We Study Billionaires - The Investor’s Podcast Network - TIP527: The Epic Collapse of GE w/ William Cohan

Starting point is 00:00:00 You're listening to TIP. My guest today is New York Times bestselling author William Kohan. William has just released a new book titled Power Failure, the Rise and Fall of an American Icon. It's the incredible story of General Electric, which at many points over its 130-year history was the largest and most admired company in the world. We sometimes take for granted all the many innovations that came out of GE, like, for starters, electricity, as well as diesel locomotives, jet engines, water treatment systems, power,

Starting point is 00:00:30 Grids, Diagnostic and Imaging Products for Healthcare, Media and Entertainment through NBC Universal and RCA. The list goes on. The book is about as big as a Harry Potter sequel at nearly 800 pages, and if you're like me and you listen to shows like this, probably more entertaining. With over 17 years on Wall Street and the opportunity to work at GE Capital for a couple of years, Williams' insights and research are unparalleled. In this episode, you will learn the real origin story of GE, starting with founder Thomas Edison with backing from J.P. Morgan. why Charlie Coffin might be the best CEO of all time, the dark side of Jack Welch and his career at GE as well as his many successes.

Starting point is 00:01:07 The debate on whether Jack handed his successor Jeff Emmelt a royal flush or an open grenade. The many cycles that repeated over its 130 year history. How Jeff Emel could have saved the company by listening to Bill Gross and Jim Grant, but didn't. Warren Buffett's bet on the company and why it's now been deconstructed into three separate entities, that and a whole lot more. I loved this book and I loved our discussion even more. A quick note that we did have a couple of technical difficulties during the recording resulting in a microphone change for William towards the back half, but the audio did improve.

Starting point is 00:01:39 The story of GE is incredible and there are many lessons to be gleaned from it. I learned a ton and I know you will as well, so without further delay, here is my conversation with William Kohan. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to The Investors Podcast. I'm your host, Trey Lockerby.

Starting point is 00:02:17 And like I said at the top, I am here with William Cohen, the author of the new book, Power Failure. And we are going to discuss the rise and fall of GE. And I'm so excited. William, thank you so much for coming on the show. Thank you for having me, Trey. It's pleasure to be here. Well, you have just finished and released a behemoth. This is Power Failure.

Starting point is 00:02:36 It's a nearly 800-page account of the history of General Electric, GE, which at multiple points and its 130-year history was the most valuable and most admired company in the world. Today, the company is now being spun off into three different companies, leaving everyone wondering, what happened? Jack Welch, who was at one point named Manager of the Century by Fortune Magazine, seemingly handed off a perfect company to his successor, Jeff Emmelt, and 16 years later, management, the company was a turnaround case. We're going to get into whether that was actually the real story or not, but first, I wanted to start with you. Early on in your career, you actually

Starting point is 00:03:17 worked at GE Capital for a couple of years. How did this experience impact your views when you started writing the book? And what was your overall impression of the company once you completed the book? Yeah, I mean, first of all, having worked there and made friends there and kept in touch with a number of people who I had worked with, as you do. You know, you don't keep in touch with everybody, but, you know, there are a few. And one of my office mate, when I first started at GE Capital, incredibly was a guy named John Flannery who became the CEO of GE after Jeff Immel. So here I'm embarking on this book. I have one of my friends is, you know, by then the former CEO, I happen to have a house on Nantucket, which of course is where a lot of G people live, including

Starting point is 00:04:05 Jack Welch and others. And so I found that, you know, this network was opening to me in a good way for me to write this book, to get insights into it. You know, I, when I was at Columbia Journalism School, which was a few years before I went to Columbia Business School, which is a year-long program, you know, out of the blue one day, I got asked to go on a GE trip to visit GE's lighting facility in Cleveland, you know, where they made the light bulbs, and on the same day, go to Louisville, Kentucky to their major appliance facilities. I have no idea how this came about. I have no idea why I was selected. I have no idea what was going on, but I did spend a day on a GE private jet going, you know, from New York to Cleveland and then to Louisville and then back with about

Starting point is 00:04:58 a couple of GE executives and some Columbia J school classmates. So, So that was obviously quite revelatory to me, and I'd never seen anything like that before. Never been on a private jet, obviously, before. So I had sort of left a sort of curious and positive taste in my mouth and then worked there. And, you know, there were ups and downs like any job, but I found it sort of paternalistic in a nice way. You know, there were all these crazy trips that they would take you on. even if you weren't like the top performer, you still got to go on a trip, you know, to some golf resorts for a few days.

Starting point is 00:05:36 They got me a car to commute from New York to Stanford. And it was a, you know, it's like a BMW, they got me. So I'm thinking, okay, you know, I'm sort of working tangentially to Wall Street. I'm working on interesting things. You know, Wall Street had blown up in October of 1987 and G. Capital sort of got stronger and stronger, even though the rest of Wall Street was suffering. So it was all looking pretty good for me. And I think I got a good sense of the culture and that helped me tremendously when I was

Starting point is 00:06:06 thinking of what to write in this book and what to say. Because again, as you said, there's so many myths that are created about Jack and GE and a lot of it promulgated by the company itself. It was just helpful for me to sort of be able to cut through that and know, I have a sense of what I was really writing about and reporting about. At one point, Jack Welch was so revered that GE was known as the house that Jack built, but Jack began working at GE nearly 70 years after it was founded. And the origin story of GE is fascinating and involves legends like J.P. Morgan, the man,

Starting point is 00:06:42 Thomas Edison, who, you know, has over something like a thousand patents, Charles Coffin, and others. How did they all come together to create what ultimately became a company synonymous with America itself. You, again, you know, especially as I was researching the early history of the company, which, of course, I didn't know much about. There were a number of interesting revelations, one of which was Gigi liked to promote the idea that Thomas Edison was the founder of the company, which is great.

Starting point is 00:07:16 I mean, who wouldn't want to have Thomas Edison be a key part of a company DNA? It implies immediately great technological. innovation and creativity. And, you know, I think Thomas Edison is obviously one of the great entrepreneurs slash inventors in our country's history. So no doubt that was useful. You know, if you go to the research lab in Niskeuna, New York, as soon as you walk into this huge lobby, it's all Thomas Edison all the time.

Starting point is 00:07:44 Well, what I discovered was that that actually wasn't really true. It was part of the mythology. Thomas Edison, yes, had created a company called Edison, General. General Electric to sort of capitalize on his creation of, you know, the protection of the light bulb and the generation of electricity, both of which were, of course, incredible innovations. You know, he wasn't a great businessman. He did that with the help of financing from J.P. Morgan the man and others. And at the same time that Edison General Electric was around, and by the way, at this point in the early 1890s, Henry Valard was the CEO of Edison General Electric,

Starting point is 00:08:25 not even Thomas Edison. Thomas Edison was just a shareholder. And there was another competitor named the Thompson Houston Company that had been gone into bankruptcy and had taken over by this fellow Charles Coffin that you mentioned, who's up in Massachusetts. And he was backed by Boston venture capitalists, you know, Henry Higginson, among others. And basically, the venture capitalists, decided these two companies should be put together, merged, to form what became GE, General Electric. Thomas Edison was very much against this merger. He did not want it to happen. He threatened to quit. He tried to block it on several occasions. But, of course, the moneyman prevailed. They went around him and announced the merger of the company, reducing Thomas Edison's role in management completely

Starting point is 00:09:16 at that, making him a relatively small shareholder. And he quickly sold out of those shares and went off to New Jersey to try to perfect some sort of limestone mine or something, which didn't really work out. And that was 1892. And then one just quick note, you know, in 1893, there was a financial crisis, the panic of 1893. And if it hadn't been for some clever, engineering, financial engineering, G, would have gone down the tubes in 1893 because it had 10 million of debt, which was a lot of debt at that time. And they'd end up buying back the debt in a discount thanks to J.P. Morgan, the man. And so right off the bat, you have a merger that takes place over the objection of the quote founder. And you then have the company in perilous financial

Starting point is 00:10:02 situation only to be resolved through some clever financial engineering. And so those two strands of the DNA of GE are very important and sort of play through the next 130 years. And Charles Coffin is a name that's often overlooked or overshadowed by some of the other names we mentioned. Researcher Jim Collins once claimed that Coffin, not Welch, was actually the greatest CEO of all time. And in his words, Edison was essentially a genius with a thousand helpers. And Coffin created a system of genius that did not depend on him.

Starting point is 00:10:36 And while he struggled in the early years after the big merger, which, like you mentioned, Edison was very much opposed to, he then became a major innovator in a lot of different ways. From your research, how do you view coffin and how he fits into this whole story? Absolutely. He's definitely one of the more interesting characters completely overlooked, which is, you know, a shame. He deserves, you know, a serious treatment, which, of course, I tried to give him, but I wasn't writing a biography of him. He grew up in Maine and his family. He went to work for his uncle's shoe manufacturing company outside of Boston. And again, I just see, you know, similarly parallels to today.

Starting point is 00:11:22 You know, shooting manufacturing was competitive, not particularly sexy or profitable, but there was this other business called the, you know, the generation of electricity, which was new and exciting and innovative. and had the potentials like, say, the internet, you know, 100 years later to really, you know, fast forward, to be a quantum leap forward in the way people live their lives. I mean, if you can imagine, Trey, if you're used to lighting your home, you know, with a wood fire or candles or with whale oil, you know, along comes electricity and the electric grid and electric power, which seems utterly mysterious, right? I mean, there's a total black box. Whenever you did, you know, you flipped a switch or whatever you did. And next thing you know, you had a light bulb that lighted up.

Starting point is 00:12:12 I mean, that had to be a mystery, like in the same way that you turn, you know, the key in a car and, you know, the engine goes on. And next thing you can drive yourself away. I mean, this obviously was a huge innovation, a hugely forward, but also scary for people. And often people would, you know, reluctantly hook up to, you know, Edison's or coffins to use electric grid. And then their, you know, fire would result and their business would burn down. So, you know, adoption of this took a lot of time and didn't happen overnight. And I think, you know, Charles Coffin really saw the way to do this. And by merging his company with Edison General Electric and becoming GE and basically

Starting point is 00:12:53 having a monopoly on this business in the, you know, the population centers of America at that time, the, you know, New York City and the Northeast, Thompson Houston Company was a lot more profitable the Minnesota General Electric. And I think, you know, J.P. Morgan, the man and Charles Coffin's backers saw that too. And that's how this, you know, merger occurred. And after the near fiasco of 1893, he resolved, of course, to have a fortress balance sheet to never have much debt at all if he could avoid it. And then he just became a great leader of men. He selected a smart successor. He really was, I have to, you know, agree with Jim Collins on this. Definitely. The right man at the right time, who's unfortunately often overlooked.

Starting point is 00:13:40 GE became so large that Ralph Kordiner, if I'm saying that correctly, was its newly appointed CEO, and he chose to decentralize it. And given my bias towards companies like Berkshire Hathaway and Constellation Software and others, I found it surprising to hear the issues that GE endured as a decentralized company. So talk to us about how this change led to executives breaking the law using circuit breakers and just the general idea that sometimes decentralizing something isn't the best way to go. Yeah, I mean, obviously when a company is got sort of like a command and control approach, there can often be more accountability. It's clear where the lines are and where the lines that you can't break or you can't ignore or violate. But also that can sort of

Starting point is 00:14:33 stifle innovation, stifle creativity, you know, stifle management development. And I think what happened in the case of GE was getting to become a bigger and bigger company, more bureaucratic, sort of stagnating in terms of growth. And so I think the idea that Ralph Cordner had was to try to push down responsibility into the organization and to pull back a little bit on the command and control nature of GE's business with this very powerful central office. And that backfired, you know, big time during this electric conspiracy scandal where basically the manufacturers of this electric equipment basically started colluding on the prices that they would charge customers. And they had this crazy. I mean, when I came across this,

Starting point is 00:15:25 I couldn't believe it either. I mean, this elaborate way of signaling each other and codes that they created and they would meet at these industry off sites. And instead of, you know, learning industrial wisdom, they colluded with each other on how to, you know, set the prices for these various technical electrical equipment that they were pricing and trying to sell to customers. And this was sort of, they'd get caught and then they'd decide not to do it anymore. And then they'd have a down year. And then they'd resume the conspiracy. And this just went on for a decade until all sorts of GE executives and others got put in jail and, you know, the whole thing kind of blew up. And then they went back to command and control again. And ironically, fast forwarding way far till

Starting point is 00:16:14 now, my friend John Flannery, who became the CEO, brought Larry Culp onto the GE board, who was the former CEO of Danorher, which is, I'm sure, you know, a company you know that is famously like Brookshire Hathaway and sort of an agglomerator, but without, you know, having a very small central authority. And John was thinking that G.E. needed to go back to that to sort of begin to dismantle Gigi's big corporate apparatus, which was, you know, spending billions a year, sort of some people thought wastefully. And so he brought Larry Cald onto the board to try to get from Larry his wisdom about his experience at Dannaher. Unfortunately, what happened was that with the help of

Starting point is 00:17:00 Nelson Peltz's hedge fund triand partners, which had invested in GE at that point, was a big fan of Larry Culp. They basically engineered a coup that got rid of John Flannery after 15 months and brought on Larry Culp, who in fact dismantled the whole company, alone in the central office. So what I found repeatedly in the researching and writing of this book was that a lot of themes that were there at the beginning, We talked about what happened in 1892 and 1893, you know, got repeated later on in its history. Like, one thing I didn't know either was that after World War I, Woodrow Wilson basically insisted that GE create what became RCA, Radio Corporation of America, inside GE to hold GE's patents in the radio business and its technology that it had discovered in a radio industry so that after World War I, the British wouldn't get a whole. of that technology and, you know, try to one-up us in this new technology of radio. And then in the 1930s, the Justice Department forced GE to divest RCA becoming a public company on its own. And then, you know, one of Jack Welch's biggest successes in his 20-year tenure at GE was buying back.

Starting point is 00:18:23 Well, you know, it turned out he was buying it back. By then I was about to go to Wall Street and studying this stuff very carefully. And the fact that GE was buying RCA was front page news in the New York Times at that time. And it was the largest M&E deal in history at that time in about $6.4 billion. And everybody sort of hailed Jack as a hero, which, of course, it was a great deal and smart and clever. They got NBC. But Jack was just buying back a business that GE had started and owned and was forced to divest. I don't think anybody realized that. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord,

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Starting point is 00:23:08 All right. Back to the show. Well, let's talk about Jack because he was a master of M&A, it seems, from your book here. The market cap of GE when he started as CEO was around $12 billion. And when he left 20 years later, it was something around 400 billion. So clearly he did a lot of things right. At one point, getting inside 650 billion. Oh my goodness. Yes. So yeah, you're right. So clearly he did a lot right and he was heralded for it. That said, there were some major issues with Jack and his leadership styles. You know, Jeff Emmelt nowadays has kind of referred to him as almost like a

Starting point is 00:23:43 scoundrel or villain. And, you know, when you read business books growing up, I mean, I think all of us are, or at least me personally, I was only really aware of him being just this amazing CEO and he's sort of like the pinnacle of what you want to reach for if you're running a company. But were there any traits about Jack you discovered that don't quite line up with his reputation as, say, the greatest leader of his era? Well, of course, my interactions with Jack, when I was working at G Capital and when I went on that trip to lighting and major appliance businesses were minimal to know. And, but of course, when I started writing this book, he agreed to spend a lot of time with me and tell me his story and answer all my questions and we spent many hours together before he passed away in March of 2020.

Starting point is 00:24:33 So obviously, I learned, I mean, he was incredibly charming and open and on the record. And, you know, it was more than I could have asked for. You know, he was, you know, not in the best of health then, but his mind was still sharp. And, but I did discover all sorts of things about him that, you know, I think that he could be cruel to employees. He could be sort of heartless. He was once known in his early years as neutron jack. The idea being he would fire people and leave the building standing. I think he, you know, reduced headcount by like 100,000 people.

Starting point is 00:25:12 And, you know, he felt like he had to do that because, you know, G. He had gotten very bureaucratic and bloated, as we were talking about. And I think he was hired, in fact, by his predecessor, Reg Jones to do that. So he could be cruel. He would make fun of people for their appearance or their weight or what they wore. He was probably a bit of a, more than a bit of a womanizer and, you know, treated his first two wives very poorly. I would think chances are, you know, in this day and age, he would have been a target. for some sort of Me Too kind of expose, which probably would have gotten him removed from

Starting point is 00:25:53 the job at some point. So, you know, but I think by the rules of the era that he was operating in, he was just sort of like business as usual kind of thing. I don't think he was necessarily any worse or better than others in some sort of these social regards. He clearly was a great leader of this company, if one is to judge a leader by various objective measures of increasing market value, increasing reputation, increasing influence, increasing world of respect. You know, Trey, even when I spoke to a lot of former Gigi executives who had been fired by Jack, you know, and who had therefore lost the opportunity to become his successor, they still praised him and they still professed their love for him. And,

Starting point is 00:26:54 you know, many of them were Paul Bearers at his funeral at St. Patrick's Cathedral. So I was quite taken by that, you know, because usually my experience, either my own experience on Wall Street or in writing books about Wall Street and other things, you know, there's not a lot of love that people have for their bosses, sort of the way they're treated in these situations. But But despite Jack being one tough son of a gun, the people who worked for him really admired him, felt that they enhanced their careers and got more out of them than anybody else could have. And by the way, I think there's a contrast there with, you know, what people felt about Jeff Immel. You mentioned him the nickname Neutron Jack. And as he described, he sort of despised bureaucracy.

Starting point is 00:27:41 He would routinely fire 10% or so of the workforce. And at one point, I think he cut half of the consumer products division. He wouldn't, quote unquote, suffer fools around him, it seemed. And this was an asset, I think, early on in his career, because that's what got him so far ahead. And he would really push people to hit their numbers. But did he soften over time? It seemed like at one point, maybe his management style needed to change once he kind of

Starting point is 00:28:04 became ahead of the company. Because, you know, people can only take so much of the hardness, as you kind of described it. Did you see a change or when you met him had he softened at all? Or was he still kind of that same neutron jack? Well, of course, he hated that label because of what it implied. And so at the same time that he could sort of be ruthless about the need to reduce the bloat in the GE bureaucracy, which, you know, I think honestly you have to do even though it means that real people who have devoted themselves and their careers to this company may lose

Starting point is 00:28:38 their job. And so that's, of course, harsh. And I do think at the same time that he could do that and do what needed to be done, you know, there are people who would tell me stories of, some guy told me a story of how he met him on the beach in Marblehead, Massachusetts, north of Boston, and the guy remembered his name and his wife and asked about his kids. I mean, Jack just had this real connection with people. There was a certain magnetism there, magnetic pull towards him. And I, of course, found that myself when I spent time with him. He was incredibly charming and open, as I said. And more than that, like, I would go to lunch with him or out with him and people would come up to him just to say hello.

Starting point is 00:29:23 I mean, he was just like this had a magnetic pull, even in his later years when he was far, much, you know, no longer the CEO of GE. He was a legendary figure, unlike almost anyone else I've really. ever encountered or written about or spent time with. So, you know, sort of in the JFK Jr. kind of sphere. It was somebody I knew growing up. And so Jack was like that. And I think you're right. Over time, I think he softened. He became less zealous, less doctrinaire. Like, he would still go into a meeting, you know, where they were considering some deal or some strategic decision. and Jack probably would have made up his mind early on, but he was also capable of having his mind change

Starting point is 00:30:13 and being open-minded enough to entertain a clever and reasonable argument about why whatever is being proposed should actually happen as opposed to not happen. I mean, this is the guy who started CNBC, who started MSNBC. We may be sorry we have those now, but nevertheless, he and his team, you know, led by Bob Wright and David Zazlov and Tom Rogers and others created what now are two very important

Starting point is 00:30:42 cable networks and had the ability to or listen to the people who had the ability to see that say just owning NBC a linear TV network was not going to be enough in the future. And so early on, you know, within the first few years after acquiring NBC, he was already doing. acquisitions for cable businesses and starting these cable channels that other people, you know, were way, way behind. And he just had this ability to see around corners, which is incredibly valuable in a leader. Now, that doesn't mean he did everything right. I mean, obviously, we talked about his personal behavior, which wasn't so admirable. But, you know, after he did the RCA deal, he was so sort of high on his own stash.

Starting point is 00:31:33 that he decided to buy Kidder Peabody of all things, which is a venerable old investment bank that GE and GE Capital had no business merging with it. And I was actually there during that time period, and that was an unmitigated disaster. But even that, there were scandals and there wasn't the synergy that he thought. And the GE Capital people were getting paid much less than the Kidder people, Peabody people. And that created a lot of tension. But even then, he did manage to get out of it, despite everything, when he sold what he could of Kidder Peabody to Payne Weber, and then Payne Weber got bought for $10 billion by UBS, the big Swiss bank. And G.E had bought Kidder for like $600 million and obviously put hundreds of millions

Starting point is 00:32:18 more into it and absorbed hundreds of millions of losses, but got $2 billion back when UBS bought Payne Weber. So, I mean, sometimes it's better to be lucky than good. And Jack's, you know, I have to say, you know, Dave Calhoun told me, who was a long time GE executive, who's now the CEO of Boeing, told me, you know, it's a great and incredibly perceptive observation about Jack and Jeff, Imalt, is that, you know, whenever Jack had a major decision to make, he tended to make the right decision. Whenever Jeff had a major decision to make, he tended to make the wrong decision.

Starting point is 00:32:57 And I think if you look objectively at the facts, that's pretty accurate. And that's seemingly what Jack told you first thing when you met right off the bat. And I think you had to do a lot of work there to justify if that was actually the case. The elephant in the room, though, around Jack is this concept of managing earnings, which to me I read as sort of manipulating earnings. And under his leadership at GE, GE was consistently growing 15% or so year over year over a year and the earnings were just so reliable. But that point about Kidder Peabody, I mean, I think at one point they were down $2 billion or something trying to write off and they

Starting point is 00:33:33 kind of pulled some money over from the insurance reserves or the reinsurance reserves. So what did you uncover from the research around whether or not Jack knowingly participated in acts of managing earnings? You know, talk about a point that Jack made when I first sat down with him. He would make his points early and then reiterate them every time we would meet. And this is another one of them, like, don't fall for the people who say, I managed earnings, or in your words, I manipulated earnings. Look, even in Jack's own book, straight from the gut, particularly around the first kidder, you know, miss, which going to cause GE to miss some earnings that Jack had told analysts he was

Starting point is 00:34:14 going to make, he writes in the book that he then asked his senior leaders, see if they could, you know, find some earnings somewhere quickly, which people have looked, and they did, and then he sort of was able to meet the earnings projections he had told analysts he was going to make, and while also absorbing the kidder, unexpected kidder losses. So people look at that and say, well, here it is. He's prima facie admitting to manipulating earnings and, you know, finding earnings that necessarily weren't there or stealing from the future to solve a problem in the present. robbing Peter to PayPal, whatever you want to say.

Starting point is 00:34:53 And so they say, well, Jack, there is admitting to this himself. And I think what I have sort of concluded and figured out is this. This was Jack's mantra, okay? If I'm the CEO of this company and this company is, you know, let's just say for argument's sake, half an industrial business and half a financial company with $650 billion of assets, you know, all around it. And I am in the business of creating shareholder value. If I tell Wall Street research analysts every quarter, I'm going to make, you know,

Starting point is 00:35:31 X dollars per quarter per share. And then if I don't do that, my credibility is lost with investors. My credibility is lost with the Wall Street research community. My credibility is lost with the Wall Street bankers. And I need all of them, like a lot. I cannot, you know, I'm GE. I am like the biggest company in the country. And, you know, I've been a key component of the Dow Jones Industrial average since the 1890s.

Starting point is 00:36:00 I have a AAA credit rating. You know, I have a responsibility. You know, we were the founder of the business roundtable. I'm a big defense contractor, all sorts of products that people, everyone in America and maybe even around the world uses and relies on and takes for granted. I have a responsibility to make sure that I do what I say I'm going to do every quarter. So if I can tell two-thirds of the way through the quarter that my industrial businesses aren't going to make it, aren't going to produce what I hope they're going to produce, or if there's a hiccup along the way like the Kidder thing that I did not anticipate,

Starting point is 00:36:39 and I have all of these assets over here in GE Capital that I can monetize, either by selling warrants that I've obtained by doing a deal or I own buildings that I got by making equity investments in real estate or, you know, I have loans that I can sell in the marketplace that are even maybe trading above par or where I issued them. Then, you know, I've got an obligation to do that. And if I don't do that, that's kind of negligence on my part. That's Jack's argument. And, you know, other people see that as manipulating earnings, kind of in the jack camp on this, that, you know, he's the CEO of this entire company. It's not just an industrial company, for better or for worse. And obviously, during the financial crisis, it became a real

Starting point is 00:37:28 problem, but it's also a financial services company and a big one and a big unregulated one and that I've intentionally created and allowed to grow and making a lot of money by arbitrage our AAA credit rating, borrowing short and lending long. And that's what, you know, as he told me, that's a lot easier to make money in that business than it is to make a jet edge. So I have a responsibility to make sure that I don't miss my earnings estimates. And I think that's what a responsible CEO does. Not like he's stealing or doing, you know, you could say that I guess by doing all these

Starting point is 00:38:08 M&A deals, which you did a lot. You know, earnings always got fuzzy and it was hard to tell, to compare one quarter's earnings to another or one year's earnings to another because there was all this noise in the earnings. And yes, there was a lot of that going on, which could probably added to the cloudy picture that resulted in GE's earnings. It was a complicated company, incredibly complex. But for a long time, like during Jack's years and even the end to some of Jeff's years, the market kind of love this company. In the same crazy way, the market loves Tesla today. You know, there's not much different. I mean, they reward Tesla with this absurd multiple of earnings. They rewarded GE with this absurd multiple of earnings. At one point, people came to

Starting point is 00:38:51 their senses and GE came back down to Earth leading to, you know, the breakup. You know, at some point, Tesla is going to, investors are going to realize that Tesla is really just in the end a car company. It's not like a car company that's landing electric cars on Mars and we should all be rejoicing. So Jack, you know, while he did have those amazing M&A moments with RCA, as you mentioned and some innovations around media, he could have taken GE into the next generation, but he'd made some questionable decisions like selling off the computer business at one point to Honeywell and then later trying to buy back Honeywell but then walking away. When you met Jack and you were talking to him about these kind of moments, did he seem like a man with any regrets,

Starting point is 00:39:32 Do you think he would have gone back and done anything differently, or was he pretty resolved in the decisions he made? Oh, well, of course, the very first thing that he said to me when he sat down at our first lunch at the Nantucket Golf Club was that he regretted his choice of his successor. So this was a man whose biggest decision that he made, his CEO, was one that he ended up regretting. That's a pretty big thing to admit to. and he was very frank about it repeatedly. So that sort of startled me. And so right from the start, as I was reporting this book, I knew that this was not at all what I thought it was going to be

Starting point is 00:40:11 and that there was this incredible story about how that happened. When it came to business decisions, yes, he obviously regretted Kidder, but he gave himself high fives for making chicken salad and chicken shit. Honeywell, you know, I look at the Honeywell situation. He certainly had no regrets about getting rid of Utah International, which was a mining company that is Brennan Sinsured bought or getting, or, you know, he certainly endorsed getting out of computer industry GE couldn't compete with that and shouldn't have been trying to compete just like, you know, many years later, Jeff tried to make GE into a software development company, which is no business. GE, you know, hiring a bunch of software developers in Silicon Valley,

Starting point is 00:40:55 he flushed $5 billion down the toilet. But, you know, Jack did not, you know, regret his moves into, say, insurance, which Jeff hated and got rid of mostly. He, I think, frankly, many, I think we wouldn't, I mean, may never have written this book or we would, may never have been talking about the breakup of GE if Jack had gone through with the acquisition of Honeywell, which, you know, was happening just as Jack was leaving. It's supposed to be leaving in 2000.

Starting point is 00:41:28 He got his tenure extended to September 2001 to try to get that deal done, which competitor, United Technologies, had reached an agreement to buy. And Jack could not let, could not fathom the idea of United Technologies merging with Honeywell. So he decided that he had to top that bid and get control of that company. And he succeeded in reaching a merger agreement. and with Honeywell. And then the U.S. Justice Department approved the deal relatively quickly, but the EU became a major roadblock. And Jack ended up deciding to walk away from buying Honeywell because the EU wanted him to sell a bunch of businesses that he didn't want to sell. And as he told me,

Starting point is 00:42:13 you know, he thought he was going to buy an 18-hole golf course and he only got 15 holes. So he didn't want to go through with buying, you know, the golf course. I think that, And if Jack had bought Honeywell, it would have made a big difference in tilting the balance of the earnings power at GE back to the industrial side, making it less reliant on GE Capital so that when the trouble came in 2008, it would have been less existential for GE. I did talk to Jack about his decision to abandon the Honeywell deal, and he did not seem to have any regrets. His position was sort of, you know what?

Starting point is 00:42:54 We didn't really want to buy it in the end anyway. We found things we didn't like, you know, after we got into due diligence, you know, post-merger due diligence phase. And so the EU's forcing us or wanting us to sell various assets that we didn't want to sell and gave us the opportunity to walk away and we decided to do that. I think in retrospect, that was a mistake. He also told me he did regret firing Dave Cody, who was running the major appliance division and then eventually became the CEO of Honeywell later after the GE's Honeywell deal fell apart.

Starting point is 00:43:28 And Honeywell became worth more than GE. And I think perhaps Jack realized that he had under-restrated Dave Cody. But aside from that, kind of very few regrets. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up. And customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance,

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Starting point is 00:47:02 All right. Back to the show. Okay, well, I definitely want to talk about Jeff Emmold, but before we do, I want to quickly touch on GE Capital because it was such a huge piece of the podcast. here. At one point, it became half of GE's earnings. In a way, it was like a corporate engine that was powering this manufacturing of engines. So walk us through how GE Capital was at once a golden goose that later became an albatross of sorts. Well, again, it gets back to simple mathematics, I guess, you know, arbitraging a price that

Starting point is 00:47:35 GE had to pay to borrow money with the price that it could get to. lend out that money. And its cost of capital was very low because it was a AAA rated credit, one of maybe 12 at that time. This was sort of before the rating agencies went berserk and started rating all of those mortgage bank securities, AAA. And so Jack just, even before he was CEO, he was put in charge of G Capital after his tour at plastics. And he just sort of fell in love with yet and what it could do. And the fact, it was unregulated, had unlimited access to capital and could borrow cheaply and lend out expensively.

Starting point is 00:48:24 And, you know, when I was there, people used to complain that we were, you know, the most expensive lender around. Like Wall Street banks were much cheaper and that, you know, in terms of pricing and fees and whether or not they took warrants or, you know, just to spread over. LIBOR or whatever it was. And, you know, at the time, I used to think, hmm, Jesus, when I thought about it and all that is, you know, how are we going to compete against First Boston or Goldman Sachs or Morgan-Sax or

Starting point is 00:48:54 Morgan Stanley who are providing these bridge loans for these buyouts and other things? You know, we're so expensive. And, you know, we would do deals that other people wouldn't, for starters. And, you know, when I thought about it in the writing of this book and, of course, having then lived through any number of financial crises, starting from 87 to the early 90s to the early 2000s to 2007, 2008. What was obviously quite clear to me is that actually GE Capital was pricing risk properly and was getting paid for the risks it was taking, unlike every other financial institution.

Starting point is 00:49:35 And that sort of reinforced in my mind sort of what a good, business G Capital was. So I think Jack understood the risks that were inherent in G Capital. And those that he didn't understand, he had people in place like Gary Went and Dennis Naden, who did understand those risks. And he had a lot of faith in. And Dennis Darerman and others, we had a lot of faith in. I think Jeff really liked the earnings that G. Capital produced year after year. But I think he didn't have the same intuitive, inherent understanding of the risks that Jack did or the Jack's leaders did. And, you know, Jack, of course, famously got rid of Gary Went, but at least replaced him with Dennis Nadin. Jeff got rid of Dennis Nadin and replaced

Starting point is 00:50:33 him with Mike Neal, who I think wasn't quite as willing to stand up to Jeff. And Jeff thought he understood the risks that were inherent in G capital. And it turned out, of course, he did not in a big way. And had, despite warnings, right, that occurred, you know, either from Bill Gross early on or to a guy who worked at Stanley Drunken Miller's hedge fund or, you know, my favorite person in this whole story, Jim Grant, who wrote repeatedly of the risks. that were inherent in GE Capital. And basically, you know, Jeff would go down and meet with the rating agencies.

Starting point is 00:51:15 The rating agencies would complain about the risks that Jeff was taking and his funding model at G Capital. And he basically poohed it all and ignored it. And it wasn't until, you know, he ignored the advice given to him by Michael Prawley, who was running GE's real estate business at G.E. Capital, you know, It had been tremendously successful and made a lot of money. And Michael probably told him in 2007 to, you know, it's time to sell this business. And I had lined up Golden Sachs to help with the sale of the business.

Starting point is 00:51:52 And Jeff sort of waved around this report from McKinsey and says, no, here, McKinsey says, you know, this real estate bubble is going to continue for the foreseeable future. Well, of course, we know what happened. McKinsey was wrong. Jeff should have sold G. the real estate business at that time and would have made a ton of money. Instead, he didn't sell it. He, you know, a lot of that profit was lost. And then, of course, come the 2008 financial crisis,

Starting point is 00:52:21 September of 2008, Jeff had to go hat and hand to Hank Paulson, the Treasury Secretary, and beg him to solve the problem that GE Capital is having in borrowing in the short-term commercial favor markets because those markets had dried up in September of 2008, and GE Capital no longer had access to those, to that kind of funding. And basically, Hank Paulson came in and saved the day for Jeff, told them to go speak to Sheila Baer, who was at the FDIC, and then Sheila Bear basically was forced to let GE into all of these financing lines of credit that the government was making available to other financial institutions. And all this occurred without anybody realizing what was going on.

Starting point is 00:53:11 Everybody was focused on Wall Street banks going down the tubes or focused on the car companies going down the tubes. But here was GE, you know, our most admired and respected industrial company, one of the largest financial companies unregulated in the country. And he was going down the tubes. Literally had twice gotten the papers ready to file GE Capital, for bankruptcy and nobody had a clue. I didn't have a clue and I worked there. I didn't know until I started reporting this book. Incredible. I mean, yeah, it seems like I'm going off memory, but I think

Starting point is 00:53:46 GE Capital was at times over levered eight to one, maybe more. That idea of them being unregulated was at one point an asset for them, right? But then after the global financial crisis, when everyone who was regulated was guaranteed by the government, all of a sudden they're left on the Rhode Island it would seem. Well, two things happened. First, they were not part of the TARP. So all these other financial institutions were getting bailed out, and Gigi was, you know, not part of that.

Starting point is 00:54:12 Then all these lines of credit were made available to essentially backstop the commercial paper markets and other short-term lending markets. And Gigi had to beg to be included in that so that, you know, if they weren't included in that, then there'd essentially be a run on the bank at G. because no one would invest in their debt or provide them short-term financing because essentially they weren't backstop by the government, but other financial institutions were. So they had to scrape their way to get into that, and they were let in. But then, of course, the result of all that, they were declared a SIFI, a systemically important

Starting point is 00:54:52 financial institution, which meant that they were regulated by the Fed. So they went from being completely unregulated to having the ultimate in regulation. And it was costing them like $2 billion plus a year. And Jeff Immel felt like the Fed was in everything that it was doing and was sitting in his board meetings and was basically regulating its financial business, which was something he almost could have dealt with, although he hated it. And it was costing him a lot of money a year. but he was afraid they were about to encroach into the industrial side of the business

Starting point is 00:55:28 and not let him run that business the way he wanted to. So he resolved that he basically had to get out of GE Capital, which was an incredibly fateful decision. And he thought was so brilliant in what he did it in 2015, but two years later resulted in his being fired from the company. And you mentioned that Bill Gross from Pimcoe and Jim Grant were publishing these amazing warnings on GE Capital prior to the great financial crisis. You mentioned Jim Grant was your favorite character in all of this. I'm kind of curious as to why that is.

Starting point is 00:56:04 Well, first of all, he's such a incredible person to begin with, and he's so sort of sui generous. And, you know, he's become an iconic character because he writes, Grant's interest rate observer, you know, so thoughtful and so well and so insightful, you know, he picks up on issues going on in the credit markets, which are, of course, four or five times the size of the equity markets and people don't really understand the credit markets. And, you know, more importantly, they don't understand what the credit markets are telling us. And, you know, one thing I love about Jim is he understands what the credit markets are telling us.

Starting point is 00:56:46 And then he tries to warn people through his newsletter and his publications about what's happening and how, you know, so he sees around corners and sees things coming that very few people do. But if you're like the CEO of GE, you're like, you know, an imperial deity kind of thing. And so, you know, are you going to stoop to taking the advice of Jim Grant? You know, probably not. And yet Jim Grant repeatedly, you know, year after year after year, would write these pieces that are of course preserved in amber of the risks that GE and GE capital are taking. And he would lay out the balance sheet risks. And he would talk about how when you have a AAA credit rating, you can only go one direction. You know, there are no quadruplea credit rate in companies.

Starting point is 00:57:40 There's only companies that are less than AAA and that, you know, just, because GE was sort of a paragon of virtue for many years. It had sort of implanted the seeds of its own destruction in the company and nobody was realizing it. And so, you know, I just loved that. That's the fact that Jim Grant, you know, who wears bow ties, saw this coming and it seems very professorial. And Jeff Immolt, you know, the master of the universe couldn't possibly stoop to listening to something that Jim Grant was saying and laying out repeatedly. and early. I mean, and not to listen to Bill Gross.

Starting point is 00:58:19 I don't understand that. Not to listen to the credit rating agencies. I mean, when credit is the lifeblood of your company, and like almost every company, you know, you have to protect. And when you've got AAA credit rating, you've got to protect that with everything you've got. Because that goes to the very confidence that people have in your company. And it's not just an equity story.

Starting point is 00:58:44 It's a credit story. And, you know, people just don't understand credit. They don't understand the credit markets. They don't, even though most of us borrow money and most of us have interactions with the bank, it's incredible how few people understand what's going on in the credit markets and what the credit markets are trying to tell us. And Jeff Immelt didn't understand that. And if you have somebody like Bill Gross and like Jim Grant telling you, laying it out for

Starting point is 00:59:12 you the problems that you are. are potentially facing and you don't take that to heart. Well, that's a big mistake. The debate around, you know, whether Jeff was handed a royal flush from Jack or not, kind of falls apart, in my opinion, from reading this book around when the tech bubble crashed in the early 2000s and in the aftermath, the markets were in turmoil. Jeff had this opportunity to reset the company and get rid of all these potentially cancer's legacy issues or these ticking time bombs that maybe Jack did have in the company, but he didn't do that. And beyond that, he went on to factor receivables and poorly timed stock buybacks and

Starting point is 00:59:48 overextended dividends. It seems like maybe his biggest mistake of all, though, was surrounding himself with seemingly sycophants, right? And I guess my question is, where was the company's board through all of this? Nowhere, Trey. They, I mean, with some notable exceptions who I know they're notable because they talked to me. They had the guts to talk to me. So Ken Langone, who Jack had appointed and then Jeff had fired,

Starting point is 01:00:14 or even Sandy Warner who tried to stand up to Jeff and was fired by Jeff. So what was clear is that if you wanted to take Jeff Immelt on in the boardroom, you were going to lose your board seat. And of course, you know, GE was, of course, the pinnacle of corporate boards, probably the most prestigious corporate board to be on. And so if you were asked to be on that board, the last thing you wanted to do was to be removed from the board. And of course, that meant that you did not challenge Jeff Immelt.

Starting point is 01:00:44 Well, of course, the purpose of a board is to challenge a CEO to be the last gasp for shareholders or creditors or stakeholders or employees. If something is going wrong, you're supposed to stand up to the CEO and push back and hold him or her accountable. And this board didn't do that. was constantly being overrun by Jeff. And of course, when I come along and want to talk to them about what happened and why they made the decisions they made and why they didn't stand up to Jeff and why they let him get away with all these things. Or, you know, as Dave Calhoun said, to, you know, making the wrong decision every time he had a big decision, why didn't they challenge him on these things?

Starting point is 01:01:31 Instead of talking to me and explaining to me why they made this. decisions that they made or why they allowed Jeff Immelt to, you know, sort of bulldoze them through various board meetings. And, you know, they were getting paid whatever, $400,000 a year to go to some board meetings. And they just didn't do their job. They, you know, enjoyed too much being on the board of GE and failed to do their job, which was to hold the CEO accountable on behalf of the shareholders. And they didn't do that. And instead of explaining why they didn't do that to me or engaging with me, they just ignored me and gave me the stiff arm, except for largely Ken Langone and a couple of others. Yeah, this amazing quote about boards from Warren Buffett

Starting point is 01:02:19 in the book where he says, CEOs go shopping for pit bulls, but it's the Cocker Spaniels that get taken home. That's such a great quote. And Warren, Warren comes into the picture around the great financial crisis. He ends up buying $3 billion of GE preferred stock with a 10% dividend. And he also receives these five-year warrants and an additional $3 billion for a strike of $2.50. What I'm curious about is how Jeff goes from getting that investment from Warren Buffett to then Tryon, if I'm saying that correctly, or Trion, who is this highly aggressive activist investor and seemingly part of the death knell for GE overall. Well, obviously, those two things were separated by seven years. GE wasn't Warren Buffett's first rodeo. You know, Warren had done the same thing at Goldman Sachs and at Bank of America.

Starting point is 01:03:10 So, you know, the Warren Buffett preferred equity seal of approval was something that was in the air at that time. And of course, Warren being the genius that he is, he knew that these firms, these financial institutions couldn't get money other places and that it would be a huge vote of confidence for them. with their investors, their creditors, their stakeholders, their depositors if he came in and sort of ratified the genius of the management and the business plan. And so Warren did that, as I said, at Goldman, B of A and GE. And, you know, that enabled GE to then go out and raise, you know, I think an additional 12 billion of equity for a total of 15 billion, which they felt they needed very much at that time. And, you know, again, it proved, you know, not even to be enough. GE had to cut its dividend. And then, of course, Jeff decided he had to sell NBC Universal

Starting point is 01:04:12 to Comcast without an auction to raise even more capital. And G was in a desperate situation. But by 2015, I think Jeff thought, you know, the ship had been righted that he felt like, you know, he had bought Alstham. He had decided to sell GE Capital and raise even more capital. And he used that money, as you said, he made a big mistake again. I mean, I think he made a mistake by selling GE Capital off in pieces, but then to use the proceeds of that to spend $30 billion or so buying back stock at $45 when the stock later went to teens was, of course, a ridiculous use of capital, completely wrong investment capital. I should have paid down debt.

Starting point is 01:05:00 Probably should never have gotten rid of GE capital to begin with. But, you know, he thought he was this so-called Project Hubble, which was the selling of GE capital, getting GE out of the SIFI business, getting GE out from under the Federal Reserve's regulation, getting rid of $2 billion of annual expenses, was the way to go and to sort of ratify his, what he thought was his genius in doing all of that. He brought in Triand Partners, which was an

Starting point is 01:05:29 activist hedge fund headed up by Nelson Peltz. And he thought that they would be friendly because when he was at Dartmouth, he was friends with a guy named Tom Garden, who was Ed Garden's brother, and Ed Garden is Nelson Pelt's son-in-law who worked at Tryon Partners. And so he thought this familial relationship would be beneficial to him in GE, and that You know, Nelson Peltz, who he referred to as the smiling crocodile, wouldn't bear his teeth when things weren't going as well as Jeff had promised they would. You know, I think he was told by Wall Street bankers that GE was ripe for an activist investor. So he thought he might get one that was what he thought would be friendly and more sympathetic to him than another one who might come in that he didn't know. But of course, you know, two years later, that all backfired too.

Starting point is 01:06:23 Okay, so GE is now the biggest fall from grace we've seen from an American company. And through all of this, this three years of research you put into this book, which is just, I have to say, so incredibly detailed, it's unbelievable, really, this book. I mean, the research that went into it is just incredible. And I'm just kind of curious through all of that, what are the lessons we can now take? I mean, we can certainly throw Jeff under the bus all day long, right? But what were some of the key lessons that people who are running businesses today can really lean from all of this 130 year business that ultimately failed in a very short amount of time? Well, first of all, just because something seems, you know, that it has a mode around it, that it's impenetrable, that it's imperial, that it's the most valuable company in the world, that somehow that inoculates it from a fall.

Starting point is 01:07:15 Joseph Schumpeter, the Austrian economist, talked about creative destruction and that the seeds of, you know, companies are sown early on. And I think that that is especially true in the case of GE, as we've discussed. So, you know, this idea that somehow you're invincible, which was, you know, basically Jack's theory of the case, as you said that he had handed off to Jeff what he thought was a royal flush. Jeff certainly didn't see it that way. But, you know, that's what Jack believed. He thought that he had created. this, you know, behemoth that would have last for another 130 years and had this was surrounded by an impenetrable moat. So lesson number one, you know, Tim Cook or Elon Musk or Jeff Bezos is, hey,

Starting point is 01:08:00 just because you're, and I think actually Jeff Bezos understands this and has said to his, you know, employees, you know, it's just going to be a matter of time before we're gone. So let's see how long we can keep that from happening.

Starting point is 01:08:10 Just because you're on top now doesn't mean you're, you know, not vulnerable to all sorts of macroeconomic and microeconomic events. And, you know, one of which is, of course, making sure you choose the right person is your successor. And of course, Jack admitted that he chose the wrong person and would become susceptible to Jeff's charms. And that's often what happens in these kind of succession races. It's often the most, you know, politically adept person who charms the pants off of the person he needs, you know, that is making the decision that gets those jobs as opposed to maybe the person who might actually be the best person to take the company

Starting point is 01:08:49 forward. So that's major lesson number two is making sure you have the right successor. And major lesson number three is if you are the successor, make sure you understand the businesses that you are inheriting, that you are charged of running. And if you're going to keep them in the stable, really make sure you understand them. And don't ignore the warnings that you're getting from people who do understand the businesses that maybe you don't understand as well. And all that, of course, is what befell Jeff Immelt. And then, you know, don't surround yourself with sycophants and yes men and people telling you what you want to hear. Make sure you are open-minded enough to listen to people who have dissenting points of view and not dismiss them

Starting point is 01:09:35 because they are offering you a dissenting point of view. You know, they're smart too. They've been in this company a long time too. You've been paying them a lot of money too. Maybe they know something that you don't know, even though you are the CEO and they're not. You know, it was all kind of preventable in my mind. It didn't have to happen. I didn't have to write this book if this hadn't happened, but it did and I did. And that's where we are now. Company being split up into three pieces and, you know, general electric disappearing after 130 years. It's one of the biggest tragedies, I think, in corporate America. And it's just an amazing account what you've put together in this book. The book is called Power of Failure. And I think the lesson, as you put it there,

Starting point is 01:10:16 is going back to that Jim Collins quote about Edison being a genius with a thousand followers. It seems like that ultimately came back around with Jeff O'Molt. And maybe genius is not the maybe generous term there. But anyway, I want to say, thank you so much for this book. And please, before I let you go, tell the audience where you want them to find the book and learn more about what you're up to and your other books that are also amazing. So please share whatever you'd like before you take off here. Well, thank you, Trey, for those kind words and this excellent conversation, which I really enjoyed. You know, I'm easily Googlable and I have a website, William Kohan.com, which lists all my books and many of my articles that I've been writing

Starting point is 01:10:57 ever since I left Wall Street back in 2004. And I encourage people, if they have questions or want to get in touch with me, I'm happy to do that. William, thank you so much again for your time. And I hope we can do this again. I mean, hopefully it takes maybe less than three years to write your next book, but I'll be equally awaiting the next one. So thanks again. Thank you, Trey.

Starting point is 01:11:19 All right, everybody, that's all we had for you this week. If you're loving the show, don't forget to follow us on your favorite podcast app. And if you'd be so kind, please leave us a review. it really helps the show. If you want to reach out directly, you can find me on Twitter at Trey Lockerby. And don't forget to check out all of the amazing resources we've built for you at the investors podcast.com. You can also simply Google TIP Finance and it should pop right up. And with that, we'll see you again next time. Thank you for listening to TIP. Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence.

Starting point is 01:11:53 To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

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