General Electric Company

At his annual presentation to investment analysts on December 11, 2007, Jeff Immelt, GE’s Chairman and Chief Executive, presented “a safe and reliable plan for 2008” which would deliver earnings per share growth of “at least 10%.” Mr. Immelt’s assurances that day were based on a cautious outlook for the global economy and modest expectations (5% growth) for GE’s financial service business -- GE Capital Services (GECS). The reality of the last fifteen months has been very different: a 19% drop in GE’s earnings per share in 2008, a 75% decline in GE’s stock price, the loss of its Triple-A credit rating, a 68% cut in the annual dividend, and a damaging loss of credibility for Mr. Immelt and his management team.

Despite this litany of disappointments, General Electric remains one of America’s most vital companies. There are very few companies with as many constituents -- customers, employees, retirees, shareholders -- for whom the financial success of the company is critical. For example, approximately 40% of the company’s 10 billion shares are held by individual investors (like you) for whom GE has been a reliable source of dividend income and capital appreciation for generations. Hundreds of thousands of retirees and their families depend on GE for pension and healthcare benefits. Most important, for millions of customers around the world (including governments, public utilities, hospitals, and airlines) there are few if any alternative suppliers who can match GE’s combination of technical expertise, large scale manufacturing, and ability to finance very large projects over many years.

For a company as big and diverse as General Electric the critical determinant of growth and profitability is capital allocation; strategic decisions about which businesses to build or shrink, acquire or divest, in order to drive the company’s financial results over a generation. For this reason, GE has repeatedly selected a young man as its Chief Executive. Mr. Immelt was only 46 when he assumed the CEO position in 2001. Like his predecessor, Jack Welch, who led the company for 20 years, Mr. Immelt has devoted the early years of his tenure to divesting slower growing, cyclical and less profitable businesses (e.g. plastics, insurance) and acquiring operations which strengthened GE’s competitive position in core infrastructure businesses. Indeed, Mr. Immelt deserves high marks for shedding some of the financial service units which helped to drive GE during the Welch era. Unfortunately, Mr. Immelt did not move fast enough and far enough to shrink the financial service business before the credit bubble burst last year.

The sharp decline in GE’s profit last year was due almost entirely to the results of GE Capital Services. Pretax profits of GECS plunged by 60% (from $13.8B to $5.4B) due to higher funding costs and a sharp increase in reserves for anticipated future losses. Although there are similarities between GECS and the large banks to which the company is often compared, the differences are far more significant. For example, unlike the banks GECS has no exposure to the U.S. consumer mortgage business -- the primary source of the multi-billion dollar losses among the large commercial and investment banks. Indeed, loans to U.S. consumers account for only 6% of GECS’ total assets compared to almost 60% of assets at the four largest banks (JP Morgan, Bank America, Wells Fargo and Citigroup).

GECS depends on the willingness of investors to buy its short and long term debt in order to fund its loans and investments. In contrast, the banks rely mostly on deposits held in savings accounts and CD’s. These retail deposits are widely considered a more stable source of funding. However, the “wholesale” funding model of GECS subjects the company to the discipline of market forces (rather than government regulators). In order to compete with the lower cost of funds enjoyed by the banks, GECS must maintain a strong credit rating which, in turn, is predicated upon lower-risk lending practices and higher ratios of capital relative to loans and other assets. As shown on the next page, GECS’ ratio of total common equity-to-total assets, the key measure of financial strength, was comfortably higher than the major commercial banks at the end of last year.

JP Morgan : 3.4%

Bank America : 2.1%

Wells Fargo : 1.1%

Citigroup :1.2%

GECS : 4.9%

In early 2009 General Electric added $9 billion of capital to GECS. Adjusted for this action, GECS’ ratio increases to 5.9%. Also unlike the banks, GECS has received no taxpayer-funded capital from the U.S. Treasury TARP program. The only external source of new capital to GECS in the past year was Berkshire Hathaway – the holding company of Warren Buffett.

Nevertheless, GECS faces considerable challenges. Its U.S. consumer finance business, which dates to the 1930’s and includes the private label credit cards of major retailers (e.g. Wal-Mart, JC Penney, Lowe’s, GAP), will be impacted by the continuing rise in unemployment. Also, almost 60% of GECS’ total assets are outside the U.S. where the global recession began later and may ultimately be more severe. Consequently, senior management has acknowledged that continued economic deterioration might cause GECS to achieve only break-even results in 2009. Thus, despite a recent day-long briefing to provide greater transparency about its exposure in specific markets, as well as its accounting and risk-management practices, Wall Street remains skeptical; anticipating that GECS may incur significant losses and require additional capital from the parent company.

Over the last 30 years the large financial companies have become like a black box; generating volatile and unpredictable profits and losses from a variety of opaque lending, trading and investing strategies which bear little resemblance to traditional banking practices. For this reason, we have purposely limited our investments in major financial institutions. This policy has served us well, especially over the past few years.

General Electric is the only company we own with a meaningful presence in financial services. We have tolerated the risks and uncertainties of GECS because of our deep respect for GE’s industry-dominant infrastructure businesses -- e.g. engines for commercial and military aircraft, gas and wind turbines for power generation, locomotives, and medical imaging equipment. These are enduring business franchises which cannot be replicated. Their products have long life cycles; producing a steady stream of profits from aftermarket service and spare parts. Indeed, GE’s infrastructure businesses achieved pretax profit growth of 12% in 2008 despite the global recession. Also, these businesses require modest annual capital investments; allowing GE to return cash to shareholders through steadily increasing dividends (for 32 consecutive years until 2008) and large share repurchases. Amid the angst surrounding GE Capital, many investors have lost sight of the intrinsic value of GE’s powerful industrial businesses.

We estimate that GE’s 2008 earnings per share of $1.78 included $0.77 from GECS and $1.01 from the non-financial businesses. Further, we estimate that the infrastructure businesses alone accounted for earnings per share of about $0.82. NBC Universal added about $0.18/share and GE’s lighting, appliance and electrical equipment operations contributed just a penny. Thus, a stock price under $10 represents a price/earnings ratio less than 12x last year’s profits for the infrastructure businesses alone and an implied market value of $0 for everything else -- $0 for $34 billion of tangible equity at GE Capital; $0 for $17 billion of revenue and $3 billion of pretax profit at NBC Universal; and $0 for $12 billion of revenue from appliances, lighting and electrical equipment.

Rarely in our experience have we seen such a dichotomy between market price and intrinsic value for one of the world’s most dominant industrial companies. That is why we have held onto your investments in GE and made additional purchases which, in some taxable accounts, will allow us to sell higher cost shares at a later date. Although our conviction is a minority point of view, we are happy to share this position with one particular shareholder – Jeff Immelt. Mr. Immelt holds almost 1.7 million shares. Since becoming CEO in 2001 he has purchased over 836,000 shares on the open market -- including 317,000 last year and 50,000 shares thus far in 2009. Other investors may question his credibility, but we have no doubt that the interests of Mr. Immelt are aligned with all GE shareholders – as he should be.

March 20, 2009