"Markopolos is working with a hedge fund he didn’t identify and stands to benefit from bets that GE’s stock will decline, according to the Wall Street Journal, which reported earlier on the accounting report. Markopolos and his colleagues also hope to collect a whistle-blower reward by reporting their findings to regulators, the Journal said."
That's an important point. But this is not a one-shot game. When they're all sitting around the table, picking a target to "whistleblow" against, 'pick a target that is actually doing something wrong' is probably very high on the list of criteria.
They're going to want to do this again. They need to preserve their brand, "the guy who busted Madoff and wrote a best selling book about it" is a really valuable brand.
The fact that he's shorting GE should probably give you more confidence that he's right. That demonstrates skin in the game. He's not just speculating idly - he's putting his own assets at risk in the bet.
And then you get charged for fraud, SEC doesn't take these things lightly... with this much public attention you'd have to be crazy to try to pull of a scam like that hoping to get the money without showing any proofs to the claims...
I don’t know enough to comment on that, but the point is that so long as they are based on a shred of truth, even if over emphasized, it is hyperbole not fraud.
It can't be that hard if you have some credibility you are willing to sacrifice. If this report turns out to be complete BS, they still could have made over 10% return in a single day by the way the market reacted today.
they really better genuinely believe that this is true, and have lotsa evidence - or the fact that they stand to gain financially is going to be used to hit them very, very hard.
Alot of people just lost money, if it's for reasons - they will suck it up. If it's because "you made it up" then they will get their pounds of flesh, and not from the numb bits.
GE was founded 130 years ago, they've been through some shit and one of the most stable and well-known brands in the history of America if not the world. We're not talking about Uber here.
Nobody with any capital in significant amounts is going to take this report at face value. They're going to investigate the claims on their own before they make any moves.
Roughly $7 billion in value disappeared from GE's market cap today. People are certainly going to investigate this more and the stock will move in one direction or another depending on the validity of the report, but regardless of the ultimate outcome significant capital was moved around today which presented an opportunity to make a lot of money.
The market moved too quickly for the parties acting to have had time to actually digest the merits of the report. The market moved because the people who released the report had credibility.
It's possible that that was part of it. But the market closed with GE's price barely recovering. Which means people who analyzed it more slowly agreed with the initial movement. Which means there is no evidence for the view that the initial movement was spurious or unvetted.
I think you're putting a bit too much faith in due diligence for a market that is largely run by algorithms. There was some Google traffic for "GE fraud" right before market open and then search traffic spiked at 10:40am.[1] Now look at the trajectory of GE's share price this morning.[2]
I'm really not. The price closed down quite a bit. It recovered only a little bit of its loss by the end of the day. Which means the algorithms that traded quickly are in agreement with the humans who traded slowly.
It seems to me he is being paid by hedge funds to come up with research that supports their short positions. I see no evidence anywhere that he's shorting them using his own personal funds and even that would not necessarily give me any additional confidence he's right.
With your logic one might also claim that promoters of pump-and-dump schemes should be commended for having skin in the game.
> I see no evidence anywhere that he's shorting them using his own personal funds
From page one of Markopolos' presentation:
> [...] members of the Company are personally in possession of securities, derivatives, and/or other financial instruments of, and correlating to, GE, which may generate profits should the price of GE securities decrease
To be clear: I think Markopolos is on to something here, and the presentation does a pretty good job of showing how GE is sitting on some really really bad news for its investors. But yeah, he's definitely shorting GE personally in addition to whatever he's getting from the sponsor.
And there's nothing wrong with that! This is the whole point of having public securities markets!
Why would I pick a company to short, and then pay someone to bad mouth that company?
Seems like a lot less risk to pay analysts to find possible frauds, and then short them while disclosing what they found.
The Netflix series "Dirty Money" introduced me to this concept, episode 3 "Drug Short" covers the analysts who called out Valeant Pharmaceuticals and took a pay day for their hard work through shorting the stock. Really I found it inspirational :)
Not if this research is what causes the stock to drop and is what allows them to collect a reward. Then the merits of the accusations doesn't actually matter and they don't have to true for the people shorting the stock to profit from releasing them.
I have no idea if these accusations are true, but the accuser's short position on the stock has zero positive bearing on the validity of the accusations.
> Not if this research is what causes the stock to drop and is what allows them to collect a reward.
I don't understand the causative relationship you're asserting between a drop in value and a whistleblower award that's only granted after an enforcement action. How would a drop in stock value result in a whistleblower award?
Sorry, I misunderstood your comment then. I though you were using "reward" generally. A financial windfall from shorting a stock and then releasing bad news about the stock is a "monetary reward" that doesn't depend on the merit of the accusations. I didn't realize you were speaking specifically about a "whistleblower reward" which wouldn't be awarded until well in the future after the report had been verified.
What are you talking about? There is zero whistleblowing going on here. This is an outside investigative report funded by a hedge fund. The only link to whistleblowing is the investigators biography.
> Prior to the initial distribution of this Report on August 15, 2019, the Company also submitted this Report to the U.S. Securities and Exchange Commission’s Whistleblower Program and the U.S. Department of Justice’s FIRREA Whistleblower Program. Both or either of those submissions may generate profits for the Company independent of the financial performance of GE and/or the securities, derivatives, and other financial instruments of, and/or relating to, GE.
I don't know how the DOJ program works but SEC Whistleblowers can be awarded 10-30% of the money recovered as a result of their information.
I think he came out with the report as SEC had already started investigating GE. If he had not come out with his report he might not have been able to trade in GE stock as he would have had insider information and could be dinged for insider trading. After putting the information out in the public he can short all he wants.
He’s putting his reputation up against it, which apparently is powerful enough to make the stock slide. He makes money either way (since correctly seeing he can move the stock price), the question is whether he comes out of it with his reputation.
It depends on when he closes the shorts. If he holds them I am fine but it’s also conceivable to buy shorts, publish bad news, see the stock drop and immediately close them.
It's my understanding that "publishing bad news" does not equate to the subject in question being "true", certainly not in today's media climate. Had the OP said something like: "publishing evidence of bad things" then of course that the discussion would have been totally different. And to judge by the discussion in this thread the linked article is not "evidence", is merely "news".
To recapitulate: willingly publishing "bad news" (which you don't have any evidence that they might be true or not) in order to financially gain stuff on a stock exchange should be treated as securities fraud.
The part where he says that he hasn't make everything available because he has fw-ed some information to the police/authorities. Until said police/authorities take the necessary actions (if needed) based on the provided info is best for the parts involved to let said authorities decide if the facts provided are evidence enough.
Also the part where he complains about GE's profit margin being the same as Madoff's, i.e. a guy who was active in a completely different industry, while companies/conglomerates active in the same markets as GE post similar profit margins as GE. This part is fake news pure and simple.
While it can certainly color Bronte Capital's motivations, the author of the paper (John Hempton) has generally been forthright in his analysis of other companies and his analysis of GE doesn't seem different from his other comments.
Sure. But “they have skin in the game therefore the analysis is invalid irrespective of any actual criticism of the content of the analysis, which I have not bothered to mention” is OP’s insinuation, not mine.
I’m just pointing out that that cuts both ways. If there’s a problem with Markopolus’ report it should be critiqued on its merits. OP didn’t bother to bring any of that forward and just focused on shortselling.
Wow, that comparison with Madoff's returns is so sleazy that the person who created that image has to know they're being a dishonest scumbag. For context, the suspicious thing about Madoff's returns wasn't just the size of the returns, it was that his Ponzi scheme returned that amount consistently year after year, seemingly risk free, regardless of what the markets did. That was the part that was "too good to be true" - the average returns of Madoff's scheme were pretty unremarkable. Also I'm pretty sure that's comparing apples to oranges, or rather return on investment with profit-to-income ratio.
The alternative viewport by Hempton is valuable, but I think the ad hominem against Markopolos is not. That's not how short-selling even works anyway. Could you please discuss it on merits instead?
That's not an 'alternative' viewpoint.
Reading the headline already told me he was shorting the stock.
An alternative viewpoint would be: All the numbers add up and we expect growth.
I distinctly recall a USA top-ten business school with an ad for "Financial Engineering MBA" (yes, real math) showing a small, smiling brown-skinned woman in Fortune 500 business attire. At the same time, top management at GE mentioned "financial engineering" as a strength in the business press.
Perhaps it is an obvious evolution of their complex asset leasing models from forty years ago to "financial engineering", but the implications of a USA engineering firm, outsourcing all the work and focusing on money tricks instead.. it just shouts everything that went wrong with American Business, to me.
I think it's a mistake to imagine GE as some sort of monolithic "engineering firm". GE is a huge conglomerate with business in countless different industries (trains, nuclear plants, chemicals, light bulbs, jet engines, health care, missiles, oil & gas... the list just goes on). There's no way the MBA team at the top can have the faintest idea what's going on in each of those companies, engineering-wise.
It's better to think of GE as a mutual fund. Management and financial engineering is what holds it together.
2007 called. They want their insight back. GE sold off GE Capital over a decade now. None of the "financial engineering" relates to leases (although the dodgy accounting often does...but that is something else).
Financial engineering is usually concerned with building and valuing pointless derivatives.
In most cases, the derivative will pay equity-like returns with low volatility or income (stupid financial advisers go nuts for both). Invariably, these products self-destruct in a crisis (when the lads are off in their Ferraris) due to some bizarre optionality that is built in.
The other side is valuation which is about employing a combination of inapplicable maths with a wilful ignorance of common sense (usually to satisfy regulators who will approve your bullshit and then come to work with you next year to make up more nonsense).
The first task is dressing the pig up. The second task is inventing a mathematical formula that explains why the pig is actually a human. French banks are pretty much ground zero for this (I have no idea why).
Also, nothing is particularly wrong with American business. Most firms are not involved in anything like this, and when they do get involved it is rarely a case of them deciding to do so. They do so because they feel they have no other choice (i.e. engineering firms provide finance so that people buy their stuff, GE Capital existed because of the torrent of cheap money that flooded the market in the 2000s). The general move to greater financial efficiency, however, has been a massive boon (look at places that haven't done that...Japan is a great example, you want to work 12 hours for a day for like $35k/year?).
They did? TFA (and Markopolus’ report) doesn’t seem to reflect that:
> In January 2018, GE reported a $6.2 billion charge based on liabilities in its long-term care business, which is run by the company’s financial services unit, GE Capital. To make up for the costs, GE Capital said it needed to set aside $15 billion to hold against potential losses, and stopped paying a dividend to its parent company for the “foreseeable future.”
A cursory glance at Wikipedia suggests some subdivisions were sold off between 2015 and 2017, which is...not the whole thing and definitely not “over a decade ago”
GE did not sell all of GE Capital; they are still in business and part of GE. From GE's answer to Markopolos:
> The Company ended the second quarter with $16.9B of Industrial Cash excluding BHGE, $12.5B of liquidity at GE Capital and access to $35B of credit facilities.
> In fact, the destruction of America’s once vibrant military and commercial industrial capacity in many sectors has become the single biggest unacknowledged threat to our national security. Because of public policies focused on finance instead of production, the United States increasingly cannot produce or maintain vital systems upon which our economy, our military, and our allies rely.
It is not really only about the military, but about a larger context. They seem to be quite concerned about the industrial base of the US, including in high-tech industries. In support of their point, when I look up chip manufacturing capacity worldwide - https://anysilicon.com/semiconductor-wafer-capacity-per-regi... - Asia is 75% and the US ~10%.
What is your opinion about the point made by the article? In the larger context, not necessarily the military focus.
The US has since the 80s adopted an economic strategy that favors financial investments instead of industrial production - for example, very low taxes are charged for financial investments. The advantage of this is that financial investments give higher returns. The disadvantage is that such investments are detrimental to industrial production, as capital will try to relocate industry to places where production is cheaper and concentrate only on the financial engineering of the business. This is effectively what happened, since there is no advantage for American capital to start producing things when investors can just put their money in other places for higher returns. This affects even companies such as Apple, which is not at all concerned with finance. As a result of such policies there will be with very little industry left in the US (other than the essencial that cannot be relocated) and production will continue going to other places -- and those places are in Asia.
I'm glad to see that article is slowly making the rounds through circles such as this. The implications of the facts presented by that author should terrify anyone concerned about the future of the US and yet the clearly detrimental practices of a company like TransDigm are virtually unreported despite investigations conducted against them at the highest level. The picture painted by Stroller and Kunce is very bleak, so bleak in fact, that I'd say part of the reason issues like this go unreported is because there would be mass panic should the public at-large ever become aware of just how broken everything is.
No, they spun off some of their LTC and Life Insurance business into Genworth, which, incidentally is suffering from some pretty severe LTC woes themselves.
LTC is literally the textbook case study in shitty actuarial assumptions. A combination of low interest rates, huge medical expense inflation, adverse experience (i.e. people staying on claim for 2x as long), and low lapse rates have bankrupted at least one insurer in the last two years (Coloniel Penn). Genworth may be next.
GE's auditor KPMG has had some "strikes" against them in recent years that are bad enough to draw attention from the PCAOB.
It's inaccurate to say that GE outsourced all their engineering. That's not true at all. GE Aviation is a powerhouse and their engineering abilities is still world class. Despite all of China's advancements, creating engines like the type GE Aviation created is still beyond their reach (although they will eventually catch up).
GE Power made a bad bet against renewables and went with gas but that's a business mistake, not an engineering one. They recently hit a milestone with one of their biggest wind turbines. So they're slowly fixing themselves. This is again a management error, not a lack of engineering abilities.
GE Healthcare is still a leader in their field and also VERY valuable (along with Aviation, these two parts are the best parts of GE).
What the problem for GE is that they've saddled themselves with financial engineering and moved away from their core competency to generate the numbers they want. At one point that made a lot of sense because it enabled their customers to make those large capital investments but then GE managers started using GE financial engineering to smooth over earning reports. Anyone remember when GE was the darling of Wall Street? GE was touted as this well managed firm that gave steady dividends. Well part of that steady dividend and growth came from these financial engineering methods and rather opaque accounting practices (to be fair other companies did similar things).
I can't tell you if GE is a good investment or not. I am long on GE but this new report is pretty damning but as someone pointed out, the person behind the report is far from neutral. Then again, having followed GE for so long (I was long on them starting 2008, sold it all before the plunge, and now long again), there are no real neutral voices in this debate. This though is the fault of GE management, which is not as transparent as they should be.
Some of the counter points to the report holds water. The interest of Markopolos isn't neutral. And some long time observers have pointed out mistakes in his report. Accusation of accounting issues with GE isn't entirely new. GE is a beast and it's not transparent enough so that leaves a lot of room for speculation. It's probably one of the most divisive stocks out there (strong opinions on both sides). I think people with an interest in shorting it assumes the worst and vice versa.
Also, the CEO purchased a whole bunch of shares before the report and again after the report. He is probably well positioned to know GE fairly well. It's not a necessary move on his part but it does signal some confidence in GE. Also, having watched him, I can see some inflection points. If you were to graph "sentiment" of news for GE for the past couple of years, it would be kind of a parabola: lots of negatives, then less negative, then it's mixed, and now it's more of "not good enough" (although today was a hugely negative one).
In the end it's still a gamble. I'm not betting the house on it -- it's in fact a tiny percentage of my portfolio (I generally stick with index funds) but sometimes I like to keep myself honest by putting some skin in the game along with my opinions.
> Also, the CEO purchased a whole bunch of shares before the report and again after the report. He is probably well positioned to know GE fairly well. It's not a necessary move on his part but it does signal some confidence in GE.
Couldn't this be seen as a PR move to do damage mitigation and earn market confidence? As you mentioned that it's an opaque company accounting-wise it'd be hard to evaluate this objectively but the CEO of a possibly fraudulent company buying stocks to earn the market confidence seems to be a very low price to avoid the possible side-effects if the allegations are true.
It's totally a PR move but it certainly does increase his exposure to the fortunes of GE. His ability to sell his shares are limited by his position as CEO. I also imagine that if the frauds were real and gone on for as long as the report states, the first thing a new CEO would do is to expose them because otherwise he will be on the hook for the frauds committed by his predecessors. (Culp was a successful CEO at a very successful company before taking the helm of GE)
It makes me sad every time I see strong American businesses getting into the "financial engineering" business. It's not just GE. Every time I take a flight nowadays the attendants come around pitching some airline branded credit card; you buy a shirt at a clothing store and are asked to sign up for a credit card; buying diapers at Target--"do you want to sign up for the Target debit card"?
American banks and "financial engineers" are good at screwing over the 80% of the population, and transferring wealth to the 1%, and the fact that they are able to pull in great American companies into their schemes is embarrassing, disheartening, and in the case of GE Capital, foreboding.
For decades they were screwing me over and then when I joined the 1% it was suddenly, "hey, come open a bank account with us and we'll give you $5K!" Shameless.
The onslaught is so constant, I sometimes just want to scream at a clerk, "JFC, what happened to just exchanging money for goods and calling it a day?!" Of course, it's not their fault, the person I want to scream at is well insulated from screaming customers in some corporate office somewhere. But $DEITY forbid the clerk not ask, because someone's numbers will be down. That part will filter right the fuck up to the correct person.
Ignore your twitching knee when I say this, but it's one of the things I like about Apple: "here's some money. Might I have one of those fine devices you have on display?"[0]
"Certainly my good sir! Let me fetch one from the back...here you are. Apple Care? No? A fine choice, sir! Have a nice day!"
No cajoling about some card. If you don't want the extended warranty, it's a simple "no" and done. No popups on their internet properties asking to join their mailing list. I give money, they give me stuff. I'm sure there's some dark pattern I've missed, but for the most part the experience seems to be free of such jackassery.
[0] Admittedly, this part needs work lately at their retail stores.
Yes please, this is the only card I actually want mostly for security, privacy, zero fees and expense tracking reasons.
Disclaimer: I used to work at Apple in their online services division, and I know first hand that (at least during that time) they cared a lot about privacy (often against short to medium term financial gains)
This does make me sad. The shift away from hardware and software to "services" and "financial products".
Despite the fact that I want the banks to be disrupted, I'd rather have a Stripe or Square or Coinbase etc do it, and have Apple focus on other things.
Oh God no! Not Square at least. They'll happily send your financial statements to random other people, then act like it's completely normal that they did that, and really weird that you're upset about it. Plus their customer service (for end users who buy products, not the merchants) is extremely adversarial. They have a really shitty chat bot that is the only way to contact them to get help when they screw something up. It's awful and very anti-consumer.
When you get the device home you'll need (edit: be asked) to sign up for an Apple ID and an iCloud account, I believe? They may not bother you at the point of sale but that's only because they know you'll be giving up your private info soon enough.
You believe incorrectly. If you want to use some other services for email, streaming, etc., you need neither an AppleID nor an iCloud account to use any of your Apple devices. They may ask you to enter or create one, but I haven't seen a case where there isn't a (small hard to see) way to opt-out.
They're still asking you for all that info. Saying no to a checkout clerk is easier and faster than finding the "hard to see" (your words) opt-out, which may only suppress the request for a week or month before popping up again.
Your examples are an inherent part of the value proposition. With an Apple ID and an iCloud account you can do much more with your device than you otherwise could. Customers who buy into the Apple ecosystem need to be assigned an identity within that ecosystem, and most people understand that. If it bothers you, you can always decline, or buy some other phone or computer.
There is no room whatsoever to compare Apple IDs with being force-fed sales pitches for unrelated items while trapped in an aluminum tube at 30,000 feet.
If you wanted to tilt at this particular windmill, Microsoft account IDs would be a better horse to ride. They provide little or no value to most Windows users, but the company does everything it can to drag you into their ecosystem.
You're choosing to understate the value of these "unrelated items." Just yesterday I was upgraded to first-class on an international flight, in part because I once signed up for the "unrelated" credit card on that particular airline. Signing up for a Target card gives you 5% all Target purchases. Both those things do offer real, tangible value, whether you want to believe it or not.
We'll need to agree to disagree on this. IMO, airplane trips will become more or less unbearable if this practice is scaled to its full potential.
To be clear, I have no problem with the airline offering a credit card. Put an ad in the flight magazine, maybe hand out brochures with the ticket folder. But having the F/As treat the whole airplane like a cheap hotel conference room, as breck describes, where people have shuffled in to listen to timeshare sales pitches or Scientology lectures in exchange for some stale donuts? No, that's not OK.
Not saying I enjoy in-flight announcements, I most certainly don't. But you and mikestew are saying it's OK for Apple to bug people to sign up for shit or to request personal info, but not OK for everybody else. The differentiation is what I'm objecting to.
All that stuff makes me think of a puppet on a string. I prefer a life with fewer strings. Frankly I don't really see why customer cross licensing deals between businesses isn't an anti-trust issue.
All your examples are marketing ideas and promotions. Nothing at all to do with financial engineering. As much as you seem to enjoy complaining, surely your favorite companies engage in the practice -- hedging currency risk, locking in stable fuel prices, avoiding interest rate shocks.
I like these things. I have a lot of friends who are very passionate about finance and do very hard and valuable work in domains like that. Some do truly extraordinary work that goes on completely behind the scenes and makes markets serve businesses better.
I guess what I don't like is when non-financial businesses get into the business of offering financial products. I would hope operationally they take advantage of smart financial engineering on the backend, but instead of spending valuable time in front of customers talking about credit cards, they should be talking about the thing they make (engines, air travel, clothing, retail, respectively).
(Note: perhaps there's a better term for what I'm complaining about than "financial engineering")
Airline branded credit cards are not the same as store branded credit cards and none of this has to do with financial engineering. None of the comments in this thread do.
You're probably right about that not being "financial engineering", as I wasnt familiar with the term prior to this article.
But other than airline rewards being generally valued more than store rewards, how are they different? I guess I can always tell the store worker "no thanks" before they start the annoying pitch, while the loud sales pitch on airlines is unskippable, blasted through everyone's audio system, and often happens when people are trying to sleep.
just more fungible and improve travel experience and status. the cards themselves are more prestigious too and also accepted everywhere. not too much of a difference after that.
consider noise cancelling headphones that aren't connected to the airplane media system
> it just shouts everything that went wrong with American Business, to me.
Quite the opposite. Sound financial management implies financial engineering. I recommend you study and understand the field before criticising it; it's not "tricks" at all.
As an uninformed outside observer, I have seen a large number of companies that used to pride themselves on product quality, customer support, and treating workers well get bought by private equity or other finance guys (or maybe sometimes just taken over from inside), shed everyone competent, focus on cost cutting and nickel-and-diming customers, and start producing garbage products with no support, transforming the relationship with customers into a largely adversarial one.
In many cases the finance guys have (legally?) embezzled large amounts of money while loading the companies with debt and then dumped them, leaving customers, employees, suppliers, and other investors holding the bag.
I’m sure this process is considered to be “sound financial management” by some.
There seems to be an insane amount of misinformation and misunderstanding on this topic. What you and others are describing is not financial engineering. It's corporate raiding, fraud, etc.
I'll list some examples in the field of financial derivatives (speaking here in my personal capacity, not an expert, this is not advice, disclaimer disclaimer disclaimer):
* An oil production company knows they can comfortably operate at a particular price level, P/BBL. They're willing to forego any additional profits provided they can guarantee receiving P/BBL. Commodity swaps make this possible, and it means that people in the industry get to have a reliable job despite the volatility in the market.
* The national airline of a small, poor developing country depends on tourists buying plane tickets in a foreign currency, often months in advance. How can they manage the risk of the exchange rate volatility, when one of their biggest costs are fuel and they have to pay this in yet another foreign currency? Currency derivatives make this possible, and it means this developing country can reliably operate an airline and thereby receive an economic boost from tourism, helping at least some of its citizens make it through another day.
* The CEO of a F500 company knows some bad news is about to hit the market and negatively impact the value of his stock. But he can't sell his shares because he'll be guilty of insider trading. Instead he enters into an equity swap arrangement with some poor sucker who doesn't know about this bad news, and because it's a pre-Dodd Frank Act deal, nobody is the wiser, and our CEO gets to enjoy another stress-free day on the golf course.
As I hope my last tongue-in-cheek example demonstrates, these are just instruments. How they get used and abused is a problem for regulators; they are not inherently evil.
I can appreciate your breakdown and agree with the basic sentiment but the last sentence sounds like a cop-out.
Guns are just tools that poke holes in things. We can't hold the manufacturers responsible for the way they get used.
Fentanyl is just a medical drug. The pharma companies aren't responsible for addiction.
I don't even disagree with your sentiment and I don't necessarily agree or disagree with my silly examples. But I hope you can see why some people would see calling them 'just instruments' can come across as washing ones hands from any responsibility.
Computers aren't "just tools", you can use them to stalk people online, harass them, hack into computers, etc, etc. Maybe Dell should be checking your mental history, criminal history before selling you a computer too? Just because you can list all the bad things people can do with any object, doesn't give any credence to your argument.
They are "just tools" in the context of the way that term was used in the comment I was responding to.
I'm not sure you were following the point. It was about the culpability of the manufacturer/creator. In your example, it would mean Dell should shoulder some responsibility for somebody misusing their product. The fact is some people think use/trading of certain financial tools should be illegal and that those who caused problems with them should be held responsible. I'm not sure where that line is for financial tools but we already have guardrails in other areas of society to address similar concerns.
Well, you were the one who said it was a cop-out. Are you not of that opinion any more?
IMO, the culpability of the manufacturer should be zero for general purpose tools. For things like guns/weapons, which were invented solely for killing living things, you can make an argument for regulation...
>The fact is some people think use/trading of certain financial tools should be illegal and that those who caused problems with them should be held responsible.
I don't think its right to base any argument simply on what "some people" think. Why not instead, list the pros and cons of the tool, and what you would change?
Sorry to beat a dead horse, but I think you are still missing the point. When I was alluding to them being "just instruments" analogous to the way drugs or guns could be considered "just instruments", it was tongue-in-cheek. Sorry if that didn't come across clearly in text. So yes, my comment is still congruent with thinking of financial derivatives as "just instruments" is a cop-out.
FWIW on your second point, "some" of those people are members of Congress who are meant to represent constituents and draft laws. What you're advocating in listing the pros/cons is a risk based approach, which is the way most decisions, including these, should be framed.
I agree with what you said. I notice that 'engineering/engineered' term have positive connotation as opposed to 'doctoring/doctored'. But with this Financial engineering thing scam artists have taken over 'engineering' now.
The other... EAK Ramen in NYC (small chain that landed here a couple of years ago out of LA so I'm sure it is financial engineering at work, not just an owner experimenting). They removed what used to be a standard part of the ramen that came with it ( egg, some toppings ) and started offering removed parts as "customize your own ramen! Add an egg for a $1! Add corn for a $1! Add X for a $1 ) as a way to raise prices by wrapping that into "customization". As if their customers are stupid and don't notice that the same ramen now costs not $14 but $18.
I'm willing to guess the disagreement here is due to the definition what constitutes 'financial engineering'.
I would say most laypeople would agree that using applied mathematics to hedge investments and reduce risk is okay. Most would probably also say that creating overly technical mechanism to obfuscate what is really going on would not be acceptable. I think this is why people cringe at the prospect of more and more derivative financial products being 'engineered' to create value.
I personally say it gets gross from the standpoint that it is almost entirely a field of contrived rules of convenience. In other words, the 'system' is entirely human-created which comes with all the shenanigans humans bring to the table. This is in contrast to traditional engineering disciplines that are generally rooted in some sort of physics. A mechanical engineer can improve their understanding of reality, but cannot wave a magic wand and make different a different reality for their system to operate within.
You're right that the definition of "financial engineering" varies widely based on the interests and understanding of the parties flinging it around.
One thing I'd like to point out that not all "financial engineering" involves complex mathematics. For example one of the most widespread instances of "financial engineering" across many if not most large corporations is the issuance of corporate bonds. While some corporations do this because they truly need the cash, most do so as a financial calculation based on their growth projections, the rates of returns on government bonds and other investments. The huge influx of cash raised by this sale of corporate bonds can then be used to buy back stock (inflating the stock price), paying a dividend or even taking straight cash payouts for executives. This all looks good on paper until growth projections turn out lower than expected, there is a disruption in the bond markets, currency markets or anything else that threatens to reduce the ability of the corporatation to make bond payments. This can lead to defaults, liquidation of company assets to pay bond holders or even bankruptcy. However, those executives and stock holders who made massive amounts of cash from the bond issuance, either directly or indirectly (through buybacks which artificially raised the price of the stock) walk away with all that money while the corporation itself (and the workers) are SOL.
All good points. I was considering something like your bond scenario as an example of obfuscation. E.g., a company can fund dividend payouts through debt mechanisms, fooling the uninitiated into thinking they are more profitable than they really are
For those momentarily misled by this condescending comment:
> Despite its name, financial engineering does not belong to any of the fields in traditional professional engineering
> It is generally (but not always) a disparaging term, implying that someone is profiting from paper games at the expense of employees and investors.
>Many other authors have identified specific problems in financial engineering that caused catastrophes: Aaron Brown[23] named confusion between quants and regulators over the meaning of “capital”, Felix Salmon[24] gently pointed to the Gaussian copula, Ian Stewart[25] criticized the Black-Scholes formula, Pablo Triana[26] dislikes value at risk and Scott Patterson [27][28] accused quantitative traders and later high-frequency traders.
Is that a definition, or a statement that financial engineering has nothing in common with fraud, or some other statement?
From my view the greater the degree of 'financial engineering' in a company's P/L the greater the likelihood that some kind of fraud upon the investor or business partner is being conducted.
Let's just say that the fact you thought it important to mention the height of the person in the ad is the first of several clues that your comment is... suspect.
...and the top skill of most tech people is spreading superficial, malignant stereotypes of professions they fail to understand. Those include everything that is not a direct derivative of classical logic and mathematics, because they refuse to consider any creative or social domains to be "real".
Because of this narrow view of the world, the tech crowd is constantly perplexed by the continuing dominance of that other tribe in their organisations as well as society at large. This inferiority complex causes them to indulge in ritualistic in-group demonisation, whereas the reverse manifests mostly in brief interludes of eye-rolling whenever the internet goes down.
Reminds me of one CEO of mine proudly holding up a Nokia n95 Navigator and telling us how the iPhone was trash and the n95 was the future of mobile phones. This was his excuse for not signing our retail provider up to sell Apple phones.
Within a couple of years he had left to join the board of a small credit union with his crowning achievement being the introduction of low-balance fees and cash withdrawal fees.
So yes, I am perplexed at how people like this keep getting highly paid executive positions while I am stuck in a damp cell in a poorly lit dungeon.
In all seriousness, my opinion is shaped by experience. I once worked at a startup burning through VC money, run by a Harvard MBA CEO. It was ridiculously wasteful. And these things were obvious to us down in the trenches.
Granted, they don't teach frugality, and these degrees are fairly useless for startups in particular, if not harmful.
I wonder if the bullshit taught at top tier business schools starting in the 1980s isn't as responsible or perhaps even more responsible for the destruction of American industry than outsourcing, bad trade policy, and other more familiar villains. A generation or two of business leaders were systematically educated on how to trade away deep proficiency and substance for financial smoke and mirrors. GE is a microcosm of what the entire country has done.
It would be helpful if people commented on why you were downvoted.
Americans have no appreciation for businessmen and businesswomen with experience. Sales people at Levi's who don't know how to measure your waist, roofers who don't know how to repair roofs, only replace them, dealerships who don't know how to repair, only upsell to the newest car.
Too much bullshit and not enough hardwork. Too many charlatans and not enough seasoned tradesmen, salesmen, and otherwise.
It goes back further than the 1980's. It had its advent with the rise of business/managerial "science" that thought trained middle & senior managers could become standardized units of productivity to be swapped in & out of any position as equivalent units. It left out the fact that good managers have strong knowledge of the operations under them and the business as a whole, not just a managerial rule book.
It's been a while since I read it but I think the book "The Firm" about McKinsey talked a bit about this movement and how business studies became a graduate degree.
My own theory about MBAs is that it seems to be a signalling mechanism where people are saying "I want to stop doing <stuff> and want to manage people doing <anything>" - spending the time and money being a way of signalling that you are serious about being committed to management rather than being a practitioner.
Visualization sake? I often write like that, possibly under the influence of Russian/European 18th and 19th century literature I read during most of my life, thanks to education around here. It excels in overly detailed visualizations.
Please don't start ringing alarms, not everyone is a biggot. Not saying the commenter isn't, just don't judge.
First of all, English is not my native language nor I live in an English speaking country. Second, I didn't choose to read those books, the education system made me :). I don't read them that much today, but did enjoy it. Third, this is not bragging as I don't consider myself being super duper educated. I just read some books from time to time. I honestly thought it was the proper way to spell it, because I've seen it like that.
The style just looked to me as people around me describe events, often starting with the look of the scene, including the person.
Nevertheless, thanks for learning me how to spell a new word.
I'm torn because I've definitely heard plenty of rumblings about GE Capital over the past decade so the accusations certainly seem plausible. I feel like I even opened the report expecting to confirm the rumors I had heard. But I've only made it to page 5 and so far it's a lot of hot air without any substance. And the tone of the writing is needlessly flippant. It's difficult for me to take the report seriously.
For example, this sentence raises red flags to me:
> I won’t reveal every technique we used because every wannabe accounting fraudster out there is going to be
reading this section closely looking at it as a “how not to get caught” primer. There’s no point in making them harder to
catch than they already are.
We're just supposed to take him at his word in order to protect ourselves from "wannabe accounting fraudsters" who might try to repeat what GE has done? That doesn't make sense to me. Revealing GE's supposed tricks would allow everyone else in the industry to better monitor for them.
> I'm torn because I've definitely heard plenty of rumblings about GE Capital over the past decade so the accusations certainly seem plausible.
Back in the 1990s and maybe early 2000s, GE would 'beat' analyst profit estimates every quarter by 'a penny' per share (occasionally by a few pennies). This went on for _many_ years.
I don't have any special insight, but this always struck me as _fishy_. You have a stable of presumably competent analysts prognosticating on your next quarter's revenue and profit and you consistently beat their average estimate _by a tiny bit._ You would think that you would come in _under_ the estimate every-so-often, but that was incredibly rare and the consistency always had a whiff of impropriety.
It wasn't just GE that did this. Many Fortune-500 companies had similar behavior, so perhaps it has an innocuous explanation, but I always wondered how it was possible to consistently beat estimates like this.
There's more degrees of freedom in accounting and accounting-related matters that non-accountants tend to realize. An easy trick to explain is a big deal of some kind that is closing near the end of the quarter. If your customer doesn't care, you may be able to choose whether you close that deal this quarter, because you need the revenue this quarter, or if you want to close it next quarter because you've got this quarter's "beat" covered, and there's no great advantage to beating by just that bit more.
Obviously in this specific case, it's only a quarter's worth of flexibility; I mean this as an example, not a manual on the practice.
There's a lot of ways of borrowing against the future to show revenue now. It is suspicious, but it may not necessarily be suspicious in the "fraud" sense of they aren't making the money they claim to be making, but rather, are they eating their seed corn to get this quarter's beat? Did they pull revenue forward they "shouldn't" have? (Sometimes it seems like it's better to beat expectations by a little for several quarters, then have one big disaster quarter, than to miss by a little for several quarters.) Did they profit this quarter by failing to invest in growth that they're going to need later?
So, I wouldn't say it's an innocuous explanation exactly, but perhaps rather, there's a range of explanation that range from mostly innocuous gimmicks to the outright fraud, and it's hard to tell from the summary sheets which one you're looking at.
I agree that it's not a credible statement. I do not think that their primary interest is the public good, even if the public good is ultimately a beneficiary of their possible discovery of fraud and shorting of GE.
Releasing the statement is meant to fight the implications of the saying, "Markets can remain irrational a lot longer than you and I can remain solvent." In other words, they want the market to move faster toward the correction they believe GE should undergo. They are not disinterested, they need people to believe them.
In fact, this type of statement in retrospect has been the biggest sign that Enron was a fraud that should have been discovered earlier. Typically a fund that has a black box producing returns trades at a lower price than its yields alone would justify. You get punished for not showing your work. Enron on the other hand claimed that their black box deserved a premium.
GE could be a fraud, but when the messenger says not showing their work is a feature, there should be a presumption of shadiness.
I started smelling something odd when the site wanted my personal info in order to let me download the report.
In general though, I find the claims plausible, but what sort of access did he & his organization have as outsiders? It's not like they had full audit access. Access of publicly accessible documents doesn't seem like it would be enough.
The report specifically and repeatedly talks about the genworth spinoff (in multiple sections) and how it was supposed to help in various ways but specifically didn't.
Given their stake, this seems like bronte capital trying to do damage control.
The report itself would be more persuasive (IMHO) if written less flippantly, but this is definitely not a sane criticism of it ...
If you remove the flippancy, there are some serious issues exposed by this report (the GAAP vs SAP accounting tricks GE keeps claiming won't matter but will, double counting BHGE, etc)
GE decided that playing financial tango is more profitable than manufacturing. Too many US companies become shell-game manipulators rather than shell makers. Maybe that's somehow fine and normal, but it's hard to sleep sound at night knowing the US economy's main product is financial tiddlywinks.
This has been the end-goal since the 1980s when everyone realized there was way more money to be made in running companies into the ground to sell them off for scrap, raiding pension funds, and securitizing everything.
GE has been a mess for a while now. I know many vendors that won't ink a deal with them because they always try and pay at the end of next quarter. Ironically, because everyone knows their tactics, they either end up paying more for reputable vendors that need an insurance buffer, or they end up with a worse product from fringe companies that are willing to roll the dice on getting paid.
We recently did work for a very large corporation that switched from net 60 to net 180. I'm not sure if they did it for cash flow reasons, but I doubt it. We're a small company, so it was tough for us considering we'd be paying developers 6-months of salary before we'd see a dime. They did conveniently offer financing so that we could get paid sooner, albeit with interest.
It seemed to me like large corporations feel that they can strong-arm their vendors into unsavory terms because of their clout.
I think they also know that the cost of onboarding new providers for large corporations is high, so vendors tend to price enterprise higher than SB, since they know there is more reporting and more hoops to jump through.
Personally as a self employed consultant, I'd take the financing. Not so much for cash flow (though it is a consideration), but just my overall paranoia toward not getting paid and always valuing a bird in hand. But I've been burnt before.
This actually has got a name in treasury circles: it's called "reverse factoring".
One of the very nice side effects is that when you're a big publicly traded company, you can generally afford to set up a dedicated entity to handle this business, which gets to be considered a financial entity by IFRS reporting standards, which (through a complex reasoning I won't bother you with) magically enhance your operating cash flow - one of the more important reporting metrics when you're not actually not a bank but e.g a retailer.
Same experience here in India. Larger companies (with $billions in revenue) pay in 1-3 months. Small/medium companies pay in a week.
The problem is that in big companies, nobody really owns anything. So you're going to have to chase a whole bunch of people and processes, from finance to compliance to HR. And it's not individually any single person's fault.
You seem to suggest the paying-late is a symptom of the org, my experience is different : I happen to know certain big corporations have departments making sure bills are paid as late as possible, including haggling the invoices down.
Paying late is corporate finance 101. Or at least 201. I remember building spreadsheets in class showing the difference in paying bills on time vs net 30, 60, 90. The difference is pretty significant when dealing with large numbers.
The difference used to be significant when inflation and interest rates where in the order of 10% year over year. It's not the case anymore since they dropped to near zero, unless you really don't have the cash on hands to pay now.
Funny thing about NET terms.. Now a lot of the large companies do billing only twice a month. So if you're unlucky your NET 30 will change to NET45 + 5 days for mailing, bank processing etc.. Somehow I always get unlucky and miss their billing day with my invoices.
duh, whether it's true or not when their accusations are release the initial knee jerk reaction from the sheeple will be to sell which will drive down the price.
Shorting GE before making the accusations is profiteering in my book. If it turns out they were wrong they'll still be able to make money on the short, buy back in with the profits and then when the stocks rebound they cash in again.
The entire stock market is a ponzi scheme for insiders.
No, if Markopolos's allegations are correct then this is exactly how financial markets are supposed to work. They are about price discovery - the reward for this information integration is the profit that Markopolos and the Hedge Fund have made / are about to make. If these allegations prove to be baseless then they will receive a hefty fine by the SEC which I'm sure will at the very least take away any profits they've incurred.
>If these allegations prove to be baseless then they will receive a hefty fine by the SEC which I'm sure will at the very least take away any profits they've incurred.
No they will not. There are no rules against exaggerating information about a company you don't operate. The SEC does not fine hyperbole as it's not covered by the exchange act.
The so-called short-and-distort scheme may violate the Securities Exchange Act anti-fraud provisions, as well as SEC Rule 10b-5, just like the better known antithetical "pump-and-dump" scheme. It checks all the boxes: (1) misrepresentation to the market (through articles, blogs and social media); (2) materiality (often including false statements about a company's financial condition or viability); (3) an intent to deceive (manipulating the market to create downward pressure on the share price to make a profit); and (4) connection to the purchase or sale of securities (initiating a selloff of securities to allow the short seller turned analyst to cover their short position). Likewise, this scheme may violate state securities and consumer protection statutes and common law.
>Shorting GE before making the accusations is profiteering in my book
It's also how you call companies out on their bullshit and counter their PR deflection game.
And yep, if I do a shit load of accounting research, figure out one of the biggest conglomerates has about $38 billion in fraud, you bet your ass I expect to get paid for the effort. I'm morally on board with the authors getting the first shorts in.
> If it turns out they were wrong they'll still be able to make money on the short, buy back in with the profits and then when the stocks rebound they cash in again.
It's simple: GE is down, as of right now, over 11%. Knowing the sensational allegations of the report would have a short-term deleterious effect, they shorted the stock. They can turn the profit from the successful short around into buying GE at its depressed price, and profit a second time when the stock returns to normal levels after the report is found to be exaggerated.
Isn't it more the reverse? They shorted GE, so now they're well positioned to reap the benefits of convincing other people to short GE, regardless of the truth of the accusations.
Also creates an financial incentive to try and spread FUD to tank the stock. "Skin in the game" is overrated. It inclines one towards partiality rather than impartiality.
If you hold the stock and make a knowingly false statement about the stock in an attempt to move the market, particularly without disclosing that you hold the shares, it may be securities fraud.
The line is very difficult to draw between constitutionally protected speech and securities fraud. [1]
Prior to the initial distribution of this Report on August 15, 2019, the Company also submitted this Report to the U.S. Securities and Exchange Commission’s Whistleblower Program and the U.S. Department of Justice’s FIRREA Whistleblower Program. Both or either of those submissions may generate profits for the Company independent of the financial performance of GE and/or the securities, derivatives, and other financial instruments of, and/or relating to, GE.
If the information was synthesized from public knowledge, then it is fair game. Non-public is not determined by "how many people know this information".
Actually this is standard practice in the shorting industry and perfectly legal since the information is publicly available. It was entirely their goal to push the stock price down just as there are legions of folks trying to do the opposite (in perhaps not so immediately obvious ways).
Before becoming too concerned with the fact that the author of this report is compensated based on the performance of the sponsoring fund's short position, one should note that it has been argued that allowing Enron insiders who knew of the irregularities to short Enron stock would have supplied a downward pressure that may have saved Enron employees millions of dollars. Many of those employees were investing 100% of their 401k into the stock at its peak.
The FinTech company I work at offers ESPP and an option to invest in company stock for your 401k. I take full advantage of ESPP but sell it quickly. My coworkers have saved it and been through 3 splits and made a ton of money. The same coworker lost 10s of thousands when he worked for WorldCom/MCI in the late 90s. He’s probably even right now.
I would never invest 100% of my 401k into my employers stock. Even 10% seems risky.
The first part of this comment is accurate and important. The second part is pretty much always what fraudsters claim when caught: "I could make it all back given enough time, I just need that one big score!"
my mother's 401k at the time, they were forced to buy company stock. Her company was also in the process of merging with Enron. Luckily, my father had a better plan so they ended up mostly investing in his and what was left over they invested in hers.
GE should be a warning for all management gurus. I still remember when Jack Welch was the idol of all managers and I read a lot about how GE was grooming the next generation of super managers. Turns out that Welch didn’t really create a company that could perform with excellence in the long run. Seems he was more of a one hit wonder.
Actually, I'd say he was more of a fraud. It's been well known that under his administration GE earnings growth was basically linear and returned to typical volatility after he left, suggesting he was manipulating the figures to make it work. Meanwhile the company had sold off most of the businesses it was known for with the exception of light bulbs and aircraft engines.
I have friends working as senior developers for GE in Poland. Basically US branch outsource project to Polish brand because they are paid peanuts in comparison, then part of the work is outsourced to India branch which is paid even less. I have ZERO respect for American mega-corps.
At my last job I worked exclusively with our Europe branch and European customers. 75% of the developers I worked with were contractors or consultant companies they outsourced to. More than half also had offshore India teams.
You’d recognize all the customers names and likely own their products.
Each state has a Guaranty Association that provides up to several hundred thousand dollars per policy for failed insurance companies. We've seen this story before with Penn Treaty which was liquidated in 2017. In California it's $560k. https://www.califega.org/
Marlopolos point where he says the Baker Hughes investment should take a goodwill impairment charge is incorrect. GE is right when they point out that they own more 50% of the company so it needs to be consolidated.
It was, it has been sold by GE a long time ago (at least 5 years). Maybe some of the staff still feels some sort of loyalty (or relief) I don't know but there is no reason now that CNBC should be more harsh or gentle on GE news.
The Affinity is built around the CFM56 core. Not a brand new turbofan, just a further development of a massively successful product.
Edited to add: there was originally a lot of vague insinuations about the GE Affinity turbofan in the parent comment, but it was edited down from five paragraphs to one after I replied.
There are two economists – one young and one old – walking down the street together.
The young economist looks down and sees a $20 bill on the street and says, “Hey, look a twenty-dollar bill!”
Without even looking, his older and wiser colleague replies, “Nonsense. If there had been a twenty-dollar lying on the street, someone would have already picked it up by now.”
Libor manipulation was on the public record years before the scandal blew up. Exposing anything but dirt-simple financial fraud is hard, even to people who know all the facts.
Malcolm Gladwell has a great piece about how all the information needed to piece together Enron's fraud was always available in public records. Worth a read.
I'm not agreeing with the previous poster but GE is anything but small potatoes nowadays. They have over 100bn in debt and there's a very real case where they get downgraded to high yield which is a near death sentence for an industrial company of their size.
There’s much bigger problems with the economy than GE. See the yield curve inversion yesterday, the most reliable signal we have of a pending recession.
What's hilarious is that if you look at the website gefraud.com and attempt to download the report take a look at the fine print. These guys SHORTED GE before they made this report public....
Edit: Guys, I understand the logic behind shorting GE, what I found funny was that they made it public that they had short positions in their disclaimer. IF I were in their position I would've shorted GE just like any other individual with this information.
If they have information that GE is overvalued, what should they do? If they don’t short, people like you go Taleb and accuse them of throwing out accusations with no skin in the game; if they do short, they get accused of making things up for profit. They can’t win.
They can win, if they prove their case and it is found to be true and comes to pass as they say it will. Until then, the company being shorted will generally lash out regardless of the truth or not of their accusations.
Generally at this point worrying about what Taleb and his fanboys think shouldn't be anyone's concern. They only "can't win" if they are concerned with fringe voices who are constantly looking for fights to pick.
But you see, I didn't say that they were wrong or right. I merely was pointing out the fact that they put in their disclaimer that they did in fact have short positions on GE prior to publication.
You didn’t “merely point it out”, you described it as “hilarious”. This implies that you view the disclosure as some sort of evidence of impropriety, as if you discovered what game they were truly playing or something.
As others have told you, this is standard practice for short sellers, and the financial industry as a whole.
What would you rather them do? Simply claim that GE is a fraud without having any stake in GE, long or short? Don’t you lend their claim more weight given that they’ve taken a financial position based on their belief? I would think that would be a more rational view.
Disclosure of a financial position when offering any kind of commentary on a stock is legally prudent if not explicitly required.
I believe adding the disclosure serves as a mitigating factor if it turns out your analysis was bullshit, if the SEC tries to come after you for fraud.
https://brontecapital.blogspot.com/2019/08/the-flat-out-sill...
As Charlie Munger says, always look at the incentives to understand people's behavior. Markopolos' sponsoring hedge funds are shorting GE:
https://www.bloomberg.com/news/articles/2019-08-15/ge-drops-...
"Markopolos is working with a hedge fund he didn’t identify and stands to benefit from bets that GE’s stock will decline, according to the Wall Street Journal, which reported earlier on the accounting report. Markopolos and his colleagues also hope to collect a whistle-blower reward by reporting their findings to regulators, the Journal said."