JEFF IMMELT TRAVELED up to West Point in December 2009 to give a speech entitled “Renewing American Leadership.”
The historic military academy is about fifty miles up the Hudson River from Manhattan and not too far from GE’s Crotonville compound. Appropriately, it was the weekend of the Army-Navy football game, and Immelt opened his speech by making a crack about his college days as a lineman and lamenting that since he was no longer eligible to play he wouldn’t be able to help Army win the game that day.
It was prime Jeff Immelt. He then ran through his usual dramatic talking points, hitting on GE’s importance in the world and the struggles it (he) had faced, including 9/11, the Iraq and Afghanistan wars, and economic turmoil. With an eye toward economic stimulus, he also spoke of partnering with the government on massive energy and manufacturing spending.
Facing the military’s leaders of the future, he opened up about the recent financial crisis and the road ahead in signature Immelt fashion—by apologizing for his and GE’s failings:
“I decided that I needed to be a better listener coming out of the crisis. I felt like I should have done more to anticipate the radical changes that occurred.”
And then he was quick to chastise others for their greed and pointed a stiff finger at the financial services industry: “While some of America’s competitors were throttling up on manufacturing and R&D, we de-emphasized technology,” he said. “Our economy tilted instead toward the quicker profits of financial services.”
He spoke in a way that Immelt had mastered. He acknowledged some failings, while also distinguishing GE from its lesser competitors. In this case, he brought out a familiar argument. GE Capital, one of the biggest financial services operations in the industry that he was denouncing, was in fact nothing like a bank, and its operations were balanced by an unsinkable industrial powerhouse. It was other banks that had let financial services take over the economy, and their actions that had harmed others. Again, GE, in its telling, was the exception.
“Rewards became perverted. The richest people made the most mistakes with the least accountability. In too many situations, leaders divided us—instead of bringing us together,” Immelt told the West Point audience. He then returned to the theme of what set GE apart from its peers by giving the cadets his sage thoughts on how “it takes courage to rethink your leadership paradigm.”
As he often did, Immelt spoke with a combination of boasting and joking. He was a pro at rattling off a very serious story while cackling to give it a lighter feel. Speaking of his leadership during the financial crisis, he gave his audience an unintentionally candid glimpse into his unilateral decision-making during one of the most chaotic times in recent financial history.
“I had weekly board calls, making frequent decisions, and doing things I never thought I would have to do. I am sure that my board and investors frequently wondered what in the heck I was doing.”
On the surface, Immelt was taking credit for GE’s navigation of the crisis and highlighting his bold leadership. But he also admitted that the board of directors was only peripherally involved in his decision-making. Immelt, who was both CEO and chairman of the board, wasn’t seeking constant advice or approval; instead, he was moving quickly, backed by the board’s trust in him. On the other hand, he was ignoring the prime reason that companies have an independent board: to protect the investors who elect them and help manage risk.
“I had to act without perfect knowledge; I had to act faster than my ability to communicate or explain my actions. I could do this because we had built trust. And we kept GE safe because we moved fast.”
Of course, GE was also kept safe because of the helping hand of the federal government, and that came at a price. As Immelt lectured cadets about integrity and the future of leadership, his own future inevitably was shaping up to include more and more regulators looking over his shoulder.
But first, GE had to deal with its past. After more than two and a half years, the Securities and Exchange Commission concluded its investigation into GE accounting practices, having found multiple instances of misbehavior in the pursuit of financial targets.
The company had overstated its earnings by hundreds of millions of dollars and stretched the accounting rules to their breaking point. For its sins, GE agreed to pay a $50 million fine and essentially promised not to misbehave again. The fine was small considering that the SEC had alleged violations that were intended to present the company’s results as something they weren’t. In the end, GE managed to keep up the appearance of stability and ensure there were no surprises for investors.
The settlement seemed to confirm the long-held suspicions of accounting games within the company. Many on Wall Street scratched their heads at the relatively small fine, which seemed unlikely to deter future misbehavior. The SEC’s charges included multiple counts of fraud, filing misleading documents, and failure to maintain accurate records and internal controls.
The SEC settlement came as sweeping reform to the financial services sector was taking hold of an industry already saddled with heavy, if ineffective, regulation. After all, those who almost destroy the entire financial system have to expect some changes as to how they are allowed to conduct business.
The sweeping changes proposed that summer by President Obama formed the basis for what would become the Dodd-Frank Wall Street Reform and Consumer Protection Act. Signed into law in July 2010 by Obama, the act effectively overhauled the entire system with a promise that companies would never be bailed out again using taxpayer money.
Dodd-Frank marked a tectonic shift in how banks were allowed to do business. The two-thousand-page law rolled back risky strategies at large financial firms and changed everything from credit cards to mortgages. The balance sheets of the major banks would get regular checkups from the government. Yearly stress tests would determine whether banks had enough cash to cover extreme distress.
Of course, GE was different. It wasn’t technically a bank. For years, GE Capital was regulated by the Office of Thrift Supervision, a division of the Treasury Department established in the 1980s in the wake of the savings and loan crisis. The OTS wasn’t expected to survive the coming reform, and it didn’t. The agency had overseen Washington Mutual, IndyMac, and the financial products division of AIG, all of which collapsed or came very close to collapsing. The mortgage giant Countrywide Financial had reorganized itself in 2005 in a way that shifted its regulator to the OTS, a move that some saw as a scheme to get a less stringent regulator. Countrywide collapsed during the housing crisis and was acquired by Bank of America in a fire sale.
With the OTS dissolved, GE’s regulator would now be the Federal Reserve, which would regulate it like a bank. An army of Fed officials would now set up shop in GE Capital’s offices in Norwalk, stress-testing the company’s financials.
After the near-death experience of seeking federal help, and with new regulators on GE’s back, Immelt was openly talking about shrinking Capital when the time was right. Years would pass before GE made a major move out of Capital, he said, but “at some point capital markets are going to open up and we are going to be able to do some bulk dispositions at that time.”
In other words, when the door opened, he planned to push right through it. Immelt seemed to have finally had enough of the division that plagued him from the start. The crisis had made the internal separation between the finance team and the industrial businesses even wider.
GE Capital employees at management training sessions in Crotonville flipped their name placards around in some meetings to hide their division. It helped them avoid the scorn of those from other businesses who blamed the finance cowboys for almost destroying GE and punishing the legitimate industrial operations.
In the meantime, even though GE seemed to be planning to shrink Capital after learning a humbling lesson, the deal-making didn’t stop. In mid-2011, it made an unexpected cash offer for ING’s US online banking business. The thinking was that the bank deposits would be an attractive form of funding for its other lending and leasing operations, and a cheap alternative to commercial paper. But GE’s offer didn’t win the day, and the business was acquired by Capital One for $9 billion.
Capital begrudgingly accepted the presence of federal regulators, but the tension in its offices was clear. GE didn’t like outsiders telling it how to better run its operation—that was typically GE’s role. In May 2012, GE Capital’s leader, Mike Neal, made it clear that the new regulatory atmosphere was a big change, but said that people were learning and the relationship was “constructive.” He estimated that the Fed’s presence was costing GE about $400 million a year, but he seemed to have made peace with the situation.
“They are going to be with us for a very long time,” he said. “There is really no other way to think about it in that regard.”