GE’s earnings today are likely to be irrelevant because Wall Street is now worried about GE’s long-term exposure to commercial real-estate, the WSJ says.
And no wonder.
In April, when concerns about the real estate first surfaced, Steve Eisman of FrontPoint wrote a detailed analysis concluding that the company has $40-$45 billion of embedded losses in its commercial real-estate portfolio.
If these losses were taken all at once, they would wipe out the company. As it is, they’ll likely weigh on GE’s earnings for years.
For those who didn’t see the analysis the first time, here are some of Steve Eisman’s slides:
First, the bottom line: $41-$46 billion of embedded losses (bear in mind that these are all estimates. GE would probably violently disagree):
And now the details… Eisman says GE’s asset quality is low and that the company under-reserves relative to its competitors:
If GE were to increase its reserves to match the rest of the industry…
This would result in a huge hit to pre-tax earnings:
Next, the specific assets. If GE’s financial investments were marked to market, the company would have to take an estimated $9 billion loss.
Marking GE Capital’s securities to market would result in an estimated $5 billion hit.
Next, GE’s residential European mortgage portfolio. The Polish and Hungarian mortgages are paid in Swiss Francs. Unfortunately, the folks who are supposed to pay them are paid in zlotis, etc–and the value of these currencies has plummeted against the Swiss Franc. Steve Eisman re-calculates the loan-to-value ratios in the local currencies:
The UK mortgage portfolio is hurting, too.
Then there are GE’s Commercial Real Estate holdings. Eisman thinks this portfolio is worth up to 40% less than its carrying value. Why? Because most of the holdings (securities and buildings) were acquired at the peak of the market. An investor familiar with GE’s real-estate investment timing described GE’s timing this way: “Why don’t you just put a fucking gun to your head and blow your brains out?”)
Add all this up, Steve Eisman says, and you get $41-$46 billion of embedded losses on a $600 billion book of assets–enough to cripple GE’s earnings for years.
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