THE STOCK MARKET didn’t appreciate what General Electric was really worth. And it was driving Jeff Immelt crazy.
His handlers claimed that he didn’t watch the daily movement in the shares, but his actions betrayed him. The stock market was the ultimate scoreboard tracking his performance. But rather than addressing investor concerns about the company’s results, future growth, and transparency, he instead gave a sales pitch.
“The stock is currently trading at one of the lowest earnings multiples in a decade,” he wrote in his annual letter to investors in early 2006. GE had “a great team generating record results with more valuable businesses that have high visibility on future growth.”
“Investors decide the stock price, but we love the way GE is positioned. We know it is time to go big!” he wrote.
Immelt possessed a legendary ability to put people at ease. His cool confidence telegraphed that he knew what he was doing. When challenged, he used his sharp wit and well-worn talking points to explain why he was right. His loud guffaw and easy backslapping lightened moods and closed deals.
But that wasn’t working on Wall Street. Not anymore. Smooth-talking leaders from Enron, Worldcom, and Tyco had left a legacy of bitter wariness that would not soon be forgotten. And the financial models of sophisticated investors simply didn’t factor in Immelt’s optimistic visions of where GE was headed. Performance was needed to move the stock, not promises.
That didn’t stop Immelt from trying to argue the stock price higher. Sometimes, when Immelt tried to base his case on the numbers, he left Wall Street scratching its collective head.
He proclaimed that GE would deliver sustained organic growth—that is, bring in more money to its existing businesses, without acquisitions—of two or three times the growth rate of global gross domestic product. In 2005, global GDP grew by 3.8 percent, according to the World Bank. The notion that GE could double or even triple such growth over the long term wasn’t just optimistic: to many observers, it sounded impossible.
“No company has ever achieved the kind of growth GE is seeking, and certainly not on a revenue base of $150 billion,” wrote the Harvard Business Review, which also noted that the path to that growth wasn’t clear.
Nevertheless, Immelt stuck to detailing his strategy only in broad, vague strokes. One element of that strategy was having employees pitch ideas to him for approval. He was serving as the “program manager” so that workers could “live their dreams” on the platform he was providing.
“Size facilitates growth. It gives us the chance to take swings, spread successes, and learn from failure,” he wrote in the same shareholder letter. “We have developed a large pipeline of Imagination Breakthroughs that can create growth in the short and long terms.”
He projected that GE would generate more than $10 billion of free cash flow per year and explained that this was cash GE didn’t need. It would be what was left over after paying dividends. “Our industrial businesses do not require much investment to grow, while our financial services businesses have inherently high return on equity,” he explained to shareholders. Pledging another $25 billion share repurchase plan, he assured them that “the next few years should be good ones for your Company.”
In 2006, GE’s stock rose 5.2 percent while the S&P 500 rose 15.6 percent.
In Norwalk, where GE Capital was based, they weren’t dealing in dreams, counting on imagination breakthroughs, or taking big swings at transforming the company. The way Capital and its people saw it, they just made money.
The search for returns was never ending. Capital was constantly on the hunt for deals to finance, assets to buy, and businesses to run. From taco stands to ocean freighters, they were putting GE’s money to work.
But all those years of success at Capital had also laid a trap. As big investors and other financial companies had unpleasantly discovered, the bigger Capital grew, the harder it was to move the needle with a successful deal. The unit could get higher returns only by shouldering more risk. Capital had little choice but to go after acquisitions or new lines of business that it might earlier have rejected.
Capital’s massive size also enabled it to jump into new markets in a significant way, making major plays with the hundreds of millions it had to put to use every day to make a profit on the back of GE’s sterling credit. Subprime mortgages were just such a market in 2006. A white-hot housing market had set off a flurry of lending, with banks and mortgage lenders cranking out mortgage loans even to borrowers whose credit rating was poor—or not even fully known.
For GE Capital’s executives, whose marching orders were to invest the corporation’s money and put it to work, leaping into the subprime market wasn’t a hard call. And there would be little objection that an industrial company that specialized in selling and servicing giant machines should think twice before entering the mortgage market. Capital was already a vast financial operation, and the almost absurd breadth of GE’s businesses was well established. It was an industrial company that also broadcast Friends, sold insurance, and had a long line of previously owned properties that ranged from Gibson Guitars to a massive Australian metallurgical coal mining business to the department store Montgomery Ward.
Why would it be scared to add some portfolios of home loans?
GE Capital had taken the plunge in 2004 by buying WMC, formerly Weyerhaeuser Mortgage Company, for about $500 million from the private equity firm Apollo Global Management LLC, the lender’s owner for the past seven years. Apollo had purchased the lending unit from Weyerhaeuser, a timber company that was one of the largest private landowners in the United States. At Weyerhaeuser, management had decided to simplify its portfolio, selling off the lending business to concentrate on its core business. GE was headed in the opposite direction.
For Capital, it was easy money. WMC lent money to home-buyers, then flipped the mortgages, selling them to investment banks that wanted to package the streams of loan payments into bonds. WMC, and thus GE Capital, got its money up front from those banks and went back to work finding people who wanted to borrow.
All the assets on GE Capital’s balance sheet had been worth less than $200 billion in 1995. That still made it a bigger financial unit than any modern industrial company had ever operated, but one that the leadership said was just as safe and manageable as the rest of the company’s portfolio. It had been supercharged in Welch’s years, growing to $425 billion by the time Immelt took over, as GE leaned on the unit to keep generating profits and smoothing returns. By the end of 2006, Capital had mushroomed, having grown by another third, to $565 billion in assets. And it wasn’t done growing.
GE Capital wasn’t only minting earnings. It was also producing executives. Among them was a short, gruff, hard-charging native of Lewiston, Maine, who had risen through GE’s legendary corporate audit staff to become one of the key lieutenants to the men who ran the lending unit. He loved to fish and had a theatrical disdain for dumb questions. His name was Jeff Bornstein.
Bornstein had come to GE after studying finance at Northeastern University in Boston, proudly lacking the Ivy League pedigree of many colleagues. As an employee in the Power division, he had joined the rigorous financial management program. The two-year program amounted to an MBA of sorts for young GE recruits, and it put those who completed it on a fast-track rotation through different roles at divisions across the conglomerate’s businesses. It was the first step for people whose ambition was to rise to the highest levels of the company.
From Power, Bornstein moved on to the Corporate Audit Staff (CAS). This finance program, another elite job rotation, was the Praetorian guard of GE’s corporate culture and a pathway upward for the most ambitious of GE’s young executives. It traced its roots to the early twentieth century and accepted only a couple hundred workers a year. Most of the top tier of GE’s management were graduates. CAS was a notorious burnout machine: participants were expected to sublimate virtually everything else in their lives—their schedules, family obligations, outside interests—to the company and the demands of their assignments.
CAS teams dropped in on GE businesses and audited their finances, operations, and anything else relevant. To get a broad view of the company, the teams rotated into different GE businesses every few months. The CAS role, with its policelike authority over the books of other units, came with a lot of power. Having the head of the program report directly to the chief financial officer turned CAS into a de facto network of information about the inner workings of various business units available only to the CFO and a very few others across GE.
CAS also worked closely with KPMG, GE’s external auditor for more than a century. The accounting firm often relied on the findings of the staff to guide their own work in reviewing GE’s endlessly complex finances. Indeed, the relationship was cozy, given GE’s habitual forays into aggressive, questionable accounting practices. To outsiders, like reporters and market analysts, GE leaders referred to CAS as an additional layer of independent auditing, serving a function much like the one KPMG was supposed to serve. In practice, there was little to separate GE’s audit staff and the company’s interests. If anything, CAS was as responsible as some executives at the businesses they examined for digging up new opportunities for profit.
If KPMG rarely questioned GE’s findings, the corporate audit staff was even less prone to uncomfortable demonstrations of independence. In fact, they were incentivized to juice GE’s accounting wherever possible. CAS teams descended on businesses to make sure they were performing, but also to search for ways to adjust practices to increase profits. In other words, the crack internal squad with the word “audit” in its name was also being paid to search for ways to boost GE’s quarterly earnings.
One fast track to getting the attention of GE’s CFO was to win the Corporate Audit Staff Honor, an award that went by its acronym: CASH. The honor typically went to staffers who had found large beneficial accounting adjustments—ways to tweak the numbers, within the bounds of the law, that boosted the profits that GE would report to Wall Street.
The CAS program consisted of two two-year increments, at the end of which successful entrants could become bona-fide company executives after just five years. The burnout rate was intentionally high; “up or out,” the program rules said. After most of the ambitious candidates were bumped out of the program, only a handful were left who made it all the way through, having been invited back for each level of the program. Still, a decent showing in CAS, even if bumped in the end, could be the start to a solid GE career. Lists of those who hadn’t been awarded another year at CAS were passed around to HR executives in the industrial businesses, who used it as a sort of waiver wire for workers who had been almost good enough to be on the inside track to GE’s highest echelon of leaders.
Jeff Bornstein made it all the way through, exiting with the internally propitious title of executive audit manager. He also managed to meet his wife Jill in the process. She also went through both programs and landed a job in credit card finance.
From there, Bornstein’s stock soared within the company. In 1996, he became CFO of GE Aviation, and then he became a GE officer two years later. At just thirty-three years old, Bornstein was one of the top two hundred executives in the company. His meteoric rise made it clear that he was being groomed for one of the top slots in the corporation.
When Immelt split GE Capital into four parts reporting directly to him, Bornstein was installed as chief financial officer of the commercial finance unit. The business was the largest piece of GE Capital and managed assets of about $180 billion.
Then, in 2005, Bornstein was named chief financial officer of GE Capital. He joined the small group that gathered for lunch most days outside the office of Mike Neal, the CEO, on the top floor of the office in Norwalk. Bornstein and Neal became close and would retire together to the roof to smoke cigarettes and talk about business, away from the eyes and ears of others.
As the decade rolled on, the pair pushed GE Capital to get bigger and bigger through the relentless pursuit of more deals. Capital bought $2 billion in commercial finance assets from Boeing, which was selling in order to focus on financing only its own products. Unlike GE, Boeing was no longer interested in being a bank.
Capital then bought 40 percent of Hyundai Capital Services and Dillard National Bank, which was a private-label credit card business. It bought Bombardier’s inventory financing division, and it spent $1 billion on aircraft assets from CIT Group and $1.8 billion for a 25 percent stake in Turkey’s third-largest bank. Capital acquired Antares Capital in late 2005, adding an important puzzle piece in the middle-market financing world that worked with private equity funds.
There was a swagger to GE Capital’s deal-making. It acknowledged no limits or borders as it rolled up assets that others didn’t want. Size and volume were only benefits. GE had a seemingly bottomless pot of cash to put to work. Its deal-makers—its salesmen, as one executive called them—just had to go find places to put it.
They went, eventually, to the end of the world. In 2006, GE bought the $500 million mortgage portfolio of New Zealand’s Superbank, a joint venture that aimed to bring mainstream banking to supermarkets. The unusual operation would last just three years. But GE had what it wanted: more assets on the balance sheet—another heap of business on the GE Capital pile.