William D. Cohan on the Rise and Fall of GE

Episode Summary

Executive Summary: Barry Ritholtz interviews Bill Cohen, author of "Power Failure: The Rise and Fall of an American Icon," about the history and decline of General Electric. They discuss Cohen's career from journalism to investment banking and back, GE's origins under Thomas Edison, the leadership of Jack Welch and his successor Jeff Immelt, GE Capital's role in the financial crisis, accounting controversies, and broader lessons from GE's collapse. The conversation also touches on Wall Street, activism, and Cohen's other books including those on Goldman Sachs and Lazard.

Main Topics: Bill Cohen's Career Trajectory (Priority: 3/5): Cohen transitioned from journalism covering public schools to investment banking at GE Capital, Lazard, Merrill Lynch, and JPMorgan Chase, eventually returning to writing and co-founding Puck. GE's Origins and Early History (Priority: 4/5): The merger that created GE in 1892 was opposed by Thomas Edison; Charles Coffin was the actual founder. GE pioneered electrification and the power grid, and later engaged in price-fixing conspiracies with Westinghouse. The Jack Welch Era (Priority: 5/5): Welch transformed GE into a financial powerhouse via GE Capital, arbitraging a AAA credit rating. He was celebrated as "Manager of the Century" but left behind accounting issues, a high PE ratio, and a cratering financial arm. GE Capital and the Financial Crisis (Priority: 5/5): GE Capital grew to be like a third- or fourth-largest unregulated bank, providing 50% of GE's profits. The 2008 crisis exposed its black box of assets and leverage, leading to a major earnings miss and loss of confidence. Succession and Decline (Priority: 4/5): Welch handpicked Jeff Immelt as successor but later publicly criticized him. Immelt had to clean up Hudson River PCBs, deal with SEC accounting fines, and refocus GE on industrial roots, but the company continued to struggle. Media, Activism and Wall Street (Priority: 3/5): Nelson Peltz's Trian Partners became involved in GE, leading to Immelt's ouster. The discussion also covers Bob Iger's similar mistake with Peltz at Disney, and Trump's relationship with Wall Street and the media.

Key Arguments: GE's decline stemmed from over-reliance on GE Capital's unregulated financial engineering which masked underlying industrial weaknesses. Jack Welch's legacy is mixed: he created enormous shareholder value but also left behind opaque accounting, a high PE multiple, and a ticking time bomb in GE Capital. The financial crisis revealed GE Capital as a 'dirty little secret' that had been sustained by constant earnings management and obfuscation rather than true industrial performance. Succession planning is critical; Welch's failure to groom a capable successor contributed to GE's post-2000 struggles. Activist investors like Nelson Peltz can force change but also create instability, as seen at GE and potentially at Disney.

Data Points: GE market value under Welch: $12 billion to $650 billion - When Welch took over and left GE as the most valuable company in the world. GE Capital share of profits: 50% - GE Capital contributed half of GE's total profits during Welch's tenure. GE's PE ratio at Welch's departure: 47 - An inflated PE multiple for an industrial company with a troubled capital arm. Hudson River PCB cleanup cost: $500 million to $1 billion - Ultimate cost borne by Immelt's GE to dredge PCBs, after Welch had initially settled for $3 million. Goldman Sachs IPO vs current valuation: 4x book vs trading below book - Cohen notes Goldman's relative decline compared to Morgan Stanley (1.7x book). Trian's GE investment: $2.5 billion - Trian Partners bought that much GE stock, eventually leading to Immelt's ouster.

Pivotal Quotes: "I think what Jack really understood was stock price and shareholder value. When he took over GE, it was had a market value of $12 billion. And by the time he left, like a year before he left, it was the most valuable company in the world. $650 billion." — Bill Cohen: Explaining Jack Welch's focus on shareholder value and market cap growth. "I messed up the succession process. I had messed up the selection of Jeff Immelt, which basically was his hand-picked successor." — Jack Welch (reported by Bill Cohen): Welch's admission to Cohen that he chose the wrong successor, affecting his legacy. "GE Capital was like the third or fourth largest banking institution in the country, and it was completely unregulated, Barry. Completely unregulated. It was not a bank because no FDIC insurance, no regulation." — Bill Cohen: Highlighting the lack of oversight that allowed GE Capital to grow risky.

Implications: GE's rise and fall illustrates the dangers of financial engineering, opaque accounting, and over-reliance on a single charismatic leader. It serves as a cautionary tale for investors, regulators, and corporate boards about transparency, succession planning, and the risks of conglomerates with hidden leverage.