Essay: The decline of GE Capital – what happened?

This company services in 170 countries across the world, it is a truly global company. At the head of General electric is Jeffrey Robert Immelt, who took over the position of CEO from the former CEO, Jack Welch in September 2007. Since then, the 6o-year-old, born in Cincinnati Ohio, Africa has played an important role in the company’s strategy. Immelt says increasing GE’s footprint in Africa has been a critical part of his plan to transform it into a truly global company. “As CEO, I always was intrigued to see what it Africa could mean for us…GE was 70% inside the United States in 2001. In 2016, we’ll be 70% outside of the United States, I always had a vision, along with the leadership team, for the company that was much more global. And I think because of that, it made us more adventurous, as a leadership team, to go to places that we weren’t as big.” (Immelt, J) Between 2001 and 2016, Immelt approximated, GE’s financial presence and integrity to the continent sky rocketed from $500 million to 6 billion. In practical terms, this correlated into a presence in eight countries: Angola, Ethiopia, Ghana, Kemra, Mozambique, Nigeria, South Africa and Tanzania, covering most of the continent’s key markets. How could something that was once seen as amazing flip into something so horrible?
Do people doubt that large market gains are partially based on fraudulent accounting and fake earnings? Or an extreme combination to future market returns? That was the hand dealt to Immelt by his previous CEO and the financial markets. There isn’t a whole lot of glory in reassuring shareholders that the false earnings reports are no longer happening and that the company’s sullied books are now clean. That is a long, slow and distracting process. Although the accounting manipulation came into play during Immelt’s tenure, they likely predated his term. Barron’s for example, reported that the company underfunded reinsurance reserves by $9.4 billion, helping to inflate profits from 1997 to 2001. Immelt was in charge of cleaning up the mess left by Welch. One other advantage Welch had: At the time, GE owned NBC, including the financial and business news channel CNBC. Welch skillfully managed his image using the NBC, inevitably getting good press. The anchors even joked about softball questions while interviewing the boss. It not only set the tone for the rest of the press, but it helped drive the story of Welch, making him almost invincible in the public’s imagination.
The accounting scandal and unimpressive stock performance made it almost impossible for Immelt to appear on CNBC and expand in the same way that Welch did, that’s when GE sold NBC to Comcast Corp for about $30 billion in 2009. “Losses at GE Capital stemming from the financial crisis helped the parent company lower its tax rate for several years. Still, GE’s average rate before the crisis, from 2002-07, was 17.5 percent- higher than now, but below the mid- to high-20 percent range that many large U.S. companies paid in the same period.”(Rubin, Donmoyer et al) Welch had lucky timing, Immelt didn’t. The accounting mess up at GE Capital under Welch, followed by the financial credit crisis, all but guaranteed that Immelt would come up short. Despite this, many still consider Welch the gold standard for CEOs.
I am not saying that Welch was an awful CEO or that Immelt was great.  In reconsidering the two CEOS with all the facts, it seems clear that one was given more credit than was due and the other really did not get anything. No major shareholder has attacked Immelt publicly, no proxy advisory firm has told clients to vote against him. The board is officially silent, but people close to the directors say he still has their confidence. Immelt’s record isn’t one that anybody would want. “When he got the job on Sept. 7, 2001, GE stock was $40 a share. Almost 10 years later, it’s around $20.”(Colvin, Geoff) The company’s credit rating was AAA, the best, awarded to only a handful of business enterprises. But no more. “It was the most valuable company on earth, commanding the highest market capitalization. Today it’s around No. 8 (its rank varies day by day), just behind Royal Dutch Shell.” (Colvin, Geoff)
“The past year, however, has seen GE enter new territory. Since Donald Trump’s election in November 2016, during a stock market boom in which the Dow is up 41 percent, GE has lost 46 percent of its value, or $120 billion.” (Bennett, Drake, Clough) A few months after Immelt retired as chief executive last summer, the company shocked Wall Street by announcing earnings that were barely half of analysts already lowered estimates. Soon after, GE said it would halve its stock dividend because it was short on cash. It also said it would sell or spin up to $20 billion in businesses, including its light- bulb division.
A record of decline, mistakes, and wealth destruction? Yes. A slam-dunk case for throwing the bum out? Not exactly. The difficulty in judging Immelt is that, observed today and gauged by the standards of normal companies, GE looks pretty good. To be among the 10 most valuable companies on earth, among the 20 most admired, and among the 30 most desired employers, most companies would kill for that. Since bottoming on March 4, 2009, the stock has more than tripled. The company earned $11.6 billion of profit, probably ranking in the top 25 globally. Immelt has made some smart choices as well as he has made bad choices, such as selling GE Plastics to Saudi Basic Industries for $11.6 billion in 2007. GE got out of subprime mortgages in 2007 (at a deep loss but hanging on to it would have been far worse) and exited insurance before that sector cratered. Though the company’s mammoth GE Capital unit suffered huge reversals in the financial crisis, it never lost a dime. GE didn’t have a losing year or a losing quarter.
You could even argue that the stock’s poor run under Immelt isn’t nearly as bad as it looks because the price was irrationally high when he got the job. At $40, it was still coming down off its market peak of $60. Number crunching by the E.V.A Dimensions consulting firm shows that the $40 price meant that investors were expecting GE’s earnings after a capital charge to increase by some $3 billion a year for 10 years and then hold at that level; the company’s economic profit would now be about $40 billion a year and expected to stay there forever. Such an expectation was ignorant. “The highest economic profit ever achieved excluding super-major oil companies, whose numbers were briefly skewed by oil price spikes was, Microsoft’s $15 billion in 2007.”(Colvin, Geoff) At GE last year the figure was $3.9 billion. If the stock had been priced more reasonably perhaps $20 would have been realistic, even without knowing that a financial crisis, and a recession lay in the future. then consider the dividends GE has paid to investors. Immelt’s performance vs. the market looks respectable.
Then in January came news of a $6.2 billion charge related to costs incurred more than a decade ago by GE’s financial services business. A public announcement that triggered a U.S. Securities and Exchange Commission investigation. GE’s new CEO, John Flannery, has grimly promised that “all options are on the table.” including the once unthinkable option of dismembering the company entirely.  “GE CEO John Flannery on Tuesday told Wall Street analysts in a special conference call the embattled company is considering a range of possibilities including separately traded assets for some of the company’s units.”(Kevin, McCoy) The assessment came as GE said it would take a $6.2 billion after-tax charge to address problems with its insurance. a hit that will be reflected in the company’s upcoming earnings report for the fourth quarter. Shares of a Boston-based company fell almost 3% Tuesday, closing at $18.21. Since President Trump’s inauguration through last week, shares of GE stock fell 40%. In December, GE announced plans to cut 12,000 power division jobs as the company grappled with a decline in business for coal and natural gas products. That followed dismantling plans for the bulk of the GE Capital business, Immelt announced in 2015 during a $26.5 billion sale of its factories, commercial loans and apartment complexes. The slimmed-down unit’s insurance portfolio was the focus of GE’s latest financial problem. The company exited most of the insurance business from 2004 to 2006 but decided to keep current books of insurance related business based on the view that, “a gradual runoff would yield the better economic result,” Flannery said. “In hindsight, we underappreciated the risk in this book.”
The decline of GE capital falls entirely on John Flannery, and Jeff Immelt, although the corporation has been running for nearly a century, because of greedy choices and poorly made decisions these two men have single handedly destroyed a billion-dollar corporation. What once was world renowned is now slowly burning away into ashes