Are extended pensions bankrupting GE?
Photo By: Business Insider
Mason Bennett, Business Editor
Former securities industry executive and financial fraud investigator Harry Markopolos has recently accused General Electric of participating in accounting fraud worth up to $38 billion, claiming the company is hiding massive losses and rapidly heading for bankruptcy. The issues Markopolos outlined primarily regard GE’s Capital unit, a financial services division often viewed as a black hole in the company. The Capital unit not only holds commercial and personal loans, but also insurance policies that cover long-term care. Within his lengthy report, Markopolos claims that insurance liabilities rule changes and a significant lack of reserves to cover long-term care liabilities will set GE back about $29 billion.
In response, GE called Markopolos’s claims “unsubstantiated” and “meritless,” saying its reserves are in good standings, and the company undergoes thorough testing every year to ensure their Capital funds are adequate: “GE operates at the highest level of integrity and stands behind its financial reporting.” The company goes on to say they have no reason to worry about these claims: “We remain focused on running our businesses every day, following the strategic path we have laid out.” Despite GE’s neglect to the situation they may be in, a recent decline in shares is a hit against them. In Boston specifically, GE shares went down over a dollar in less than a week, about a twelve percent decrease. In what appeared to be an attempt to solidify management’s confidence in their economic future, GE reported that after the close of trading that Thursday, its CEO, Larry Culp, bought around 250,000 shares of GE stock.
Markopolos first became suspicious of GE’s financial status when he attended industry meetings with portfolio managers and analysts from the company. They claimed that they didn’t believe GE’s numbers regarding their funds were legitimate because they either met or surpassed earnings estimates every quarter for a consecutive amount of years. Markopolos concluded from this that the $15 billion deficit GE underwent was “a nasty market surprise and it’s about to get $29 billion worse.” This initial huge hit to the company was a result of their retired workers living longer than expected; they miscalculated and underestimated the cost of caring for those who are still receiving pensions. Markopolos went on to say that GE needed to act much sooner to boost its reserves—which ultimately would have covered their unfunded long-term care liability—rather than waiting until a new management team is in place.
Despite these recent claims, GE is not the first to underestimate the reserves needed to cover long-term liabilities. Private companies and public pension funds across the country have struggled to keep up with the growing cost of providing health care to an aging population that continues to live longer than expected. Many advocates would even say it’s a stretch to call this almost common occurrence among many businesses fraud. Fortunately for Erie residents who have been retired from GE for some time, even if the fraud claims go beyond accusation their pensions are safe. Although GE might not have been smart about the way they wrote these policies to begin with, their hands are tied regardless; you can’t go back and rewrite premiums.