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December 30, 2022 - January 17, 2023
“He was a brutal bastard,” until he one day woke up and decided, “You know, I’ve got to do a better job of nurturing the people and developing relationships and really growing the intellectual capital of this company. And then his whole management style changed.”
Jack wanted more “candor” and more “constructive conflict” from the top GE executives.
melancholy photographs of Gregory Crewdson, who lives near Pittsfield.)
Per Jack’s dictum, GE would need to be number one or number two in each business segment.
As was becoming increasingly fashionable on Wall Street during the 1980s, if he told research analysts GE was going to earn a certain amount of money in a given quarter, come hell or high water GE was going to earn that amount of money.
Integral to transforming the company would be an indoctrination camp for its best, brightest, and future leaders at the newly refurbished Crotonville, run by James Baughman, a former Harvard professor.
Jack thought his idea of being number one or number two in a business was a simple message. Either lead or get out of the way. But it turned out to be a lot more difficult to implement his strategy across GE’s massive workforce or its forty-two business units than it was to talk about it in a room full of Wall Street analysts at the Pierre Hotel.
To implement what he had mapped out on his cocktail napkin, Jack turned GE into a mergers and acquisitions machine, buying and selling companies with abandon in a never-ending effort to construct the perfect portfolio of high-performing, high-profit assets.
Carpenter started work at GE in February 1983, a month after Jack had shared his vision with his wife.
Mike Carpenter, his mergers and acquisitions guy, was just one member of the new team that Jack was assembling around him. There were, of course, the loyal lieutenants he had elevated or kept around as vice-chairmen, including Larry Bossidy and Paolo Fresco.
And GE was failing at that: GE’s sixteen major businesses, where it was a top player, accounted for 92 percent of its profits and 87 percent of its revenues; another twenty business lines, where it wasn’t particularly competitive, resulted in $54 million in profit on revenue of $3.5 billion. That’s why Jack was pushing for the elimination of the businesses from the GE portfolio that weren’t industry leaders.
In 1984, Jack made his first big strategic move. He decided to buy Employers Reinsurance Corporation, known as ERC, from Texaco, for $1.08 billion in cash.
One telling illustration of his penchant for controlling his image came when a major problem occurred with a new type of rotary compressor in certain models of GE refrigerators. This fiasco threatened GE’s entire refrigerator business, and it set
Jack on a collision course with a Wall Street Journal reporter named Thomas F. O’Boyle, who had broken the story of the faulty compressors.
Roger Schipke, GE’s head of major appliances, quickly ordered the replacement of millions of compressors in a variety of new GE refrigerators. In 1988, GE took a charge of $450 million to account for the cost of the damage to its appliances and to its reputation for engineering excellence.
July 1985, O’Boyle wrote a piece for the Journal about the deterioration of loyalty across corporate America, what with the increase in mergers and acquisitions, corporate raiders, LBOs, and the drive for higher profits.
In his Journal article, O’Boyle quoted Roger Schipke, the former division chief, who had since moved on to Ryland, a home builder, describing the failed compressors as “your worst nightmare come true. I don’t even want to think about it anymore.”
But, O’Boyle wrote, the new compressor “flopped so badly” that GE had to take a $450 million pretax charge in 1988 and that it had voluntarily replaced 1.1 million defective compressors.
O’Boyle explained how the compressors that GE used in the refrigerators were nearly identical to the compressors used in the GE air conditioners, with one exception: powdered metal, instead of hardened steel, which was less expensive and more easily molded to fit the need.
There was more. Jack was “responsible for a series of stunningly inept blunders,” was leading a “corporate culture that has tolerated and even promoted recklessness, lawlessness and the persistent waste of corporate assets.”
Awbrey said, was “totally ruthless” and created “an aura of fear at GE” and didn’t “engender trust and integrity.” He also claimed that GE’s board of directors “censured” Jack for “persistent womanizing” and that his “illicit sexual behavior ruined his first marriage, which ended in a messy divorce.” There were the stories about how when Jack would visit the GE medical system business in Milwaukee, he would demand to be set up with hookers while in town.
GE had gotten O’Boyle’s book proposal—he had not even written a word of the book—and engaged the services of one of the nation’s top litigators to try to thwart him because Jack and GE did not like the direction in which O’Boyle seemed to be heading.
When the book was published, in November 1998, neither O’Boyle nor Knopf heard a peep from GE, Jack, or Webb. The years of legal intimidation had all been bluster.
Against this riotous canvas, GE was busy building up its own internal financial prowess while also pursuing two supposedly transformational deals—one for RCA, the mini conglomerate that owned NBC (and that GE had once owned), and another for Kidder Peabody, the venerable investment bank—deals that would showcase the strengths and weaknesses of Jack’s tenure as CEO.
That left Jack with an obvious choice: to buy back for GE the RCA Corporation, which the Justice Department had forced GE to divest in 1933.
In July 1987, Fortune wrote about how GE and Jack were relying on management consultant Ira Magaziner, then thirty-nine, whose insights into how American manufacturing might better compete with the Japanese had become Jack’s “bible” for the TV business.
According to Jack, the idea behind buying Kidder was “simple,” but in reality, it was mind-numbingly misguided.
GE Capital became the nation’s first, and biggest, nonbank bank.
GE Capital got the money it needed by borrowing it on the cheap—leveraging GE’s AAA credit rating—from the commercial paper market or from other pools of cheap capital around the world. It made money by borrowing short and cheaply and lending long and expensively.
the 1970s, GE Credit made around $45 million, or roughly 4 percent of GE’s pretax income. By the end of the 1990s, GE Capital was providing nearly 40 percent of GE’s pretax income, and by 2003, it was providing more than half of GE’s pretax net income. It’s fair to say that without the profits that GE Capital was churning out year after year, Jack would never have been named Fortune’s “Manager of the Century” and GE would never have become the world’s most valuable company.
As the new head of GE Capital, Wendt found himself stuck between the yin that was Jack and the yang that was Bossidy. Mike Carpenter, the architect of the RCA deal, was an additional—and largely uncontrollable—presence in the leadership team of GE’s growing financial supermarket.
In other words, Siegel was a crook and had fingered Freeman, Wigton, and Tabor in exchange for leniency from prosecutors.
Part of Wright’s vision for NBC getting into the cable business was to launch new cable channels from scratch.
According to Jack, the man who “got CNBC going” was Roger Ailes, the controversial Republican presidential political consultant to both Ronald Reagan and George H. W. Bush and the executive producer of Rush Limbaugh’s television show.
buy back stock in an effort to boost the company’s stock price. He told the analysts in Miami that he was leaning “60–40 against” buying back stock because he believed GE had better ways to create shareholder value.
Gary Wendt and GE Capital were becoming the driving force behind GE’s consistent earnings growth.
What’s more, GE Capital had such an extraordinarily large collection of assets, many of which were fairly liquid—a loan here, an equity stake there—that Jack became increasingly confident that when he told Wall Street analysts he was going to hit a certain earnings number for the quarter, he could do it—knowing that, if need be, he could always sell some of the assets in the GE Capital portfolio to make up for any earnings deficiencies on the longer-cycle industrial business for which GE had become justifiably famous. Above all, Jack subscribed to the idea that if he told Wall Street that GE
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One fifth of the company’s net income was coming from its unregulated bank. Grant went further and suggested that this new reliance on finance would become a potential weakness for GE. Since there was no AAAA rating in the bond market, the debt ratings of companies such as GE and GE Capital—both rated AAA by S&P and Moody’s—could go in only one direction, and that was down. He noted that GE was only one of twelve companies rated AAA and that the yield on its debt was virtually the same as that issued by the U.S. government—the
claimed that nearly $2 billion of the loans, or 25 percent of the portfolio, were “potentially troubled” and were at risk of not being paid back.
GE Capital was the fiefdom of Gary Wendt, who, despite the Cassandras, kept pumping out the profits and the acquisitions into the 1990s,
many other lenders—to take control of a defaulted asset and manage it until markets improved sufficiently to sell it. For instance, when Eastern Airlines defaulted in 1991, GE Capital seized twenty-six jets that
By November 1994, GE Capital had assets of $212.5 billion, making it the third-largest, by assets, bank company in the country, behind only Citicorp and Bank of America.
carries his own tray through the company cafeteria,”
Headlined “Managing Profits,” it was a story about how Jack supposedly used one trick after another to smooth out GE’s annual earnings to make sure that he never disappointed Wall Street’s profit expectations for the company.
Martin Sankey, a respected research analyst at First Boston, agreed that GE was a “relatively aggressive practitioner of earnings management.” The idea, according to the Journal, was to match both accounting and actual gains with losses so that the overall quarter-to-quarter effect was a slow, steady earnings rise, a pattern that investors could not only love but also count on—and that would result in an ever-increasing stock price and market value.
The Journal correctly pointed out, though, that GE Capital was like a big cookie
Years later, from the comfort of his Florida home (and his post-GE life), Wendt was more candid about the use of GE Capital’s assets to smooth GE’s earnings. “We did, we did,” he said. “We were able to. I always had a lot of things available for the quarter. I had to because I knew he”—Jack—“was going to call up and say, ‘I need another $1 million or another $2 million or whatever,’ and so I’d go over to [James] Parke and I’d say, ‘Okay, let’s do this one and this one.’ ” He said under Jack, GE “always” made its numbers. “Making your earnings was just life to us,”
he continued. “We all knew it. [Jack] was the one that had to get it done, and we knew he had to get it done, and so it was part of the company culture, clearly. Make your numbers. Make your numbers. And stretch. The guys did it.”
philosophy was deliver the earnings you promised you would deliver, every time. No matter what.
There had been some suggestion that Jack’s aggressive quarterly financial goals, and his insistence that they be met, were driving GE people to misbehave.
