Power Failure: The Rise and Fall of an American Icon, by William D. Cohan (Portfolio, $40, 816 pages)
NRPLUS MEMBER ARTICLE W hile William Cohan is no doubt to the left of me politically, he is simply one of the great writers of our day. He is one of the preeminent Wall Street chroniclers of this generation, having written masterful histories of Goldman Sachs, Lazard, and Bear Stearns. Financial history might not be known for page-turners, but Cohan’s books are impossible to put down.
Power Failure, Cohan’s most recent work, is not a Wall Street saga per se, but it is adjacent. It tells the story of General Electric, an industrial conglomerate with iconic American roots. That Cohan chose to give us the entire 125-year history instead of starting the book in the last 20 years is to his credit. Students of business history deserve to know the intersection of capital and innovation that was instrumental to American progress in the 19th century, and Cohan makes the details and particulars riveting.
What evolved at General Electric before World War II is just as fascinating as the firm’s recent history, and the “past is prologue” lessons about M&A, regulation, antitrust concerns, and political hobnobbing are delightful. For those obsessed with New York history, like this reviewer, the ability to place specific buildings and sites in the context of real industrial and transactional activity is a real pleasure.
But where Cohan should be most congratulated for his retelling of the implosion of General Electric is in what he did not say, do, or imply. There is no question that he will be accused of being too friendly towards Jack Welch and too hard on his successor, Jeff Immelt, yet no honest history of General Electric could read any other way. Though some high-profile critiques of General Electric have felt the need to throw the baby out with the bathwater, Cohan never blames the American free-enterprise system, or the basic foundation of a profit motive, as the root of General Electric’s problems. Rather, he carefully and accurately walks through the fatal errors of execution that led GE to the abyss.
His treatment of Jack Welch can hardly be called a puff piece. He documents his womanizing, his self-centeredness, and the high-profile errors of judgment he did make, including the one Welch himself wrote about in his autobiography, the ill-timed acquisition of Kidder Peabody in the 1980s. In the end, General Electric sold Kidder to Paine Webber for a large stock position. GE ended up making a billion dollars on their Kidder mistake over a decade later when UBS massively overpaid to buy Paine Webber in the early 2000s (I worked for Paine Webber at the time). But I digress. Jack Welch’s story is an inspiring one, and Cohan did not write as a public-relations advocate or as an irrational critic. He called balls and strikes, and there is no question that Welch threw a lot of strikes in his time on the mound at GE.
But the greatest business decision Welch ever made was timing his exit, and leaving GE when he did meant that he will never be tarnished by the tragedy that befell the company. Welch himself has said that his choice of Immelt to succeed him was his worst mistake, but as Cohan so carefully relates, GE’s failure was a story of mismanagement, hubris, poor execution, palace intrigue, and yes, the only one that really matters in the end, falling for the lure of money-making unconnected to productive economic activity.
As Cohan documents, GE evolved into a financial-services business, not suddenly, but incrementally. GE’s industrial business strength came with a AAA credit rating that gave it access to the commercial-paper market, which it used with reckless abandon. Eventually, its “borrow short, buy and lend long” approach destroyed its liquidity. It also eventually became a leading owner of poorly underwritten long-term-care insurance policies, a fact that would be devastating to its viability. General Electric had every right to partake in the healthy use of capital markets as a part of its business, but its inability to manage risk and to stay strategically focused on the production of goods and services, versus the arbitrage of interest rates, was the real source of its downfall.
GE Capital became a powerhouse, and the math of borrowing at X to lend or buy at greater-than-X is irresistible. But a company of innovation and invention became a company of interest rates and leverage, and the inexplicably poor use of capital markets drowned out its legacy as a solutions-provider at scale.
Cohan’s telling of the management tales is powerful, and there is no doubt that egos, squabbles, and basic org-chart errors led to GE’s downfall. But what you take away from Power Failure if you believe, as we do, that capital matters, is that General Electric did not understand why or how that is true.
Maybe Cohan and I are not so ideologically separate after all.