I had only one question after seeing General Electric tossed from the Dow Jones Industrial Average: What took so long? Yes, GE used to be revered by Wall Street. Investors would explain to each other that GE was 1% of the U.S. economy. As the company went, so did the U.S. But its stock peaked in 2000, and GE has been a failing industrial giant ever since. This underlying reality was hard to see through the smokescreen of its finance business, GE Capital.
I remember when HarperCollins, which had published a book of mine, announced it would be publishing a book by former GE CEO Jack Welch and his wife. I immediately called my publisher and complained in mock horror, “I thought I was your hedge fund guy.” He didn’t get it. I explained that he should forget about turbines and locomotives. GE was basically a giant hedge fund—a bet on its finance unit, which contributed half of GE’s profits.
Jack Welch played Wall Street like a fiddle with his decadeslong record of consistent earnings. His CFO, Dennis Dammerman, even told Fortune magazine in 1997, “We have a lot of diverse businesses, and when you put them all together they produce consistent, reliable earnings growth.” Wall Street believed it. A colleague once told me that Mr. Welch would get up in front of Wall Street analysts and toy with them. He’d joke, “Well, you guys are saying that ‘we might not meet our earnings estimates this quarter because of this or that.’ Wait, why are you writing that down? I’m telling you what you are saying, only write down what I am saying, which is that we deliver consistent earnings growth.”
Dammerman further admitted, “We’re going to take these large gains and offset them with discretionary decisions, with restructurings.” I’ve seen it. I invested in technology companies only to see GE Capital come in and write big checks. It’s an old corporate accounting trick—some called it a honey pot, others a cookie jar. When the investments went public, GE could time the sale of stock for when it needed to book additional profits to make up for a shortfall elsewhere. Jeffrey Immelt took over as CEO at the end of 2001 and kept the Welch legacy going, growing assets at GE Capital to more than $500 billion for a globally expanding business of loans, leasing, factoring, equity finance and insurance.
Mr. Welch had a famous leadership lesson—be No. 1 or No. 2 in any business, or get out. Sadly, as a hedge fund, it was dead last. During the 2008-09 financial crisis, its honey pot was destroyed. GE even took $3 billion from Warren Buffett to meet short-term obligations. Mr. Immelt and GE have been unwinding this hedge fund ever since.