was rewarded with a stock increase of +1,111.97% from the September 1990 close to the October 2000 peak. Somehow, GE couldn’t lose it’s AAA credit rating until after the March 9, 2009 low, after a decline in stock price of –83.96%. In fact, GE’s change in credit status was effectively a marker for the bottom in the market.
The questions for today is, after the 2009 low and recovery in the stock market while GE sinks to the lowest level in 24 years, do we think that GE has more problems that have not been revealed since September 1990? Will the recent accusation of GE committing accounting fraud be the marker for the top after the long run-up in the market since 2009?
See also: Andrew Left is Wrong About GE