‘IN the Nasdaq’ with William Cohan, author of ‘Power Failure’

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Greenberg: Your book, “Power Failure,” it’s an extensive history of General Electric, but it’s so much more. It’s a history of corporate America in the 20th century, it’s a case study for business schools. But let’s get back to the very beginning, because it all starts with Edison and the light bulb.

Cohan: Well, it does, and it doesn’t, Gregg. Actually, it starts in 1892. They put the merged the two companies, two companies Edison’s General Electric and another company called Thompson Houston Company. Edison actually was against the merger, didn’t want it to happen, tried to get JP Morgan, the man, and Henry Villard, who was the CEO of Edison General Electric, not to do the merger, but the money kings won out, even then. And so they did the merger, and soon after that, Thomas Edison was gone. But yes, they were absolutely exploiting his creations, the light bulb and the electric power grid.

Greenberg: And then the book really evolves into the Jack Welch and the Jeff Immelt years, but I want to talk a little bit, before we get to them, as to how important GE was to America in the 20th century, economically, militarily, industrially. How important was it?

Cohan: If you can impact imagine, you know, Google, Microsoft, Apple rolled up into one company, that was GE. They were hugely important in aerospace, but with jet engines in the defense department, obviously, all the electrical appliances that we took for granted, you know, dishwashers and refrigerators, light bulbs, electricity, power grid, all sorts of medical equipment. They were huge. As we know, a huge financial powerhouse as well, the fourth-largest sort of bank in the country, but it was a non-bank bank. So, this was the most important industrial company, one of the most important financial services companies, the most valuable company in the world, the most respected company in the world.

Greenberg: And in the Dow Jones as well, almost since the Dow Jones Industrial Average origination.

Cohan: Yes, that’s right. It was one of the original members of the Dow Jones Industrial Average.

Greenberg: But by the time you end your story, not anymore. But let’s get more to the story, into this behemoth comes John Francis Jack Welch. So, tell me about Jack Welch, where did he come from?

Cohan: Well, he was an only child, born and raised in beautiful Salem, Massachusetts, which was nearby where I was raised as well. And his father was basically a conductor on the on the railroad that went from Boston up to the North Shore of Massachusetts up to Gloucester and Rockport area. His mother was a homemaker. Jack was a little guy, but a very serious in terms of athlete, always was on sports teams, very competitive. And then made his way into the world between UMass and then University of Illinois, where he got a PhD in chemical engineering and then to GE.

Greenberg: Can you talk about how he climbed the rankings, the rungs of success at GE? I know he was a feisty guy, but there’s a lot to get to the top of the world’s most important company of course.

Cohan: And the odds are against anybody ever getting to the top, but Jack was a wonderkin from the start. He went to the plastics business up in Pittsfield, Massachusetts, and he basically commercialized GE’s discoveries in the plastics business. He made products like Lexan a household name and used by corporations all over the world. So, this of course became Jack’s fiefdom. He never wanted to leave Pittsfield. Eventually, he got more businesses to run like the light bulb business in Cleveland and then he was running GE Capital. He really exploited GE Capital. He exploited GE’s AAA credit rating to essentially arbitrage that into GE Capital and create GE Capital into a huge powerhouse.

Greenberg: Let’s get into GE Capital because one of the reasons why Jack Welch rose to the top is because he never missed his numbers and when he got to become the CEO of General Electric, he didn’t miss his numbers either because of GE Capital. So, how important was GE capital to Jack Welch?

Cohan: He told me that it was much easier to make money from money than it was to make money from metal and aircraft engines and all the other things that GE did because, what Jack figured out was, he could make a ton of money, to the point where GE Capital was providing some 50% of GE’s earnings. From arbitraging GE’s AAA credit rating, it could borrow money at the same rate as the U.S. government, and then lend it out very expensively. They also took warrants in the companies and stock in the companies they financed, and it just became a powerhouse. And whenever he needed to make numbers for his earnings in a given quarter, he was more than happy to sell a loan or sell a building that GE had financed, sell the warrants or the stock that GE had gotten by financing these businesses.

Greenberg: But GE capital also proved to be a ticking time bomb, that didn’t go off until Jack’s successor, Jeff Immelt, took over. So, how did Jeff Immelt climb to the top of GE? Because once again, it’s not easy. There’s a lot that goes on with GE corporate succession.

Cohan: Well, Jeff Immelt had a great resume for starters. His father worked at GE engines and jet engines in Cincinnati for something like 30 years. Jeff Immelt had gone to Dartmouth and Harvard Business School, so he was sort of a natural to go to GE. He always wanted to be running a business, and he figured if he went to GE, he could do that. And I think, you know, at the end of the day, he was one of three. He rose up through the ranks, moved around all sorts of different businesses, including the healthcare business and the major appliance business. He did well in those businesses and caught the eye of Jack Welch, and then basically, wowed Jack Welch.

Greenberg: And now we come to the crux of the story, where all the big questions come out, because Jeff Immelt takes the helm of GE just before September 11th and then you had the financial crisis and he’s trying to wheel and deal to keep GE, the GE that Jack created, together through all this economic turbulence. So, why did Jeffrey Immelt have so many problems holding GE together? Was it because it was such a colossus that Jack built, or was he just unable to have the tools to do it?

Cohan: Well, obviously that’s a big part of what the book is about, but I think he really, at the end of the day, he was a marketing guy. He was sort of a visionary about where GE should be and how GE should evolve out of the Jack era, but he did have GE Capital, which was 50% of GE’s earnings. And I think in the financial crisis of 2007 and 2008, he didn’t really understand the risks that were inherent at GE Capital. This idea of borrowing short and lending long is what gets banks in trouble every single time. That’s what got Bear Stearns, Lehman, and Maryland in trouble. No one was focused on GE Capital, everyone was focused on the Wall Street banks and then the car companies, but GE had to go hat in hand to Hank Paulson at the Treasury, Sheila Bair at the FDIC, and essentially participate in all these bailouts to keep, literally, from going under.

Greenberg: I’m going to press you further: Would Jack Welch have been able to keep that company together? Because they had to break it up after. Would Jack have been able to hold it together?

Cohan: Well, obviously pure speculation right, but I would say absolutely yes. Because Jack loved the conglomerate structure, he loved what he had created in GE. He might have trimmed some companies here and there, made some changes to the portfolio, but Jack also understood the risks in GE Capital. He had basically built or made GE Capital a behemoth and it became so he understood the risks and he also had people there who understood the risks. Jeff tended to get rid of people who didn’t agree with him, and I think he lost a lot of talent at GE Capital. He didn’t really understand the risks that were there. He had been warned about them but didn’t act on them. Jack, I think, understood the risks. If he had been warned by somebody that some risk was building up, he would have done something about it. Jack would have kept that company together. In fact, if Jack were alive today and saw what was happening to GE, it would kill him.

Greenberg: There were a lot of folks on Wall Street who saw GE Capital, Jim Grant, you had some analysts who were always looking and they went at Jeff, but they didn’t go at Jack Welch in the same way. Can you talk about the folks that got proven right?

Cohan: Well, you mentioned Jim Grant now. Jim Grant was at Grant’s Interest Rate Observer, who’s a hero of mine even before this book, but this book makes him even a bigger hero. He did warn Jack. He thought Jack was overplaying his hand with GE Capital. He really went to town on Jeff, especially after Bill Gross, the bond king, who was at PIMCO in the early 2000s, and Jack and Bill Gross also warned Jeff Immelt about the risks building up at GE Capital and the way it was financing itself in the short-term commercial paper market. GE Capital was the largest borrower of commercial paper, and so Bill Gross warned Jeff Immelt. Jim Grant warned Jeff Immelt. Ravi Soria, a hedge fund manager, warned Jeff Immelt. His own treasurer warned him, took him down to the credit rating agencies, kind of made light of that. To be charitable, I think Jeff thought he knew better than other people and, you know, once he made a decision, that was kind of it, even though people warned him and he thought he could manage through the warnings.

Greenberg: And then, finally, as we mentioned before, General Electric was an original Dow component and it was replaced in 2018 by Walgreens. Now it’s still a massive company, but it’s being broken up as we speak. What’s the legacy of General Electric?

Cohan: Well, I think it’s a cautionary tale in the end, Gregg. I mean, because you think to yourself, a company like Apple, or a company like Microsoft, or a company like Amazon or Google, they’re so big, they’re so powerful. I mean, GE was all of those things wrapped into one company. The most admired, the most valuable, the CEO of the century. And suddenly, now, in the beginning of 2023, it’s going to be broken up into three parts and it’s going to be no more. Well, I guess as Joseph Schumpeter said, the great Austrian historian who talked about creative destruction, this is an example of that. I mean, nothing unfortunately lasts forever and so as an investor, as an employee, as a CEO, as a management, you have to think about those things to try to avoid a fate that would have been inconceivable, that GE would be breaking itself up and be no longer relevant 20 years ago when Jack Welch was still head of the company or just given up being out of the company.

Greenberg: Congratulations on the book.

Cohan: Thank you very much. Thanks for having me.