The light dims at General Electric

Once the world's largest company, GE's disastrous exposure to the banking crisis is now a major threat to its future. Stephen Foley reports

Thomas Edison will be turning in his grave. On his invention of the electric lightbulb and other innovations sits one of the world's biggest, most historic and best respected companies. For the humble lightbulb, through cookers and fridges, to jet engines, medical scanners and nuclear reactors, it is famous throughout the globe for the tradition of inventiveness infused by its legendary founder.

If an American owns just one share, chances are it will be General Electric. It is the only member of the Dow Jones Industrial Average to have been a member of that index for all its 113 years. Millions rely on its stock for its dividend income; the company's bonds are the bedrock of any conservative pension plan; its chief executive – Jeff Immelt now, like Jack Welch before him – is a kind of business guru for the nation.

And yet there is a cancer at the company's heart. From beginnings in the Great Depression, when GE started offering loans to customers so they could afford its appliances, its finance arm has grown to the point that it accounted for more than half its bottom-line profit in 2007. Thanks to the solidity of the rest of the business, GE was able to raise cheap debt that it lent out to businesses, property speculators, homeowners and credit card borrowers the world over.

There was nothing inventive about that particular money-go-round. Sadly, there is nothing surprising about the pain that GE is currently suffering, now the credit bubble has burst. As GE Capital undergoes an intensive dose of chemotherapy to bring it back under control, GE is sicker than ever.

Mr Immelt is struggling to hold together the competing interests of bondholders, shareholders and GE's own businesses, which had hoped to make big investments in profitable new areas such as wind turbines and other renewable energy projects. It looks like something is going to have to give.

For the past week, analysts on Wall Street have been combing through GE's annual report and coming to the conclusion that the collapse in GE Capital's earnings will force the parent company to cut its dividend – a seismic event for a company with an army of small shareholders – or face losing the gold-plated AAA credit rating on its bonds. One analyst, Deutsche Bank's Nigel Coe, even suggested the parent company may have to pump more money into GE Capital to keep it solvent, something head office denied. The cost of insuring GE's bonds against default soared to more than even Citigroup's, and the shares plunged into the single digits, down to about $9 apiece, for the first time in 13 years.

"GE is such a popular share because the company is so diverse, it reflects the economy globally and investing in GE is like investing in the market as a whole," Daniel Holland, an analyst at Morningstar in Chicago, says. "Of course, a lot of the profits for GE, like a lot of the profits in the world, were generated by its financial companies, and it looks like GE had a little too much to drink at the party."

In April last year, GE shocked the stock market with a profit warning, less than a month after Mr Immelt had given an up-beat presentation to invest-ors. The culprit then, as now, was the spiralling losses on commercial property held by the finance division, and the incident led analysts to question whether head office had a proper grip on the problems at GE Capital.

Inevitably, those problems have only got worse, and analysts are increasingly fearful about a full-on meltdown of the commercial property market this year, as mortgages come up for refinancing and some of the world's biggest buildings might end up having to be sold. Meanwhile, GE Capital is still sitting on personal loans and residential mortgages from the UK, France, Australia and elsewhere, whose future profitability is uncertain.

What you can say in GE's defence is that it did not plant the sort of timebomb under its finance division that sat under many of the world's biggest banks and insurers, which chased after complicated mortgage derivatives and credit default swaps and now find themselves with billions of dollars in losses that they are still struggling to understand. Nonetheless, it is scrambling to bring the business back down to size and labouring under the intense problems in the credit markets, where a lot of its short-term funding came from. It has had to avail itself of the insurance provided by the federal government so it can refinance GE Capital's borrowings; GE used a $15bn fund raising from Warren Buffett and new shareholders last year to plump up a cash cushion; and the dividend that GE Capital used to remit to the parent company has been slashed.

The company's problems don't stop there: there's a hole opening up at the head office pension fund, whose collapsing portfolio of stock market in-vestments has turned a $14bn surplus into a $7bn deficit, and the low-margin consumer and industrial division is still within the company (after failing to find a buyer last year), threatening to drag earnings lower. "Deterioration in GE Capital's business or a further capital injection could strain cash flow and make it difficult to sustain the dividend," says Stephen O'Neil, an analyst at Hilliard Lyons. "GE's board had previously signed off on management's plan to maintain the dividend through 2009. However, after approving the April dividend, it then indicated it will review payments in the second half of the year."

With the Obama administration's economic stimulus plan promising investment in the infrastructure for renewable energy, a business that GE is shooting to dominate, there could be big opportunities for growth, if only the conglomerate had the cash to invest in manufacturing. The black hole at GE Capital means it may have to forego some of the opportunities, with knock-on consequences for earn-ings growth.

Or alternatively, there is the bond rating that could be jettisoned, al-though a bout of speculation about a GE downgrade in 2005 sparked turmoil in the credit markets, making such a move potentially even more explosive than a dividend cut.

Morningstar's Mr Holland, though, questioned the value of maintaining the AAA rating at all costs, if the financial markets are ignoring it anyway.

"GE issued a number of bonds in January at about a 7 per cent interest rate. That compares to about 5 per cent on a 30-year mortgage so, goofily, the company is being asked to pay more than an individual buying a house. Let's put it this way: there's not a lot of respect."

Global giant: GE's many parts

Energy Infrastructure

2008 revenues: $38.6bn (2007: $30.7bn)

2008 profit: $6.1bn (2007: $4.8bn)

From oil wells to wind turbines, GE's energy infrastructure business spans the globe and spans the ways that we produce energy. Also included in the division is equipment for water treatment.

Technology Infrastructure

2008 revenues: $46.3bn (2007: $42.8bn)

2008 profit: $8.2bn (2007: $7.8bn)

Includes many of GE's fastest growing businesses, from manufacturing of medical scanners and testing equipment, to cutting-edge aircraft engines.

GE Capital

2008 revenues: $67.0bn (2007: $66.3bn)

2008 profit: $8.6bn (2007: $12.2bn)

During the credit market boom, GE Capital grew to be the group's most profitable division, offering comm- ercial loans, mortgages, insurance, credit cards and other personal loans, all around the globe.

NBC Universal

2008 revenues: $17.0bn (2007: $15.4bn)

2008 profit: $3.1bn (2007: $3.1bn)

GE is also one of the world's leading media and entertainment companies, spanning film, television, news, sports and special events.

Consumer & Industrial

2008 revenues: $11.7bn (2007: $12.7bn)

2008 profit: $365m (2007: $1.0bn)

From its familiar light bulbs, washing machines and toasters to the latest advancements in consumer technology, the historic core of the business has shrivelled in importance as the rest of the conglomerate has grown.

Start your day with The Independent, sign up for daily news emails
Voices
There will be a chance to bid for a rare example of the SAS Diary, collated by a former member of the regiment in the aftermath of World War II but only published – in a limited run of just 5,000 – in 2011
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm tomorrow
Arts and Entertainment
Mark Wright and Bianca Miller in the final of The Apprentice
tvMark Wright and Bianca Miller fight for Lord Sugar's investment
Arts and Entertainment
X Factor winner Ben Haenow has scored his first Christmas number one
music
Arts and Entertainment
James May, Jeremy Clarkson and Richard Hammond in the Top Gear Patagonia Special
tv
PROMOTED VIDEO
News
File: James Woods attends the 52nd New York Film Festival at Walter Reade Theater on September 27, 2014
peopleActor was tweeting in wake of NYPD police shooting
News
Claudia Winkleman and co-host Tess Daly at the Strictly Come Dancing final
people
News
i100
Extras
indybest
News
peopleLiam Williams posted photo of himself dressed as Wilfried Bony
Sport
Martin Skrtel heads in the dramatic equaliser
SPORTLiverpool vs Arsenal match report: Bandaged Martin Skrtel heads home in the 97th-minute
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Arts and Entertainment
The Apprentice finalists Mark Wright and Bianca Miller
tvBut who should win The Apprentice?
News
The monkey made several attempts to revive his friend before he regained consciousness
video
Extras
indybest
News
Elton John and David Furnish will marry on 21 December 2014
peopleSinger posts pictures of nuptials throughout the day
Life and Style
A still from the 1939 film version of Margaret Mitchell's 'Gone with the Wind'
life
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Day In a Page

The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'
Marian Keyes: The author on her pre-approved Christmas, true love's parking implications and living in the moment

Marian Keyes

The author on her pre-approved Christmas, true love's parking implications and living in the moment
Bill Granger recipes: Our chef creates an Italian-inspired fish feast for Christmas Eve

Bill Granger's Christmas Eve fish feast

Bill's Italian friends introduced him to the Roman Catholic custom of a lavish fish supper on Christmas Eve. Here, he gives the tradition his own spin…
Liverpool vs Arsenal: Brendan Rodgers is fighting for his reputation

Rodgers fights for his reputation

Liverpool manager tries to stay on his feet despite waves of criticism
Amir Khan: 'The Taliban can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'

Amir Khan attacks the Taliban

'They can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'
Michael Calvin: Sepp Blatter is my man of the year in sport. Bring on 2015, quick

Michael Calvin's Last Word

Sepp Blatter is my man of the year in sport. Bring on 2015, quick