A few weeks ago, we featured a podcast about the rise and fall of GE, the American conglomerate with a Morningstar analyst. This week’s Schumpeter column in the Economist features the recent book on the same subject – ‘Power Failure’ by William D Cohan, which seems to have the same message as the podcast – Jack Welch has been unnecessarily blamed for GE’s fall when much can be attributed to decisions made under Jeff Immelt’s tenure. But that’s not the main point of the article. The article compares Jack Welch to FTX’s Samuel Bankman-Fried as two people who perhaps ‘flew too close to the Sun’ and why media and Wall Street alike tend to fall for such larger-than-life figures too often.
“Both men share the experience of having been considered the corporate messiahs of their generations. Welch was hailed as the greatest ceo of the 20th century. The 30-year-old Mr Bankman-Fried wore a halo of sorts on his mop-haired head not just for trying to bring a semblance of respectability to the chaos of crypto, but for appearing to do it to promote the greater good of humanity. Yet both saw their reputations crushed as the businesses that they nurtured imploded—agonisingly slowly in the case of GE, which is splitting into three, and at warp speed in the case of ftx. You could call it the Icarus complex. They both flew too close to the sun. But where was Daedalus? Why do the self-interested stewards of American capitalism—Wall Street, venture capitalists, investors, the business press—so often fall victim to too-good-to-be-true corporate narratives?”
The article points to Cohan’s book for answers: “…it is instantly clear how important brilliant people are to business success—and how their brilliance can become a dangerous vulnerability.”
“Under Welch, GE’s mythology—and no doubt M&A fees —meant that Wall Street mostly turned a blind eye to the growing role GE Capital, an unregulated bank, played in enabling the firm to meet its “stretch” profit targets. Under Jeff Immelt, his successor (whose appointment caused Welch such bitter regret), its size became an Achilles heel.
Likewise, Mr Bankman-Fried, whose net worth reached $26bn at its peak, played the iconoclastic whizz kid and raised almost $2bn from investors. All appear to have been blindsided by the disastrous relationship between FTX and Alameda Research, his trading firm”
Whilst Wall Street’s greed created blindspots for itself, the article also points to the media’s ‘magazine cover curse’:
“… Hagiographies in the financial press add to the risks. Like a modern-day Welch, Mr Bankman-Fried graced the covers of both Forbes (“Only Zuck has been as rich…this 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 was compared to John Pierpont Morgan, lender of last resort in the Panic of 1907. Mr Cohan relates how Welch crafted his own media image, too. Not only did he develop close relationships with the journalists who covered ge. He had a “catch-and-kill” approach to problematic stories.”
If you want to read our other published material, please visit https://marcellus.in/blog/
Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.
Copyright © 2022 Marcellus Investment Managers Pvt Ltd, All rights reserved.
