Power Failure: The Rise and Fall of an American Icon

by William D. Cohan

Debra Chasnoff’s taut thirty-minute documentary film about GE and its involvement in the nuclear weapons industry, Deadly Deception: General Electric, Nuclear Weapons and Our Environment, openly questioned Jack’s integrity.

1987, he decided to divorce Carolyn, the mother of their four children.

there was also the disastrous scandal perpetrated on Kidder by Joseph Jett, who had started at GE in the plastics division only to return paradoxically years later as a Kidder trader and one of the few Black employees at GE or Kidder.

Playing with other people’s money is fundamentally different than investing your own. If you really tear apart the culture, that’s what it gets down to, the cultural difference.”

“Kidder,” he told me, “was a small symptom of a larger problem that Jack Welch and Gary Wendt created: using the GE credit rating to build a massive lending operation that was more short-term funded, including with commercial paper, than any bank would have done after the early 1980s, and certainly not after 1994. A Harvard classmate of mine ran a commercial real estate lending operation at GE and there seems to have been no limit to GE Capital’s appetite.”

But getting Kidder off GE’s books was at least one example where Jack’s penchant for “smoothing” earnings in one year created a time bomb that went off—with nearly calamitous effect—decades later.

So, according to the director, an equal of amount of money—$2 billion—was removed from the reserves of GE’s insurance subsidiary, Employers Re, to cover the $2 billion Kidder loss and to make negligible the impact on GE’s quarterly earnings.

Well, $2 billion grew into ten-plus times that [amount]”—a reference to a major problem with GE’s legacy insurance subsidiaries that was revealed to the public in 2018. “Put that on the pile with fifteen other things like that, and there you have it.”

Another longtime GE executive told me that “for years” the “word” around the “water cooler” was that GE’s insurance companies were used as “shock absorbers” anytime Jack needed a few pennies of earnings to make the numbers he had promised the Wall Street analysts.

“He did things that today would be considered borderline fraudulent, but in those days it was acceptable practice,” he said.

If managing earnings was a sub-rosa practice of the Jack era, then Six Sigma was the more public face of how he attempted to maximize efficiency across GE’s disparate businesses.

By then, Bossidy was the CEO of Allied-Signal and an early convert to the Six Sigma doctrine, which was a way to reduce manufacturing defects first pioneered by Motorola in 1987 after one of its executives traveled to Japan and then adopted the process.

GE invested more than $1 billion in training thousands of employees, and the system was adopted by every GE business unit.

But the results from the 1995 employee survey were clear: GE employees were disappointed with the quality of the company’s products.

Jack became Mr. Six Sigma.

He just cared about how focusing on improving manufacturing quality could boost profit margins.

Jack was pushing Six Sigma on an already stressed workforce. He wanted more, and he would get it. To drive home the importance to him, and to GE, of Six Sigma, Jack asked his direct reports to find their best people, take them out of their existing positions, and second them for two years to be trained in the dark arts of Six Sigma.

More important, Jack changed the incentive compensation structure at GE to reward Six Sigma compliance.

Furthermore, Jack decided that only people who were proficient in Six Sigma—and believers in it—would get promotions into the company’s top ranks. The change in the reward system worked. “The demand was for all executives, if you didn’t at least qualify to become Green Belt certified for Six Sigma, you weren’t getting a bonus that year,” Conaty told me. “If you don’t think everybody was all in on this, they were.”

Jack loved Six Sigma and proclaimed its results, albeit after a slow and clunky start. There were five hundred Six Sigma projects in 1995,

three thousand Six Sigma projects in 1996, and double that the next year, when, according to Jack, GE achieved $320 million in “productivity gains and profits.”

Jack was pushing people at GE hard. It took a toll on them and on him. In the first weekend of May 1995, Jack had a massive heart attack.

Wendt’s prospects for succeeding Jack—if there were any—began to unravel once and for all in December 1995.

Wendt left GE in December 1998 and in June 2000 became chairman and CEO of Conseco, Inc., an Indiana-based insurance company in need of a serious turnaround.

The Lake acquisition, soon to achieve a nearly mythical status inside GE’s executive ranks, would balloon into one of many financial disasters that would befall GE and GE Capital.

In June 1994, Jack and Conaty made their first presentation about succession to a committee of the GE board of directors.

The family moved from Louisville to Rockford, Illinois, for GE.

Eighteen months later, in 1997, he succeeded Gene Murphy as head of GE’s aircraft engine division, the biggest and most admired business in the company.

Roger Schipke was fired.

What made Immelt a consensus finalist to

succeed Jack was his ability to supercharge the medical systems business during his four years at the helm.

Greenville, South Carolina, the home of GE’s power systems business.

Poinsett Club, in what had once been the imposing private mansion of a wealthy textile executive, built in 1904.

the Jack Welch era had been defined by Six Sigma, splashy acquisitions in media and financial services, the rise of GE

Capital, and an almost religious devotion to delivering steady earnings and earnings growth for investors—all of which made GE the most valuable and most admired corporation in the world—Jeff Immelt would attempt to take GE in a very different direction, one weaned off its growing dependence on financial services and the vicissitudes of Big Media and returned to its roots as a hub of technological innovation and industrial might.

But unlike Jack, Jeff would struggle mightily from the beginning to articulate a clear, simple vision for the sprawling conglomerate—a challenge that was complicated by Jeff’s own shortcomings as a leader and the fact that he was put on the defensive f...

A surprising number of close GE observers, both inside and outside the company, believed that Jeff should have used the time after the September 11 attacks to sit down with the research analysts on Wall Street who were covering the company and also with key GE shareholders and explain to them the world had changed. That GE had changed and the days of continuous double-digit sales and earnings quarterly growth were gone.

It was time for Jeff to “reset” expectations about GE’s earnings and GE’s stock. He could have put an end to Jack’s practice of managing earnings, taking any write-downs that needed to be taken, and he could have begun to defuse the ticking time bombs tucked away in the recesses of GE’s balance sheet. He could have told Wall Street that it was no longer reasonable for GE to have the astronomical price-to-earnings multiple that it had under Jack, often approaching fifty times earnings. He could have said that GE was a bank attached to a huge, slow-growth industrial company that had just suffered a major rupture.

Another Wall Street analyst, who asked for anonymity, said that early in Jeff’s tenure he was shown—either by Wall Street bankers or by big shareholders—a plan that would have reeled GE Capital back in and made it a much smaller and much less significant part of the overall GE picture. “If he had unwound this business, you would have been sitting there saying, ‘Holy bejesus, Jeff Immelt is a fricking genius. . . . I know he was shown something that told him, ‘You’re going to take a hit today, but you will be happy in the future if you do this.’ He basically said, ‘Yeah, thanks for the analysis. We’ll talk later.’ And didn’t take it.”

people did not own the stock because of GE Capital.”

addition to the effects of September 11, Jeff was also operating in a political environment that was very different from Jack’s, particularly when it came to corporate transparency. After the dramatic collapses of Enron and other big companies such as WorldCom, Global Crossing, and Adelphia Communications due to accounting scandals and other financial irregularities, the media and investors were increasingly skeptical of nearly everything they had once thought they understood about corporate disclosure and accounting. In that context, it was inevitable that questions would be raised about GE and GE Capital, which was famously opaque, and how GE had managed to hit its earnings numbers quarter after quarter with astonishing precision and consistency.

It was as if once the emperor had exited the stage, his subjects finally figured out he had no clothes.

on a stand-alone basis GE Capital would be rated lower than AAA. GE Capital was not a bank. It had no bank branches in the United States and no way for anyone to make deposits. Unlike a bank, which relied on deposits to get the money it uses to lend out, GE Capital got the money it lent out primarily from the short-term commercial-paper market. And why not? The borrowings were unsecured, readily available, and cheap.

Instead, he argued that Moretti was “trying to mask” the real reason for the bond offering: the fact that the commercial-paper market “is quite sensitive these days and is drying up for some heretofore stellar corporate credits that are then required to fund in the longer-term credit markets.” Gross pointed out that “a lack of market discipline” had allowed GE Capital to have three times more commercial paper outstanding than it had credit lines to back it up. Typically, a company had backup bank lines equal to its outstanding commercial paper, just in case.

“The fact is that GE is a conglomerate financed by a money machine,” he wrote. The two CEOs kept the machine humming through acquisitions—more than five hundred in the previous five years—using either GE’s high-priced stock—he was wrong about this, as most of GE’s deal were done with cash—or its low-cost commercial paper.

He remained convinced that GE was more of a finance company than an industrial company. In his interview with the Journal, Gross addressed the long-standing belief that GE manipulated earnings every quarter.

“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.”

GE Capital was making the classic mistake that banks have made from time immemorial: borrowing short and lending long—borrowing money inexpensively in the short-term markets and lending it out a higher interest rates for the longer term. The difference between what GE paid to borrow the money and what it received to lend the money was a big part of GE Capital’s profit.

Hence the paradox at the center of the so-called fractional banking system. We’re willing to put up with the occasional financial crisis—on average once every decade or so—to make it possible for loans to be made, which in turn helps companies grow, hire more employees, and pay them higher and higher wages and wealth be created. In exchange for increasing our standard of living, we have collectively decided we will permit the occasional financial crisis, despite their incredibly high costs, and misery, when they do occur.

thirty years earlier when, on a Friday, the ratings agency reconfirmed the AAA rating of the Penn Central Railroad and then, on Monday, the company declared bankruptcy.