The Fall of General Electric — Thomas Gryta
The Fall of General Electric — Thomas Gryta
It was one of the world’s most valuable companies … But a series of bad business decisions and change in leadership led to General Electric’s steep decline. Thomas Gryta, author of Lights Out: Pride, Delusion, and the Fall of General Electric, joins host Charles Mizrahi to talk about the figures and controversies that ended GE’s reign as America’s most powerful corporation.
- An Introduction to Thomas Gryta (00:00:00)
- Early Days of General Electric (00:03:56)
- Celebrity CEO Jack Welch (00:6:40)
- Stepping into Finance (00:17:23)
- Successor Jeff Immelt (00:20:07)
- Pulling Back the Curtain on GE’s Magic (00:27:07)
- A New Age of Regulation (00:33:34)
- Last Ditch Efforts (00:40:37)
- Goodbye Jeff (00:47:35)
- John Flannery’s Approach (00:50:04)
- Lessons Learned (00:56:17)
Thomas Gryta is a Wall Street Journal reporter and author. He covers the latest on General Electric as well as various industrial conglomerates.
In addition, Gryta co-authored Lights Out (below), with Ted Mann. Their book follows one of America’s most iconic companies, General Electric, and its fall from grace. This gripping story serves as a cautionary tale of what can happen when businesses lose direction.
Before You Leave:
THOMAS GRYTA: The leadership lost sight of what they were they were trying to do. Their hubris and arrogance got in the way.
CHARLES MIZRAHI: My guest today is Thomas Gryta. Tom works at The Wall Street Journal, where he writes about General Electric. His latest book, which he co-authored with Ted Mann — also a reporter for The Wall Street Journal — is Lights Out: Pride, Delusion, and the Fall of General Electric.
CHARLES MIZRAHI: The book has been called “the definitive history of General Electric’s epic decline.” Bill Gates said it answered questions he had on how a company as big and successful as GE can fail.
CHARLES MIZRAHI: I recently sat down with Tom, and we talked about how GE — a company founded in 1892 and was one of the original members of the Dow Jones Industrial Average —lost its way and is now only a shadow of its former self.
CHARLES MIZRAHI: Tom, thanks so much for being on the show. I greatly appreciate it. I can’t tell you how much I enjoyed reading your book, Lights Out: Pride, Delusion, and the Fall of General Electric. Outstanding job.
THOMAS GRYTA: Thanks, I really appreciate that.
CHARLES MIZRAHI: I’m not the only one who has told you that, right? There are a lot of people who are saying this looks good.
THOMAS GRYTA: Yeah, we’ve gotten some praise. Some of that praise comes with sadness. For people who have a connection to the company, it’s a dark read for them.
CHARLES MIZRAHI: It was a dark read. If you worked there, it’s a really dark read. You see your whole life — and all of your investments — go up in smoke.
CHARLES MIZRAHI: Bill Gates wrote in “Gates Notes” that if you’re in any kind of leadership role — whether in a company, nonprofit or somewhere else — there’s a lot you can learn from your book. That must have been a blast.
THOMAS GRYTA: That was totally unexpected. Obviously, Bill Gates doesn’t give us clues as to what he’s reading. And over the summer, he gave it a big recommendation. He wrote his own review of it — which was pretty flattering.
THOMAS GRYTA: If I remember right, he said that [GE] was always a company he looked at and admired. But he never quite understood what went wrong. The book unwrapped it for him —which is entirely the point. Our goal is not to tell the entire arc of General Electric’s history, it’s to talk about the decline.
CHARLES MIZRAHI: I want to let our listeners know that at The Wall Street Journal, you were a GE master. You followed this company, and 95% of your time was spent analyzing GE. So, when you wrote about it, you weren’t a cub reporter writing a short story. You had a real, in-depth knowledge of not only the business but the players and culture. You probably had zillions of contacts, yeah?
THOMAS GRYTA: I think that’s right. Even before this, I’d covered telecommunications, pharmaceuticals and the steel industry. I had enough experience covering large corporations —which was helpful. I worked closely with Ted Mann, who covered GE right before me. So, I had some of that knowledge behind me.
THOMAS GRYTA: We spent a lot of time talking to a lot of people — as we would with any company or beat. But when [the] GE [story] really started, it became clear that there was some trouble going on. Then, Immelt stepped down, and things started falling apart. We were in a good position to write about it and break some of those stories to make sure our readers knew what was going on at this iconic company. It was kind of unbelievable as it was happening in real time.
CHARLES MIZRAHI: Let’s take a step back for those who might not know why this is important. This is earth-moving. This is a big deal.
CHARLES MIZRAHI: GE started in 1892. J.P. Morgan put it together. He took Thomas Edison’s name and put it up there — he was basically the brand. They created one of the most iconic companies in U.S. history. It was one of the original 12 of the Dow Jones. I learned that from your book. GE was the last one to survive — until it was kicked out a few months ago. Think about it: There’s no other company that has lasted as long, is as important or has the same history as GE.
THOMAS GRYTA: It’s pretty incredible. It goes back to the roots of modern industrial America. You describe it as this iconic, important company. But it’s for a reason, right? They were building the equipment that was making electricity and bringing it across the country for the first time. The electrification of this country could only be done by giant companies with a ton of capital. J.P. Morgan knew that.
THOMAS GRYTA: Over the years, it became a fundamental part of American history — even in the war and post-war. [GE] got into aviation with the jet engine. There are connections all over the place. The rubber in Neil Armstrong’s boots was made by General Electric. We sometimes joke that there’s a GE angle everywhere. And it’s true. It is all over.
CHARLES MIZRAHI: It launched Ronald Reagan’s career. He was a washed-up, B-grade actor. Then, he went into GE and spread the message of capitalism in GE plants throughout the country. That was his politician training — and a great one at that.
THOMAS GRYTA: That’s absolutely right. As you said, there were GE plants all over the country. Its footprint was enormous. It was in so many different industries, and many people worked there.
THOMAS GRYTA: At the time, working for GE was a lottery ticket. It was a good job with a good pension at a good company. And there was a lot of pride. To be clear, I think there still is. We talk about the fall and some of the problems it has had at the top. But there is still a lot that GE does. And I think that a lot of those folks are still really proud of what they do.
CHARLES MIZRAHI: So, let’s fast forward. I remember this because I was just getting out of high school, getting into business and starting my career on Wall Street. Back in the day, Jack Welch was Bill Gates and Jeff Bezos combined. He was one of the first CEOs that had celebrity status. Just by saying “Jack,” everyone knew who you were talking about.
THOMAS GRYTA: It’s funny that you say “Bezos” and are talking about founders. Jack really had that sense. He was a CEO who rose through the ranks of this giant corporation. And yet, he came off like a founder. He had that kind of power and vision. He was larger than life. There are [both] books of praise and criticism written [about him].
THOMAS GRYTA: But he definitely changed the company. Whether or not you approve of his methods, he was an effective manager. When he came in, he cut a lot of people and bureaucracy. He hated all of that. He hated spending hours in meetings and planning. He thought [GE] needed to move faster. It needed to have a clear mission. It needed to be first or second in an industry — or it’s not worth the fight.
THOMAS GRYTA: And then, there was the cult of personality around him — which I think you’re referring to. It owns CNBC, so he was on there often and talked about a lot. You’re right, a celebrity CEO was this rare occurrence.
CHARLES MIZRAHI: In 1981, he comes in. It was my first year out of high school. So, Jack Welch comes over. He comes up with amazing new things. It was a time that most people don’t remember. For business, it was terrible. We had just finished the terrible four years of the Carter presidency. The country was stuck in stagflation. The inflation rate and unemployment were in the double digits. The prime rate was close to 20%. It was very difficult for business.
CHARLES MIZRAHI: And here comes this guy. He’s a small guy from an Irish working-class background. He’s from Boston, and he’s tough as nails. And he goes in there and not only slices and dices, but he creates the Six Sigma. Talk about that.
THOMAS GRYTA: So, that comes in the 1990s when Jack gets exposed to Six Sigma. Supposedly, once he learned about it, he was in love with it, and it became like a religion to him. Actually, it originally came out of Motorola. But GM made it famous.
CHARLES MIZRAHI: He branded it to be a GE boot camp for training managers. Jack Welch had his signature all over that.
THOMAS GRYTA: Absolutely. And Six Sigma is all about quality control. It has these elaborate systems. You can become a black belt in it. It was about ultimate profitability for Jack and operations.
THOMAS GRYTA: He was an operations guy. You talked about him being blue-collar and from Boston. But he was an enormously compensated CEO who knew what folks at the bottom of the chain were up to. He would have pointed questions for a random executive because he knew what they did, where they did it and what the issues were. He was meticulous, and he was famous for that. He became known for his rank-and-yank. There’s plenty of room for criticism of Jack — not to mention how he left the company to Jeff. But certainly, he was effective in many ways.
CHARLES MIZRAHI: So, Welch comes in and is an amazing force in all facets. And GE has a lot of moving parts. It has a power business, aviation business and is starting to build a financial business. So, it has a lot of moving parts.
CHARLES MIZRAHI: The most amazing thing was that the company never missed its earnings numbers. It always hit the numbers. It was as dependable as dependable can be. GE had a dividend. I think, at one time, it was the most owned stock. Is that right?
THOMAS GRYTA: Even recently, it’s still up there — as far as widely held stocks. It’s among the highest. But what a coincidence, right? The company managed to nail [the numbers] every time.
CHARLES MIZRAHI: It was amazing. For those of you listening: When a company comes out with an earnings call, it usually gives guidance as to what it’ll be. Other times, brokers or analysts try to guess it — sometimes within a few pennies per share.
CHARLES MIZRAHI: Sometimes, the company misses the earnings. Sometimes, it beats the earnings, and sometimes it hits them. GE was known to hit those numbers every single quarter. So, that’s four times a year. You’re taking a huge conglomerate and getting it down to the penny. It seemed like magic.
THOMAS GRYTA: It wasn’t magic. We know that. It was pretty engineered.
CHARLES MIZRAHI: But no one knew it at the time. Before he left, nobody knew how engineered it was. He was considered brilliant in the way that he ran the company. It continued to build the myth that he knew every single detail about this company — down to the penny. All of that was fantastic. The company was doing great.
CHARLES MIZRAHI: By the way, we had Dave Cote on the show a couple of months ago. He worked for Honeywell. He took it from worst to first during his tenure. I think the market cap went from $20 billion to $120 billion after Dave left. And Dave was an alum of GE. You had a lot of them. How many alums went on from GE to other firms?
THOMAS GRYTA: It’s almost countless. They were a factory for that for a long time. It goes back to what they’re saying about Jack and the mythology — this idea that their managers could solve any problem. They knew how to run businesses. It didn’t matter what kind of business it was, they knew how to do it. They had the skeleton key. The GE managers were somehow taught this “magic” — that was a word you used, right?
THOMAS GRYTA: They have their own management training institute. They have their own system. I think there’s certainly some truth to that. But for a long time, it was known as the management mystique of GE. It’s interesting that Dave Cote came in. He turned around Honeywell — to say the least.
CHARLES MIZRAHI: I happened to email him a few days ago after reading your book. I asked him about GE, and he said: “Charles, the last time I was there was in 1999 — when Jack fired me.” So, he really didn’t give me any insight. But yeah, he was fired from GE.
THOMAS GRYTA: Yeah. He was actually on one of the early lists to replace Welch. And he was bumped off. I don’t want to say that the last laugh was his, but he had a stellar career. In fact, talking about the Dow, I think Honeywell was the only company to ever be removed and re-added back to the Dow. I believe that’s right…
CHARLES MIZRAHI: He’s an outstanding manager and person. He did all the right stuff, and what he did was amazing. By the way, the reason I bring that up is because Dave worked there. And it’s funny that Jack Welch fired him. But right before Jack left the company — retired, if you will, in 2001 — the last big deal that he wanted to put together was buying Honeywell. And that fell through.
THOMAS GRYTA: Yeah, that was Jack’s last attempt to do a big deal. I think what’s notable about that deal is that it would have rebalanced GE. It would have brought in a huge industrial operation — which would have offset the size of the financial services operation.
CHARLES MIZRAHI: Let me stop you because we both jumped. I’m jumping the gun. I know the story, but I want everyone else to hear it. Folks, I highly suggest you get this book for a couple of reasons. If you like business history, fantastic. If you want to see a big company and what it looks like behind the scenes, fantastic.
CHARLES MIZRAHI: But from a leadership perspective — especially for those who are going to business school or investing in the stock market —a lot of what you learn in school, see in the newspapers or read in the annual reports is not really what happens. There’s a lot of pettiness. There’s a lot of hubris. There’s a lot of stubbornness. There’s a lot of jealousy. All the human emotions you would have in a kindergarten classroom happen on a corporate level — which is amazing. You’d think: “Oh, they’re smart.” No, they’re not. It’s human nature. Do you agree with that?
THOMAS GRYTA: I appreciate that. I appreciate you saying those things. I think it’s true. “Hubris” is the word that really sticks.
CHARLES MIZRAHI: That’s the killer. OK. So, GE — before it has the financial component — what businesses does it have?
THOMAS GRYTA: Before financial services blew up, GE was focused on power — almost like they are now. Power, health care and aviation. It had operations with space, and it had a bigger military operation. It has changed its setup over the years. [The company] got back into media under Welch, but it was mostly into big industrial machines that powered the world.
CHARLES MIZRAHI: Huge turbines. I think it’s the largest leaser — hold on. I’m jumping ahead. These turbines are huge things that only two or three companies in the world make, right?
THOMAS GRYTA: Totally. They’re giant industrial machines.
THOMAS GRYTA: Of course, there are toasters, fridges, ovens and stuff that they were still making back then. But it was in industrial manufacturing. Lots of plants with lots of workers.
CHARLES MIZRAHI: A lot of them were in America.
THOMAS GRYTA: Yeah.
CHARLES MIZRAHI: OK. Jack Welch starts to get into finance. He starts to get into the money side. When was that? What year?
THOMAS GRYTA: The 1990s is when he sets his sights on that and really falls in love with it. The financial services operation of GE goes back to the history of it. It helped people buy appliances and such. It’s not unusual for companies to have a finance component. But I think that when he saw how easy it was to make money with money in financial services, he fell in love.
THOMAS GRYTA: Our story was basically that he was blown away. You could just do this. And I can explain it. They were using the borrowing power of the industrial side — and its wonderful ratings and credit.
THOMAS GRYTA: Because as you said, they’re making these huge machines. They’re dealing with customers who can afford them. They can borrow money. And then, they’re taking it and lending it to other folks at a higher rate. It’s like you’re printing money. And GE was able to grow that operation over the years and essentially become an unregulated bank.
CHARLES MIZRAHI: Right. OK, before we get into that, Welch retires in 2001. He leaves behind a power business, a health care business — like those big MRI machines, ultra-scans and all those things for hospitals — and aviation. I think most jet engines are made by GE, right? A large percentage of them are.
THOMAS GRYTA: Yep.
CHARLES MIZRAHI: Okay. And there’s the financial component: GE Financial. He leaves it to his successor, and he handpicks them, right?
THOMAS GRYTA: Yeah.
CHARLES MIZRAHI: OK. He handpicks a tall, good-looking guy who is able to walk into a room and own it. And that’s Jeff Immelt. Jeff Immelt is a guy who rose through the ranks as a salesman. He takes over the company. Take us from there. What starts happening when he gets there? What’s his management style like? Because that is going to play into how everything plays out over the next 16 years.
THOMAS GRYTA: Yeah. Jeff was handpicked by Jack — as you said. We’ve been talking about this company — with all its management magic and experience. Yet, in the end, it was Jack’s gut feeling. They went through this process, and it was his gut feeling. And after, he said he got it wrong.
THOMAS GRYTA: Jeff was a tall, charismatic salesman. He could work a room. He has that backslapping big guffaw laugh. Good luck finding anyone who’s met him, spent time with him and doesn’t like him. He’s that kind of person. And based on our discussion about Jack, he has a very different, gruff and blue-collar Massachusetts background. Jeff’s dad worked for GE. Jeff wanted to work for GE.
THOMAS GRYTA: But because he was a salesman, he had a marketing focus — in the sense that he wanted things to have a story. He wanted to tell the story of what GE was doing and why it was so great. I think he knew he could be Jack Welch. And he didn’t try to be Jack. I think Jack picked him because he was so different — which was part of why Jack got there.
THOMAS GRYTA: Jack was aware, and he thought that someone who was a lot different than him might shake it up. But Jeff didn’t have that rank-and-yank feeling. It was a softer touch. It was kinder and gentler. And he was also big on diversity, promoting women and making sure that different types of people were getting the job. He was actually pretty effective at that and got some real pushback.
THOMAS GRYTA: He had a different style. He came in at a time when the world was changing. September 11th and all of that. And in a few years, his job is a different job.
CHARLES MIZRAHI: So, he comes in, and pretty soon after is 9/11 — which is a big deal because all the planes that they make parts and engines for — that market — shuts down. The country shuts down. He comes into a very difficult period in American business.
CHARLES MIZRAHI: But soon after, he finds his feet, and they start continuing on. And then, you start to see the wheels fall off. It starts slowly at first. But then, as time goes on, it compounds. Walk us through that.
THOMAS GRYTA: Sure. Jeff was trying to make the company in his own image. He certainly made a lot of changes. He tried to make a lot of deals. He had some things that he went into. He went into the security business after 9/11. He went into the water business. Those did not work. He ended up having to get out and sell those. When he came in, Jeff recognized the role of GE Capital — the financial services business — and tried to make changes. I think he recognized that there was an overreliance. That said, the dependence on it got bigger under Jeff.
CHARLES MIZRAHI: When you say “dependence,” I want you to spell it out for us. What we’re seeing is a company with four or five major moving parts, right? [It has] the power business, health care, aviation and finance.
CHARLES MIZRAHI: Finance starts to become bigger and bigger. And even the culture of GE —you have the GE Capital guys and everyone else. Capital guys think that nobody knows anything about business. And the regular guys who don’t do the capital look at these guys as Wall Street buccaneers. They don’t get it, either.
CHARLES MIZRAHI: So, you had a bifurcation of the culture — which was a major deal because GE used to have one culture for everybody, and GE people were like family.
THOMAS GRYTA: Well, that’s the story, right? That’s the idea you have in your head about GE. But you’re right. In reality, it was two different companies. And financial services were more than half at times. They thought they were better than Wall Street because they were beating Wall Street without being regulated. They could work in markets that Wall Street wasn’t serving. And they made a lot of money doing it.
THOMAS GRYTA: But it was important because it produced cash and earnings against this industrial business that was largely cyclical and subject to a lot of other things. And making those numbers every quarter seemed magical under Jack but more magical under Jeff. But Jack didn’t have Sarbanes-Oxley.
CHARLES MIZRAHI: OK, hang on. That’s the turning point. Perfect. So, life is going great — on the surface — for the average investor and most of Wall Street. They looked at this company as a well-tuned machine — and for good reason. It was founded in 1892, one of the original members of the Dow, the most widely held stock and never missed a dividend.
CHARLES MIZRAHI: You could see the products. They were changing America. GE and America were synonymous. So, everything was great. Then, you have a division that’s growing enormously. Now, every quarter, the earnings numbers are met because of some type of financial sleight of hand. You get some money from here to there. So, GE started making the earnings really well.
CHARLES MIZRAHI: Now, in 2006, Sarbanes-Oxley pulls the curtain out from behind the Wizard of Oz, and everyone sees that it’s just an old man pulling levers. I want you to explain that to us.
THOMAS GRYTA: GE — in its days under Welch — was a black box. We didn’t really understand how or what it was doing. It just was. Under Jeff Immelt, that started to change. After Enron, Arthur Andersen and all of these disasters, GE essentially had to clean itself up. It had to be able to start disclosing everything else that all these other companies do. Up until then, it did not disclose a lot.
CHARLES MIZRAHI: By the way, let me interrupt you for a second because you wrote it so well in the book. They didn’t have to! And nobody pressed them for it. This was a company that was based on the fact that it was GE. Come on. They do magic. It was like a suspension of reality. They were doing the numbers. The company was growing. That’s not to ask too much.
THOMAS GRYTA: Right. But the reality of some of the things that we include in there — like having to sell half a parking lot on the last day of the quarter and knowing you’re going to buy it back a week later. There are a lot of tricks that can be used because you have a big financial services operation. You can always do a deal. You can always do something in the last minute. They get in trouble for it. They’ve gotten in trouble multiple times.
CHARLES MIZRAHI: Before you give an example, I want to set this straight for our listeners. They basically had a whole bunch of levers that they could pull at the end of a quarter to make this magical earnings number. And one of the biggest levers was GE Capital. And you’re going to tell us about in a second. I couldn’t believe some of these deals. This was not only illegal, but they should be shot. It was trickery. There were sham sales and purchases. They were doing all this because the focus was to make the numbers in any way they could. Welsh’s magic wasn’t magic after all.
THOMAS GRYTA: Well, no. And there were times when he even admitted that this was what you had to do. Of course, you had to. They would never say “manipulate.” They would say “smooth.” You have to smooth the earnings. Nobody wants a company that produces 75% of its earnings in the first quarter. You want consistency. So, he felt like part of his job was to make that happen. Under how we currently view corporations should behave under regulations, that’s absurd.
CHARLES MIZRAHI: Give us some examples.
THOMAS GRYTA: There’s one where, at the end of the quarter, they sold locomotives. They sold them to JPMorgan — which is not a railroad.
CHARLES MIZRAHI: It’s an investment bank.
THOMAS GRYTA: JPMorgan held them for a few weeks until they were sold to somebody else. But they did it so [GE] could make the quarter. The FCC had to come in and say: “This is not a real sale. We have to investigate. Did the actual asset change hands? Did the risk of owning it change hands?” And it didn’t. In fact, the locomotives were running the entire time. They were still running in GE’s grounds. They never moved. But through some transactions, they were able to record a sale and boost their quarterly numbers.
THOMAS GRYTA: And as you said, is that a sham sale? They were good at knowing what the rules were and using them in a way that was not what the spirit of it was. So, what they did with the locomotives — was that illegal? Not necessarily. Not disclosing it was the problem — which is kind of amazing to think about.
CHARLES MIZRAHI: What about the oil deal that they did with Merrill Lynch? I forgot exactly what the whole thing was. Was it oil or barges? It was a sham deal.
THOMAS GRYTA: It’s not ringing a bell. But there certainly were a number of tricks that they had where they could almost sell themselves assets. And when they acquired them — you could adjust the price that you acquired something at so that when you sold it, you could record a large gain. And they were very good at that.
CHARLES MIZRAHI: Right. So, they had a whole bunch of accounting tricks. Now, the worst thing that could possibly happen to Jeff Immelt was Sarbanes-Oxley — which was passed in 2002 by Congress. It passed into law, and there were a whole bunch of corporate and accounting rules and regulations to expose a lot of this.
CHARLES MIZRAHI: In the face of Enron blowing up in 2001, they said: “Enough of this. We know all the tricks. We’re going to come out.” For example, a CEO has to certify the numbers. He can’t say: “The CFO told me that this is it.” No, you’ve got to sign it. A whole bunch of things.
CHARLES MIZRAHI: Warren Buffett said: “When the tide goes out, you get to see who’s swimming naked.” Why does Sarbanes-Oxley expose GE and all of its accounting trickery?
THOMAS GRYTA: It’s exactly what you just said. They have to start disclosing all that stuff. And when you can’t operate inside the black box anymore, it gets a little harder. They lost a lot of their tricks. I think Jeff didn’t have one of the big tools in Jack Welch’s toolbox. And it’s funny because Jack got a lot of credit for having it. Jeff had it taken away. Regardless of your criticisms of Jeff, he wasn’t playing the same game.
CHARLES MIZRAHI: So, Sarbanes-Oxley comes. And all of the sudden, Wall Street starts to see some of these tricks — the sham sales. [GE] created a whole bunch of transactions in order to book it in that quarter — and not in the next — to make the numbers.
CHARLES MIZRAHI: Immelt is faced with 9/11 and Sarbanes-Oxley in 2002. And then, what kicks him right in the privates is the financial crisis of 2008. That exposed to the whole financial world that its capital business was huge. Walk us through that.
THOMAS GRYTA: Yeah, that’s right.
CHARLES MIZRAHI: By the way, when you say “that’s right,” it makes me feel so good. I read the book, I’m speaking to the author and I got all these points right. So, thank you!
THOMAS GRYTA: Well, it’s true. As you said earlier, Jeff Immelt wanted to get out of financial services to some degree. And he didn’t get out. The tide went out. All of the sudden, GE was lumped together with names like Lehman Brothers and AIG. And people were like: “What?”
THOMAS GRYTA: I don’t think that ever stopped. GE had a number of problems during the crisis. One of them was that it had some difficulties funding itself. It got some government help — without getting into details. But it certainly opened up the can to investors that GE was not only deep in financial services but in over its head.
THOMAS GRYTA: And this wasn’t just an industrial company. Even though that was always out there, that was not the same as people having it right at their front doors. And as we said, this was a widely-held stock. So, these troubles were relevant to a lot of people.
CHARLES MIZRAHI: As time goes on, GE Capital has to rein itself in. The Fed sent people over there who actually worked in the company. I couldn’t believe it when I read that. They were actually sitting in on board meetings and interviewing the board of directors.
CHARLES MIZRAHI: There’s another thing. The governance was horrendous. You had the board of directors — which was supposed to be the boss of the CEO. The board of directors looks out for shareholders interest. And now, you have the CEO as chairman of the board of directors. So, it made no sense. He was policing himself. It became a joke.
CHARLES MIZRAHI: I remember someone said: “They asked me to come on the board, and that was the last thing I was asked to do.” They just sat there. They made their $300,000 for their four or five meetings a year. They got a whole bunch of perks, and they just rubberstamped what the CEO did. That’s not what corporate governance is.
THOMAS GRYTA: Yeah. I have definitely had my own thoughts around whether the chairman should be the CEO. And I think what you stated makes it pretty clear — especially when the chairman is the CEO for a long time. They’re really rebuilding the board. They’re influencing who the members are going to be. There are always exceptions. But over time, it’s going be hard to find opposition to that chairman.
CHARLES MIZRAHI: Well, you have Berkshire Hathaway and Warren Buffett. That’s an exception. You have good governance there. But you have an independent board.
THOMAS GRYTA: And founders. Founders will hang around. That’s sort of the one exception.
CHARLES MIZRAHI: But this was terrible. Nobody ever wanted to challenge him. He seemed to be a guy who had a different type of reality. If news was bad — numbers needed to be met or conditions needed to be so — if you just willed it and said it, it became. They don’t see what’s in front of them, and it’s just a matter of grit.
THOMAS GRYTA: Yeah, I think the ability to dictate your own future by telling people what it is — there was a strong belief in storytelling in marketing. In the last years, you can see that. [GE] makes a push to be considered a technology and software company. And it’s going to be one of the top 10 software companies in the world. It’s a little delusional.
THOMAS GRYTA: But I think it’s also what you said. If we will it, it will be so. We are GE. It’s that mythology. We can do it right. Of course, we can do it. We can make $2 a share. We’re going to do everything we can, and we can make it happen.
CHARLES MIZRAHI: OK, so all these regulations came down on them. Regulators were trying to rein in GE Capital. They were going through all of the company’s past misdeeds and building cases against it. You had the Fed in GE — with its own accounting team and sitting as an observer — on the board. So, they had a bird’s eye view.
CHARLES MIZRAHI: You never want a regulator in your place. They’ll find something. That’s the worst thing you ever want to have.
CHARLES MIZRAHI: But they have this. And then, the wheels start to fall off the cart. The business isn’t so good. It’s not making as much because it’s hamstrung. And the sacred dividend — a dividend is the extra money that a company returns to shareholders.
CHARLES MIZRAHI: Many people bought GE for its steady eddy dividends. That dividend came every single quarter, and you had retirees living on it. You had orphans and widows living on it. It couldn’t have been better. Instead of cutting the dividend, GE kept it going, and money kept exiting. This was the wrong thing to do. He should have cut the dividend, but he couldn’t.
THOMAS GRYTA: That’s right. Dividends and stock repurchases should generally be done with cash. You don’t need to run the business. But that’s right. He was very devoted to the dividend. He thought that it was one of the most important things to shareholders. He would often describe the day that he had to cut the dividend during the financial crisis as the worst day of his life.
CHARLES MIZRAHI: They dropped it down to a penny, right? Just a number. If you were getting a quarterly check to live on — from your dividends from GE — to cut that to virtually zero was something that happened on his watch. And from what I read, he dropped the ball on a GE tradition.
THOMAS GRYTA: Yeah, it was the first cut since the Great Depression. I think that weighed on him. He would talk about that a lot. Whether it had to be a mark of his failure — or whatever it was that bothered him — it was something that deeply influenced him years later. He felt like he had to do whatever he could to maintain the financial structure with the dividend and stock price.
CHARLES MIZRAHI: I think they spent close to $100 billion on buying back shares at $30 per share — which eventually went down to $6 per share. It was not a good trade. It destroyed tons of shareholder value.
THOMAS GRYTA: It was almost hard to do it the way it was done. That’s right. GE eventually sold off most of its financial services operation. And to replace that, it largely bought back stock — which, in hindsight, was an incredible decision. All that money essentially evaporated. Rather than reinvesting it in the company — we could talk about Alstom. They ended up doing this huge deal to try to…
CHARLES MIZRAHI: Talk about Alstom. I’ll give the background. This is a French company that was on its last leg. And I remember I spoke to you about this last week. I said: “Why were they all trying to buy this company?” This company was in dire straits, and it needed tons of money. What was the motivation for GE to buy this company?
THOMAS GRYTA: Well, it’s a pretty concentrated industry. You only had so many companies that made these giant turbines. So, I think there was some interest in gaining a competitor. Now, when GE went after them … Why was Siemens interested? It’s unclear. Joe Kaiser — the old CEO of Siemens — implied that they essentially wanted to run the price up for GE, which may be true.
CHARLES MIZRAHI: They said that the EU would have never let them have it to begin with. There was some type of law in there or something. So, you would think that GE would know this with its buildings of lawyers. Someone would have figured this out. But that’s what I find so interesting. I’m sorry to interrupt you there, Tom. But [GE made] so many mistakes that you would think wouldn’t happen on that level. The average Joe could say: “My gosh, that’s just dumb.”
THOMAS GRYTA: The whole idea was to buy a struggling company and get it cheap — which is a sound strategy if you can pull it off. And it goes back into that GE mythology again. We can buy the broken company, and we can fix it.
THOMAS GRYTA: But they didn’t get it cheap. As the discussions got heated, and the French government got involved, the value of the asset dropped, and they increased the price. They were even dropping certain parts of the deal. Even during the deal, there were people inside who were saying: “What are we doing? We should get out.” We talk about that in detail in the book. But Jeff and the leadership were adamant. We need to do the deal. This is the deal. This is the course we’ve set. We’re going to do it. I don’t know of anyone who defends that deal.
CHARLES MIZRAHI: It was terrible.
CHARLES MIZRAHI: OK. Folks, I highly recommend you read the book. Tom and Ted write in very short chapters. Right before dinner, I would read a real quick chapter — about five or seven pages. And you have another story coming up. So, I kind of liked that — instead of those books where they have one chapter that’s 70% of the book. You don’t know where to stop. I feel like I’m swimming, and I can’t get a gulp of air.
CHARLES MIZRAHI: Your book kept picking up, and it’s really simple. You don’t need to be a financial genius to figure this out. You can just read and say: “Oh my gosh. I can’t believe the disaster that’s coming.” You can see them coming ahead of time. It’s like watching an accident happen.
CHARLES MIZRAHI: OK, so let’s fast forward to where enough is enough, and Jeff has to go. Set the stage for us.
THOMAS GRYTA: As always with GE, it’s complicated. You have Jeff — whether you are 14- or 15-years in. You have an activist coming into the stock. Jeff welcomes that, knowing that his accountability is going to be put to the test, and he has to make these targets — including one that he threw out. It was $2 per share in 2018.
THOMAS GRYTA: As the Alstom deal is not doing well, the company is not saying that. It’s certainly saying the opposite. Alstom is doing great, and the benefits of it are not even fully seen. And he refuses to take the numbers down. He sticks to his guns, and he has an appearance at a financial conference in Florida.
THOMAS GRYTA: His usual smooth presentation [of] reassuring everybody in the room that it’s all going to be OK just didn’t work. He was pressed on whether or not he was going to hold his financial targets. And he wavered a bit in a weird way. He just seemed shaken up. And that was really the end.
CHARLES MIZRAHI: That’s when everyone smelled blood in the water. It was over.
THOMAS GRYTA: Yeah, weekend calls were coming in. People were concerned. And as he tells it, he realized that people weren’t listening to him anymore. He didn’t have investors’ confidence in his ability to do the job. He was certainly nudged.
CHARLES MIZRAHI: So, he leaves. He’s gone. The company’s market cap — which was close to $600 billion a decade before — has now gone down. I don’t know where it was when he left, but I’ll tell you where it is now. It’s not even $100 billion now. So, they went from $600 billion to $100 billion. That is enormous value destruction over a 20-year period.
THOMAS GRYTA: Yeah, absolutely. Incredible.
CHARLES MIZRAHI: Okay, now they take this guy, Flannery. His first name is John, right?
THOMAS GRYTA: John, yep.
CHARLES MIZRAHI: John Flannery comes in — I’m just going to put him down as a footnote —for 16 months. I think that’s one of the shortest CEO [terms] at GE ever.
THOMAS GRYTA: That’s right. It might have been 14 months. They spent so much time trying to find a CEO. And they brought him in. He was a former CEO in health care. In fact, he was the one who basically exposed everything. He came out and said: “Everything is a mess. We’re going to cut expectations and the dividend. We’re going to have to rethink everything.” He freaks everybody out.
CHARLES MIZRAHI: This guy gets shot for telling the truth. I love the fact of his disclosure. None of these were under his watch. He was in a different division. He was not in finance. He seemed like a straight-laced guy. GE ran through his blood.
CHARLES MIZRAHI: And now, he’s put in a position where he’s seeing all the skeletons in the closet fall out. And he’s calling them out to the public. Instead of the investing public saying, “He’s cleaning house,” they say, “If there’s smoke, there’s a tremendous fire.” And he said: “No, this should be it.” But the faith that the market had in GE was gone. All the credibility is history.
THOMAS GRYTA: Yeah, I think he exposes a lot, and the stock goes down. Ultimately, where the stock was and the problems they were talking about — and the turnaround that was needed — I think the board realized that it needed an outsider. It wasn’t going to be a problem that someone from GE was going to fix.
CHARLES MIZRAHI: There were too many sacred cows in that company.
THOMAS GRYTA: That’s something John Flannery used to say. He would say: “No sacred cows.” You can’t speculate on whether or not he could have done the job. You could certainly say that a number of the things he laid out should happen — or what the company has done since then.
CHARLES MIZRAHI: But he was dealt such a terrible hand. And he made the best of it. There are only so many plays you can do. You can either bluff your way through it — which he didn’t do. He basically said: “I don’t even have a pair of deuces in my hand. But I’m going to be totally upfront with everyone, and here’s what I plan on doing. Here’s the situation.” And it backfired. It really backfired. Nobody wanted to hear that.
THOMAS GRYTA: Yeah. I think that’s right. He was open. This was going to take years. I think that, up until then, the CEO of GE [kept] the job for a decade or more.
CHARLES MIZRAHI: You had time.
THOMAS GRYTA: Job security wasn’t really an issue. I don’t know if John thought that he had to worry about that.
CHARLES MIZRAHI: Right. He could let his plan play out. We’ll rip the Band-Aid off where we need to. And we’ll work this out over time. But he didn’t have time.
THOMAS GRYTA: Yeah, I think he thought he had time, but he didn’t. From the board’s view, they had to do something. He was remaking the board. He was doing a lot of stuff. And then, they brought in an outsider, Larry Culp, and he continued with a lot of the same stuff. He had his own style, and he adjusted.
THOMAS GRYTA: What GE is doing today is similar to the outlines that John Flannery laid out. And that’s not to say that John is smart or dumb. But some of GE’s problems were around its fundamentals. It was not focused. It wasn’t efficient in XYZ. He saw that it needed to unwind the basic MBA-type concepts. Wait a minute, this is broken. And they lost sight of some of their core values.
CHARLES MIZRAHI: So now, just to get you up to date, the market cap is less than $100 billion. It’s no longer apart of the Dow Jones Industrial Average — which was pretty hallowed ground. It was the last of the original 12 Dow Jones stocks. When Charles Dow put this together — I think was in 1896 or something — GE was still one of them. It’s absolutely amazing that it survived. But big businesses or corporations surviving for long periods of time is virtually unheard of. You just can’t do it. The market has competition and a whole bunch of other things.
CHARLES MIZRAHI: I’m going to let you have the last word here, Tom. I could speak to you for hours about this. I find it so amazing, and it gives me hope. I look at it and say: “Wow, these guys — with all of their teams — make mistakes. So can I.” Stay away from the mistakes that involve emotion. And stay away from the mistakes that you believe — as Ace Greenberg or Bear Stearns say: “Your own flatulence is perfume.”
CHARLES MIZRAHI: That’s what you start thinking after a while when you have your own security team and two planes — which Jeff Immelt had. [He had] one plane and a backup plane in case his own private plane had any problems. Staff. Cars. Coca-Cola was in every boardroom. Lobster and steak were on every plane. If the boss wants them … It’s your head of state, and you start to believe that you do walk on water.
THOMAS GRYTA: Yeah. Regardless of who’s to blame and what went wrong, there’s something to be said about governance, having the CEO and the chairman being the same person — or deciding who’s going to be on the board. When the board is turning over, who’s watching the board?
CHARLES MIZRAHI: It’s a confluence of errors and problems. I have one last thing for you, Tom. In one sentence, what lesson do you think comes away from your book? What’s that one lesson? If you said: “Charles, the lesson I learned from putting this book together and analyzing GE…” What is it?
THOMAS GRYTA: That’s a tough one. I would say it’s about not resting on your laurels. I think these guys took their eyes off the ball after a long time. As you said, whether it was their flatulence or believing their own press, I think the leadership lost sight of what it was trying to do. Its hubris and arrogance got in the way. They scoffed at the question of “Should GE break up?” rather than considering it.
CHARLES MIZRAHI: Yeah. All right, folks. The name of the book is Lights Out: Pride, Delusion, and the Fall of General Electric by Tom Gryta and Ted Mann. It’s outstanding. Get the book! It’s a business lesson in and of itself. Like I told you when we first spoke, I think they should hand this out to MBAs and say: “Put aside everything you learned in the last couple of years. Read the book. Don’t do this. Just stay away from this.”
THOMAS GRYTA: Sounds good to me.
CHARLES MIZRAHI: All right, Tom. Best of luck to you, man. When your next book comes out, you’ve got to come back. Because I really enjoyed it.
THOMAS GRYTA: All right. I appreciate that a lot.
CHARLES MIZRAHI: All right. Thanks so much, Tom.
THOMAS GRYTA: All right. Take care.
CHARLES MIZRAHI: Thanks for listening to this episode of The Charles Mizrahi Show. If you’re a new listener, welcome! If you’ve been listening for a while, we’re glad to have you back. Either way, we’d love to know what you think of the show. Please leave a review if you listen on Apple Podcasts. Reviews make it easier for others to find the show. You can also see the video of the interview on The Charles Mizrahi Show channel on YouTube.
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