My long-time friend Martin Bayne had Parkinson’s disease for decades, forcing him into nursing care in his middle-age years. The cost of his care over 20 years was enormous, unbearable by either him, his family or (more important) any of the long-term care policies he had previously been in the business of selling, evaluating and recommending as “Mr. Long-Term Care.”
What Bernie Madoff whistleblower Harry Markopolos is calling a “fraud” by General Electric (NYSE:GE) of just over $38 billion, enough to sink the company, is mostly the natural consequence of forcing an unlimited draw on a limited pool of funds.
The Cost of Long-Term Care
That’s what long-term care represents. It’s not just waiting to bankrupt GE, but you and your family — even if you think you’re comfortable. It can hit at any moment, from an accident, disease, or just natural aging.
Nursing home care costs an average of $245 per day. That’s $1,715 per week and almost $90,000 per year. This doesn’t include the costs of doctors, drugs and the occasional hospitalization.
The companies that sell long-term care policies are aware of these costs when they quote premiums. But they haven’t always been, and many carriers have gone bankrupt. So have senior care centers and hospitals. So did my friend Martin Bayne.
What Immelt Did Not Do
According to Markopolos’ report, GE should have been accounting for its unsustainable obligations with reserve funds back in 2012. The whistleblower claims General Electric didn’t acknowledge them until new management came in. This created a $15 billion hit that had to be spread out over seven years.
This was during the time when then-CEO Jeff Immelt was transforming GE from the banking-and-entertainment giant that predecessor Jack Welch had built into an industrial enterprise. This was highlighted by the $10 billion acquisition of French power and grid business Alstom in 2015. Analysts called the Alstom deal “brilliant” but it eventually became a disaster. General Electric’s GE Power has been dragging the rest of the company down ever since.
But the company’s refusal to account for policy costs is worse, Markopolos writes. GE is stuck with reinsurance on policies written in the twentieth century, long before the real costs were known. They have just $1,133 of premium, on average, 70% of which cover lifetime benefits for customers whose average age is now 75.
Markopolos also claims that GE is hiding $9.1 billion in losses on its acquisition of what is now Baker Hughes (NYSE:BHGE), which the company closed on in June 2017. This was just four months before Immelt’s sudden retirement that October. Markopolos estimates GE stock’s current ratio of assets to liabilities at 0.67, once Baker Hughes’ numbers are taken out of the balance sheet.
The Bottom Line on General Electric Stock
Neither John Flannery, who succeeded Immelt as CEO, nor current General Electric CEO Larry Culp, who once headed Danaher (NYSE:DHR), caused GE’s problems.
But I have 20 years of second-hand experience in the horrors of long-term care, of how it bankrupts everyone it touches — those who need care, who provide care, and those who try to insure against the un-insurable costs of care.
I can’t speak to Baker Hughes but, to me, the long-term care section of Markopolos’ report adds up. Reinsurance costs have always hung like a Sword of Damocles over GE stock’s books, perhaps even before Immelt became CEO in 2001.
If you want to get to the bottom of this, ask Jack Welch when GE wrote that reinsurance. Meanwhile, get out of General Electric stock if you can.
Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.