It’s hard to think of two companies more different than GE, a once exalted symbol of American inventiveness, and FTX, a fly-by-night cryptocurrency exchange based in the Bahamas. Other than high-pitched voices, it’s hard to think of two people with less in common than the late Jack Welch, the legendary former CEO of GE, and Sam Bankman-Fried, the disgraced founder of FTX. The former, the son of working-class parents, was fiendishly competitive about profits, had a frat house approach, and was as comfortable on a golf course as he was in a factory. The latter, son of Stanford law professors, is scruffy, nerd, player of “League of Legends”, and claims to be motivated to make money just to be able to give it away.
Yet there’s one big thing they share, and it’s not just a love of swearing: “I fucked up, I fucked up,” admits Welch, with tears in his eyes, at the start of a monumental new book by William Cohan on the rise and fall of GE, published Nov. 15. “I fucked up, and should have done better,” Mr. Bankman-Fried tweeted a few days earlier, as his once $32 billion crypto empire crashed around his ears, leaving out about 1 million creditors out of pocket.
Both men share the experience of having been regarded as the corporate messiahs of their generations. Welch has been hailed as the greatest CEO of the 20th century. Thirty-year-old Mr Bankman-Fried wore something of a halo on his mop-haired head for not only trying to bring a semblance of respectability to the cryptocurrency mess, but for appearing to do so to further the greater good of humanity (see overleaf). Briefing). Yet both have seen their reputations crushed when the businesses they’ve nurtured imploded, heartbreakingly in the case of GE, which is splitting in three, and at warp speed in the case of FTX. You could call it the Icarus complex. Both flew too close to the sun. But where was Daedalus? Why do the concerned stewards of American capitalism – Wall Street, venture capitalists, investors, the business press – so often fall victim to corporate narratives that are too good to be true?
Read “Power Failure,” Mr. Cohan’s 800-page extravaganza about the company founded in 1892 as the General Electric Company, and it’s immediately clear how important bright people are to business success, and how their brilliance can become a dangerous vulnerability. GE didn’t just have the inventor, Thomas Edison, to thank for his initiation into his life; Charles Coffin, a visionary businessman, set her on the path to lasting greatness. Welch, who took over as chief executive officer in 1981, was on a similar pedestal. The author describes in beautifully reported detail Welch’s mastery of the chemistry behind GE products, such as plastics, as well as his leadership skills at persuading, captivating, partying with, and, yes, annihilating the staff. From a profit standpoint, it worked. Under him GE achieved quarter-over-quarter earnings growth and a market value that grew from $12 billion in 1981 to $400 billion when he stepped down in 2001.
But such a success inevitably overly seduces investors. No one but short sellers have an interest in peeping through the hype. Under Welch, the mythology of GE – and undoubtedly M&A fees – meant that Wall Street mostly turned a blind eye to the growing role that GE Capital, an unregulated bank, played in enabling the firm to meet its targets. “stretched” profit targets. Under Jeff Immelt, his successor (whose appointment caused Welch bitter regret), his size became an Achilles heel.
Similarly, Mr. Bankman-Fried, whose net worth reached $26 billion at his peak, played the iconoclastic whiz kid and raised nearly $2 billion from investors. Everyone seems to have been taken aback by the disastrous relationship between FTX and Alameda Research, its trading company. The stock’s balance sheet, reported by the Financial Times Nov. 12, looks as sophisticated as a family’s spreadsheet. Even now its founder continues to act casually. The New York Times reports that since the collapse of FTX, he has been relaxing by playing video games. Maybe this is multitasking 3.0: tearing apart enemies while tearing fortunes apart.
Such spectacular failures are more likely in finance because mixing money is a game of trust. But in ge’s case, as Mr. Immelt has sought to reduce the company’s reliance on ge Capital, he is also accused of bungling the takeover of the energy business of Alstom, a French rival, which brought his company to the edge of the abyss. It’s a reminder that industrial businesses can harbor danger too, and that even makers of beloved products, such as Tesla and the iPhone, are worth a peek under the hood.
The hagiographies in the financial press increase the risks. Like a modern-day Welch, Mr. Bankman-Fried has graced the covers of Forbes (“Only Zuck has been that rich…so young”) and Fortune (“the next Warren Buffett”) in less than a year. No one asked where the money came from when he used FTX and Alameda to bail out struggling crypto firms. Instead, he has been compared to John Pierpont Morgan, lender of last resort in the panic of 1907. Mr. Cohan recounts how Welch also created his own media image. He not only developed close relationships with journalists who covered GE. He had a “catch and kill” approach to problematic stories. A former Wall Street Journal reporter who wrote a book about Welch’s lower tenure at GE was so hurt by the experience that he turned to God.
The baggy shorts
Yet the truth is, for all their hubris, some business titans are in a league of their own, which is why it’s so hard for investors to be dispassionate. Welch’s reputation may have collapsed, but a thoughtful book like Mr Cohan’s suggests that he will be vindicated in the long run. As one executive says, most of his decisions were the right ones. Most of Mr. Immelt’s were wrong. For now, Mr. Bankman-Fried’s name is in the dirt. Perhaps an upcoming tome presented by Michael Lewis, author of “The Big Short,” will reveal what caused the house of cards to fall. He will no doubt be compelling. But why weren’t the investors, whose money was on the line, the most eager to get the inside story?
Read more from Schumpeter, our global business columnist: Even with the Political Stalemate, America Inc Should Still Fear the Domineering State (November 10) Olaf Scholz Leads a Blue-Chip Business Delegation to China (November 2) The Reluctant Rise by the diplomatic CEO (October 27)
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From The Economist, published under license. Original content can be found at https://www.economist.com/business/2022/11/17/from-ge-to-ftx-beware-the-icarus-complex