September 11, 2019 • 46 mins
Tragedies and financial crises turned what used to be General Electric's strengths into liabilities. In this episode, we learn how the once dominant company began to struggle and why some think its heading for insolvency.
Learn more about your ad-choices at https://www.iheartpodcastnetwork.com
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:04):
Welcome to tech Stuff, a production of I Heart Radios,
How Stuff Works. Hey there, and welcome to tech Stuff.
I'm your host, Jonathan Strickland. I'm an executive producer with
How Stuff Works and I Heart Radio and I love
all things tech. And we have come to the end
of our journey covering the history of General Electric up
(00:27):
to today, and just a heads up, this episode is
going to focus a lot on the business side of
General Electric rather than the tech side of General Electric.
I could have ended the series with the last episode
as far as the technological innovations go. Now, that's not
to say GE hasn't continued to innovate in the post
(00:48):
Jack Welch era, but rather that the innovations the company
is most known for span the previous one hundred years
of its existence. The last twenty year is the most recent.
Twenty years have been more marked with controversy and business
practices and market issues, and I think it's important to
(01:09):
understand what's happened since two thousand one because g has
been such an incredibly important part of the modern technological landscape.
I mean, that's one of the main companies that helped
spread the electrical infrastructure in the United States. You know,
without GE, it would have taken much longer for that
(01:29):
to have happened, and the world would be very different
today if GE had not existed. But in the last episode,
I told you guys about Jack Welch, the g E
CEO who pushed the company to incredible profitability, mainly by
selling off businesses where General Electric wasn't in first or
second place in the industry. He sold off more than
(01:51):
seventy of g S businesses just in his first two
years of being CEO. He also laid off more than
one hundred thousand employees, which earned him the nickname Neutron
Jack because like a neutron bomb, he eliminated people without
damaging the assets. And he also led efforts to acquire
financial institutions like banks and insurance companies in order to
(02:14):
launch this financial and insurance business, and that would end
up giving g E an enormous revenue boost. It would
become incredibly important for the company in the nineteen eighties
and beyond for different reasons. Now. One exception to Welch's
amazing victories was an acquisition of a securities firm called Kidder,
(02:38):
Peabody and Company, which was actually an even older company
than General Electric. If you looked at the origin for
Kidder Peabody and Company, that firm traced its history all
the way back to eighteen sixty five, more than a
decade before even the earliest of companies that formed General Electric.
(02:58):
Welch led the acquisition effort in nineteen six, but then
there were a series of scandals centered around insider trading
that brought a lot of suspicion and scrutiny on Kider
Peabodies business and therefore g E Capital the financial division
of General Electric, and a year after the acquisition, the
(03:19):
global stock markets crashed on October nineteenth seven and what
was called Black Monday. The combination of events convinced Welch
that he had made an error in judgment acquiring Kidder Peabody,
and it took several more years and more scandals centering
on Kidder Peabodies record keeping and allegations of reporting false profits,
(03:41):
but GE would eventually sell Kidder Peabody off at a
huge loss. Now that embarrassment aside, GE for the most
part did very well in the eighties and nineties. The
stock price for g E rose four thousand percent. Some
sources state that when you take all the factors into consideration,
it was more like five thousand two. Under Welch's command,
(04:04):
he put off his retirement in order to secure an
acquisition of Honeywell International. If you listen to my last episode,
you know that didn't go well. The European Commission denied
the merger for anti competitive reasons, and the man who
hated to lose, Jack Welch, had to go out on
a down note. But compared to GE, you could say
(04:25):
Jack Welch got off easy. Now, this episode will cover
what happened to General Electric since two thousand one, including
the events that would create massive problems for the huge company.
And there is ongoing disagreement as to whether most of
the blame should fall on Welch's successor, or if Welch
himself should shoulder some of that responsibility or some other party.
(04:48):
So what the heck actually happened? Well, first, let me
talk a little bit about g S stock, because that's
going to come back around later in this episode. A
few times. So, for years, g E paid out a
dividend on its stock. Not all companies do this, and
a dividend is a payment that a company makes to
(05:08):
distribute some of its revenue to its shareholders. So a
company makes money and then distributes some of that money
amongst the people who hold shares in the company. It's
usually not very much per share. In fact, it's typically
less than a dollar. Gees case, it was around thirty
one cents for a long time. In the US, there
(05:28):
are no rules about how frequently a company actually pays
out dividends. Most companies will do it quarterly, so you
would get one quarter of your dividend four times a year.
So if it was a dividend of forty cents, that
means every three months you would get a check for
ten cents for every share you own. So it's not
very much, but if you own a lot of shares,
(05:49):
it starts to add up. And besides distributing revenue, it's
also meant to incentivize shareholders to reinvest and buy more
shares of stock in that company. So the idea is, oh,
you got a dividend payout, it's enough for you to
buy another share in the company, so you spend that
dividend buying another share. That's the logic there. Well, when
(06:09):
Welch first took over g E stock wasn't doing so great,
it wasn't super high. A lot of investors thought of
the stocks as essentially a dividend payout and not much else.
So you wouldn't buy g E stocks with the idea
of selling them at a higher price later on the road.
You know, you weren't thinking, I'm gonna buy now, because
(06:31):
in five or ten years this stock is going to
be worth two or three times as much. You bought
g E stock because it paid out a dividend, so
it would take a long time, but you would eventually
make more money than you invested if that dividend were
to hold steady. Now, when Welch took over, the stock
price actually dipped a little bit after he had been
(06:53):
running GE for a year or two, But another year
later the entire stock market took a turn and it
started climb and value. This would be the beginning of
eighteen years of a climbing market, a bull market. In
other words, even with events like Black Monday in Night
seven taken into account, so you had moments where the
market was not bullish, where it was crashing, but it
(07:16):
would recover and then go back on its bullish route trajectory.
If you will now, collectively the SMP five hundred index
it would climb by two thousand and this was the
same time that we started seeing packages like four oh
one K plans replaced traditional retirement plans. Now that meant
(07:37):
that stock market performance would become far more important to
weigh more people. Like in the old days, it was
just people who traded in stocks, and largely it was
a lot of businesses that did that trading. Your average
person didn't play the stock market that much. But now
stuff like our retirement was tied directly into stock market performance.
(07:58):
So suddenly everybody was really really focusing on the stock market,
and it meant that it became far more important for
stocks to do well. See before the nineteen eighties, stock
market performance was you know, it was an indicator of
a company's overall health, but most people didn't consider it
the metric against which all companies should stand. You would
(08:20):
worry more about the company's profitability, how much revenue is
it bringing in, how much does it cost to do business,
and how much profit is the company making. The share
price wasn't as big a deal. That changed around the
same time that Welch took over at g E and
Welch's philosophy happened to match this general shift in how
businesses operated in the United States. Now. I don't say
(08:43):
this to diminish Welch's contributions or GEES performance, because the
company's own stock outperformed the general market significantly. But I
do also want to take the overall market performance into consideration,
because while I don't want to take any credit away,
I also don't want to give too much credit to
Welch and his impact beyond what it actually was. Anyway,
(09:08):
as the market improved, and as g S performance in
particular made its stock price rocket upwards, ge stocks were
seen as more than just a dividend payout. The company
continued to pay dividends, though, which again is going to
be important later. Those dividends were largely funded by the
incredible performance of g E Capital, that's the financial services
(09:30):
division of General Electric. In the last year of Welch's
tenure as CEO, GEES stock price did take several hits,
but then so did just about everybody else. In March
two thousand, the stock markets performance shifted. It was no
longer bullish. It was going into a bear market, so
instead of growing, it was receding. The Dot com bubble
(09:54):
had crashed, and that caused a bit of a stock
market crisis. Companies that were in the dot com in dustry,
obviously they suffered the most. Many of them just were
blinking out of existence after it became clear that those
companies had no way to deliver upon the promises that
they were making or to be able to justify the
crazy speculation that drove their stock prices into the stratosphere
(10:17):
before the companies had even figured out how to generate
ascent in revenue. But even companies like General Electric, which
were traditional, established, giant conglomerate companies, were affected by this
change in the market. Between March two thousand and when
Welch would hand over the CEO role to his successor,
Jeff Emilt, in early September two thousand one, the stock
(10:41):
price for GE had fallen by twenty four percent. Now
I point that out because often the simplified story about
what happened to GE was that Jack Welch stepped down
and Imilt fumbled the ball, that Emilt was a terrible
CEO and he could not follow Welch's lead. But in reality,
I think the story is far more nuanced, and we
(11:03):
have to remember that the market itself was changing during
this transition. It wasn't the case of Emilt being handed
a profitable company on a silver platter and nothing was
going wrong and he just messed it up from there. Uh.
He did make a ton of decisions that would not
turn out to be great for GE. So I don't
want to diminish his responsibility either. I just think it's
(11:25):
important for us to take all these factors into consideration. Okay.
So Welch stepped down on September six, two thousand one.
Emil took over on September seven, and four days later,
the United States was rocked by a series of terrorist
attacks that shook the country to its core. Those effects
were widespread. The tragedy touched thousands of people directly, tens
(11:48):
of thousands millions of people indirectly. It transformed the New
York City Escape permanently, and it caused disruption in the
markets as well. Wall Street made the decision to not
open the New York Stock Exchange the morning of September eleven,
two thousand one, fearing that the terrorist attacks would prompt
panic selling amongst shareholders, making a truly horrible situation even
(12:13):
more dire both the New York Stock Exchange and the
NASDAC would remain closed until September two thousand one. When
trading resumed, the market fell by nearly seven hundred points.
That was a decline of almost mobile actually more than
seven per cent, and that was just the first day
(12:33):
of trading. Losses actually continued throughout that week. I hate
even talking about this, but it is important in order
for us to understand ges story. At this stage in
the company's history, business philosophies had changed significantly in the
United States in the nineteen eighties and nineteen nineties. We
(12:54):
had created a new environment where share value was the
most important metric for a business, the company's stock price.
If the stock price was going up, that was good.
That was pretty much the end all be all. A
company wasn't thought of doing well unless it's stock price
was growing year over year, or at least the overall
(13:16):
value of the company when you take in at stock.
Because of course, companies can do things like stock splits
so that the price of an individual shriff stock goes down.
But because you've doubled the number of stocks or a
number of shares, I should say, out on the market,
the value of the company itself remains stable and can
continue to grow. This drove a lot of business decisions
(13:37):
that put shareholders above just about everything else in the company,
including customers. Now, in my opinion, it's one of the
biggest economic mistakes made in recent decades, as it has
created a world in which many company executives focus very
much on the short term to mid term gains as
(13:58):
opposed to long term strategies. So often I think companies
are making choices that hurt the company's chances to survive
in the long term, all in an effort to drive
that stock market price further up. Anyway, this disaster impacted
gees stock price along with countless other companies, and you
(14:19):
can't lay that blame on Emilt. It's not his fault
that this series of awful attacks happened four days after
he took control of the company. In the wake of
nine eleven, all airline operations in the United States stopped
for several days. That had a direct impact on gees business,
which included building stuff like jet engines for the airlines
(14:42):
and also leasing out parts for various companies. All of
that was put on hold. On top of that, gees
insurance business was suddenly inundated with claims which the company
had to make good on. For one thing, GE was
responsible for the insurance policy for the World Trade Center, which,
as I'm sure you all know, lost the two towers
(15:03):
that made the center iconic back in two thousand one
as a result of those attacks. Prior to September eleven,
it wasn't unusual for GE to lean a bit heavily
on GE capital to kind of smooth things over. The
branch was so profitable, that division of GE was so
profitable that could help conceal if another division weren't quite
(15:24):
doing so well. A lot of gees accounting practices have
over the years been called opaque, meaning that you might
get the end result of how well the overall company
is doing, but you might not know how it got there,
which divisions are doing well versus which ones are not.
The overall performance of the company was what mattered, right,
(15:46):
So who cares what's happening in the individual divisions. Well,
Emil would get to work selling off parts of GES
insurance business, though the company would still maintain some of
that business up to present day. I'll explain more about
that in a little bit. It and he also began
to look at possible acquisitions. So what things turn out, Well,
(16:06):
we'll find out. But spoiler alert, no they don't. But
before I get into that, let's take a quick break.
One thing I want to mention before I forget it
is that during Emilt's run as CEO of GE, there
(16:29):
was a particularly wasteful practice going on that would later
get a lot of media attention when it was made public.
Emilt traveled a lot. He would meet with various GE
executives and facilities all around the world, as well as
with other company and industry leaders and politicians. Particularly. He
would do this when he was on the lookout for
(16:49):
possible acquisitions, and he made a lot of those as
he was CEO of g E. Now, to hop over
to the other side of the world, he would take
one of the g E owned business jets. They had
six of them. But here's the curious thing. Every time
you would travel, there would be a second empty jet
that would follow along behind and stay at the same
(17:12):
airport and wait there. And then when Emilt would fly back,
so did the empty jet. Now the justification for that practice,
which again eventually became public, in which a jet carrying
only a crew no passengers would burn through fuel, it
would generate pollution. The justification was that Emilt was a
(17:33):
very important person on very important business and yes I
capitalized very important in my notes in this section. As such,
he couldn't be delayed by mechanical failures. His business was
far too important. So the empty jet was essentially a
backup transport in case his primary should experience a mechanical delay.
(17:55):
It was his just in case measure, a very expend
of wasteful measure. The company would actually stop that practice
in two thousand fourteen, which was a few years before
Emilt would be replaced as CEO. Spoiler alert, will get there,
all right, So back to the post two thousand one
g E. In two thousand two, GE would acquire a
(18:17):
business from a formerly huge company. That company was in Ron,
which went bankrupt in two thousand one after its own
massive scandal, which I'm not going to get into here.
It's outside the purview of this episode, but one of
the many parts of in Ron to go up on
the auction block after the bankruptcy was a wind power business.
(18:38):
Emilt was, in his own words, not enthusiastic about wind power.
He felt wind power wasn't profitable, and it was too
dependent upon subsidies, and those subsidies could disappear at any
time according to which way any government budget might be headed,
So there was no way to control that. If the
subsidies went away, you'd be saddled with a really expensive
(19:00):
of a nonprofitable business. But Emil gave the authority to
executives who really believed in that acquisition to go forward
with it, and they went and purchased the division. It
would end up becoming profitable and perhaps should have served
as a lesson for future emmilt and I'll get back
into what I mean about that in just a little bit.
(19:20):
In two thousand three, GE announced its intention to purchase
a majority stake in Universal Pictures. That was a company
that was under the control of another company called Vivendi,
a French company. In this deal, g E would acquire
eighty percent of Universal. Vivindi was going through kind of
a financial crisis at the time, so GE merged Universal
(19:43):
with NBC, creating NBC Universal, and the deal included several
cable television channels like Sci Fi Network, USA Network, as
well as the Universal Film Studio, the Universal Theme parks.
It did not include Universal Music that would remain completely
under Vendy's control, but lots of the other Universal properties
were part of this deal. Vivendi would have twenty control
(20:07):
of this and then UH you would have GE with
control and you got in BC Universal. G E would
not hold on to this property forever. G was acquiring
other companies as well at this time, adding them to
the various divisions of General Electric. GE. Healthcare was growing
with companies like UH Instrumentarium and Amersham Plc. Those were
(20:32):
being added as part of healthcare. G Capital was also
growing with similar acquisitions, including some subprime mortgage loan companies,
and we'll get into that in a bit. And G
would also build out its industrial, consumer and energy businesses
and made several acquisitions of companies in the oil industry,
also in banking and that old course of fossil fuels
(20:54):
in general, because he really believed that that was going
to be the mainstay for energy production or electricity production.
I guess I should say for the foreseeable future. Throughout
this time, GE Capital would remain the most profitable division
of General Electric, and so the company would lean more
heavily upon GE Capital in order to do things like
(21:16):
pay out that dividend to shareholders that set up GE
for disaster. Just a couple of years after GE purchased
subprime mortgage businesses, the world plunged into a global economic crisis,
which we often refer to as the two thousand eight
financial crisis, but really the crisis first started becoming apparent
(21:38):
in two thousand seven with the subprime mortgage market. So
what the heck is a subprime mortgage Well, the short
answer is it's an incredibly risky, predatory, and irresponsible market
practice that depends upon people who are some of the
most vulnerable folks out there. Maybe that's just me putting
my own bias on things, but it's hard for me
(21:59):
to see the whole concept as anything other than dumb
and harmful. But here's how it breaks down, all right.
So you know about credit scores, right, They're supposed to
represent how much of a risk or a lack of
risk a person is when it comes to paying off
debt like loans. So if you have a high credit score,
it means your history shows that you're diligent about paying
off debt and that you represent a low risk for
(22:22):
future loans. It does not mean that you've never had debt.
You want to have some debt, and then you want
to be able to pay it off because that's what
gets you that high credit score. But if you have
a low credit score, it means that, in the eyes
of a lender, you represent a risk. Maybe you have
a spotty employment history, maybe you have a lot of
outstanding debt, maybe you've missed some payments on some loans.
(22:43):
The purpose of these credit scores is to give lenders
enough information to make responsible loan agreements. Subprime lending involves
giving loans to high risk individuals, and typically you pair
this with really high interest rates and other restrictions in
order to mitigate the risk you incur when you give
a loan out to one of these people who have
(23:04):
a very low credit score. And so people who are
looking to buy homes or to take out other loans
were securing the money through financial institutions with these subprime
mortgages and subprime loans, but with incredibly punishing restrictions on
those loans, and surprise, surprise, a lot of folks found
it impossible to pay off that debt, and ultimately many
(23:27):
of the companies that were making those loans found themselves
in a hole that they had dug themselves and it
was too deep to climb out. Everyone was put in
an awful situation and it had a really big ripple effect.
Part of that ripple led to an investment bank called
Lemon Brothers collapsing in September of two thousand eight. Other
(23:47):
major financial institutions were in danger of following suit. The
whole thing was leading to a global economic collapse, with
the financial industry on the brink of total disaster. That's
when arious parties swooped in to rescue the situation, bailing
out banks that had over extended themselves. This in turn
ticked off a lot of folks who are directly affected
(24:10):
by this problem. These were people who had been evicted
from their homes because they weren't able to make their
mortgage payments, or people who were otherwise hurt by the
subprime mortgage crisis, either directly or indirectly. And it didn't
help that many of these people saw the bailouts as
being rewards for the same financial institutions that caused all
the misery in the first place. Well. Ge Capital was
(24:32):
one of those institutions, and it was hit hard by
the two thousand eight crisis worse because General Electric was
so dependent upon GE Capital for revenue, it put all
of General Electric at risk. To help whether the storm,
the company announced it would attempt to raise twelve billion
dollars through a common stock offering. Warren Buffett investor Extraordinaire,
(24:55):
also helped out by investing billions of dollars in GE
in retros. Fact, many analysts have said that GE was
playing an increasingly dangerous game since Welch had transformed GE
Capital from a small division that helped consumers get financing
to purchase big appliances like refrigerators into a global financial institution.
(25:16):
Gees more traditional divisions like it's lighting business, industrial equipment business,
medical equipment business, it's a via Asian businesses. All of
these secured for the company the respect of Wall Street
because they were dependable parts of GE. They could make
a dependable revenue, and they were traditional. They had a
(25:37):
long history with the company that gave the company a
lot of room to swing for the fences with GE
Capital and thus engage in more risky behaviors in an
effort to win big payoffs, drive that stock market price up,
and again pay out those dividends, and that risk was
somewhat necessary because of that changing climate of business, So
(25:58):
you had to grow year over years. Traditional businesses usually
had steady performance, and they did grow, but they grew slowly,
so that wasn't the kind of performance that would really
when you the the front cover of various business magazines,
you wanted to really go for it. So GE Capital
was that method. That was how GE was going to
(26:22):
be the leader. Then it became an anchor weighing the
company down in the wake of this financial crisis. EMIL
would start trying to sell off parts of g E Capital,
but it wasn't easy. Before Buffett rushed into help. GE
famously couldn't secure overnight loans to keep the business afloat.
Most investors felt it was far too risky to pour
(26:43):
money into General Electric, so the house that Jack built
was in danger of crashing to its foundations. Even with
the influx of investment cash, not to mention an incredible
one thirty nine billion dollars of federal government bailout money,
g was still struggling, and one thing barreling down at
(27:03):
the company was that dividend payout. The dividend made g
E stock one of the most popular stocks on the market.
Tons of people owned g E stock because it paid
out dividends, But paying how that dividend was going to
put a huge burden on the company. It just wasn't
going to have the cash to do it, so in
two thousand nine, EMIL decided to cut the dividend from
(27:26):
thirty one cents a share down to ten cents a share.
It would mark only the second time the company had
reduced its dividend payout. The first time had been during
the Great Depression and spoiler alert. It would not be
the last time they would have to cut the dividend. Also,
in two thousand nine, the company announced its intention to
(27:46):
sell off NBC Universal to cable provider Comcast. To do that,
it would first have to acquire the other twenty percent
of NBC Universal from Vivindy. They still had that air.
That process took some time, so it wasn't until two
thousand eleven that GE would sell off a majority stake
(28:07):
in NBC Universal to Comcast. At that time, GE would
still retain a forty nine percent share in the company,
although it did have the intention to sell the rest
of those shares off. A few years later, uh. This
would become a common plot element and a source of
jokes in the series thirty Rock, just as ges ownership
of NBC Universal had been a source for humor previously
(28:30):
in that series. Two years later, in Comcast would arrange
to purchase the entirety of NBC Universal from g E,
and g E would get out of the entertainment and
media business and it would use some of that money
to cover some of the debt that g E had
accrued following the two thousand eight financial crisis. The NBC
Universal deal was just one of several that GE pursued
(28:52):
in the first decade of the two thousand's The company
looked to sell off some of its businesses and divisions
in an effort to refocus on core strategy. G's Emilt
kept working on ways to extract GE from GE capital business,
and he didn't have a whole lot of success with it,
and he had his eyes set on another company to
try and turn gees prospects around. The company in question
(29:14):
was a French company that was making coal powered turbines.
In other words, it was a company that built stuff
for the energy electric industry electric utilities, right specifically for
fossil fuel based power companies. The name of this company
was Alstom A L S T O M. And as
it would turn out, the timing could not have been worse,
(29:36):
though it is arguable over whether or not that was predictable.
At that time, Emil was hoping that Alstom would become
a key component in g ees power division. He thought
that Ge could take this French company which had been
struggling financially, and used GES processes and practices to turn
Alstom around. Then he would use Alstom to meet the
(29:57):
electricity demands of clients all over the world at all
with fossil fuel based turbines. So what went wrong? Well,
I'll tell you after we take this quick break. Not
everyone at g was crazy about acquiring Alstom. Several executives
(30:20):
felt that the asking price was far too high, but
Emma was optimistic that Ge could take Alstom and turn
it into a profitable business. As it turns out, he
wouldn't get the chance to stick around long enough to
see how far Alstom would fall. But I'm not quite
there yet. Ge needed to do something. The company's oil
and gas services, which revolved around actually extracting oil. You know,
(30:43):
making the equipment that would be used for that sort
of stuff. Those were on the decline as energy prices
were collapsing. But the power division GE Power, the part
of g that actually produced equipment that was used to
generate electricity, that was still a reliable revenue source. In fact,
at that point was the largest source of revenue for GE,
(31:03):
and it had a high profit margin to boot. G
E made a lot of money from that particular division.
So if g E could do the same thing for
Alstom and turn things around, then in Emilt's mind, the
company would have a rock solid foundation from which to work.
But a few big factors would hamper the success of Alstom.
One was that there just wasn't as big a demand
(31:23):
for turbines as Emilt had anticipated. They got fewer orders
than what they were hoping for. In places like the
United States, power companies were improving efficiencies and so they
were able to do more with less. There wasn't as
big a demand to add additional infrastructure to meet consumer needs.
Then there was the fact that Alstom's employees were very
(31:44):
highly compensated, which was good for them but rough for GE,
and regulations in the EU meant that EMILT couldn't just
pull a Jack Welch and start laying off employees in
an effort to cut costs. EU had protections in place
to prevent that sort of thing, so you couldn't just
make the books look better by laying off a bunch
(32:04):
of people. And the EU also blocked one part of
the business from g E acquiring it. That was Alstom's
service business, their maintenance business that would have supplied revenue
as the company would provide maintenance services for its clients.
That was off limits. And the other major factor was
that the cost of building out renewable energy systems fell
(32:24):
drastically not long after GE completed the ten billion dollar
acquisition of Alstom in two thousand fifteen, so it looked
like the wrong bet right buying a very expensive fossil
fuel based company just as renewable energy prices were falling
to the point where they were uh they could compete
(32:46):
against fossil fuels. Now, around the same time that the
Alstom deal was starting to take shape, GE would spin
off its credit card business, which was part of GE Capital,
and it would become Synchrony Finance. Nchell and I'm guessing.
It filled a lot of folks at GE with a
bit of dismay to see that once it was free
of General Electric, this former division actually outperformed all expectations.
(33:10):
It did much better on its own than it did
as part of General Electric. On top of that, the
oil price crash pushed GE to merge its own oil
and gas division with a company called Baker Hughes, and
then g E got a majority ownership in the Baker
Hughes company became Baker Hughes, a g E company at
least for the time. Oh and two thousand fifteen, GE
(33:33):
formed a unit called GE Digital. G had been in
various digital products for a while, but marked the move
for the company to create an independent business unit. Most
of the unit's focus was on a software product called Predicts,
sort of a play on Prediction, and it was a
business to business product. It was meant to help big
(33:54):
companies like airlines identify strategies and manage assets. But over
time that unit would experience slow revenues and technical issues,
and in eighteen there was real serious talk of GE
potentially selling off the division entirely. That is yet to happen.
GE Digital still as part of GE, but GE did
(34:15):
do a few rounds of layoffs, so things have not
gone smoothly for that part of the company. Back to
gees leadership WOS. In October two thousand seventeen, GE announced
that Jeff Emilt would be stepping down as CEO, and
he had served in that role for about sixteen years.
The company's stock price was around a third of what
it had been when he took control. Emerald had spun
(34:37):
off numerous businesses over the years, including gees Plastics division
if you remember, that's the division that Jack Welch had
actually come to. He had also spun off the appliances business.
He's spun off the insurance business, or a lot of
it anyway, and more. And by that time much of
the upper leadership at g E got caught in a shacub.
(35:00):
There were members of the board who left, there were
other executive members who left, and investors, employees, and retirees
were all growing more and more unhappy. The company had
lost and estimated one hundred billion dollars worth of shareholder
wealth over the previous decade and a half. Critics stated
the Emilt had a habit of chasing after fads, investing
(35:21):
in businesses at the peak of their visibility and then
later selling them off for less than what g had
paid for them in the first place, And people said
the GE method was to buy high, sell low, which
in general is the opposite of what you want to do.
I think, oh no, not a business guy. Not every
deal Emilt made went sour. By the way, the in
Ron deal in which g took over that wind power
(35:43):
business ended up being very profitable, though again Emil initially
opposed that deal, and when GE sold off its plastics
division it was for a higher price than what a
lot of analysts expected. But generally speaking, the deals didn't
break in gees favor or imilts watch. Emeralt's successor was
John Flannery, who had up to that point headed up
(36:06):
gees healthcare business and had worked for GE for thirty years.
Flannery's goal was to build a strong core for g
E around its aviation business, its power business, and its
healthcare business, and there was talk of the possibility that
GE itself might break apart into several different companies. The
reaction to that idea kind of fell across the spectrum.
(36:29):
Some people saw it as a necessity if the various
parts of GE were to stabilize. Others saw it as
the end of a legacy, and they had a bit
of a point. One of the discussions was about possibly
selling off GES lightbulb business, that was the business that
started it all, really, all the way back in eight
seventy eight, and the Edison Electric Light Company. But innovation
(36:52):
could sometimes be a double edged sword. The move towards
l E ed lights, which can last for thousands of hours,
meant that there just wasn't as big a demand for
light bulbs anymore. Because if you don't have to worry
about the light bulb burning out on a regular basis,
there's not much call to buy new ones. You just
buy the LEDs. You might sell your house before you
(37:13):
ever have to change that light bulb. So lightbulb sales
were starting to drop. There just wasn't enough call for them.
I bet it made GE long for the days when
it had formed that secret lightbulb cartel in which companies
agreed to limit the useful life of a light bulb
through engineering. And things were rough for shareholders too. Since
GE had cut its dividend payouts a few years earlier,
(37:34):
the payouts had slowly increased again. They had grown up
to twenty four cents per share, so that was an improvement.
It was still below the thirty one cents that it
had been at its peak, but it was better. But
in late G had to cut the dividend again, that
time down to twelve cents, and then not too long
(37:55):
after that they were forced to do another cut. They
just realized that they're just wasn't enough money to cover
the dividend payout, so the dividend got cut down to
just one cent per share. It just didn't have the
money to cover the payments otherwise. In addition, G was
having to deal with an unexpected cost. The company had
(38:16):
not issued any long term care insurance policies since two
thousand six, and in fact, it had spun off almost
its entire insurance business with a company called gen Worth. However,
in order to make that deal happen, GE was forced
to agree to cover any losses from long term care insurance.
It was just seen as too great a financial risk otherwise,
(38:39):
so GE signed that agreement. Now, those long term care
agreements are policies that are meant to cover the elderly,
and it turned out that insurers not just a GE,
but across the industry had underestimated how long policy holders
would actually live, and the medical costs, including things like
nursing home fees, would tend to get higher as customers
(39:02):
got older. So as people lived longer, they were creating
a larger and larger drain on resources for these insurance companies.
Like if you looked at it from a financial perspective,
the person who was paying for the policy was getting
way more benefits out of it than they were paying
into it, and that was an issue. So this was
(39:23):
a huge cost for GE, and it's no wonder that
the company was continuing to try and find ways to
get completely out of the insurance business. Now. To meet
the obligation, Flannery had to redirect fifteen billion dollars of
GES wealth in two thousand eighteen just to cover the
obligations of that insurance policy stuff. And the company was
(39:45):
also hit with a seven and a half billion dollar
after tax charge, so things were really rough. Also in
two thousand eighteen, GE would leave the dal Jones Industrial Average.
If you listen to my previous episodes, you remember that
GE was one of the original companies listed on that
average when it was first created, and it was the
(40:05):
only company of that original list that still existed in
two thousand eighteen. It had been part of the Dow
Industrial Average for a hundred eleven years, but the performance
of the company, along with the perception that industrial companies
in general weren't really key indicators for overall market performance,
meant that those days were over, so in its place,
(40:27):
a different company would join the Dow. That was Walgreen's
Boots Alliance drug store chain company. Meanwhile, a problem with
gs most recent heavy duty gas turbines caused other issues
for General Electric. A utility in Texas had to shut
down two different power plants for repairs due to failures
with these new turbines. That news would end up hurting
(40:50):
GE power sales, which weren't doing super a great at
that moment. Already, Flannery's efforts were seen as insufficient by
the board of directors, and on October one, els and eighteen,
the company announced that Flannery had been removed from the
position of chairman and CEO, and the board appointed an outsider,
Lawrence Culp, to serve as the new chairman and CEO.
(41:12):
Flannery had been CEO for about fourteen months and then
he was out that would give Flannery the unenviable distinction
of having served the least amount of time as CEO
of all g e C e o s, at least
so far. Culp would be the third CEO to lead
the company since two thousand seventeen. The company Culp took
(41:35):
over was in turmoil and there were pending investigations into
g S accounting practices, which had for years, as I
said earlier, been described as opaque. It's polite way of
saying the company wasn't making it easy to see where
money was coming from or where it was going to.
GE had already settled sec charges in the past, but
(41:57):
there were others that sought to find out more about
the finances of the company. And then, of course there
was no recent report from Marcopolis, the guy who was
one of the early whistleblowers on Bernie made Off before
everyone was aware of the Ponzi scheme that made Off
was running. The Marcopolis report alleges that GE is essentially
robbing Peter to pay Paul, shifting cash around frantically to
(42:21):
fend off insolvency. It's kind of like a shell game
to trying to move money around fast enough so that
the company doesn't collapse. G E I should add, disputes
this report and says that the allegations are baseless and
it cannot be ignored that Marcopolis himself actually stands to
make a lot of money should GES stocks decline and value.
(42:43):
So you could argue there is a motive for Marcopolis
to try and drag ges name in the mud. Uh
So their valid arguments on either side about whether or
not this report is something you should pay attention to
or if it's something that has alter are your motivations
behind it. That being said, the fact that the Marcopolis
(43:05):
report came out doesn't change the fact that there were
already numerous investigations government investigations into g S businesses that
could end up hindering the company further. So there seems
to be smoke. There's just a question of is the
fire what Mark coupolists is saying or is it something else?
(43:26):
On top of all the problems the company faces, is
another external force that could really spell doom. Many financial
analysts say that signs point to another global recession. Already,
industries like manufacturing and freight are in a bit of
a slide, so a recession would greatly exacerbate General Electrics problems.
(43:47):
So are we seeing the end of days for a
company that helped launch the technological age? I don't know.
I don't feel great about it, but it is a
very large company. It's not like any of these things
is definitively the death knell for General Electric And there's
a lot of stuff that could happen. We could see
(44:07):
GE get broken up into smaller companies that individually are
able to succeed much better than they can collectively. All
of that remains to be seen. But it was fascinating
to learn more about this company's incredible, rich history. And UH.
I know that this last section was much lighter on
the tech side, as I said at the beginning, but
(44:29):
at the same time, I thought it was important for
us to understand how a company that had been so
instrumental in setting the tone for the technological age could
be facing extinction UH in two thousand nineteen. So here's
hoping that things turn around for GE, that the company
(44:50):
is able to reconcile all these accounting practices, that it
is able to deliver value to employees, to customers, to retirees,
and two shareholders not just two shareholders, and that wraps
up this episode. If you have suggestions for future topics
of tech stuff, whether it's a company, a technology, a
(45:13):
concept in tech, anything like that, let me know. Send
me an email the addresses tech stuff at how stuff
Works dot com or draw me a line on Facebook
or Twitter. The handle of both of those is text
Stuff hs W. You can also pop on over to
our website that's tech Stuff podcast dot com. You've got
to find a link to the archive of all of
(45:33):
our previous episodes there, so you can look up all
the different stuff we talked about, including the previous episodes
I did on g S History where Chris Pallette and
I sat down and talked about it. But the show
was very different back in those days. But if you
want to hear a different take on this same sort
of stuff, you can check that out. That one came out,
I believe in two thousand twelve. And don't forget we
(45:54):
also have a link to our online store where every
purchase you make goes to help the show, and we
greatly appreciate it and I will talk to you again
really soon. Y Text Stuff is a production of I
Heart Radio's How Stuff Works. For more podcasts from I
heart Radio, visit the i heart Radio app, Apple podcasts,
(46:17):
or wherever you listen to your favorite shows.
Welcome to tech Stuff, a production of I Heart Radios,
How Stuff Works. Hey there, and welcome to tech Stuff.
I'm your host, Jonathan Strickland. I'm an executive producer with
How Stuff Works and I Heart Radio and I love
all things tech. And we have come to the end
of our journey covering the history of General Electric up
(00:27):
to today, and just a heads up, this episode is
going to focus a lot on the business side of
General Electric rather than the tech side of General Electric.
I could have ended the series with the last episode
as far as the technological innovations go. Now, that's not
to say GE hasn't continued to innovate in the post
(00:48):
Jack Welch era, but rather that the innovations the company
is most known for span the previous one hundred years
of its existence. The last twenty year is the most recent.
Twenty years have been more marked with controversy and business
practices and market issues, and I think it's important to
(01:09):
understand what's happened since two thousand one because g has
been such an incredibly important part of the modern technological landscape.
I mean, that's one of the main companies that helped
spread the electrical infrastructure in the United States. You know,
without GE, it would have taken much longer for that
(01:29):
to have happened, and the world would be very different
today if GE had not existed. But in the last episode,
I told you guys about Jack Welch, the g E
CEO who pushed the company to incredible profitability, mainly by
selling off businesses where General Electric wasn't in first or
second place in the industry. He sold off more than
(01:51):
seventy of g S businesses just in his first two
years of being CEO. He also laid off more than
one hundred thousand employees, which earned him the nickname Neutron
Jack because like a neutron bomb, he eliminated people without
damaging the assets. And he also led efforts to acquire
financial institutions like banks and insurance companies in order to
(02:14):
launch this financial and insurance business, and that would end
up giving g E an enormous revenue boost. It would
become incredibly important for the company in the nineteen eighties
and beyond for different reasons. Now. One exception to Welch's
amazing victories was an acquisition of a securities firm called Kidder,
(02:38):
Peabody and Company, which was actually an even older company
than General Electric. If you looked at the origin for
Kidder Peabody and Company, that firm traced its history all
the way back to eighteen sixty five, more than a
decade before even the earliest of companies that formed General Electric.
(02:58):
Welch led the acquisition effort in nineteen six, but then
there were a series of scandals centered around insider trading
that brought a lot of suspicion and scrutiny on Kider
Peabodies business and therefore g E Capital the financial division
of General Electric, and a year after the acquisition, the
(03:19):
global stock markets crashed on October nineteenth seven and what
was called Black Monday. The combination of events convinced Welch
that he had made an error in judgment acquiring Kidder Peabody,
and it took several more years and more scandals centering
on Kidder Peabodies record keeping and allegations of reporting false profits,
(03:41):
but GE would eventually sell Kidder Peabody off at a
huge loss. Now that embarrassment aside, GE for the most
part did very well in the eighties and nineties. The
stock price for g E rose four thousand percent. Some
sources state that when you take all the factors into consideration,
it was more like five thousand two. Under Welch's command,
(04:04):
he put off his retirement in order to secure an
acquisition of Honeywell International. If you listen to my last episode,
you know that didn't go well. The European Commission denied
the merger for anti competitive reasons, and the man who
hated to lose, Jack Welch, had to go out on
a down note. But compared to GE, you could say
(04:25):
Jack Welch got off easy. Now, this episode will cover
what happened to General Electric since two thousand one, including
the events that would create massive problems for the huge company.
And there is ongoing disagreement as to whether most of
the blame should fall on Welch's successor, or if Welch
himself should shoulder some of that responsibility or some other party.
(04:48):
So what the heck actually happened? Well, first, let me
talk a little bit about g S stock, because that's
going to come back around later in this episode. A
few times. So, for years, g E paid out a
dividend on its stock. Not all companies do this, and
a dividend is a payment that a company makes to
(05:08):
distribute some of its revenue to its shareholders. So a
company makes money and then distributes some of that money
amongst the people who hold shares in the company. It's
usually not very much per share. In fact, it's typically
less than a dollar. Gees case, it was around thirty
one cents for a long time. In the US, there
(05:28):
are no rules about how frequently a company actually pays
out dividends. Most companies will do it quarterly, so you
would get one quarter of your dividend four times a year.
So if it was a dividend of forty cents, that
means every three months you would get a check for
ten cents for every share you own. So it's not
very much, but if you own a lot of shares,
(05:49):
it starts to add up. And besides distributing revenue, it's
also meant to incentivize shareholders to reinvest and buy more
shares of stock in that company. So the idea is, oh,
you got a dividend payout, it's enough for you to
buy another share in the company, so you spend that
dividend buying another share. That's the logic there. Well, when
(06:09):
Welch first took over g E stock wasn't doing so great,
it wasn't super high. A lot of investors thought of
the stocks as essentially a dividend payout and not much else.
So you wouldn't buy g E stocks with the idea
of selling them at a higher price later on the road.
You know, you weren't thinking, I'm gonna buy now, because
(06:31):
in five or ten years this stock is going to
be worth two or three times as much. You bought
g E stock because it paid out a dividend, so
it would take a long time, but you would eventually
make more money than you invested if that dividend were
to hold steady. Now, when Welch took over, the stock
price actually dipped a little bit after he had been
(06:53):
running GE for a year or two, But another year
later the entire stock market took a turn and it
started climb and value. This would be the beginning of
eighteen years of a climbing market, a bull market. In
other words, even with events like Black Monday in Night
seven taken into account, so you had moments where the
market was not bullish, where it was crashing, but it
(07:16):
would recover and then go back on its bullish route trajectory.
If you will now, collectively the SMP five hundred index
it would climb by two thousand and this was the
same time that we started seeing packages like four oh
one K plans replaced traditional retirement plans. Now that meant
(07:37):
that stock market performance would become far more important to
weigh more people. Like in the old days, it was
just people who traded in stocks, and largely it was
a lot of businesses that did that trading. Your average
person didn't play the stock market that much. But now
stuff like our retirement was tied directly into stock market performance.
(07:58):
So suddenly everybody was really really focusing on the stock market,
and it meant that it became far more important for
stocks to do well. See before the nineteen eighties, stock
market performance was you know, it was an indicator of
a company's overall health, but most people didn't consider it
the metric against which all companies should stand. You would
(08:20):
worry more about the company's profitability, how much revenue is
it bringing in, how much does it cost to do business,
and how much profit is the company making. The share
price wasn't as big a deal. That changed around the
same time that Welch took over at g E and
Welch's philosophy happened to match this general shift in how
businesses operated in the United States. Now. I don't say
(08:43):
this to diminish Welch's contributions or GEES performance, because the
company's own stock outperformed the general market significantly. But I
do also want to take the overall market performance into consideration,
because while I don't want to take any credit away,
I also don't want to give too much credit to
Welch and his impact beyond what it actually was. Anyway,
(09:08):
as the market improved, and as g S performance in
particular made its stock price rocket upwards, ge stocks were
seen as more than just a dividend payout. The company
continued to pay dividends, though, which again is going to
be important later. Those dividends were largely funded by the
incredible performance of g E Capital, that's the financial services
(09:30):
division of General Electric. In the last year of Welch's
tenure as CEO, GEES stock price did take several hits,
but then so did just about everybody else. In March
two thousand, the stock markets performance shifted. It was no
longer bullish. It was going into a bear market, so
instead of growing, it was receding. The Dot com bubble
(09:54):
had crashed, and that caused a bit of a stock
market crisis. Companies that were in the dot com in dustry,
obviously they suffered the most. Many of them just were
blinking out of existence after it became clear that those
companies had no way to deliver upon the promises that
they were making or to be able to justify the
crazy speculation that drove their stock prices into the stratosphere
(10:17):
before the companies had even figured out how to generate
ascent in revenue. But even companies like General Electric, which
were traditional, established, giant conglomerate companies, were affected by this
change in the market. Between March two thousand and when
Welch would hand over the CEO role to his successor,
Jeff Emilt, in early September two thousand one, the stock
(10:41):
price for GE had fallen by twenty four percent. Now
I point that out because often the simplified story about
what happened to GE was that Jack Welch stepped down
and Imilt fumbled the ball, that Emilt was a terrible
CEO and he could not follow Welch's lead. But in reality,
I think the story is far more nuanced, and we
(11:03):
have to remember that the market itself was changing during
this transition. It wasn't the case of Emilt being handed
a profitable company on a silver platter and nothing was
going wrong and he just messed it up from there. Uh.
He did make a ton of decisions that would not
turn out to be great for GE. So I don't
want to diminish his responsibility either. I just think it's
(11:25):
important for us to take all these factors into consideration. Okay.
So Welch stepped down on September six, two thousand one.
Emil took over on September seven, and four days later,
the United States was rocked by a series of terrorist
attacks that shook the country to its core. Those effects
were widespread. The tragedy touched thousands of people directly, tens
(11:48):
of thousands millions of people indirectly. It transformed the New
York City Escape permanently, and it caused disruption in the
markets as well. Wall Street made the decision to not
open the New York Stock Exchange the morning of September eleven,
two thousand one, fearing that the terrorist attacks would prompt
panic selling amongst shareholders, making a truly horrible situation even
(12:13):
more dire both the New York Stock Exchange and the
NASDAC would remain closed until September two thousand one. When
trading resumed, the market fell by nearly seven hundred points.
That was a decline of almost mobile actually more than
seven per cent, and that was just the first day
(12:33):
of trading. Losses actually continued throughout that week. I hate
even talking about this, but it is important in order
for us to understand ges story. At this stage in
the company's history, business philosophies had changed significantly in the
United States in the nineteen eighties and nineteen nineties. We
(12:54):
had created a new environment where share value was the
most important metric for a business, the company's stock price.
If the stock price was going up, that was good.
That was pretty much the end all be all. A
company wasn't thought of doing well unless it's stock price
was growing year over year, or at least the overall
(13:16):
value of the company when you take in at stock.
Because of course, companies can do things like stock splits
so that the price of an individual shriff stock goes down.
But because you've doubled the number of stocks or a
number of shares, I should say, out on the market,
the value of the company itself remains stable and can
continue to grow. This drove a lot of business decisions
(13:37):
that put shareholders above just about everything else in the company,
including customers. Now, in my opinion, it's one of the
biggest economic mistakes made in recent decades, as it has
created a world in which many company executives focus very
much on the short term to mid term gains as
(13:58):
opposed to long term strategies. So often I think companies
are making choices that hurt the company's chances to survive
in the long term, all in an effort to drive
that stock market price further up. Anyway, this disaster impacted
gees stock price along with countless other companies, and you
(14:19):
can't lay that blame on Emilt. It's not his fault
that this series of awful attacks happened four days after
he took control of the company. In the wake of
nine eleven, all airline operations in the United States stopped
for several days. That had a direct impact on gees business,
which included building stuff like jet engines for the airlines
(14:42):
and also leasing out parts for various companies. All of
that was put on hold. On top of that, gees
insurance business was suddenly inundated with claims which the company
had to make good on. For one thing, GE was
responsible for the insurance policy for the World Trade Center, which,
as I'm sure you all know, lost the two towers
(15:03):
that made the center iconic back in two thousand one
as a result of those attacks. Prior to September eleven,
it wasn't unusual for GE to lean a bit heavily
on GE capital to kind of smooth things over. The
branch was so profitable, that division of GE was so
profitable that could help conceal if another division weren't quite
(15:24):
doing so well. A lot of gees accounting practices have
over the years been called opaque, meaning that you might
get the end result of how well the overall company
is doing, but you might not know how it got there,
which divisions are doing well versus which ones are not.
The overall performance of the company was what mattered, right,
(15:46):
So who cares what's happening in the individual divisions. Well,
Emil would get to work selling off parts of GES
insurance business, though the company would still maintain some of
that business up to present day. I'll explain more about
that in a little bit. It and he also began
to look at possible acquisitions. So what things turn out, Well,
(16:06):
we'll find out. But spoiler alert, no they don't. But
before I get into that, let's take a quick break.
One thing I want to mention before I forget it
is that during Emilt's run as CEO of GE, there
(16:29):
was a particularly wasteful practice going on that would later
get a lot of media attention when it was made public.
Emilt traveled a lot. He would meet with various GE
executives and facilities all around the world, as well as
with other company and industry leaders and politicians. Particularly. He
would do this when he was on the lookout for
(16:49):
possible acquisitions, and he made a lot of those as
he was CEO of g E. Now, to hop over
to the other side of the world, he would take
one of the g E owned business jets. They had
six of them. But here's the curious thing. Every time
you would travel, there would be a second empty jet
that would follow along behind and stay at the same
(17:12):
airport and wait there. And then when Emilt would fly back,
so did the empty jet. Now the justification for that practice,
which again eventually became public, in which a jet carrying
only a crew no passengers would burn through fuel, it
would generate pollution. The justification was that Emilt was a
(17:33):
very important person on very important business and yes I
capitalized very important in my notes in this section. As such,
he couldn't be delayed by mechanical failures. His business was
far too important. So the empty jet was essentially a
backup transport in case his primary should experience a mechanical delay.
(17:55):
It was his just in case measure, a very expend
of wasteful measure. The company would actually stop that practice
in two thousand fourteen, which was a few years before
Emilt would be replaced as CEO. Spoiler alert, will get there,
all right, So back to the post two thousand one
g E. In two thousand two, GE would acquire a
(18:17):
business from a formerly huge company. That company was in Ron,
which went bankrupt in two thousand one after its own
massive scandal, which I'm not going to get into here.
It's outside the purview of this episode, but one of
the many parts of in Ron to go up on
the auction block after the bankruptcy was a wind power business.
(18:38):
Emilt was, in his own words, not enthusiastic about wind power.
He felt wind power wasn't profitable, and it was too
dependent upon subsidies, and those subsidies could disappear at any
time according to which way any government budget might be headed,
So there was no way to control that. If the
subsidies went away, you'd be saddled with a really expensive
(19:00):
of a nonprofitable business. But Emil gave the authority to
executives who really believed in that acquisition to go forward
with it, and they went and purchased the division. It
would end up becoming profitable and perhaps should have served
as a lesson for future emmilt and I'll get back
into what I mean about that in just a little bit.
(19:20):
In two thousand three, GE announced its intention to purchase
a majority stake in Universal Pictures. That was a company
that was under the control of another company called Vivendi,
a French company. In this deal, g E would acquire
eighty percent of Universal. Vivindi was going through kind of
a financial crisis at the time, so GE merged Universal
(19:43):
with NBC, creating NBC Universal, and the deal included several
cable television channels like Sci Fi Network, USA Network, as
well as the Universal Film Studio, the Universal Theme parks.
It did not include Universal Music that would remain completely
under Vendy's control, but lots of the other Universal properties
were part of this deal. Vivendi would have twenty control
(20:07):
of this and then UH you would have GE with
control and you got in BC Universal. G E would
not hold on to this property forever. G was acquiring
other companies as well at this time, adding them to
the various divisions of General Electric. GE. Healthcare was growing
with companies like UH Instrumentarium and Amersham Plc. Those were
(20:32):
being added as part of healthcare. G Capital was also
growing with similar acquisitions, including some subprime mortgage loan companies,
and we'll get into that in a bit. And G
would also build out its industrial, consumer and energy businesses
and made several acquisitions of companies in the oil industry,
also in banking and that old course of fossil fuels
(20:54):
in general, because he really believed that that was going
to be the mainstay for energy production or electricity production.
I guess I should say for the foreseeable future. Throughout
this time, GE Capital would remain the most profitable division
of General Electric, and so the company would lean more
heavily upon GE Capital in order to do things like
(21:16):
pay out that dividend to shareholders that set up GE
for disaster. Just a couple of years after GE purchased
subprime mortgage businesses, the world plunged into a global economic crisis,
which we often refer to as the two thousand eight
financial crisis, but really the crisis first started becoming apparent
(21:38):
in two thousand seven with the subprime mortgage market. So
what the heck is a subprime mortgage Well, the short
answer is it's an incredibly risky, predatory, and irresponsible market
practice that depends upon people who are some of the
most vulnerable folks out there. Maybe that's just me putting
my own bias on things, but it's hard for me
(21:59):
to see the whole concept as anything other than dumb
and harmful. But here's how it breaks down, all right.
So you know about credit scores, right, They're supposed to
represent how much of a risk or a lack of
risk a person is when it comes to paying off
debt like loans. So if you have a high credit score,
it means your history shows that you're diligent about paying
off debt and that you represent a low risk for
(22:22):
future loans. It does not mean that you've never had debt.
You want to have some debt, and then you want
to be able to pay it off because that's what
gets you that high credit score. But if you have
a low credit score, it means that, in the eyes
of a lender, you represent a risk. Maybe you have
a spotty employment history, maybe you have a lot of
outstanding debt, maybe you've missed some payments on some loans.
(22:43):
The purpose of these credit scores is to give lenders
enough information to make responsible loan agreements. Subprime lending involves
giving loans to high risk individuals, and typically you pair
this with really high interest rates and other restrictions in
order to mitigate the risk you incur when you give
a loan out to one of these people who have
(23:04):
a very low credit score. And so people who are
looking to buy homes or to take out other loans
were securing the money through financial institutions with these subprime
mortgages and subprime loans, but with incredibly punishing restrictions on
those loans, and surprise, surprise, a lot of folks found
it impossible to pay off that debt, and ultimately many
(23:27):
of the companies that were making those loans found themselves
in a hole that they had dug themselves and it
was too deep to climb out. Everyone was put in
an awful situation and it had a really big ripple effect.
Part of that ripple led to an investment bank called
Lemon Brothers collapsing in September of two thousand eight. Other
(23:47):
major financial institutions were in danger of following suit. The
whole thing was leading to a global economic collapse, with
the financial industry on the brink of total disaster. That's
when arious parties swooped in to rescue the situation, bailing
out banks that had over extended themselves. This in turn
ticked off a lot of folks who are directly affected
(24:10):
by this problem. These were people who had been evicted
from their homes because they weren't able to make their
mortgage payments, or people who were otherwise hurt by the
subprime mortgage crisis, either directly or indirectly. And it didn't
help that many of these people saw the bailouts as
being rewards for the same financial institutions that caused all
the misery in the first place. Well. Ge Capital was
(24:32):
one of those institutions, and it was hit hard by
the two thousand eight crisis worse because General Electric was
so dependent upon GE Capital for revenue, it put all
of General Electric at risk. To help whether the storm,
the company announced it would attempt to raise twelve billion
dollars through a common stock offering. Warren Buffett investor Extraordinaire,
(24:55):
also helped out by investing billions of dollars in GE
in retros. Fact, many analysts have said that GE was
playing an increasingly dangerous game since Welch had transformed GE
Capital from a small division that helped consumers get financing
to purchase big appliances like refrigerators into a global financial institution.
(25:16):
Gees more traditional divisions like it's lighting business, industrial equipment business,
medical equipment business, it's a via Asian businesses. All of
these secured for the company the respect of Wall Street
because they were dependable parts of GE. They could make
a dependable revenue, and they were traditional. They had a
(25:37):
long history with the company that gave the company a
lot of room to swing for the fences with GE
Capital and thus engage in more risky behaviors in an
effort to win big payoffs, drive that stock market price up,
and again pay out those dividends, and that risk was
somewhat necessary because of that changing climate of business, So
(25:58):
you had to grow year over years. Traditional businesses usually
had steady performance, and they did grow, but they grew slowly,
so that wasn't the kind of performance that would really
when you the the front cover of various business magazines,
you wanted to really go for it. So GE Capital
was that method. That was how GE was going to
(26:22):
be the leader. Then it became an anchor weighing the
company down in the wake of this financial crisis. EMIL
would start trying to sell off parts of g E Capital,
but it wasn't easy. Before Buffett rushed into help. GE
famously couldn't secure overnight loans to keep the business afloat.
Most investors felt it was far too risky to pour
(26:43):
money into General Electric, so the house that Jack built
was in danger of crashing to its foundations. Even with
the influx of investment cash, not to mention an incredible
one thirty nine billion dollars of federal government bailout money,
g was still struggling, and one thing barreling down at
(27:03):
the company was that dividend payout. The dividend made g
E stock one of the most popular stocks on the market.
Tons of people owned g E stock because it paid
out dividends, But paying how that dividend was going to
put a huge burden on the company. It just wasn't
going to have the cash to do it, so in
two thousand nine, EMIL decided to cut the dividend from
(27:26):
thirty one cents a share down to ten cents a share.
It would mark only the second time the company had
reduced its dividend payout. The first time had been during
the Great Depression and spoiler alert. It would not be
the last time they would have to cut the dividend. Also,
in two thousand nine, the company announced its intention to
(27:46):
sell off NBC Universal to cable provider Comcast. To do that,
it would first have to acquire the other twenty percent
of NBC Universal from Vivindy. They still had that air.
That process took some time, so it wasn't until two
thousand eleven that GE would sell off a majority stake
(28:07):
in NBC Universal to Comcast. At that time, GE would
still retain a forty nine percent share in the company,
although it did have the intention to sell the rest
of those shares off. A few years later, uh. This
would become a common plot element and a source of
jokes in the series thirty Rock, just as ges ownership
of NBC Universal had been a source for humor previously
(28:30):
in that series. Two years later, in Comcast would arrange
to purchase the entirety of NBC Universal from g E,
and g E would get out of the entertainment and
media business and it would use some of that money
to cover some of the debt that g E had
accrued following the two thousand eight financial crisis. The NBC
Universal deal was just one of several that GE pursued
(28:52):
in the first decade of the two thousand's The company
looked to sell off some of its businesses and divisions
in an effort to refocus on core strategy. G's Emilt
kept working on ways to extract GE from GE capital business,
and he didn't have a whole lot of success with it,
and he had his eyes set on another company to
try and turn gees prospects around. The company in question
(29:14):
was a French company that was making coal powered turbines.
In other words, it was a company that built stuff
for the energy electric industry electric utilities, right specifically for
fossil fuel based power companies. The name of this company
was Alstom A L S T O M. And as
it would turn out, the timing could not have been worse,
(29:36):
though it is arguable over whether or not that was predictable.
At that time, Emil was hoping that Alstom would become
a key component in g ees power division. He thought
that Ge could take this French company which had been
struggling financially, and used GES processes and practices to turn
Alstom around. Then he would use Alstom to meet the
(29:57):
electricity demands of clients all over the world at all
with fossil fuel based turbines. So what went wrong? Well,
I'll tell you after we take this quick break. Not
everyone at g was crazy about acquiring Alstom. Several executives
(30:20):
felt that the asking price was far too high, but
Emma was optimistic that Ge could take Alstom and turn
it into a profitable business. As it turns out, he
wouldn't get the chance to stick around long enough to
see how far Alstom would fall. But I'm not quite
there yet. Ge needed to do something. The company's oil
and gas services, which revolved around actually extracting oil. You know,
(30:43):
making the equipment that would be used for that sort
of stuff. Those were on the decline as energy prices
were collapsing. But the power division GE Power, the part
of g that actually produced equipment that was used to
generate electricity, that was still a reliable revenue source. In fact,
at that point was the largest source of revenue for GE,
(31:03):
and it had a high profit margin to boot. G
E made a lot of money from that particular division.
So if g E could do the same thing for
Alstom and turn things around, then in Emilt's mind, the
company would have a rock solid foundation from which to work.
But a few big factors would hamper the success of Alstom.
One was that there just wasn't as big a demand
(31:23):
for turbines as Emilt had anticipated. They got fewer orders
than what they were hoping for. In places like the
United States, power companies were improving efficiencies and so they
were able to do more with less. There wasn't as
big a demand to add additional infrastructure to meet consumer needs.
Then there was the fact that Alstom's employees were very
(31:44):
highly compensated, which was good for them but rough for GE,
and regulations in the EU meant that EMILT couldn't just
pull a Jack Welch and start laying off employees in
an effort to cut costs. EU had protections in place
to prevent that sort of thing, so you couldn't just
make the books look better by laying off a bunch
(32:04):
of people. And the EU also blocked one part of
the business from g E acquiring it. That was Alstom's
service business, their maintenance business that would have supplied revenue
as the company would provide maintenance services for its clients.
That was off limits. And the other major factor was
that the cost of building out renewable energy systems fell
(32:24):
drastically not long after GE completed the ten billion dollar
acquisition of Alstom in two thousand fifteen, so it looked
like the wrong bet right buying a very expensive fossil
fuel based company just as renewable energy prices were falling
to the point where they were uh they could compete
(32:46):
against fossil fuels. Now, around the same time that the
Alstom deal was starting to take shape, GE would spin
off its credit card business, which was part of GE Capital,
and it would become Synchrony Finance. Nchell and I'm guessing.
It filled a lot of folks at GE with a
bit of dismay to see that once it was free
of General Electric, this former division actually outperformed all expectations.
(33:10):
It did much better on its own than it did
as part of General Electric. On top of that, the
oil price crash pushed GE to merge its own oil
and gas division with a company called Baker Hughes, and
then g E got a majority ownership in the Baker
Hughes company became Baker Hughes, a g E company at
least for the time. Oh and two thousand fifteen, GE
(33:33):
formed a unit called GE Digital. G had been in
various digital products for a while, but marked the move
for the company to create an independent business unit. Most
of the unit's focus was on a software product called Predicts,
sort of a play on Prediction, and it was a
business to business product. It was meant to help big
(33:54):
companies like airlines identify strategies and manage assets. But over
time that unit would experience slow revenues and technical issues,
and in eighteen there was real serious talk of GE
potentially selling off the division entirely. That is yet to happen.
GE Digital still as part of GE, but GE did
(34:15):
do a few rounds of layoffs, so things have not
gone smoothly for that part of the company. Back to
gees leadership WOS. In October two thousand seventeen, GE announced
that Jeff Emilt would be stepping down as CEO, and
he had served in that role for about sixteen years.
The company's stock price was around a third of what
it had been when he took control. Emerald had spun
(34:37):
off numerous businesses over the years, including gees Plastics division
if you remember, that's the division that Jack Welch had
actually come to. He had also spun off the appliances business.
He's spun off the insurance business, or a lot of
it anyway, and more. And by that time much of
the upper leadership at g E got caught in a shacub.
(35:00):
There were members of the board who left, there were
other executive members who left, and investors, employees, and retirees
were all growing more and more unhappy. The company had
lost and estimated one hundred billion dollars worth of shareholder
wealth over the previous decade and a half. Critics stated
the Emilt had a habit of chasing after fads, investing
(35:21):
in businesses at the peak of their visibility and then
later selling them off for less than what g had
paid for them in the first place, And people said
the GE method was to buy high, sell low, which
in general is the opposite of what you want to do.
I think, oh no, not a business guy. Not every
deal Emilt made went sour. By the way, the in
Ron deal in which g took over that wind power
(35:43):
business ended up being very profitable, though again Emil initially
opposed that deal, and when GE sold off its plastics
division it was for a higher price than what a
lot of analysts expected. But generally speaking, the deals didn't
break in gees favor or imilts watch. Emeralt's successor was
John Flannery, who had up to that point headed up
(36:06):
gees healthcare business and had worked for GE for thirty years.
Flannery's goal was to build a strong core for g
E around its aviation business, its power business, and its
healthcare business, and there was talk of the possibility that
GE itself might break apart into several different companies. The
reaction to that idea kind of fell across the spectrum.
(36:29):
Some people saw it as a necessity if the various
parts of GE were to stabilize. Others saw it as
the end of a legacy, and they had a bit
of a point. One of the discussions was about possibly
selling off GES lightbulb business, that was the business that
started it all, really, all the way back in eight
seventy eight, and the Edison Electric Light Company. But innovation
(36:52):
could sometimes be a double edged sword. The move towards
l E ed lights, which can last for thousands of hours,
meant that there just wasn't as big a demand for
light bulbs anymore. Because if you don't have to worry
about the light bulb burning out on a regular basis,
there's not much call to buy new ones. You just
buy the LEDs. You might sell your house before you
(37:13):
ever have to change that light bulb. So lightbulb sales
were starting to drop. There just wasn't enough call for them.
I bet it made GE long for the days when
it had formed that secret lightbulb cartel in which companies
agreed to limit the useful life of a light bulb
through engineering. And things were rough for shareholders too. Since
GE had cut its dividend payouts a few years earlier,
(37:34):
the payouts had slowly increased again. They had grown up
to twenty four cents per share, so that was an improvement.
It was still below the thirty one cents that it
had been at its peak, but it was better. But
in late G had to cut the dividend again, that
time down to twelve cents, and then not too long
(37:55):
after that they were forced to do another cut. They
just realized that they're just wasn't enough money to cover
the dividend payout, so the dividend got cut down to
just one cent per share. It just didn't have the
money to cover the payments otherwise. In addition, G was
having to deal with an unexpected cost. The company had
(38:16):
not issued any long term care insurance policies since two
thousand six, and in fact, it had spun off almost
its entire insurance business with a company called gen Worth. However,
in order to make that deal happen, GE was forced
to agree to cover any losses from long term care insurance.
It was just seen as too great a financial risk otherwise,
(38:39):
so GE signed that agreement. Now, those long term care
agreements are policies that are meant to cover the elderly,
and it turned out that insurers not just a GE,
but across the industry had underestimated how long policy holders
would actually live, and the medical costs, including things like
nursing home fees, would tend to get higher as customers
(39:02):
got older. So as people lived longer, they were creating
a larger and larger drain on resources for these insurance companies.
Like if you looked at it from a financial perspective,
the person who was paying for the policy was getting
way more benefits out of it than they were paying
into it, and that was an issue. So this was
(39:23):
a huge cost for GE, and it's no wonder that
the company was continuing to try and find ways to
get completely out of the insurance business. Now. To meet
the obligation, Flannery had to redirect fifteen billion dollars of
GES wealth in two thousand eighteen just to cover the
obligations of that insurance policy stuff. And the company was
(39:45):
also hit with a seven and a half billion dollar
after tax charge, so things were really rough. Also in
two thousand eighteen, GE would leave the dal Jones Industrial Average.
If you listen to my previous episodes, you remember that
GE was one of the original companies listed on that
average when it was first created, and it was the
(40:05):
only company of that original list that still existed in
two thousand eighteen. It had been part of the Dow
Industrial Average for a hundred eleven years, but the performance
of the company, along with the perception that industrial companies
in general weren't really key indicators for overall market performance,
meant that those days were over, so in its place,
(40:27):
a different company would join the Dow. That was Walgreen's
Boots Alliance drug store chain company. Meanwhile, a problem with
gs most recent heavy duty gas turbines caused other issues
for General Electric. A utility in Texas had to shut
down two different power plants for repairs due to failures
with these new turbines. That news would end up hurting
(40:50):
GE power sales, which weren't doing super a great at
that moment. Already, Flannery's efforts were seen as insufficient by
the board of directors, and on October one, els and eighteen,
the company announced that Flannery had been removed from the
position of chairman and CEO, and the board appointed an outsider,
Lawrence Culp, to serve as the new chairman and CEO.
(41:12):
Flannery had been CEO for about fourteen months and then
he was out that would give Flannery the unenviable distinction
of having served the least amount of time as CEO
of all g e C e o s, at least
so far. Culp would be the third CEO to lead
the company since two thousand seventeen. The company Culp took
(41:35):
over was in turmoil and there were pending investigations into
g S accounting practices, which had for years, as I
said earlier, been described as opaque. It's polite way of
saying the company wasn't making it easy to see where
money was coming from or where it was going to.
GE had already settled sec charges in the past, but
(41:57):
there were others that sought to find out more about
the finances of the company. And then, of course there
was no recent report from Marcopolis, the guy who was
one of the early whistleblowers on Bernie made Off before
everyone was aware of the Ponzi scheme that made Off
was running. The Marcopolis report alleges that GE is essentially
robbing Peter to pay Paul, shifting cash around frantically to
(42:21):
fend off insolvency. It's kind of like a shell game
to trying to move money around fast enough so that
the company doesn't collapse. G E I should add, disputes
this report and says that the allegations are baseless and
it cannot be ignored that Marcopolis himself actually stands to
make a lot of money should GES stocks decline and value.
(42:43):
So you could argue there is a motive for Marcopolis
to try and drag ges name in the mud. Uh
So their valid arguments on either side about whether or
not this report is something you should pay attention to
or if it's something that has alter are your motivations
behind it. That being said, the fact that the Marcopolis
(43:05):
report came out doesn't change the fact that there were
already numerous investigations government investigations into g S businesses that
could end up hindering the company further. So there seems
to be smoke. There's just a question of is the
fire what Mark coupolists is saying or is it something else?
(43:26):
On top of all the problems the company faces, is
another external force that could really spell doom. Many financial
analysts say that signs point to another global recession. Already,
industries like manufacturing and freight are in a bit of
a slide, so a recession would greatly exacerbate General Electrics problems.
(43:47):
So are we seeing the end of days for a
company that helped launch the technological age? I don't know.
I don't feel great about it, but it is a
very large company. It's not like any of these things
is definitively the death knell for General Electric And there's
a lot of stuff that could happen. We could see
(44:07):
GE get broken up into smaller companies that individually are
able to succeed much better than they can collectively. All
of that remains to be seen. But it was fascinating
to learn more about this company's incredible, rich history. And UH.
I know that this last section was much lighter on
the tech side, as I said at the beginning, but
(44:29):
at the same time, I thought it was important for
us to understand how a company that had been so
instrumental in setting the tone for the technological age could
be facing extinction UH in two thousand nineteen. So here's
hoping that things turn around for GE, that the company
(44:50):
is able to reconcile all these accounting practices, that it
is able to deliver value to employees, to customers, to retirees,
and two shareholders not just two shareholders, and that wraps
up this episode. If you have suggestions for future topics
of tech stuff, whether it's a company, a technology, a
(45:13):
concept in tech, anything like that, let me know. Send
me an email the addresses tech stuff at how stuff
Works dot com or draw me a line on Facebook
or Twitter. The handle of both of those is text
Stuff hs W. You can also pop on over to
our website that's tech Stuff podcast dot com. You've got
to find a link to the archive of all of
(45:33):
our previous episodes there, so you can look up all
the different stuff we talked about, including the previous episodes
I did on g S History where Chris Pallette and
I sat down and talked about it. But the show
was very different back in those days. But if you
want to hear a different take on this same sort
of stuff, you can check that out. That one came out,
I believe in two thousand twelve. And don't forget we
(45:54):
also have a link to our online store where every
purchase you make goes to help the show, and we
greatly appreciate it and I will talk to you again
really soon. Y Text Stuff is a production of I
Heart Radio's How Stuff Works. For more podcasts from I
heart Radio, visit the i heart Radio app, Apple podcasts,
(46:17):
or wherever you listen to your favorite shows.
TechStuff News
Hosts And Creators
Oz Woloshyn
Karah Preiss
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
24/7 News: The Latest
The latest news in 4 minutes updated every hour, every day.
The Joe Rogan Experience
The official podcast of comedian Joe Rogan.