What set off Bill Gross?

On Wednesday, Mr. Gross, the behemoth of the bond market, abandoned his usual low-key style and ripped into General Electric, accusing the world's largest company of misleading its investors, overloading on short-term debt and massaging its earnings without telling investors. The critique has sent GE shares tumbling, including a drop of 3.5% yesterday, which followed a 3% decline on Wednesday, for the worst two-day decline for the company since December.

But while the scrap surprised Wall Street -- and sent GE supporters scrambling to defend the company -- it capped weeks of frustration for Mr. Gross, the bond manager at Pacific Investment Management Co., the biggest bond-market player in the world.

In an interview yesterday, Mr. Gross said he has grown increasingly concerned as he has watched the drumbeat of recent news about companies and their accounting tactics. That ire finally boiled over earlier this week, when, in Mr. Gross's view, GE misled bond investors, costing them millions of dollars in losses.

It was then that Mr. Gross says he decided to make an example of GE. "I chose GE as the lightning rod," he says. "They're not the only ones, but there's real suspicion about them."

For months, analysts, Congress and frustrated shareholders have been assailing aggressive accounting used by many U.S. companies -- accounting techniques that often have boosted earnings and propped up stock prices that otherwise may have fallen. Meanwhile, the debt levels at many companies have gone up in recent years, alarming other investors.

That combination, says Mr. Gross, could hurt earnings later this year if the economy, as he predicts, abruptly slows, making it hard for many of these companies to service that debt.

In response to investors' questions following Mr. Gross's spotlighting GE's reliance on short-term commercial paper, GE Chief Financial Officer Keith Sherin late yesterday released a statement saying that because so much of GE Capital's growth came during the fourth quarter, "GE Capital entered 2002 with a high proportion of commercial paper in its debt structure."

Mr. Sherin said GE Capital is "in the process" of increasing its bank lines to $50 billion, from $33.5 billion, in an effort to reassure investors that it has ample access to cash.

While broad concerns about accounting and corporate debt have been known for months, Mr. Gross became one of the first major investors to act publicly on his concerns, selling about $1 billion of GE's commercial paper.

In the past year, Mr. Gross has been increasingly suspicious of GE and how the company has managed to just barely beat earnings expectations for many quarters. "What you keep hearing behind the scenes is they're selling corporate securities to book profits" before each quarter ends, Mr. Gross claims. "Everyone on Wall Street knows GE plays games; it's totally legal but just another example of how companies aren't coming clean with investors." Mr. Gross acknowledges that he has no evidence to back up his claim about the sale of securities to increase earnings. A GE spokesman declined to comment.

What finally triggered his response, Mr. Gross says, was a Wall Street Journal story on March 14. In the story, about a record $11 billion bond sale by GE's GE Capital unit, a company spokeswoman was quoted as saying the company sold the bonds because "absolute yield levels are at historic lows, and investor demand for long-term debt from high quality issuers is strong."

But while GE's bond yields were low compared with recent history, they weren't at historic lows, and indeed had been recently rising. In Mr. Gross's eyes, the real reason behind the sale was that GE Capital was unable to turn to the struggling market for commercial paper, or short-term IOUs, and was forced to sell the long-term bonds with higher yields, to raise cash.

The comment "got under my skin," says Mr. Gross.

For its part, GE said its statement was meant to convey that the company was selling at a low rate -- not the lowest in its history. The company also gave additional reasons for the bond sale.

In the report released on Wednesday, Mr. Gross discussed how companies increasingly use aggressive accounting techniques, such as emphasizing "pro forma earnings," which often exclude a wide range of ordinary business expenses. But he focused the report on GE, suggesting that the company hasn't been upfront about how it uses acquisitions financed by stock and cash to boost its earnings, or about how it relies on short-term financing without having adequate backup credit lines, in his view.

After the report was written over the weekend, he said he grew even more peeved at GE earlier this week, when the company announced that its financing unit might sell an additional $50 billion of bonds or other securities. That raised the prospect of additional bonds swamping investors who had just purchased $11 billion of bonds.

The price of GE Capital's bonds immediately fell, hurting investors who bought the bonds in the $11 billion sale. "This was another example of how companies trample on investors," says Mr. Gross. "Executives care more about their options than their balance sheets."

Yesterday, GE said the $50 billion "shelf" registration gives GE Capital "the capacity and flexibility to issue additional long-term debt as $31 billion of existing long-term debt matures through the rest of the year and as market conditions and growth warrant."

On Tuesday evening, Mr. Gross finished off the report, and it was posted on PIMCO's Web site the next morning. GE's stock and bond prices immediately began to fall.

An hour or so after trading began on Wednesday, Mr. Gross received a call from Dennis Dammerman, a vice chairman at GE. He was furious, Mr. Gross recalls, pointing out that GE doesn't generally use stock to make acquisitions, a point Mr. Gross now concedes.

But Mr. Dammerman failed to convince Mr. Gross that his larger points about GE's actions weren't justified. Soon, the executives were screaming at each other. "Why are you giving me such a hard time, I'm an investor in your company, for God's sake," Mr. Gross remembers telling Mr. Dammerman. "It was getting to be like a Fox News segment, where one person tries to outshout the other. I said, `Forget it.' " Then he hung up the phone.

Through a spokesman, Mr. Dammerman declined to comment.

In response to Mr. Gross's complaints about GE's reliance on short-term funding that isn't backed up with credit lines from banks, GE said that it hoped to reduce its short-term debt to between 25% and 35% of its debt total from 49% last year.

But now, some investors worry that GE's strategy to sell higher-cost long-term debt, rather than raise money in the troubled commercial-paper market, will hurt GE's bottom line. Moreover, some investors fear that others might follow Mr. Gross in abandoning GE's commercial paper, making it tougher for GE to tap that $1.4 trillion market. Recently, companies such as Tyco International have had to hunt down other sources of financing after being shut out of the commercial-paper market.

"I really just want GE to come clean, not to knock them down a notch," says Mr. Gross." We don't stand to benefit from this" squabble.

Credit: Staff Reporters of The Wall Street Journal