AS THE SPRING of 2013 unfolded, Mike Neal had waited as usual for his annual consultation with Immelt. Although the documents on file at HR might have suggested otherwise, the business unit CEOs served at the pleasure of the boss, and Immelt’s ability to nudge them aside was always unquestioned. As it turned out, Neal was not allowed to stick around to see what would happen to his beloved GE Capital.
Big changes were coming for Capital. The market would not yield to Immelt’s desire for a revaluation. As long as Wall Street believed that America’s great industrial company was in fact a massive bank with a couple of turbine businesses bolted on the sides, nothing about Jeff Immelt’s reputation or the company’s stock price would change meaningfully.
It wasn’t just the stock multiple’s resistance to change that bedeviled GE Capital. The unit was discovering that life was different in the aftermath of the crisis, and not just because Caroline Frawley’s team was patrolling the halls and listening in on board meetings. The essential element of GE Capital, from the Welch revolution on, had been the cost of money. They had borrowed low, thanks to GE’s sterling credit rating, and lent at aggressive rates, undercutting banks for narrow bands of customers that their competitors didn’t fully appreciate. Whereas banks with hoards of depositors’ cash could always find the lowest cost of capital to lend out—nothing was cheaper than a dollar already in hand—using its huge stores of commercial paper had enabled GE to pick its spots and find deals, sometimes holding on to more of its booked loans than a bank would. The crisis had upended all that.
Now, in the aftermath, GE’s reliance on commercial paper to fund its deals and lending had become untenable. And at the same time the retrenched banks, flush with the greater stores of deposits and capital that regulators insisted they hold on to, were chasing the deals that GE Capital had once had the lead on. “There’s just so much money now chasing new business,” the Capital executive said. To chase those deals in turn, GE was squeezing its profit margins.
In one sense, this was just the story of finance in the postcrisis period: figuring what could and couldn’t make money in the new regime of rules put in place after an orgy of profit madness had nearly crushed the global financial system. But the wrinkle in the story at General Electric was the new relevance of a question that not even the near-destruction of the company had prompted, but that seemed germane now that GE Capital’s margins were flagging and its usefulness in managing corporate earnings was waning: was GE Capital really worth the trouble anymore?
A newly hired General Electric executive was waiting by the gatehouse at the entrance to the corporate campus in Fairfield one morning in 2013. Suddenly, one of the guards looked up at a colleague in a panic and began shouting, “Gate! Gate!” The second man leaped forward and landed hand-first on the button that opened an entrance gate just in time to lift the bar out of the way of a car that roared past up the drive, never braking. The new hire thought it looked like a late-model Porsche. Behind the wheel, unmistakably, was Jeff Bornstein.
Bornstein was a hard-charging guy, short with a close-shaven, balding head and the presence of an enforcer. The GE press staff confirmed on background that it was nicotine gum he was so often chomping on when he made the rounds, glad-handing the investors, parrying the sell-side guys, gracing the reporters with an off-the-record quip or two. They also confirmed that he was a shark fisherman, though Bornstein himself would clarify that it was tuna he hunted. Despite his reputation, Bornstein was charming. He could be condescending and even harsh when he dressed down subordinates, but he had a warm cackle and disarming candor that many in the company’s upper echelons lacked, especially his predecessor, the automatonic Keith Sherin.
Early in Bornstein’s tenure as CFO, one GE director remarked that he wasn’t the GE type, but in a good way. This person meant that Bornstein spoke candidly about things that had to change and was unaffected by the nostalgia for GE’s traditions and long-standing business lines.
Having reached the job of CFO, Bornstein now sat at the apex of an obscure internal hierarchy of financial operatives who were interspersed through the company’s scores of companies and divisions.
By early 2014, the meetings had begun—always in secret, always in small groups. These informal ad hoc gatherings—which included Bornstein, Denniston, Immelt, Sherin, and a handful of others—were considering the unthinkable.
What if they could find a way out of GE Capital?
Such thinking had been bolstered by the success of spinning off part of GE’s consumer finance business as Synchrony in 2014. The first plan explored by the company’s teams, dubbed Project Beacon, was the possibility of slicing GE Capital into a separate independent company. This analysis showed that the move would entail massive tax costs and other risks. A second approach was developed to simply sell off the major pieces of the division; this alternative, dubbed Project Hubble, would still have large tax costs and bring its own uncertainties. The final decision would come later, but for now GE was heading in the direction of Hubble.
The complications were enormous. First, of course, they needed to find buyers for huge, diverse assets in the GE Capital balance sheet—office buildings and corporate parks, rail tank car fleets, rafts of loans to fast-food franchisees and farmers. They would need to resolve the taxes, including the disposition of billions in deferred losses, which now were accounted as tax assets that GE could use to boost its earnings. Above all there was the consideration of earnings. The successful sale of GE Capital’s parts would generate big onetime gains, the GE executives thought, especially if they were all sold off quickly. Those gains could be reinvested, either in industrial businesses or, preferably, in stock buybacks, which would mop up outstanding shares and boost the price.
But GE would also need to prepare for a vastly different future in which the parent company would be operating without the reliable, regular dividend of earnings flowing up from Capital into the corporate treasury. Could GE reliably hit its earnings targets without the tools it had used at corporate to smooth out rough quarters and boost its paper profits when needed?
The leaders of the company were quietly considering a kind of disarmament. They wanted to see if they could finally shed their tremendous, but troublesome, financial weapon by laying it down entirely. They considered the question with the characteristic self-assurance of GE men. Even without the use of Capital—which some likened to a steroid that boosted the company’s performance artificially—they were certain that they could generate huge profits, pay the unusually rich dividend that kept shareholders happy, and squeeze greater profit out of the aging manufacturing base of jet engines, power turbines, and MRI machines. They would keep going global—expanding abroad into new markets in search of the growing international middle class whose demands for a higher standard of living underpinned GE’s commercial strategy. They would gobble up market share in everything from power turbines to medical devices. They would be rewarded by Wall Street for moving on from finance. They would tell the world a story about innovation and excellence, and they would be believed. As the spring of 2015 arrived, it was clear that GE was going with Project Hubble, which was still a secret kept from everyone except the highest echelon of GE executives and a small team of its most trusted bankers, including Jimmy Lee.
GE was getting ready to sell Capital.