Lights Out: Pride, Delusion, and the Fall of General Electric

by Thomas Gryta

Now, just weeks before becoming CEO of the General Electric Company, John Flannery sat in Schenectady watching disaster approach on the horizon. Combing through the books of the sprawling conglomerate in preparation for taking on the job of his life, Flannery looked into the biggest and most important industrial business of them all—the unit that was the reason for GE’s existence—and found a deep, empty hole where there should have been cash. The reported profits were aspirational, if not fraudulent. And the accounting devices that had hidden this disarray from the public were beginning to fail. Thirty years into a career at America’s most iconic company, John Flannery had reached the pinnacle. But now the whole corporation was about to plunge into the abyss. Flannery was understated, even in panic. Still, a palm upturned, an eyebrow raised, made the incoming CEO’s thought clear to anyone in the room as he turned from the charts to the financial chief he had known for two decades. “Did you fucking know about this?”

Since its founding in 1892, General Electric has been more than a corporation. It has been an American institution. For decades, it was a winning lottery ticket for its hundreds of thousands of employees and a safe bet for shareholders. For its executives, it was an elite business education, and for some a path to enormous riches. GE electrified America, powered its biggest machines, and became integrated into American society as few companies ever did. It was so large that it was given the same brand of financial credit and trust as the US government itself. GE melded Thomas Edison’s workbench with J. P. Morgan’s financial might to create a juggernaut that, in powering the nation’s middle class, its military might, and its explosion of financial wealth, marched in step with the rise of modern America.

Thwarted on antitrust grounds from participating in the dawn of the great American radio networks, GE nonetheless found its way into pop culture as a sponsor of live television in TV’s golden age. It hired celebrity pitchmen—in particular, a film actor whose career was on the wane named Ronald Reagan—to entice consumers to buy its home goods and fire up workers with enthusiasm about the world-changing innovations being driven by GE’s work. It’s a truism of modern-day Silicon Valley that every startup promises that its business aims to change the world; GE beat them all to that line by at least three-quarters of a century.

The oversight role of the board was minimal. After all, Welch’s meteoric success provided very little for the board to complain about. Being appointed to GE’s board was already seen as a prestigious accomplishment and considered an honor for leaders, business titans, and other powerful people. The board had largely followed the chairman’s lead. One newcomer to the board under Welch was surprised by the CEO’s command of the boardroom and the sparse debate among the group. Confused by how the meeting transpired, the new director asked a more senior colleague afterward, “What is the role of a GE board member?” “Applause,” the older director answered.

Gross’s comments were a shot at the heart of GE Capital, which generated its outsized returns by borrowing huge sums via short-term debt and commercial paper, then lending it out at higher rates for longer terms. At the time of Gross’s attack, Moody’s reported that GE Capital’s short-term debt, covering commercial paper and debt due within twelve months, totaled a stunning $127 billion and that only 24 percent of this amount, or $31 billion, was backed by bank lines. That $31 billion was the only credit that GE, “the largest corporate issuer of commercial paper in the world,” could draw down to pay off the short-term bonds if it couldn’t roll them over. In Gross’s view, there was a massive and dangerous mismatch between what GE owed and what it could pay back should a crisis hit. GE seemed to be exempt, he pointed out, from the financial parameters demanded by investors in other companies.

Immelt felt that he was truly innovating, forging a new unifying vision that justified the conglomerate structure so out of favor elsewhere. Danaher, for example, used a very thin umbrella, only a few hundred people, to oversee its portfolio companies. Berkshire Hathaway, the conglomerate run by the billionaire investor Warren Buffett, was even leaner, with just a handful of people at the top. All other functions were put into the divisions so that they could manage costs appropriately and then be held accountable for keeping them under control. By contrast, GE’s corporate structure not only could prevent managers from developing the skills they needed to run an independent business, but also made it impossible to get an accurate picture of a division’s performance or health. Measuring profit without including all the underlying costs distorted the performance of the businesses and their management. It was great for painting a picture of success to investors. Less clear was whether the thickening of the corporate layer was a solid strategy for the long term. Immelt was effectively undoing the aggressive cuts that Jack Welch had inflicted on the GE bureaucracy. Welch’s dreaded layers were now returning under another name.

There was a swagger to GE Capital’s deal-making. It acknowledged no limits or borders as it rolled up assets that others didn’t want. Size and volume were only benefits. GE had a seemingly bottomless pot of cash to put to work. Its deal-makers—its salesmen, as one executive called them—just had to go find places to put it. They went, eventually, to the end of the world. In 2006, GE bought the $500 million mortgage portfolio of New Zealand’s Superbank, a joint venture that aimed to bring mainstream banking to supermarkets. The unusual operation would last just three years. But GE had what it wanted: more assets on the balance sheet—another heap of business on the GE Capital pile.

Immelt’s consistent declarations about the company’s astute risk management and the dependability of his own management sharply contrasted with what the SEC was uncovering. Even some inside the company saw a culture that didn’t match Immelt’s spin that Capital was superior than the banks with which it competed because it was imbued with the “magic of management” for which GE was known. “Our financial services businesses are inherently more valuable than those of traditional banks or other financial services companies. Why? Because we have significant global origination in end-user markets that we understand better than others,” he wrote to investors around this time. These kinds of reassurances would take Immelt only so far as the timbers of the entire US financial system began to creak.

Take Bill Lane, Welch’s speechwriter, still warmly remembered by some of the company flacks. His memoir of his GE years provides a refreshingly candid glimpse of Welch and the company’s foibles, as well as the tone-deaf chauvinism of General Electric in the depths of the 1980s and ’90s. In one early passage, Lane gleefully relates an episode from one of his first retreats at Crotonville: one evening a beer-fueled posse of attendees found a way to project rented porn videos on the big screen of The Pit, the leadership training auditorium. “The two ‘girls’ in our class, almost as wild as the worst of us, shook their heads and took a pass on this particular evening’s entertainment,” Lane reports. His Boswell reports Jack Welch’s reaction: “He laughed and purred, because he perceived, correctly, that the juvenile, Animal House behavior was a welcome symptom of the high-spirited joie de vivre that was spreading across his company. Our behavior reminded him of our early days in the plastics business—and that was just fine with him.” Whether that joie de vivre extended to the women of the company is not explored in Lane’s anecdote. Other than escaping from the shenanigans that evening, the reactions of their female colleagues to GE’s men merit no mention in Lane’s account of Crotonville and the bonding that happened there.

Flannery cut Lee off. They had an idea already in motion, he told the banker. GE was ready to cut a profitable chunk of GE Capital loose, throwing a little over the side to show investors that they were serious about reducing its dependency on the financial services unit that had led to such lingering disgust. Actually, a giant spin-off was in the making. What had been a unit of GE Capital that funded store-branded credit cards and layaway financing plans at outlets like Walmart would become its own company, with shares of stock swapped out to GE shareholders. By creating a new public company, Synchrony Financial, out of the old GE Capital, GE would lose the money it had been making from the unit, but it would also shave off some of its financial risks. To no one’s surprise, when the move went public, Jimmy Lee and JPMorgan Chase were in on the deal.

GE didn’t just pour money into Predix—it smothered the project with cash. But without a coherent strategy and well-thought-out processes, the product development path was a wasteful one. GE’s plan to move fast, produce a viable product, and then perfect it in the field got bogged down partly because of the size of the effort. GE hired armies of new employees and gave them all the resources they wanted to build its vision. It was like an auto company building an assembly plant, hiring workers, and leaving them standing on the production line, waiting for the vehicle to be designed. Instead of charging a small team with developing the best product and then letting the operation grow with the product’s evolution, GE set up a huge organization that wasn’t quite needed yet. Development was often paused or delayed in order to start the process over entirely or just to stabilize the systems.

Unfortunately for Immelt—and the legions who held GE stock options that continued to sit untouched—the stock would have a hard time going much further. The frustration of wallowing below the $30 benchmark deepened with the realization of being stuck there. In the annual letter, Immelt wrapped up his lecture on the limitless superlatives of GE with an awkward public plea to major institutional investors—a blanket term for banks, mutual funds, hedge funds, pension funds, insurance companies, and other large investors. Institutional investors own the vast majority of the equity markets, and they aren’t usually pitched in public by the CEO of a major corporation. “We have delivered for you in the last five years. But we are still under-owned by big investors. In this time of uncertainty, why not GE? We have great businesses, global scale and strong initiatives,” he wrote, like a heartbroken lover begging for reconciliation. “We have a ton of cash that can protect you,” he added. “And we will lead the Industrial Internet. We are the Digital Industrial. We have grit. Our leaders learned from the experience of economic volatility.”

Deeply entrenched in the GE view that the world was heading into the “Age of Gas” for decades to come, Bolze then made an assertion that would fall flat. It also gave a glimpse of GE’s blurred view of the market that it planned to corner. “The world needs about 50 percent more power in the next two decades,” he said. “The biggest power source going into the next decade is gas . . . Gas will grow almost 50 percent more in the next decade, and we are positioned very well there in that space.”

Next came Jeff Bornstein, who many had once thought would be CEO someday. He had been a counterbalance to Immelt and was generally respected by Wall Street. Many in the room felt comforted that he had committed to GE and to helping Flannery navigate the job. Now Bornstein launched into an exhortation: Run the company like you own it. Be the leaders General Electric bred you to be. You should all be accountable for every prediction made and every target missed. “I love this company,” he said. Then he stopped and took a breath, deep and halting. He started up, and stopped again. Jeff Bornstein, the muscled, nicotine-gum-chomping, weightlifting, hard-driving CFO, was . . . crying. The reaction in the room was confused and inconsistent. Some thanked Bornstein for his passion, while others left the bizarre scene wary. If this guy was fighting back tears, something must be seriously wrong. The group shuffled out in shock and confusion. Flannery and Bornstein had hammered away at some of GE’s intractable bad habits, but there had been no bombshells revealed. Still, stress and strain had reduced one of their toughest tough guys to tears. The moment would linger in the minds of GE people for years—a revelation, in retrospect. That was the moment many of them realized GE was taking on water, and that no one knew how bad it was going to get.

The GE of the late twentieth century and the fitful first two decades of the twenty-first has stood for more than what it made. It has represented a capitalistic meritocracy, a locus not just of success but of a certain version of virtue—the virtue of targets made, goals surpassed, earnings earned, markets won. And it has stood for a vague but well-marketed notion that, in the unapologetic pursuit of a company’s fortunes, and one’s own, there is a certain uprightness—and a lesson for others. But GE has stood for a well-bred hubris as well. Under Immelt, the company believed that the will to hit a target could supersede the math, even when hundreds of thousands of livelihoods—those of investors, customers, and suppliers, to say nothing of workers, retirees, and their families—hung in the balance. GE became synonymous with the idea that all that stood between a company and an arbitrary $2 earnings target was drive—simply wanting it bad enough. Here the company’s aggressive accounting, macho culture, and reliance on competitive metaphor converged. Immelt’s greatest asset as a manager, even in his staunchest allies’ telling, came down to a football coach’s insistence on the prevailing power of gumption and guts. Even numbers were supposed to give way, like a tackle sled on a football practice field, if you cared enough, lowered your shoulder, and wanted it more than the next guy in line. Where, Jeff Immelt used to ask from behind the dais in the Pit, is the guy I used to know?...