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

by Thomas Gryta

For more than a century, the conglomerate has stamped its distinctive logo on a dizzying range of objects that reflect the businesses that it has pioneered, acquired, or briefly dabbled in. The meatball can be found on jet engines, ultrasound scanners, wind turbines, televisions, commercial loan agreements, clock radios, toasters, nuclear reactors, lightbulbs, security systems, tubes of silicone caulk, wing-mounted rotary cannons, locomotives, and washing machines. One estimate pegged the value of the GE brand represented by the Monogram at nearly $30 billion.

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.

GE’s industrial machinery and consumer goods electrified the power grid and lit American homes and kitchens. Its engines kept aloft American fighter jets, commercial airliners around the planet, and even Air Force One. Its lenders propped up new owners of McDonald’s franchises and leased out railcars carrying oil, grain, and lumber across North America. Its sonograms beamed images to expectant parents, its X-rays revealed broken bones, and its MRI machines scanned organs searching for cancers. Americans dashed to its refrigerators for snacks, then back to their couches to watch episodes of Seinfeld and Friends—also made by GE. General Electric was an industrial company, yet it seemed to sell everything.

Fewer than two decades later, the meatball can still be seen everywhere, but that GE is gone, if not unimaginable.

While still a massive operation with hundreds of facilities, GE’s stock is a mere fraction of its peak value. The company is no longer a media darling or an analyst favorite, its shares are no longer counted in the Dow Jones Industrial Average, and the once-generous dividend is virtually gone. A share of GE stock was once an essential component of the beginner investor’s portfolio, but is n...

GE’s fall was fast when measured in dollars and cents and people employed. Pensioners and retirees watched money evaporate at a time in their lives when they had no way of replacing it. Thousands of employees lost their jobs, and those who remained were left with an uncertain future. Many who weren’t laid off at first found themselves working outside the very company they had always known after GE sold off pieces of its storied history in exchange for the cash it need...

At its height, GE Capital produced more than half of GE’s total profits. The most famous industrial company in America had essentially become one of its largest and most inscrutable banks.

To Welch and his acolytes, the proof of his methods’ glorious success was in the numbers. But the glory came at great human cost. Welch famously slashed jobs wherever possible, which created tension in a company where many workers had assumed for years that they would be GE employees for life. He slashed more than 100,000 jobs in the 1980s, one-fourth of the entire workforce of General Electric, and he moved tens of thousands of other jobs overseas, where there were no unions and labor was cheap. Critics questioned whether Welch had any other management strategy than slashing costs and worried about the fallout from the dismal employee morale.

Unions and other opponents started calling him “Neutron Jack” because he removed the people while the buildings were left standing. Welch hated the nickname, but over the years, despite...

Another famous and controversial tactic—often called “rank-and-yank”—forced managers to come up with an annual ranking of the performance of their workers. The bottom 10 percent would be put on notice, and if they didn’t improve, they were fired. The consta...

Rank-and-yank worked well for GE’s acquisitions, providing a formula for trimming fat and squeezing profits out of the operations. But some managers didn’t see it as helpful, especially after it had been used for a few years and some competent employees were ending up in the bottom 10 percent. You can trim fat only for so long. Also, some thought that the policy made workers fight each other for survival and inhibited managers’ ability to bring their workers together to operate as a team for the good of the company. One manager tried to subver...

In 2002, the Sarbanes-Oxley Act was signed into law, bringing sweeping changes to corporate governance and internal company controls. It enacted more accounting scrutiny, increased disclosures, and higher penalties for fraud, and it also required that executives vouch for the results they reported. GE’s ability to manipulate its reported profits was greatly diminished.

The world in which Jeff Immelt had thought he would be leading GE had been turned upside down. The recession and the uncertainty that followed the terrorist attacks had dampened the global growth on which GE’s industrial businesses depended. And changes to accounting rules in the wake of the Enron scandal, by requiring that the company now account for the vast financial holdings on its balance sheet at GE Capital, had eliminated an easy and reliable source of paper profits to smooth over rough periods.

Part of the difficulty derived from GE’s structure. As division managers, Immelt and his peers had set and tried to beat aggressive sales and profit targets for their units. But the other side of the ledger, making the tough financial decisions facing businesses every day, wasn’t part of their job leading business units. Unit leaders didn’t have to worry about their strategy for investing capital to ensure growth, or come up with the money to fund development of new products, or build new factories to handle demand. Some of the basic decisions made by children setting up a street corner lemonade stand could be avoided by GE’s elite managers. They simply had to request capital from headquarters.

One former GE executive who left to become chief financial officer at another company quickly learned about the holes in his GE education. This executive had never had to think about cash. GE’s corporate treasury vacuumed up the quarterly cash made by the divisions and then distributed it as well. His rude awakening came in his first weeks in the new job. Sounding frantic, his treasurer called to let him know that the company might not have enough cash to make payroll. Not making payroll was a totally foreign concept to this executive. He’d had no idea that his job included keeping an eye on the daily management of money moving in and out and around the company.

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.

The new boss thus set his sights on one of the most iconic elements of the brand: the advertising tagline that GE had used since 1979, familiar to millions of Americans who knew the jingle from GE TV commercials that hawked everything from lightbulbs to clock radios: “We Bring Good Things to Life.”

GE wasn’t the first company to boldly move into international markets, but it faced unique challenges in doing so. Tapping international markets wasn’t as easy as just opening an office in a foreign city; it required deep connections with local, regional, and national governments. Moreover, GE wasn’t selling cell phones, or any other product that could be sold just by parachuting in. Its machines cost hundreds of millions of dollars and would be in place for decades. GE needed local operations that understood their market and could establish roots.

Dabbling in financial services had virtually destroyed GE’s historical rival Westinghouse. In some GE Capital offices, there were framed articles about Westinghouse’s fall in the 1990s, a collapse linked to its overexposure to financial services and commercial real estate—along with a bad bet on its core business, the power generation market.

GE Capital saw that a storm was coming in the mortgage market, especially in the type of low-quality loans arranged by the WMC unit. GE’s mortgage bet looked badly timed. In addition, it may have picked the worst possible partner to anchor the strategy. The group originated more than $65 billion in mortgages from 2005 to 2007, making it one of the top producers of subprime mortgages in the United States.

Every appearance of blatant lender fraud was there for the observing. Soon, when banks started refusing to buy certain loans from WMC because of problems or suspected fraud, WMC began shipping the same loans to other banks without disclosing the reasons for the previous rejections, or even that they had been rejected. Some banks were forcing WMC to repurchase the loans, which it then held on its own balance sheet. WMC reviewed a sampling of almost 1,300 loans it bought back in 2005 and found that the files on 78 percent of them “contained at least one piece of false information.”

The price of a share of General Electric continued to fall. Within a few weeks, the price had fallen below $30.

GE had been repurchasing its shares right into the early days of the financial crisis, even as its shares were dropping. So far in 2008, the company had spent more than $3 billion buying its own stock. And in 2007, GE had spent $15 billion on its shares. Over the entire period, GE paid an average price of about $37.50 for half a million shares worth more than $18 billion. Now, it would sell almost 550,000 shares back to the market for $22.25 a share in order to raise $12.2 billion. By selling shares back to the market at a much lower price, GE was wiping out more than twice the amount of cash that the deal with Buffett had yielded. It was a disastrous use of the equity markets, and it wouldn’t be the last time.

After repeatedly asserting that it didn’t need help, GE would use the government guarantee to sell almost $131 billion in debt through a staggering 4,328 different issuances. The second most active issuer, Citigroup, had just 1,655 issuances.

IF GE’S STOCK price was a measure of investor perception, it was heading in the wrong direction. They were deep into the worst valuation of Jeff Immelt’s time at the top. On Immelt’s first day in 2001, the shares were around $38. When he was dining in Beverly Hills in September 2008, the stock was at $25. Shares opened 2009 at around $15 and closed the month of January at $12.

After the financial crisis, Immelt had altered GE’s portfolio through subtraction more than anything else, shedding businesses that had lost their appeal after the Welch years. But now GE became, in a series of high-dollar acquisitions, a player in the oil and gas equipment market virtually overnight. They bought an oil-field service equipment business based in Britain, manufacturers of pumps, wellheads, regulators, and piping in Texas, and a Norwegian firm whose sensors measured the pressure and flow of oil.

The new arrangement didn’t spare Lufkin. The historic foundry was closed. The city’s annual financial report now just shows a blank line when listing the company’s employment tally, evidence of the more than four thousand jobs that evaporated after GE came to town. Between two Mondays—the day GE announced it was coming to Lufkin and the day the company said it would move on, leaving a shuttered foundry at the center of town—just 868 days had passed.

The global power business was already in a state of permanent, conflicted anxiety about China. With the sluggish global economy, everyone needed China’s massive market if they wanted to be able to show sales growth. But the theft of intellectual property in China was so real a threat that GE regularly reassured investors and journalists that it never sold its most state-of-the-art machines there, knowing that if it did they might be reverse-engineered by Chinese competitors. Now Brussels was asking GE to give a turbine program—one less advanced than GE’s or Siemens’s but better than Shanghai Electric’s own program—to a Chinese entity that could be relied on to quickly develop a cheaper competitor for the H-class that would eat into GE’s market share over time.

After a high-profile bake-off among various cities trying to lure the iconic company, GE announced it would move to Boston.

The company rolled out plans to restore two former candy factory buildings and build a cutting-edge—if terribly ugly—modern glass tower in Boston. GE also scooped up $145 million in incentives for the move from the city and state governments and boasted to investors that with the incentives, its move would ultimately cost the company nothing.

The accounting rules for service contracts give leeway to companies to estimate the profits they will produce in future years. Importantly, when a company adjusts those estimates of expected future income, it records the changes in the current accounting period. Thus, if a company can consistently find ways to ensure that a long-term contract will be more profitable in the future, the contract can be a source of income in the present. When the contracts are long, some even decades out, tiny tweaks to assumptions—the price of a part, the schedule of maintenance shutdown—can produce huge changes in the end result. A rosier estimate of a contract’s value in the future can allow companies to record a profit—on paper—today.

Now Immelt, for his part, showed up at the White House. He laughed and chuckled among a group of CEOs at a gathering in the State Dining Room, seated across the room from the president, next to Vice President Mike Pence. Immelt had known Trump ever since they had launched The Apprentice together on NBC, the network then owned by GE. That show had rehabilitated the famously washed-up developer’s image, introducing him to a new generation of Americans not as a joke but as an apparent success.

During Immelt’s tenure, GE spent well over $100 billion buying up its own stock, much of it at a price far above where it traded now. Without adjusting its sacred and expensive dividend, the company had gutted its ability to generate cash.

The complexity of GE and its problems required true commitment to decisions; otherwise the process would get bogged down. Searching for flaws in his own reasoning, Flannery regularly sought input from outsiders. But an abundance of feedback prevented any path forward from looking crystal clear, and the result was more indecision. Flannery was always conferring with the board and openly encouraging debate. Some directors grew frustrated.

Being on the board gave Trian substantially more insight into the company, but it also presented limitations: now considered insiders under securities law, Trian would be prohibited from acting on any nonpublic information it obtained by being on the board. Ed Garden had the raw numbers he needed about GE’s inner workings. But now his hands were tied.

Large companies regularly repurchase their own stock. The practice began in 1982, thanks to changes in securities rules. Buybacks can be a way to shrink the total shares in the market, thus reducing dividend payments; they can also offset shares issued as employee compensation. Buybacks can also shrink share counts to help nudge per-share earnings higher and, at some companies, produce healthy executive compensation.

Repurchasing stock is also a major capital allocation decision. Every dollar’s destination influences the success of the business. A dollar can be invested in the business, or spent on a deal, or used to repurchase stock.

Jeff Immelt will not be remembered for wisely deciding how to spend GE’s cash. Buybacks were a regular fixture under Immelt, who spent more than $108 billion on them after 2004, when the SEC required companies to disclose their practices. At the end of 2018, GE’s entire market value was $67 billion. In Immelt’s last eighteen months as CEO, he spent almost $26 billion in cash on repurchases even as the stock fought to stay near $30 during that period. Just fifteen months later, it had dropped below $10.

GE’s board of directors was unquestionably weakened from having the CEO as the chairman of the board. Many companies still cling to this structure, but it openly violates basic corporate governance principles. The CEO shouldn’t also be in charge of the committee that employs him. Some GE directors would challenge Immelt, but that usually was fruitless and could land them in the penalty box, or sometimes off the board entirely.

the United States skated into the winter of 2020 on pace to lose at least half a million of its citizens to an infectious virus, while broad swaths of its population furiously refused to do as little as wear a facial covering in a grocery store.