The titans of one era become the schmucks of the next.
Marshal Michel Ney, one of France’s greatest soldiers, was executed by his own people…who later put up a statue of him in Paris.
General Robert E Lee was revered by both sides in the War Between the States; statues were later erected on both banks, north and south, of the Potomac. Now they are coming down (often in the middle of the night to avoid a confrontation).
And here now, among the mighty fallen, is General Electric and its celebrity ex-CEO, Jack Welch… Mr ‘Winning’ himself.
GE is crumbling. And so is Mr Welch’s reputation. He made GE what it is today…and was named in 2000 as Fortune magazine’s ‘Manager of the Century’.
In summary of the next 500 or so words, Welch did to GE what Greenspan, Bernanke, and Yellen did to the US economy: he financialised it.
Instead of offering goods and services in honest, win-win trades, Welch borrowed fake money and built an empire. Now that empire is falling apart.
But first, we go back to the glory days…
In the 1990s, GE Capital, the financial services unit of GE, was buying businesses all over America.
‘What happened when the suits took over? we asked an old friend, circa 1995.
He had sold his business to GE. We had heard that things weren’t going well.
‘Well…it’s a disaster. They had no idea what they were getting. So they didn’t know how to manage it. I was doing about $5 million in profits a year. I think they’re doing about $5 million in losses now. They have no clue what they’re doing.’
‘Are you going to help them?’
‘No… They don’t want my help. They’ve got MBAs. I’m just going to wait until they give up and buy it back.’
Our friend must have anticipated GE’s reputation for ‘buying high and selling low’.
Which is exactly what happened: Our friend got his business back and soon made a success of it again. GE lost about $20 million on the go-round.
The house that Jack built
The chief of GE at the time was ‘Neutron Jack’ Welch.
He was a tough-minded, self-promoting executive who took the company on a borrowing-and-buying spree.
So lusty were his appetites that the old industrial powerhouse was soon in entertainment, healthcare, insurance, software…and, especially, finance.
Sales soared. The stock price rose. And Neutron Jack was named ‘Manager of the Century’.
But now, 17 years after new management took over, Jack Welch’s battle medals are looking a little tawdry.
The stock has lost three-quarters of its value — in the middle of the greatest bull market ever.
Shareholders have suffered about $400 billion in losses. As for Mr Welch, the press reports that he is ‘apoplectic’…and ‘melting down’ with anger.
GE is failing. Its member parts are being broken apart and sold off. Jack’s legacy is in shambles.
The New York Times opined:
‘…hardly anyone considers Mr. Welch, now 81, a management role model anymore, and the conglomerate model he championed at GE — that with strict discipline, you could successfully manage any business as long as your market share was first or second — has been thoroughly discredited, at least in the United States.’
And now we see, too, why he deserved the ‘Manager of the Century’ epithet.
As the economy went in the last half of the 20th Century, so went GE.
The Fed dangled cheap credit in front of ambitious businessmen. Like many others, Mr Welch took the bait.
Now, GE is on the hook for some $600 billion of debt. With $100 billion in revenue, this puts it in almost exactly the same situation as the US government.
It, too, has debts equal to about 6 times its revenues. Too bad GE can’t print money.
Straight for the gut
As GE goes, so goes America.
It was a conceit to think you could manage businesses you didn’t really understand. But it was a conceit widely shared by titans of industry and politics.
Mr Welch thought it was enough to bring the ‘straight from the gut’ management talk to a business.
And he was right…for a while.
America was being corrupted by fake money, top to bottom; Mr Welch must have figured (or maybe not figured at all) that he could make a fast buck in finance.
He looked like a visionary when he moved the company into the ‘closet banking’ business.
In its salad days, GE Capital accounted for 60% of GE’s profits. It was making money, not by selling engines and toaster ovens, but by loading up customers with billions in dodgy loans.
Of course, almost any moron can make money by borrowing short and lending long when rates are going down.
But when the credit cycle shifts, it’s best to pass thoughts through your brain as well as your lower intestine.
In 2008, credit suddenly tightened…and GE seized up.
The feds had to bail it out with $139 billion in loan guarantees. Super investor Warren Buffett helped out, too, with a $3 billion injection.
After that, GE could never quite relax. It had too much debt, and no way to master the detailed knowledge needed for the many competitive businesses Welch had blundered into.
By 2015, it was in retreat…‘getting out of the banking business’.
And now, in 2018, GE is in full rout mode. Even sales of Welch’s book, Winning, have fallen off as the company tries to unload other businesses, too…even light bulbs.
Sic transit gloria money.
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