When something goes completely off the rails like the slow-motion, multi-decade collapse of GE, the pathetic finger pointing and blame-dodging that follows can be as hypnotizing as the train wreck itself. And years after hand-picking Jeff Immelt as his successor, here's what "legendary" GE CEO Jack Welch had to say about Immelt:
"I fucked up... He's full of shit. He's a bullshitter."
It's a quote that reveals much about both men.
GE's collapse is a tale about hubris, about idolatry of the celebrity CEO, and about what happens when you run a company backwards by beating numbers and managing the stock price, rather than running the company well first--and then letting the stock price naturally follow.
Power Failure isn't just a cautionary tale of modern American business, it's a metaphor for Fourth Turning-era American society. Welch and Immelt pioneered the art of financialization, using GE Capital to massage accounting results and lever up the company with tremendous liabilities of every imaginable flavor, ultimately destroying what was once a truly great industrial company.
And society is following GE's lead. We are increasingly financialized everywhere you look. Individuals and governments are heavily indebted. "Buy now, pay later" is our collective mantra as we borrow to fund everything. Worst of all, our biggest businesses outsource operations to low-wage countries while slathering a finance layer on top of everything: they acquire and dispose of businesses with LBOs, SPACs, private equity, whatever. We live today in the era of FOE: the financialization of everything, to the point where hardly anything seems real: it's all numbers on a spreadsheet or slides in some investment banker's deal pitchbook.
My hope? That the GE catastrophe will teach a generation of investors to delever, to increase their awareness of hidden risks--but most importantly, to be infinitely suspicious of any company that always "beats earnings," especially if that company lives and dies in highly cyclical and capital-intensive markets. No company's financials can be that smooth without playing games. GE under Jack Welch was the best ever at employing the entire range of cookie jar accounting techniques to smooth and manipulate earnings. If your company's CEO brags about beating the numbers, run!
Finally, note how GE's board stands idly by, before, during and after GE's demise. The author--quite rightly in my opinion--accuses board members of cowardice. I accuse them of avarice. This book is an important read and an important warning for all.
Notes:
1) Founders Thomas Edison and Charles Coffin: Edison was the inventor, Coffin was the competent businessman.
2) Coffin used vendor financing, interestingly, and also an aggressive acquisition strategy, as he understood that scale would be critically important in the early electrical infrastructure industry.
3) "We will make electricity so cheap that only the rich will burn candles." Thomas Edison... Of course Edison wasn't always right about everything: he tells his assistant "they will never try to steal the phonograph; it is not of any commercial value and therefore no one will ever have any incentive to try to get it away from me."
4) 1889: Edison consolidates his diverse enterprises into the Edison General Electric Company. These businesses were tremendously capital intensive.
5) Edison initially resists combining with Thompson Houston but then gives in in 1892, his investors had financial and managerial control of the company at this point and made the deal happen, thus General Electric was created.
6) A year later was the Panic of 1893, up to that time the worst collapse in United States history; GE nearly failed and had to borrow to meet payroll; laid off two-thirds of its 8,000 person workforce; orders fell 75%; Coffin had to do a highly creative capital raising solution: doing a sort of rights offering where he forward sold GE's portfolio of securities to shareholders for an advance of $4 million, the assets to be transferred later when things stabilized. The entire experience changed Coffin and made him constantly keep GE in strong financial position thereafter, vastly curtailing vendor financing, requiring payment in cash or short-term credit, etc.
7) Re Coffin's conservative accounting principles: he supposedly coined the phrase "use cost or market value, whichever is the lower" later adopted as a foundational tenet of FASB accounting standards.
8) Interesting to read the author's "fiat/keynesian standard"-based comments decrying the lack of a central monetary authority during the 1893 and 1907 panics; other normie-type decrials that there wasn't enough gold production to keep pace with money demand in those days, all standard keynesian/fiat-inflationary ways of looking at those crises. The author shouldn't be held to a standard of knowing his economic history of course, but if I could talk to him I'd recommend he do his "100 hours" learning about Bitcoin.
9) Coffin also created a sort of off-balance sheet separate company that resembled a little bit what GE Capital did during the Welch/Immelt eras: finance customer purchases of GE products.
10) Coffin dies in July 1926 as one of America's richest men.
11) Rural electrification allowed factories to be closer to where raw materials were, thus you didn't have to ship raw materials to the cities (where they used to be turned into finished products. Now things like cloth could be made where the cotton is grown, manufacturing plans could be built in rural areas, etc.
12) Owen D Young led GE through the World War I era. Note the implications everybody knowing everybody else" back then; life seems a lot more anonymous and faceless today by comparison: in the 1890s St Lawrence University heard about Owen Young, the University president himself agreed to lend him the balance of his tuition (his family couldn't afford to pay it all). Compare this to the faceless bureaucracy running financial services and scholarship programs at any major university today. Young later goes to Boston University, was able to graduate in two years instead of three. A real beast...
13) Another coincidence from a non-faceless era: GE's general counsel had just died in a car accident, and GE management already knew of Young as an opposing counsel; they offered him the job, and Young goes on to professionalize and modernize the general counselor's office, and while he was at it, Young also modernizing how GE handled labor relations.
14) The Navy interferes in GE's development of wireless; stops them from sell this tech to Marconi in England.
15) The creation of RCA, the Radio Corporation of America, inside GE, this was part of the deal for GE to buy American Marconi; the Marconi guys would get to run RCA since GE had no experience in radio, only in component manufacture.
16) The negotiations to buy American Marconi from British Marconi was really a battle for control of global communications between United States and England.
17) RCA gets spun off thanks to an antitrust consent decree with the US government in 1932. Note that many years later GE would buy it back. (!)
18) Suddenly, we're onto 1942 and world War II, and GE's role in manufacturing for the US war machine; President Charles Edward Wilson, nicknamed "Electric" Charlie Wilson--not to be confused with GM's CEO "Engine" Charlie Wilson.
19) Another leap to 1950s-era CEO Ralph Cordiner, who hated bureaucracy, he decentralized GM into 27 independent divisions with distributed leadership. Cordiner famously said "A committee moves at the speed of its least informed member and too often is used as a way of sharing irresponsibility." This move was in response to typical corporate bureaucracy-related problems like having engineers who designed household appliances who were too far removed from the people selling--let alone buying--those appliances. You needed to get feedback to the people making/designing these products.
20) [It's vaguely disheartening to read about GE's (long past) successes in turning around its appliance division and how it did so well against other major American brands like Frigidaire or Sears. What has happened to all these once-great companies? Even those brands that managed to survive now do all their manufacturing offshore, or worse, just sell their brand to whitebox manufacturers offshore who make their own appliance and just slap a GE sticker on it. It's like when Sara Lee sold off its bakeries, except way worse.]
21) This decentralization plan (see note #19) unfortunately drove significant pressure on executives to hit quarterly and annual numbers (the management theory of pushing down decision-making to the business unit level tends to fall apart when there's human vested interests at stake); the entrepreneurial spirit that was supposed to be released by decentralization plan fell apart as key executives colluded with customers for pricing/deal signings, etc. "Making the numbers" was a problem in GE's even before the Jack Welch era, but of course Welch and later Immelt refined it into an art form.
22) There was essentially a cartel in the power generation business at GE and other companies but it fell apart as participants kept breaking the price agreements. Cordiner's decentralization plan actually led to tremendous amount of cartel behavior: some 19 different cartels across the company.
23) Jack Welch ("Jack from plastics") joins GE in 1960 just when the worst of GE's price fixing scandals trickled out publicly.
24) Welch gets paid the same $1,000 bonuses everybody else in his department after having a tremendously good year developing products in GE plastics; he goes apeshit and quits, but then is recruited back by his boss's boss; "All of a sudden I had a rabbi. This guy loved me. He was a slick operator. I learned from him."
25) He gets nickname Teflon Jack, the factory he was in charge of literally blew up one day in 1963, doesn't get fired.
26) GE's production of revolutionary plastic and polycarbonate products like lexan and noryl.
27) Reginald Jones succeeds Fred Borch as GE's CEO in 1973; Borch was the replacement for Cordiner who retired in 1963, two years before GE's mandatory 65 retirement age. Reg Jones was a finance and deal guy.
28) [It's fascinating to see the (surprisingly low) profit ratios of companies with this level of capital intensity: think about the comparison between GE then and modern companies that make up the top ranks of the S&P500 today: in 1973 GE sales were $10 billion with profits of $530 million (a measly 5% net margin). Compare this to the preposterously high net margins of Microsoft, Google, Apple, companies with net margins more like 25-30%, far, far higher! GE at this time was making jet engines, plastics, products for nuclear power, computers, appliances, electronic devices etc.]
29) Jumping back to 1917: Sanford Moss, a GE engineer, working on solving the problem of airplane engines at high altitude, this is when GE entered the airplane engine business. [Note that the book jumps around sometimes in a way that's confusing to the reader but probably unavoidable.]
30) So far there been some minor errors in the book: the author confuses GE's invention of the first jet engine in the United States and called it "an aviation first" when Germans and others had developed the technology before; je's a little bit confused about US Federal Reserve's regulatory influence on economic cycles; he confuses arteries with veins while describing Jack Welch's heart surgery, etc. These are minor criticisms.
31) Another intriguing theme in this book: the challenge of running complex global operations. You tied different (in some cases radically different) businesses together and you need to have some kind of strategic direction tying it all together: how do you run a conglomerate selling into industries that have radically different cycles; how do you allocate cash flows across the entire entity, how do you look down field strategically, etc.
32) On the style differences between Reg Jones and Jack Welch, "...going to see Reg Jones was like going to see the president in the Oval Office. Going to see Jack was like going to see a fraternity brother at a tailgate party."
33) Jack Welch wows Jones in a corporate presentation about the plastics business.
34) The PCB controversy with New York State starting in 1976: Monsanto was the primary manufacturer of them, a type of oil used in lubricants, paper coatings, hydraulic fluids, plasticizers, paints, inks and adhesives, also used in the manufacturer of capacitors and generators because of their fire resistance and ability to hold an electrical charge. GE "had the permission of both federal and state authorities to discharge 30lbs of PCBs a day into the Hudson." That quote is fascinating, I had no idea about that at all, and it's interesting to see the finger-pointing and blame-dodging by New York State in the lawsuits, complaints and PR battles in the media in the decades to follow as this is (still!) being fought out.
35) GE buys Utah International, the construction and mining company for $2.2 billion in 1976, at the time the largest corporate merger in history. Jack hated the deal. GE later sold it to BHP in 1984 (for only $2.4B!!) The point of this deal was to make GE more inflation resistant.
36) Jack Welch and vicious competition for the GE CEO job to succeed Reg Jones, it was a 3-year bake off.
37) [See photo] "I fired a lot of guys. I didn't give a fuck." Welch takes over the consumer products division: light bulbs, appliances, small housewares, audio products, televisions, air conditioners, at best a breakeven business with no growth. Welch ends up firing half the people, and judging by the bloat in this business unit as described by the author, it was necessary. Note that the light bulb division in Cleveland made identical light bulbs to a company in Hungary, but with twice the cost structure; Welch finds out that the Cleveland plant has a full-time swimming pool, a full-time barber, and a dentist on staff. (!) Also, inside the business was a hidden jewel: the General Electric Credit Corporation that nobody seemed to care about... Jack Welch saw it as a way to earn a spread between GE's AAA credit rating and consumer borrowing rates. This is a tremendous, even visionary, insight--even though this credit business later grew way out of control.
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| "I fired a lot of guys. I didn't give a fuck." |
38) GE's attempt to get back into media: Jack tries to buy Cox Communications but then has to scuttle the deal and eat crow in front of the board when the purchase price gets out of hand.
39) Welch gets the CEO job in 1981; he felt vibes quite a bit earlier that he was going to get it.
40) GE Credit/GE Capital, GE uses it as an intriguing non-bank financial to:
* Lend to businesses that banks wouldn't touch
* vendor financing consumer purchases but also to finance industrial equipment to large business customers
* arbitrage the parent company's AAA credit rating (thus a cheap cost of funds) via the commercial paper market to lend out at far higher rates
41) Welch also starts the "we must be number one or number two in every business" strategy: GE to boot underperforming businesses or businesses where they aren't dominant.
42) "When Jack took over as CEO, GE had a market capitalization of $12 billion, and by the end of 1981, it had $28 billion in revenue, $1.6 billion in profits... GE stock, which had traded at twenty-two times earnings a decade earlier, was now trading at a mere eight times estimated 1981 earnings [meaning that GE's market cap was basically flat despite more than doubling the company's turnover]." A few thoughts here: PE's sure can collapse, you can buy a growing company but that doesn't mean you get a growing stock price along with it. Also, you are at the mercy of the overall market and the appetite investors have for stocks, and the early 80s was basically a peak in investor pessimism, a bare year or two before the great 1982-2000 bull market where the DJIA increased 13x. If you're the CEO of a large company over that time horizon you had one heck of a tailwind.
43) Note also GE's desperate but incompetent efforts to make it in the computer and semiconductor industry, buying and then selling a computer manufacturing business, acquiring semiconductor maker Intercell and other software and chip startups. Terrible! it's like Intel trying to diversify away from CPUs or IBM trying to make it laptops or software.
44) A big part of the so-called "Neutron Jack" nickname was Welch's legitimate elimination of bureaucracy and excess layers of management.
45) Get a load of this coincidence! Joseph Jett, a newly hired engineer from MIT who worked at GE's Selkirk NY plant, was basically hidden away when Welch visited the plant: the plant manager was afraid that Jack Welch felt the same about black people as he did about fat people (!!!) [Welch was famously disparaging of obese people throughout his career]. Jett worked at GE for 3 years, then went to Harvard Business School, and then went to work at Kidder Peabody. Later GE acquired Kidder... and Jett nearly blew up the firm with a phony Nick Leeson-like trading strategy. Holy crap!
46) See also the claims that Jack Welch decimated various towns and communities across GE's plant footprint as he fired/downsized aggressively: Pittsfield, MA; Schenectady, NY; Waterford, NY; etc.
47) Welch made the company less formal, more free-wheeling, less hierarchical, he also introduced earnings management; he also rewarded executives with GE stock options, also the strategy being either number one or number two in every sector of GE's businesses, also using M&A to buy and sell companies to make a "perfect" portfolio--ironically this led mostly to GE buying companies high and selling them low, lots of terrible acquisitions.
48) Selling the household products and housewares business angered GE's rank and file employees.
49) [Another standard CEO move: get rid of your established CFO and replace him/her with someone young and impressionable so you can manage earnings more effectively. This is what Lucent did during its period of accounting malfeasance for example.] Welch does this in 1984, firing Tom Thorson and putting Dennis Dammerman in the CFO spot in 1984 at age 38, by far the youngest CFO in GE's history, no one in the business community had even heard of him.
50) The author confuses the fundamental nature of a certain famous corporate bankruptcy narratives when discussing GE's guilty plea for defrauding the Air Force on military contracts; he likens it (inappropriately) to the existential bankruptcy of Arthur Anderson (which was due to a Federal indictment that instantly and unintentionally destroyed the firm) and the accounting-related bankruptcies of Enron and WorldCom, see page 178. This is a minor error of context.
51) Serious sexual allegations against Welch: allegations that he would demand to be set up with hookers while in Milwaukee for example; this behavior reportedly ended his first marriage; these are allegations disclosed in Thomas O'Boyle's book At Any Cost: Jack Welch, General Electric and the Pursuit of Profit. Welch was able to get hold of the book proposal somehow, '"Who is this fucker O'Boyle and what does he think he's doing?' Jack screamed." Later, Welch used one of the nation's top litigators, Dan Webb to try and intimidate O'Boyle out of writing the book. Interestingly, O'Boyle thanks Jack Welch for his intimidation tactics because it helped O'Boyle find Jesus Christ.
52) Welch is in the market for a major television network, he ends up buying NBC indirectly by acquiring its owner, RCA, the very company they were forced to spin out under a consent decree in 1933. NBC was the shittiest of that era's three key networks, but under the direction of Grant Tinker in the early 80s it would become the number one network with shows like The Cosby Show, Cheers and The Golden Girls. The RCA acquisition turned out to be one of Jack's best deals.
53) GE's deal to buy Kidder Peabody deal (circa 1986) was for $600 million or 3.5 times book. (!) Ultimately turns out to be a terrible deal.
54) Welch puts Bob Wright in charge of NBC, also names Gary Wendt to run GE Capital. Note the quirky history of Gary Wendt before he joined GE. GE Capital goes from 4% of GE's pre-tax profit to more than 50% between the 1970s and the 1990s. Welch was basically running a non-bank financial, much later people would pejoratively call GE a "hedge fund in drag."
55) Wendt wasn't even involved and the Kidder deal, Kidder also wouldn't let GE look at Kidder's books before the deal, this is absolutely preposterous from a fiduciary standpoint, yet stupidly, GE still bought it.
56) [As I think about the various deals GE did over the years, the company really just looks like a retail bagholder, as if they are just serving as bagholders/exit liquidity for much smarter dealmakers. ]
57) Kidder also had an arbitrage department run by the same guy who ran M&A advisory, totally not kosher; there ended up being some insider trading prosecutions of Marty Siegel and other senior people at Kidder. GE sends it its lawyers and finally does legitimate due diligence some seven months after they acquired the company... Also, Rudy Giuliani (at the time as a deeply feared prosecutor for the famous New York Southern District) was going to indict Kidder (which would have been an insta-death penalty for the firm); Jack Welch convinced him not to.
58) The mid-80s at NBC: Bob Wright is put in charge of the network, GE/NBC starts buying cable channels like A&E, Bravo Network, American Movie Classics, Court TV, etc., at that time no broadcaster was involved in cable. Welch was convinced that people were going to spend more time watching cable than broadcast TV. Bob Wright had to go to John Malone, the huge cable operator, to get his blessing for launching a new news channel and Malone nixed it, citing CNN and Headline news which already were in business. Malone then suggested NBC start a business news channel because the existing competitor, FNN, was terrible, saying if NBC started a competitor, then Malone's company TCI would "launch you" (meaning run NBC's business news channel instead of FNN); this ultimately resulted in the launch of CNBC.
59) A funny story from the early days of CNBC: Early on Sue Herera and Joe Kernan were bantering live on CNBC about Jack Welch and the fact that he ought to split GE's stock and raise the dividend; Kernan joked around saying that Welch was probably out having a nice dinner; there was a fax from Welch waiting for Herera when she got off the air: "Good try--I'm always watching--love, Jack."
60) Welch was savvy about understanding what John Malone might do; Welch was predictive in his questions about whether CNBC could make it and whether Malone would compete against it.
61) David Zaslav, who worked with Bob Wright on NBC and GE's other media properties, with an insight on how to manage Jack Welch: you had to make sure he was "in the boat with you" solving whatever problem you had, rather than being a "diving judge" judging you from the sidelines.
62) August 1993: Roger Ailes put in charge of CNBC.
63) Jack Welch was pretty lucky in a lot of the things he did; CNBC was launched right before the 1990s stock market boom; GE Capital got a large tailwind from the long term secular decline of interest rates from the 1980s on, etc.
64) Roger Ailes eventually leaves NBC under pressure, after various conflicts with David Zaslav and allegations of antisemitic comments (Ailes allegedly called Zaslav "a little fucking Jew prick"), later Ailes goes to work for Murdoch on Fox.
65) Jack increasingly uses GE Capital as his cookie jar for meeting/beating earnings. "...if he told Wall Street that GE was going to make a certain amount of earnings for the quarter, by God, he was going to deliver those earnings."
66) 1987-1988 time frame: GE was one of the top market cap companies in the world, behind IBM and Exxon; by July 1990, IBM and GE were the #1 and #2 top companies at $67 and $65 billion in market cap. [It's absolutely wild now to look back at these numbers and consider that "big" when today we have the top companies in the trillions of market cap. That's what happens with an inflating fiat currency, and it's why asset owners can keep up when everyone else gets inflated away!! Note also that within a couple of years IBM would go through a tremendous tailspin in its fortunes.
67) David Tice writes a highly bearish article in Barron's on risks at GE Capital; this was back in 1990.
68) On "earnings management" in business culture back then versus now: back then it was necessary to manage earnings to run a well-regarded company, this is how GE got a much higher PE ratio over time during the Jack Welch era: people believed the company would always deliver and never "surprise" investors negatively, and the stock market would give companies like this a premium valuation. Today, however, savvy investment analysts know that earnings management indicates all sorts of massaging of the accounting. Jack would "call up and say I need another $1 million or another $2 million or whatever." Thus GE always made its numbers.
69) Welch divorces his first wife in 1987, devoting barely fifty words to the subject in his autobiography. (!) Welch also gave each of his kids GE stock and later believed he made them wealthier than they should have been ("they got too much money"); each of them quits their jobs. Welch starts dating a 36-year-old lawyer named Jane Beasley a year later, they got married the year after that in 1989.
70) Also notable that in 1987 Jack Welch and his (first) wife were together only worth $12 million, even after being CEO of GE for all these years! The economics of the celebrity CEO sure have changed...
71) Kidder Peabody starts blowing up; the Joseph Jett trading scandal happens, other parts of the business start struggling; Welch tries to sell certain parts of the business but he couldn't control the Kidder bankers working there: either they fought him on his efforts to sell parts of the company or they would jump ship, etc.
72) When GE sold off Kidder it was at about a $2 billion loss, which GE offset with a $2 billion "gain" taken from the reserves of GE's insurance subsidiary Employers Re, this would set up a time bomb down the road in 2018 when its legacy insurance businesses blew up. Basically the insurance businesses were used as shock absorbers whenever Welch needed a few pennies of earnings per share to make numbers.
73) GE and its fetish for Six Sigma.
74) Welch has a heart attack in 1995, at age 59, the author confuses an artery with a vein in telling Jack's heart attack story.
75) [The reader can learn (indirectly and unintentionally) a few highly disturbing things about surgery and anesthesia, and in particular about coronary bypass surgery here: the cardiologist tells Jack to not make "any major decisions for a few weeks, just because of general anesthesia. It turns out if you get general anesthesia for anything, I mean even for a hernia repair, your short-term memory is a little bit dinged. So you probably shouldn't be making major decisions for a couple of weeks, and be sure to write everything down." Yikes.
76) And it gets worse!! "He'd have a CT scan and his grafts (veins from his leg regrafted to "bypass" his blocked heart arteries) were fine. I felt good about that. I was gratified. I would have been very sad if he had died because he had lost a graft." I had no idea this "losting a graft" was even a thing, and I feel just like I did after reading Atul Gawande's book: do not get surgery unless absolutely necessary.]
77) Jack's heart attack leads to pressure to start a successor search. Gary Wendt who was president of GE Capital, ruins his chances by starting a nasty divorce with his wife in 1995, which got into the media.
78) Jack's second marriage to Jane Beasley falls apart starting in 1996, her father is murdered under mysterious circumstances and then she has an affair with an Italian guy; also Welch seems weirdly indifferent to and unsupportive of her father's murder investigation.
79) An example of how many of Welch's lieutenants really loved him and rose to the challenges he gave them:
[Welch tells Jim Mcnerney] "'Go to Hong Kong and get this company growing in Asia.'
'What do you want me to do?' McNerney asked him.
'You figure it out,' Jack said.
It was 'the absolute best thing that's ever been said to me by a boss,' Mcnerney told me."
80) Jeff Immelt: kind of an athletic frat boy who distinguished himself early on at GE, started getting promotions and grooming; Jack Welch favored him but also said "You're never going to be CEO if you don't lose weight. You've got to get your fucking weight down. Can't have everybody fucking fat." (See note #45 above.)
81) Dave Cote, who was one of the potential successors to Jack Welch, but when passed over went on to run Honeywell and do a great job there, Cote was a bit of a screwup early on in his life, and it took him a little while to get his career and his confidence under him. This guy's story is pretty interesting: he was quite successful at GE, but was assigned to run the major appliances business, but it was the business that couldn't really be fixed; Welch decides that Cote wouldn't be the next CEO and tells him "you need to be out by year end." Later Jack realized he was mistaken as Cote went on to run TRW, and then to do a tremendous job running Honeywell, "I just didn't think he was as smart as he turned out to be."
82) As soon as Welch and the board decided on Jeff Immelt as the new CEO, Ken Langone call Jack Welch asking if he could hire Bob Nardelli to be CEO at Home Depot, and Nardelli went on to do great things running that company, just as Dave Cote did great things at Honeywell, just as Bob McNerney went on to good successes running 3M and then Boeing. GE picked the wrong guy!!
83) Then right before Jack is to retire from GE, United Technologies makes a merger offer with Honeywell, and then Jack comes back to make a competing bid for Honeywell; this would be GE's largest deal ever. The European Union ultimately nixed the deal, requiring way too many divestitures. Jack Welch's response after Mario Monti of the EU droned on on all the things GE had to give up to do the deal, "'Are you shitting me? You're asking me to buy an 18-hole golf course that's only got 15 holes.' I don't know whether they got the analogy." Welch later claimed that the EU had a strategy to use deal concessions like these to build up European companies by forcing the "hiving off" of valuable assets from more successful American companies. Also worth noting "that Jack and his team started to see things about Honeywell they didn't like," for example, unaccounted asbestos liabilities, accounting issues, etc, so the EU requirements gave Jack a graceful way to exit the deal even though everyone blamed the EU.
84) Jeff immelt saying he had "one good day" during his first year as CEO of GE, September 10th, 2001, which was his first day without Jack Welch around. The next day was 9/11/2001. (!!) Note also that GE had insured 7 World Trade as well as all four planes used in the attacks and GE also had partially reinsured both towers, in total a billion dollar write off. Worse, the concerns about the aerospace industry and commercial aviation were existential, it was feared that the entire industry might never come back from an event like this.
85) GE stock drops by 25% within 10 days of 9/11, one of the largest institutional shareholders sold 200 million shares after realizing how much reinsurance exposure GE had [in some ways this is the beginning of GE Capital's "black box" starting to really wreck the company...]
86) Jeff Immelt inherited a company with all sorts of ticking time bombs in it thanks to all the earnings management that it happened under Welch; plus the stock traded with high P/E ratio predicated on much smoother earnings than the than the company would be able to produce.
87) Also nobody trusted GE Capital, especially after the WorldCom, Global Crossing, Adelphia, Enron accounting controversies. GE Capital was totally opaque but it always hit numbers. The problem was "suddenly such financial precision was viewed skeptically" by investors. See my introductory comments: smooth earnings = manipulated earnings.
88) Bill Gross fires off complaints about GE's big bond offering, as well as as GE excessive dependence on the commercial paper market. "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." [Stuff like this isn't an issue until it IS an issue.]
89) Jeff Immelt blamed a lot of GE's liquidity problems at GE Capital on Jim Bunt; ironically Bunt was one of the key people warning the company about this very problem for a long time! Immelt replaces him.
90) [Note how the company reacts with anger and hubris (and firings!) to legitimate criticisms (about their debt load, their commercial paper exposure, their leverage ratios, etc).]
91) Three key allegations: that Jeff Hamel lied in his claims of interactions with people at GE Capital, and that Jim Bunt never responded to letters from Moody's and that Denis Nayden made certain specific comments in a meeting with Immelt that never actually happened, ("Those are absolute lies. That's bullshit.")
92) Explosively embarrassing details about Jack's GE retirement package come out thanks to a divorce filing from his estranged second wife Jane. Jack's ridiculous perks include everything from lifetime courtside seats for the Knicks and various tennis tournaments, lifetime wine service, laundry service, food, toiletries, satellite TV service for four homes, even box seats at the Met (despite Jack heating the opera) and membership dues at all four of Jack's country clubs. I remember when this all came out! Jack of course is effectively now hogging the spotlight again, plus this gives just another example of the opacity of GE, nobody disclosed any of this in any filing, ever.
93) A textbook modern journalism 101 example here of Jack killing the story about his affair with a Harvard Business Review editor (the affair happened while she was writing a feature on him). Per the WSJ as it was protecting Jack: "you don't want to have that be true." [see photo below]. The WSJ and the HBR both look pathetic here, really pathetic.
94) "He didn't read the deck." Jeff Immelt loses respect from his lieutenants because he doesn't read the things they send to him, unlike Jack who read everything and knew more about the thing than you did.
95) Spinning off GE's insurance businesses in an IPO of Genworth Financial in 2004: it contained the mortgage insurance business, which ultimately bankrupted Genworth within a few years when the mortgage crisis hit, but it didn't contain GE's long-term care insurance policies which (much later) nearly broke GE, albeit at not for another 13 years. A disaster no matter how you look at it, for everyone. And worse: Immelt decided to buy a subprime mortgage broker in April of 2004 to replace the mortgage earnings that he lost by jettisoning Genworth. Wild how anti-prescient these guys are.
96) Jeff Immelt also picks a fight with Ken Langone, trying to get him to leave the board because of his conflict with Elliott Spitzer, a conflict that Langone later completely won, massively to Spitzer's discredit. Later Langone said about Immelt, "This fucking guy lied." Immelt makes an enemy for life out of Ken Langone.
97) Immelt strikes the reader as kind of an overconfident, clueless Boomer, just left in the dust by all of the technological trends of the early 2000s.
98) Immelt also has horrible idea after horrible idea, rebranding the company when it already had the world's most recognizable brand, using awful replacement phrases like "Imagination at Work," "Green is Green," or "Ecomagination." Gross.
99) Immelt also presides over a brain drain at GE, the top people who would tell him the truth or help him navigate a crisis started leaving.
100) Immelt failed to see any signs of a top in the real estate market, in fact wanted to get more long thanks to a McKinsey report that he waved around in one meeting (the report claimed real estate would continue to boom); Immelt had a chance to deconsolidate and sell off a lot of GE's real estate but refused to because he needed the one-offs from small property sales to offset losses in the industrial side of the company. Immelt famous would say "McKinsey says... and they are smarter than you are" to his top guys.
101) The author doesn't seem to be aware that Jim Grant is a perma-bear, always writing bearishly about everyone: With anything Grant writes you can always datamine it later and pull out the bearish commentary since that is nearly all he ever says. Ignoring or fading Grant in most situations is actually a value-creating action with almost any situation or company, just not in this case.
102) GE prints a huge earnings miss 1Q2008, just 2 weeks after Jeff Immelt confidently reiterated earnings targets; the implications of this were huge on a bunch of levels, it meant that:
* GE Capital wouldn't be able to act as a candy store/cookie jar for smoothing earnings anymore
* Things were way worse than anybody knew inside the company
* Either the company completely lost the ability to forecast or that something really big and bad had just happened
* Immelt was clueless about the nature of his own company's business prospects.
103) Also judging by the context in this book, as well as in former Treasury secretary Hank Paulson's post crisis book, it seems clear that Jeff Immelt lied about a conversation he had with Paulsen about GE's inability to sell commercial paper during the depths of the crisis in September 2008. Immelt denies that the subject came up.
104) Also it turns out around this time Immelt was contemplating what a bankruptcy filing for GE Capital would look like--something you could totally not even mention. Also, the TARP program severely disadvantaged GE Capital's borrowing ability: why would anybody buy GE Capital paper (especially its commercial paper) when all these TARP-financed bank loan paper had a government guarantee? Thus the US government distorted the lending market in unintended ways. Later the USA included GE in some of these programs basically to to save the company: basically the Treasury the Fed and the FDIC considered "non-bank financial institutions" on a case-by-case basis. Also it's pretty savvy, probably unintentionally so, that there wasn't a clear guarantee of GE capital's liabilities from GE the parent company.
105) GE sells 51% of NBC to Comcast and it becomes quickly apparent that GE didn't know what they were doing with NBC, it was very poorly run, Immelt didn't really know what was going on in the business, etc.
106) It's interesting the NBC deal and how it benefited both parties: GE didn't know what they were doing with NBC, by selling half of it to Comcast and having it be run by competent managers, NBC's profitability more than doubled, and so GE did much better as it gave up control yet kept 49% of the equity! Comcast then offers to buy the rest of GE only 18 months later rather than the seven years as initially agreed and paid GE $18 billion for the remaining 49%, including the office space in 30 Rock.
107) And then Jeff Immelt is pissed about the whole thing, complaining and blaming his own guys! "...we saw first hand how these guys ran stuff, and they screwed this company up like you can't believe and then sold it for a third of what it was worth and then got pissed off because they did it..."
108) GE gets grouped under the SIFI designation ("Systemically Important Financial Institution"); GE manages to get some of the language of the Dodd-Frank law changed to help GE and not force it to spin off GE Capital or divest it.
109) Internally, Immelt was viewed as an anti-Jack: "If all you did was say 'what would Jack do, and what's the opposite of what Jack would do?' You could pretty much with a 98% confidence level predict what this guy would do."
110) [Also interesting to read the stories of a lot of the mid-level managers and upper little managers who would basically get moved all over the world whenever the company wants to move them: see for example Steve Bolze, who got moved along with his kids and family in ridiculous ways from city to city and job to job, he'd have to uproot his family, often with very little notice: "if that's where the company needs me, then fine." This is a totally foreign mentality to modern workers, but in that era it was the kind of thing that you just did when you worked for a so-called great company. Note also that Bolze basically got screwed over in a way: he was trying to understand the succession plan after Immelt, and Immelt basically thought he was being some kind of brash pretender coming at the king; Immelt had too thin a skin about things like this.
111) The Treasury and Federal Reserve regulation of GE Capital under its SIFI designation was the final disaster for GE Capital; they had to de-lever, which meant they couldn't maintain their ROE targets; they also had all these gov't requests/demands for information and compliance, at a cost of as much as $2 billion a year in additional expenses, plus needing to hire some 5,000 people. Also GE management, and this includes Jeff Immelt, did not understand that you cannot be dicks to Federal Reserve regulators.
112) [Note also the tremendous existential problem of what to do with GE capital: spin it off? Get rid of it? Keep it going? How would you replace the earnings it produced as well as the earnings smoothing it made available to the rest of the company, when this earnings smoothing was so central to how you ran the company? It's like the entire territory changed and GE refused to (or simply couldn't) put down its old roadmap and pick up a new, different roadmap for navigating it.]
113) Getting rid of GE Capital was a tremendous strategic pivot (also not quite selling out at the exact bottom but certainly far from catching a top tick), and then GE turns around and puts the money into buying Baker Hughes at the top, as well as the acquisition of Alstom's power business, another huge acquisition that did not go well.
114) Immelt starts to get paranoid about certain board members, he tries to get rid of Sandy Warner a long time board member, Jeff immelt saw him as a threat. Ken Langone's comment on this was "I love watching rats fucking chew on each other's tails."
115) Nelson Peltz of Trian partners gets enticed by Immelt to join the board, but he fails to tell the lead board member Ralph Larson about it. Trian ended up buying a $2.5 billion stake in GE, its largest single investment ever.
116) GE gets out from under its SIFI designation in 2016, after 3 years of oversight.
117) Immelt's job now under threat after missing numbers/being too optimistic. [He's guilty of OPUD: you always want to err on the side of UPOD.]
118) Note also the company's amateurish response to a profile of Immelt in the nothing magazine Boston Magazine, the magazine received a harsh and berating phone call from the company's chief communications officer, totally amateurish to respond this way.
119) 2017: Immelt blows an analyst meeting, still holding onto a delusional $2.00/share earnings forecast, gets fired shortly after, replaced by John Flannery.
120) Note the long-term care insurance policies outstanding that later nearly blew up GE; CFO Jeff Bornstein started looking into this part of the business using outside actuaries. This thing was an absolute disaster: it was "finance" business that everybody thought GE had exited a decade earlier, and all of a sudden it was spitting out a liability that might require a multibillion dollar reserve to deal with it! The division had been massaging their actuarial assumptions for years to keep the estimated liability stable. [I wonder if this is happening in any life/group life insurance companies right now given the unexpected and "unexplained" changes in mortality across many countries lately?]
121) At the same time GE's power business was having all kinds of problems. It really looks like Immelt had no idea what he was running when he got fired, he had pushed the company overall too hard to "make the numbers" and his business units did what companies always do: make sales that shouldn't be made, vendor finance sales that shouldn't be financed, etc. See for example the $1.1 billion unsecured receivable (unsecured!) to the Angolan government for rail and power infrastructure. Immelt he left a steaming pile of thermonuclear shit for his successor to clean up, which (as we will see) he obviously couldn't.
122) This part of the book gives some excellent examples of the kind of accounting techniques that can be used to boost results in the near term while stealing from future results. We see some great examples: things like vendor financing for huge capital projects then factoring the receivables: this lets you both book more sales than you'd really otherwise have and it makes it look like you're generating cash flow from operations (you sort of are but it's via factoring receivables at a huge discount). What results eventually are huge losses down the road when you have reconcile these discounted and factored "sales" with the full load of expenses you've incurred. This is also a standard problem of large, complex companies: the bad stuff can be done several layers away from senior management, so management never knows about it until its too late.
123) The author calls Immelt's tenure at GE (with good reason) "one of the greatest corporate governance abdications in American history."
124) "Success theater": Steve Tusa's (industrials analyst at JPMorgan) derogatory phrase for the Jeff Immelt era at GE. Tusa saw the problems that GE power so accurately that GE actually initiated a search for an internal mole at the company who might have been his source. (see also note #90 above). Again: note how the company reacts with anger, hubris and even paranoia to legitimate criticisms, yet it has no interest in actually fixing any of the flaws or fragilities underlying those criticisms.
125) Tremendous insights here on the kinds of problems that can happen at complex companies where there's a lot of pressure to "make the numbers": what ultimately happens is you end up having time bombs hidden in various places throughout the company... and they go off all at once later. This is exactly what happened to GE.
126) And then everybody turned against Immelt afterwards. The long knives came out and all the worst stories came out about him. A good example was "the two jet controversy" that got written up in the WSJ: Immelt traveled around the world in a private jet with a second jet tagging along in case of a delay or equipment issue, and worse yet, Immelt denied he even knew about it, which was totally implausible. This particular controversy is embarrassing on a few levels: first, that he did it, and at tremendous economic waste; second, that he claimed not to know about it; and third, that he admitted, in a conversation with this book's author, that he did know about it and had essentially lied about not knowing about it. What a fucker.
127) John Flannery is quickly made CEO, he starts blowing out Immelt loyalists; he also fires CFO Jeff Bornstein who was among many criticizing Flannery for his indecisiveness. Ironically Flannery comes up with quite an aggressive plan (the "Eisenhower plan") to break up GE, and yet the company doesn't even know what is the nature of various bond covenants or anything about the various inter-relations between the different divisions of GE that might accelerate the need to pay down debt or breach debt covenants, etc.; GE was like a gigantic Jenga tower, with GE's commitment to guarantee GE Capital's debt kind of sitting on top of everything ("everyone was strapped to the bomb"). The board unanimously agrees to support the ideas of Eisenhower.
128) More on the malicious behavior of GE investigating Steve Tus (see note #124). Tusa did exceptional scuttlebutt work on the company, discovering things that the company didn't want revealed: it turned out that instead of having a mole at the company he actually had just been talking to GE's power company customers, and he was the one who discovered the broken turbine blade problem in GE's "revolutionary" new gas turbine product. [Always watch out when a company attacks a critical analyst or a short-seller. It's a reliable indicator that the stock is going lower and the analyst is 100% right about the problems! The right answer in cases like this is to never attack, just run your business and prove the doubters wrong.]
129) Finally there's a palace coup orchestrated by Ed Garden from Trian along with Larry Culp who was lead director. The plan was to put Culp in as CEO and blow out John Flannery after just over one year. term. Worse, this also involved breaking board rules at the GE: failing to have a notice for a board meeting, the removal of a board member (John Flannery himself) before his term ends without a shareholder vote. Both of these were breaches of corporate law that were somehow done anyway. Flannery took it like a gentleman and left quietly.
130) Culp does a "kitchen sink" quarter, cuts the dividend to a penny, takes a $22 billion impairment charge (!!) for the power division, brings in a new CFO, and then goes on to basically follow Flannery's Eisenhower plan. (I'm wearing out my exclamation point key here people). Four years later, the stock is still down from where Culp took over. (Split adjusted before Culp's kitchen sink quarter the stock was around $90-ish a share, roughly $11-ish adjusted for GE's 8:1 reverse split. Today the stock is around $83.) Note also the stock is horrifically below its (again, split-adjusted) all-time high of $449 a share, which it hit 20+ years ago in 2000.
131) What is GE now?
* GE Healthcare: The company spun off its healthcare business just this month (January 2023, ticker GEHC) while retaining a 19.9% stake;
* GE Power generation, which will be spun off in 2024, and
* GE aviation, the jet engine business, which will be continued by GE under the GE brand.
* Note also that Baker Hughes now owns all of GE's oil and gas services assets, AerCap owns GE Capital's aircraft leasing business.
Thus now GE is a hybrid aviation/power generation equipment company which will soon be just aviation. All of this was essentially John Flannery's Eisenhower plan. (!)
132) And to finish with an absolute pièce de résistance: Shortly after Immelt left GE he wrote an article in The Harvard Business Review about the "resounding success" of his time there; this article was an act of supreme delusion.
To Read:
Ida Tarbell: Owen D. Young: A New Type of Industrial Leader
Jack Welch: Jack: Straight From the Gut
Jeff Immelt: Hot Seat: What I Learned Leading a Great American Company
Thomas O'Boyle: At Any Cost: Jack Welch, General Electric and the Pursuit of Profit
Thomas Gryta and Ted Mann: Lights Out: Pride, Delusion, and the Fall of General Electric
Bob Wright: The Wright Stuff [Wright was a long time GE executive who ran NBC]
Gabriel Sherman: The Loudest Voice in the Room: How Roger Ailes and Fox News Remade American Politics
Nathaniel Hawthorne: The House of the Seven Gables
Daniel Bell: The Coming of Post-Industrial Society
David Gelles: The Man Who Broke Capitalism