Power Failure: The Rise and Fall of an American Icon

by William D. Cohan

In the end, during its twelve-year life span, Jeff reported that Ecomagination generated $270 billion in revenues for GE, without saying how much of that revenue would

have been generated without lumping a bunch of products under the so-called eco-umbrella.

Yes, Ecomagination was “marketing,” she said, but “marketing” done right, by creating a “new business strategy,” by meeting “change early,” and by building a “coalition of those willing to work for a new future.”

For all his efforts to make GE a visionary company, Jeff was developing a blind spot as a CEO, and he was losing (or driving out) the executives who dared to tell him the truth as well as the seasoned veterans who could help him navigate a crisis.

Calhoun said he saw “early signs” of trouble at GE under Jeff’s stewardship. “I’ve stayed close enough to everybody to sort of watch it unravel,” he said. It didn’t happen overnight. “It took all of fifteen years to do it,” he said, adding that if anyone had raised his or her hand during the first eight years, “a lot of it was fixable.” But no one did, in part because Jeff didn’t like to hear dissent or bad news and praised loyalty, perhaps to a fault. Plus, as ever, it was very difficult to push back on a CEO—unless that CEO, like Jack, mostly encouraged and rewarded outspoken executives. With Jeff, “it was impossible,” Calhoun said.

Unauthorized conversations with a serious buyer about the sale of an important business like NBCU without permission of the CEO or the board of directors would surely qualify as grounds for dismissal, with cause.

As the departures of some of GE’s top executives were mounting—among them Nayden, Calhoun, and Wright—Jeff seemed determined to play down their importance. This was a point he made repeatedly, to me and to others, despite ample evidence to the contrary.

Instead of the team of rivals that had surrounded Jack, Jeff had created a team of sycophants, aided and abetted by the unintended consequences of a highly lucrative supplemental pension program, which had the ability to silence even the most outspoken GE executives, unless, like Calhoun, they left.

As long as GE remained solvent, the SUP guaranteed these lucky employees an additional pension from GE equal to 80 percent of their salary and bonus for life.

once awarded it, chose to keep quiet rather than risk losing the SUP by getting on the wrong side of the CEO. “I don’t want to kid you,” Calhoun told me. “The pension issue is a huge

factor in the unwillingness of people to speak up, a huge factor.”

“Jeff did not surround himself with a level of fiercely intelligent people who could—and would—on a regular basis be combative with him.

“It’s the worst thing in the world, because once you get to the gravitational pull of the SUP, what you have to do is avoid being fired,” he said. “Therefore, you take no risks.”

The ultimate stress test for Jeff’s leadership would come with the housing crisis of 2007, which ultimately led to the financial crisis of 2008.

By the spring of 2007, Pralle and his team believed the time had come to pare the portfolio, which would result in large capital gains for GE but likely also reduce the ongoing profitability of the business. “We tried to do it, but the problem was every time we tried, the board and Jeff in particular wanted more net income,”

“In the case of real estate, he just used it as a piggy bank,” Pralle said of Jeff. “He knew there was a place where he could go and get his income gaps filled. It’s true.”

His idea was to sell 51 percent of the business, deconsolidate it from GE, and book a gain of around $12 billion. “The Street will not give you credit for that,” he told Jeff, “but that’s real money that you can use to restructure some other industrial businesses.”

“Every time we had a financial meeting, Jeff wanted to continue to grow the real estate book,” recalled one GE executive. “The leadership team of the real estate business would say, ‘You’re taking a much higher risk doing that now versus a few years ago.’ ” Jeff didn’t listen. “He needed the income and he felt it was like magic dust,”

Before a group of about eighty GE executives in Crotonville, at something called LIG—for Leadership, Innovation, Growth—Pralle presented his recommendation to sell half the portfolio. “There are lots of people who are very interested,” he told Jeff. The purpose of the LIG was to have GE executives from across the company join together to swap ideas about how to think about their businesses in a new and different way. “We’ll book a $5 billion to $10 billion gain,” he said. “And we’ll have much less exposure to real estate, particularly to those things that we think will be a risk during the next downturn.” Jim Colica, the GE Capital chief credit officer, agreed with Pralle: GE had too much exposure to real estate. Goldman Sachs, which was informally advising Pralle, agreed, too, and was prepared to sell a big chunk of the portfolio. But Jeff said no.

meeting after meeting—and in particular at the LIG meeting in May 2007—Jeff held up a McKinsey presentation he had commissioned that predicted the real estate market would continue to boom.

‘McKinsey says . . . and they are smarter than you are.’ ” Jeff rejected Pralle’s recommendation. A month later, at the end of June, Jeff abruptly fired Pralle.

“For Jeff, his most important question was ‘How is Wall Street going to view this deal? Will we look smart? Should we bring in Blackstone as a partner, because they’re smart? How will the analysts see this deal?’

He said compared with the mistakes of buying Lake—the Japanese credit business—or of not including the long-term-care liabilities in the Genworth IPO, not selling the commercial real estate assets in the spring of 2007 was a mere blip on the screen.

But others in and around GE and GE Capital thought Jeff made a big mistake, especially since he didn’t listen to his well-paid professionals, including Michael Pralle and Mike Neal, who ran GE Capital after Jeff fired Denis Nayden, and what they recommended to him should be done. “If you’re not willing to listen to the experts on something that big, I just don’t get it,” said one former GE Capital executive. “Then what are they there for? Just hire some really cheap people. Pay somebody $50,000. Save the company a lot of money, if you are always right.”

It is a form of speculation, or gambling, on a company’s financial prospects.

Investors were getting increasingly nervous about GE’s credit, even though it was still rated AAA.

“triple-A is a judgment handed up by fallible human beings who draw their pay from the very borrowers they rate.

the middle of 2007, Jeff hired McKinsey, he wrote in his book, because he was “determined to monitor GE Capital’s risks.” (He made no mention of asking McKinsey to look at the commercial real estate business specifically.)

How he could have missed the gathering storm is hard to imagine, given what he had already seen at WMC, in the pleadings of his commercial real estate executives, and in the blowout of GE’s CDSs. To say nothing of the warning that Bill Gross and the ratings agencies had issued to him five years earlier. Or what Jim Grant had been writing about GE for years. Part of the problem for Jeff was that GE’s ongoing financial performance, at least through 2007, blinded him to the massive explosive device sitting on GE’s balance sheet.

When you are, as Jim Grant articulated, an industrial company inside a bank, and you don’t understand in your DNA how a bank actually makes money and the ever-present, gargantuan risks that exist when you are in the business of borrowing short and lending long, then one cannot be shocked by the devastating consequences.

How in the world Jeff believed GE—one of the largest banks in the United States—could survive unscathed is mind-boggling. But he did.

He said relying on the commercial paper market to fund GE Capital was “a model that worked until it didn’t, and then it became definitely the wrong model. It didn’t go from white to gray to chartreuse. It went like white to black in like seven seconds.” (If Jeff had understood the risks of borrowing short and lending long—the inherent risks of finance—he might have anticipated how something like this could happen, even at the mighty GE. But he didn’t.)

In explaining the miss, he finally conceded, in writing, what investors had long suspected: that GE Capital had been used for decades as an earnings candy store for GE.

“In the last two weeks of the quarter, GE Capital missed by like $500 million,” the GE executive continued. “It wasn’t like you had any chance to communicate it. It happened late and it was big. So that just turned into a surprise, not only for the Street.

He went on CNBC, still owned by GE, of course, and lit into Jeff. It was an utterly inappropriate move by a former GE CEO. But Jack was Jack, and therefore unsuggestible.

Just deliver the earnings.

Jeff called Jack after Jack’s outrageous CNBC appearance and told him, “Look, you’re dead to me. You’re dead to me.”

“That essentially ended our relationship,” Jeff recalled, “because I’d finally realized that he was using his criticisms of me to promote his own brand.”

The Federal Reserve Bank of New York was increasingly worried about two trillion-dollar holding companies—GE Capital and AIG—and how they financed themselves. At that time GE Capital had borrowed $90 billion in the commercial-paper market.

The financial system is nothing more than an elaborate confidence game; once the confidence in the banks at the center of the system is lost, all hell breaks loose, every time.

In fact, Grant had been right about GE for years. On September 5, he wrote a new piece, “Not Your Father’s GE.” Grant intoned, “General Electric under Jack Welch, like the Fed under Alan Greenspan, was an enterprise seemingly touched by the gods. It launched a thousand case studies—for growth, profitability, reinvention, globalization and all-around, Six Sigma excellence. And a wonderful business only became more lucrative when a finance subsidiary was grafted on to a manufacturing superstructure.” His beef in early September was that GE Capital had failed to put up sufficient reserves for the coming credit losses and that the inevitable economic recession would hurt GE’s industrial businesses.

In Hot Seat, Jeff conceded what many others had figured out long before: “Rolling commercial paper was a key engine that enabled GE Capital’s profit machine.” Without it, the jig was up.

If only he had listened to Bill Gross six years earlier.

On September 25, against a backdrop of cascading dominoes, Jeff and Keith Sherin gave Wall Street security analysts an update on GE’s seemingly precarious financial situation. By this point in the crisis, Bear Stearns and Merrill Lynch had been forced to merge with JPMorgan Chase and Bank of America, respectively, while AIG and Lehman Brothers collapsed. AIG would be rescued by the federal government, while Lehman Brothers filed for bankruptcy and was liquidated, its parts disposed of around the world. Wachovia, too, had failed and had been bought by Wells Fargo, and Washington Mutual failed and was bought by JPMorgan Chase. Even mighty Citigroup, once the biggest bank in the world, nearly went down the tubes but for a massive bailout courtesy of the federal government.

The biggest lifeline of all, the $700 billion Troubled Asset Relief Program, or TARP, was used to invest between $10 billion and $25 billion (or more) into a group of Wall Street investment and commercial banks to try to restore confidence in Wall Street,

Jeff Immelt finally had gotten the message that relying on the short-term, unsecured commercial-paper market for GE Capital’s funding needs embedded huge risks into both GE Capital and GE.

The risk at GE Capital wasn’t too much debt necessarily, despite the huge number, but rather liquidity, caused by borrowing money in the short-term commercial-paper markets and lending it out to borrowers for years. Hiccups on either side could be fatal.)

But as helpful as it was, the cost of the Buffett imprimatur was shockingly high, especially for a AAA-rated company such as GE, which made its low cost of capital a matter of pride and competitive advantage. “Equity is not low-cost—it’s more expensive than debt—and the special preferred shares issued to Buffett carry a 10% coupon, which is paid out of after-tax profits,”

“So that $3 billion was about the most expensive capital it’s possible to get.”

Another indication of poor judgment—and one that Jeff would continue to repeat—was his decision to have GE buy back its own stock, at prices that turned out to be high, not low. In 2007, GE bought back about $14 billion worth of its own stock; in 2008, it bought back about $1 billion of its stock—all at prices above $30 per share. Then, six days after suspending the 2008 buyback program, Jeff made the decision to sell stock to the public at $22.50 per share. “That is,” deadpanned Colvin and Benner, “buying high and selling low.”