JOHN FLANNERY WAS in Tokyo playing a familiar role: managing a business and then cleaning up a mess. He had moved to Japan in 2005 with his family to run GE Capital’s Asia-Pacific operations, after spending most of his life in Connecticut.
The typical GE executive was an outgoing, social creature, seemingly born with a list of talking points memorized and a PowerPoint slide clicker in his or her hand. In contrast, John Flannery could sometimes come off as a little bit shy. Offstage, he was wry, shrewd, and friendly, but the spotlight onstage wasn’t his favorite place. He was more at home working the numbers behind the scenes.
Flannery’s résumé couldn’t have been more focused on banking and corporate finance. After leaving Wharton, he hopscotched around GE Capital: three years in the leveraged buyout division, four years in the corporate restructuring group, three years in the equity capital group, a two-year stint in Buenos Aires running Capital in the region, three years overseeing the media and consumer group in the equity division, a year overseeing the whole equity division, and two years overseeing the bank loan group.
A number-cruncher by nature and self-declared “foodie,” he tore through a wide variety of books, sometimes simultaneously reading a nonfiction work and a novel. The relocation to Japan was a new challenge and the next step in his rise at GE. But it wouldn’t exactly be a vacation. Flannery had his work cut out for him.
Upon moving overseas and touring the GE operations, he started to get a better view of the frustrating bureaucracy that permeated every piece of GE. A relatively simple issue like the difference between time zones compounded the stress of getting all the bureaucratic approvals he needed to win back in Connecticut. GE’s bureaucratic structure made it dramatically harder to keep the overseas operation running and the company’s profits growing. Flannery thought that decision-making power needed to be more decentralized, so he could make more of his own decisions, rather than waiting for the plodding corporate Borg back home.
At the same time, as others at Capital were seeking ways to curtail risk in the portfolio, he had to find a way to deal with one of his most prominent businesses blowing up. Acquired a decade earlier, the consumer finance business called Lake had suddenly become a headache in 2006, when a change in Japan’s consumer lending laws sent the once-lucrative market into chaos. Lake had been a cash machine for GE, and investors loved it. The unit borrowed at very low interest rates and lent out funds at much higher ones—easy money.
But public pressure had persuaded Japanese lawmakers to change usury laws, capping the top interest rates on consumer loans at 15 to 20 percent, down from close to 30 percent before. Compounding the impact of the new law was a ruling from the high court of the country that existing loans with rates above 20 percent were illegal. That cleared the path for some of Lake’s customers to demand refunds for excess interest payments, an exposure that prompted banks to increase their cash reserves.
Overnight the Lake business model had gone from inescapably profitable, if morally dubious, to illegal. This was now John Flannery’s problem to solve.
The market had turned hostile on GE, and potentially large future liabilities loomed from the growing threat that the company would have to refund customers. Flannery, who had done hundreds of deals in his tenure at Capital, quickly began to take action. He made plans to close nearly two-thirds of Lake’s branches. Citigroup, another lender caught in the same pickle, had gone even further, essentially shuttering its entire operation as losses piled up. GE also shifted the Lake unit into what it called “discontinued operations,” a convenient bucket of accounting that enabled GE to exclude losses from the adjusted profits the company highlighted to investors.
Meanwhile, a scrambling Flannery found a savior: he cut a deal to sell the Lake business to Shinsei Bank for $5.4 billion, along with a loss-sharing agreement to help the new owner split the cost of the coming wave of refund requests. For GE and Flannery, escaping from the Lake fiasco with a $1 billion charge to earnings was cause to declare victory. It could have been much worse.
For Flannery, it was also a lesson in the difficulty of managing a company seven thousand miles away from headquarters on the other side of the planet. Even as he scrambled to quickly limit the company’s exposure, GE’s management and operational structures, exacerbated by the distance, had led to painful delays in getting approvals and answers back from Connecticut. Flannery could see that GE’s approach to running its international operations was deeply flawed.
Meanwhile, back in Connecticut, Immelt’s secret weapon was back by his side, and just in the nick of time. Beth Comstock—the pistol of a chief marketing officer who had snuck away for more than two years to run NBC Universal’s digital operations—came back into the fold at GE and into her previous job.
Comstock had struggled in the last assignment, where her signature move had been the $600 million acquisition of ivillage.com, a women-oriented content site. That purchase had been a kind of land grab in the digital world, but the price tag was openly mocked, partly because NBC spent more buying ivillage.com than News Corp paid in its infamous purchase of the trendy social media site Myspace.
In addition, the cultures of the companies didn’t match, and Comstock’s idea to launch a TV show connected to the ivillage.com brand also fizzled. Notably, following Comstock’s return to the conglomerate’s mothership after the disastrous deal, NBC broke up the broad responsibilities of her position among existing executives.
The stumble didn’t stunt her career. Long an Immelt favorite, she was back controlling messaging and overseeing the never-ending marketing push for GE. Then a major crack appeared inside GE Capital in early 2008.
In mid-March, Immelt assured investors that, despite the brewing storm in financial services around the world, the company’s first-quarter performance was on track and GE would be fine. The underlying message was that the conglomerate model—divisions picking up the slack when other divisions were hurting—was still working well.
A few weeks later, GE’s first-quarter results hit the newswires at 6:00 A.M. The company had missed its targets. Badly. Some thought that the reports were somehow mistaken—but they weren’t.
GE Capital had taken a massive hit from the ongoing mortgage-related disruption. GE had boasted that it knew the markets better than others and would sail through any trouble because of its risk management mastery. Now it was in the same boat as every other financial firm—explaining to investors that the collapse of Bear Stearns had hit harder than expected. The GE earnings engine had thrown a rod.
GE had prided itself on always making its numbers, squeezing out what earnings it needed, even in a flurry of last-minute deal-making, to deliver to investors exactly what had been promised, or even a little more. And that streak had largely been the work of GE Capital, which had always been there to locate the necessary pennies per share, always just in time. The first quarter of 2008 showed once and for all that it had long been GE Capital that was the force keeping the earnings streak on track—and that GE’s earnings were unpredictable when Capital itself was struggling.
The market turmoil had inched itself closer to General Electric. Keith Sherin said that the meltdown around Bear Stearns had created more volatility in the capital markets “than we could have ever anticipated.” But to GE investors—to those who truly believed in the conglomerate model—that answer didn’t make sense.
Immelt was blunter. The commercial finance division experienced an “inability to do transactions in the last two weeks that we normally could get done” and the revaluations on some assets were negative. In other words, those crucial last-minute deals that GE Capital typically pulled off—selling assets and making other adjustments—didn’t happen.
Seeing the warning sign, GE shareholders started to sell. The stock saw its worst fall in years on the news and lost almost $50 billion in market value that day.
Adding to the pain, as Wall Street still digested the news that week, Jack Welch went on CNBC, a network GE owned, and took the not-so-subtle path of ripping Immelt apart on live television. If investor confidence had been teetering, Welch pushed it off the cliff.
“Here’s the screwup,” said Welch, talking about Immelt. “You made a promise that you’d deliver this and you missed three weeks later. Jeff has a credibility issue. He’s getting his ass kicked.”
Welch’s orders were clear: Don’t do it again. Do what it takes to keep the steady earnings flowing.
“I’d be shocked beyond belief and I’d get a gun out and shoot him if he doesn’t make what he promised now,” he said. “Just deliver the earnings. Tell them you’re going to grow 12 percent and deliver 12 percent.”
For those who didn’t think Jeff Immelt was making the right decisions, they now had their infallible CEO idol making the very same point. Immelt didn’t respond publicly to the lashing, and Welch eventually tried to walk back his criticism. But the horse was long out of the barn.
Welch’s patriarchal dressing-down scorched Immelt. The message, heard all the way down to the factory workers, was that Immelt made an egregious error and violated GE’s sacred devotion to delivering consistency to investors. Suddenly Immelt, who had cultivated, with boatloads of media fertilizer, the aura of having all the answers to the toughest questions in business, didn’t seem so omnipotent after all.
On Wall Street, the earnings miss and Welch’s comments started chatter of the need to break up General Electric. That had been an almost unthinkable option under Welch. But after decades of veneration, the underlying logic of GE’s structure was now being questioned. In a sense, the street was belatedly noticing what many in the business world already knew: that devotion to its model had permitted GE to operate in an ungainly conglomerate structure that had long fallen out of fashion for everyone else. GE had gotten away with it because, well, it was GE, and the numbers were good. But now that the numbers weren’t good, investors started to question whether simply being GE was still good enough.
To Immelt’s chagrin, these questions were reflected in his stock price. The price of a share of General Electric continued to fall. Within a few weeks, the price had fallen below $30.