IF GE’S STOCK price was a measure of investor perception, it was heading in the wrong direction. They were deep into the worst valuation of Jeff Immelt’s time at the top. On Immelt’s first day in 2001, the shares were around $38. When he was dining in Beverly Hills in September 2008, the stock was at $25. Shares opened 2009 at around $15 and closed the month of January at $12.
Always aware of the stock’s reflection on his leadership, Immelt was trapped in a waking nightmare, and the constant pressure of the crisis was taking a toll on him. He was also increasingly frustrated by the semipublic disdain emanating from Jack Welch, who let every intimate acquaintance know how badly he thought his old shop was weathering the storm.
Immelt finally let his displeasure fly at a Manhattan event, the account of which flew directly into a column in the Financial Times. Jack Welch had benefited from the red-hot economy of his era and had never been tested by a major macroeconomic crisis, Immelt told the crowd. Immelt’s claim that Welch had run GE with economic winds at his back was fairly uncontroversial. But Immelt continued.
In the 1990s, “anyone could have run GE and done well,” he quipped. “Not only could anyone have run GE in the 1990s, his dog could have run GE, a German Shepherd could have run GE.”
Immelt’s representatives denied the jab, to little effect, as it raced from the FT around Wall Street and Midtown Manhattan. It was a startling sign of bitterness from the usually genial Immelt, especially about a figure still revered within the company and its investor base.
The dawn of 2009 brought hope for a better year. GE ended the previous year with an investor presentation on GE Capital. Executives took deep dives into the businesses and answered questions. GE also announced that it would no longer give quarterly earnings projections, partly because it recently had a hard time making those goals.
The meeting seemed to restore some calm among investors, but it didn’t last. The stock continued its downward trajectory as the financial crisis roared on. By the middle of February, GE shares were trading in the single digits.
The financial crisis was putting a full squeeze on GE, and Immelt conceded in his annual shareholder letter that some of its holdings were a problem. He flagged GE’s plunge into commercial real estate, a portfolio that had ballooned as recently as 2007.
“Did we end up with too much exposure in certain areas during the credit bubble? Maybe, a few,” he wrote. “Today, I wish we had less exposure to commercial real estate and UK mortgages.”
Chatter about GE’s financial condition continued. Investors were worried that a cut to the dividend was coming and that the rating agencies were going to downgrade GE’s sterling credit rating. Many other large companies were reducing dividends, including Dow Chemical, Pfizer, and Citigroup, but shareholders were worried that GE’s stock would drop sharply if that happened. The solution to the uncertainty was to sell the stock, but that would just feed the cycle.
Immelt, ever the believer, stood strong and scoffed at the idea that GE would need to cut its dividend. “We’ve got the cash flow to pay the dividend,” he said in a February 5 interview with the Wall Street Journal.
The concern over the dividend had become a heavy weight on the company. Given its distressed state and reliance on government help, GE needed to preserve cash, and the first step was cutting the dividend. But that was absolutely unthinkable to Immelt.
It had been more than seventy years since GE last cut its dividend. For Immelt, maintaining that track record was a sacred duty. He saw it as so important to shareholders that reducing the regular payout of cash to loyal investors might permanently alter GE’s valuation. He also knew that cutting the dividend would be a permanent stain on his own record. It wasn’t a comfort that other companies made the same prudent move in times of crisis. GE was supposed to be the exception.
The moment came on February 27. Immelt cut the quarterly dividend to 10 cents from 31 cents.
Immelt would for years after refer to that day as his worst ever on the job. The cut would not only hit investors but also cut the quarterly checks going out to employee shareholders and retirees.
Wall Street cheered the move. When a company is stretching to pull cash from anywhere it can, cutting the dividend is the prudent move. Generous dividend payouts—like share repurchases—don’t make sense for distressed companies. By cutting the dividend, GE removed uncertainty and also saved billions of dollars in cash going out the window every quarter.
For thousands of longtime GE investors, whose modest shares had regularly produced a payout of cash every three months, the company’s gesture to the street was far more distressing. A significant if not primary source of income had been abruptly slashed, with no warning or recourse.
After the cut, the early indicators were promising. GE’s stock kept falling for a while, but then it stabilized and turned around. It would close, at its lowest point in the crisis, at $6.66, but then rebound above $10 within weeks.
In a further attempt to stem the tide, GE decided to hold another investor meeting on GE Capital. The deep dive at the meeting would take the form of an exhaustive internal review. Capital executives spent five hours explaining all the parts of the division and how it made money, trying to win back the favor of a skeptical crowd of Wall Street analysts.
It is easy to forget why it was so important for GE to stem the tide where it could, to forget what was at stake for the company in that moment. If the decline of GE’s stock price didn’t stop, there was no telling how the drama might end, as the disappearance of other iconic companies in recent months had made brutally clear.
New York Times business columnist Joe Nocera wrote about GE’s situation near the stock price lows of the crisis in March. Nocera has shown himself to be a fan of Immelt. Less than two years earlier, he had written a rave tribute to Immelt’s greatness in pioneering a new type of leadership and approach to business. But Nocera wore a very different hat in March 2009, when he blasted the company for its lack of credibility and uncertain financial condition. He detailed Keith Sherin’s recent insistence that GE didn’t need cash and slammed the company for demanding that investors trust its numbers and “the rock solid image of GE” on faith alone.
“You couldn’t help thinking that we’d seen this movie before,” he wrote, comparing GE to other companies that came under intense pressure in the crisis, like Bear Stearns, Lehman Brothers, AIG, Merrill Lynch, and Citigroup.
GE Capital didn’t mark most of its assets to market prices, openly distorting GE’s financial position at a time when the market was severely weakened. Nocera said that the only way out was for GE to detail everything in the GE Capital investor meeting to show investors what they should or shouldn’t be worried about.
“But no investor is going to take Mr. Sherin’s word for it—not anymore,” Nocera wrote.
GE’s triple-A credit rating remained a concern as well. Having the stellar rating had been the key to GE’s success for decades. The company could borrow cheaply to fund manufacturing and raise money for GE Capital to lend.
On March 12, S&P cut its credit rating on GE, and Moody’s did the same a dozen days later. The downgrade was a painful dose of reality, but not a surprise. Given its portfolio in financial services, the credit rating was too high. Rating agencies will often give firms the benefit of the doubt for a period before downgrading, but GE couldn’t hold on any longer.
The agencies cited the obvious concerns that weren’t in line with expectations for a top-rated company. GE Capital had $600 billion in assets with massive risk, including a $28 billion private-label credit card operation, $22 billion in residential mortgages, and $81 billion in commercial real estate.
GE downplayed the rating downgrade, saying that it confirmed the soundness of the company. There was no question, however, that the downgrade was a historic blow to the psyche of the company and its mythology of excellence.
The GE Capital meeting finally arrived on March 19. The daylong affair in a chilly hotel conference room in New York featured 176 PowerPoint slides and hours of dry explanation of the risks and safeguards of the Capital businesses, presented from a long table of executives led by Neal and Sherin.
Two hours into the intense meeting, there was an interruption when the fire alarm went off and the building was evacuated. When everyone returned to the conference room, the GE executives resumed their endless drilling into Capital’s massive balance sheet and all the risks that the credit rating agencies were fretting about. They were making the case that GE had properly marked its assets and was managing the situation prudently.
It worked. After all its efforts to calm investors, the one tactic that worked was raw transparency. Investors and analysts generally felt better, assured that GE had finally revealed its secrets. The presentations hadn’t been completely exhaustive—there are a lot of places for trouble to hide amid more than $600 billion in assets—and there was still plenty of risk in the portfolio. But clearly explaining to investors the deeper details of the business helped to make them more comfortable with the adequacy of GE’s balance sheet.
For GE, it was the moment that finally started to put the financial crisis, ever so slightly, in the rearview mirror.
To Beth Comstock, the shift in how commentators talked about GE highlighted the need for a “sense-making project”: gathering information that would help GE figure out what had turned people away from the brand, and what might reverse those negative associations. The GE marketing machine acted by soliciting both sides of the just-concluded presidential contest, in which Senator Barack Obama, the Democratic candidate, had walloped Republican Senator John McCain. Comstock brought in Steve Schmidt, who had run McCain’s campaign, and David Plouffe, Obama’s campaign manager, to advise the company on how to address the mistrust of the public.
Schmidt’s advice would come to define the methods of Comstock’s media and public relations operation. The campaigns of both politicians and companies, Schmidt told GE, were not “won by the candidate or company with the best character, or product, but by the one with the simplest and most clearly told story.”
In Comstock’s summary: “Pick a simple story . . . and tell it again, and again, and again.”