This week's Stansberry Investor Hour episode features one of the most accomplished financial journalists today. He's a returning guest, and his latest book couldn't have come out at a better time...
But first, Dan and Stansberry Digest editor Corey McLaughlin start off the episode's "opening rant" by taking on a recent headline-maker: the FTX debacle. The world is watching rapt as global authorities comb through the wreckage left by the collapse of this prominent cryptocurrency exchange... only to discover that "it's worse than we initially thought."
Among other "scandals and wonderful things that crashed and burned," as Dan puts it, no one can forget the shocking downfall of another market monolith: General Electric (GE). This company gave us life-changing innovations like the light bulb, radio broadcasts, fluorescent lamps, X-ray machines, jet engines, and more... before it went into a dramatic tailspin starting two decades ago.
That's why today, award-winning author William D. Cohan joins us for his second appearance to cover this spectacular corporate meltdown in depth. His latest book, Power Failure: The Rise and Fall of an American Icon, features rare interviews with key figures from GE (like former CEO Jack Welch). Published just a week ago, it has already drawn scores of praise.
William's prolific career includes several other books – three of which are New York Times bestsellers – and writings for numerous financial publications like Fortune, Barron's, and the Financial Times, to name a few. Plus, he has 17 years of experience in mergers and acquisitions (M&A) banking at some of Wall Street's biggest firms like Lazard, Merrill Lynch, and JPMorgan Chase.
Dan picks William's brain about the writing process for his book...
There's a dead body on the floor, and how did it get there? I'm doing the autopsy. I'm doing a corporate autopsy. How did GE go from being the valuable, most respected company in the world to irrelevant, being broken up, being a fraction of both what it was worth and the respect people had for it?
The two discuss GE's beleaguered history... and then William shares his No. 1 qualitative factor in fundamental analysis that investors should always consider while researching a stock.
William D. Cohan
William D. Cohan, a former senior Wall Street M&A investment banker for 17 years at Lazard Frères & Co., Merrill Lynch and JPMorganChase, is the New York Times bestselling author of three non-fiction narratives about Wall Street: Money and Power: How Goldman Sachs Came to Rule the World; House of Cards: A Tale of Hubris and Wretched Excess on Wall Street; and, The Last Tycoons: The Secret History of Lazard Frères & Co., the winner of the 2007 FT/Goldman Sachs Business Book of the Year Award. His book, The Price of Silence, about the Duke lacrosse scandal was published in April 2014 and was also a New York Times bestseller. His new book, Why Wall Street Matters, was published by Random House in February 2017. He is a special correspondent at Vanity Fair and a columnist for the DealBook section of the New York Times. He also writes for The Financial Times, The New York Times, Bloomberg BusinessWeek, The Atlantic, The Nation, Fortune, and Politico. He previously wrote a bi-weekly opinion column for The New York Times and an opinion column for BloombergView. He also appears regularly on CNN, on Bloomberg TV, where he is a contributing editor, on MSNBC and the BBC-TV. He has also appeared three times as a guest on the Daily Show, with Jon Stewart, The NewsHour, The Charlie Rose Show, The Tavis Smiley Show, and CBS This Morning as well as on numerous NPR, BBC and Bloomberg radio programs.
He is a graduate of Phillips Academy, Duke University, Columbia University School of Journalism and the Columbia University Graduate School of Business. He grew up in Worcester, Massachusetts and now lives in New York City with his wife and two sons.
Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value, published by Stansberry Research.
Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Digest. Today, Dan talks with bestselling author William Cohan, who has a new book out on GE.
Dan Ferris: And for our opening rant, the FTX debacle gets even crazier.
Corey McLaughlin: And remember, you can e-mail us at [email protected] and tell us what's on your mind.
Dan Ferris: That and more right now on the Stansberry Investor Hour. Well, just when you thought it might be over, FTX got a little crazier this week. Did you see the Vox article with all the direct messages between Sam Bankman-Fried and his friend who just happens to be a Vox reporter?
Corey McLaughlin: Yeah, that story, as often is the case with these, it's worse than you initially thought, I would say.
Dan Ferris: Yeah, I would say it's worse than we initially thought. Like, the list of creditors, there's literally, I think it's like a million... a million creditors. And you know, the list of firms on there is just like, you never would have thought in your life. I never would have thought in my life that Dan Loeb, Third Point Capital, would have invested in this... or Paul Tudor Jones. I mean, I was shocked at the list of creditors.
Corey McLaughlin: Yeah, it's spread far and wide. I mean, like BlackRock is in there. Yeah, it's, you know. And I don't think BlackRock's going to be hurt too much by this. But still, it shows you the amount of different institutions that were wrapped up in this. And Sam Bankman-Fried's kind of con, we can call it, right?
Dan Ferris: Right. I think we can start calling it that. Like a lot of them are not a surprise, you know? Any venture capital or even private equity or whatever, OK. Fine. I get it. But I don't know. And even Ontario Teachers' Pension. I mean, the pension funds. They're always the last ones into the worst ideas at the worst moment, you know?
Corey McLaughlin: Right. I did, that thought did pop up in my mind. You know, when crypto was really – bitcoin was really taking off this last cycle, this last boom cycle. You had the institutions saying, "Oh, we're getting demand for crypto products from pension funds and people who want to get in on this." And you know, that was never a great idea for these reasons.
You know, but this story is quite something. I heard, I was listening to a sports talk radio show this morning from New York. And they were talking about it. They were talking about Elon Musk and Twitter and FTX, because FTX had advertisements on all the baseball umpires' jerseys basically.
So whenever you watched a baseball game, you'd see this big FTX symbol. And nobody knew what it was in sports, really. They had a Super Bowl ad. But in the sports world, if you're watching a baseball game and you see FTX, and the comment is, nobody knows what it is. And that's the story here. Nobody really knew what was going on.
Dan Ferris: Right. Tom Brady had 600 million bucks in it. And he didn't know what was going on. I mean, the amount of money, when I read that headline, I was like, no. I mean, they just went kind of all in, he and his now-former wife. It makes you wonder what's left in the divorce. Whatever, it's crazy.
But the thing that got me was, he had this conversation over direct message on Twitter with this Vox reporter who he says is a friend. He thought it was private. It would never be published, which is really dumb. It's more bad judgment. That's what I'm seeing all through this thing, you know? And the whole bit with lending, I thought, the way it was represented in the Wall Street Journal, they lent $10 billion of customer deposits to their affiliated crypto trading firm, Alameda Research.
But what he represents in this series of tweets... like at one point, he implies that – he says it looks like people wired $8 billion to Alameda. And oh god, we basically forgot about the stub account that corresponded to that. And so it was never delivered to FTX. And he says FTX doesn't have a bank account. I guess people can wire to Alameda's to get money onto FTX. In other words, people thought they were wiring money to FTX, and it was going to Alameda.
And their controls were so bad and they were so lax in paying attention to anything that he wants me to believe that they didn't notice that there was $8 billion that was supposed to go to FTX accounts, and it was just kind of stuck at Alameda because whatever, some dumb reason. I don't know. I don't know if I believe it. I mean, do we really believe it? I don't, maybe. Well, I don't know.
Corey McLaughlin: Yeah, I mean, I guess we have to know a little bit more about him as a person to know whether he was just inept or whether this was seriously fraudulent. I mean, some of these texts, he says he wasn't, or messages, he says he didn't want to do sketchy stuff, or he didn't mean to. So, I mean, he's also talking to a friend who's a reporter here, so you've got to know the context. So, yeah. This one will go down and be remembered for a while.
Dan Ferris: And I don't know, the things that he dismisses... like he's talking about how he thought Alameda had enough collateral to reasonably cover any shortfall or whatever the difference was between the two companies. And then the reporter goes, "Well, I get how you could have gotten away with it." But I guess that seems sketchy even if you get away with it. And then SBF says it was never the intention. Sometimes life creeps up on you. Eight billion just crept up on us.
Corey McLaughlin: Yeah, something's going on with this guy that –
Dan Ferris: Oh to be young, huh?
Corey McLaughlin: Yeah, there's a lot going on here. But the part that cracked me up was... then he says, "If you just give me two weeks, I would have been able to fix it.
And it's like, if I had a nickel for every time I made a mistake, I'd be rich.
Dan Ferris: Well, it's only $8 billion that he has to come up with in two weeks, right? how hard could that be?
Corey McLaughlin: Right, which just tells you what he thought he could get away with, too. Even as cryptos are kind of imploding, so –
Dan Ferris: Kind of.
Corey McLaughlin: Yeah, kind of, sorry. I throw in those words too often.
Dan Ferris: Right, kind of. And you know, crypto's imploding. And Cathie Wood is buying the dip, man. She bought, for her Finance Innovation ETF, she bought November 16, she bought a bunch of Coinbase and some Silvergate Capital. And Silvergate, I'm not sure really what exactly what they do. I know it's a bank that has this crypto, you know, digital asset network or something. But with Coinbase, their bonds trade at like 50-something, you know?
It's distressed. It's 1,000 points over Treasurys. It's insane. And the market cap is like 11 billion of the stock. And they've, they made money once, in 2021, at the height of the biggest crypto frenzy that you could ever imagine. They didn't make money before that. They've lost $1 billion after it. And you know, they're firing employees and their bonds are at 50 – distressed levels. I don't know, you know. I guess she puts other people's money where her mouth is, you've got to give her that.
Corey McLaughlin: Yeah, she is not giving up. I would say that on her original plans for this year, it seems like. But this also reminds me of, and we could go back to Cathie Wood if you want. This also reminds me, you know, which domino is going to be the next one to fall here in crypto. This was two months ago, we were talking about, the Terra ecosystem kind of imploding.
Now we're talking about FTX, one of the largest crypto exchanges. You know, Coinbase is the next you know, could be you know, if things are going to get worse, you would think that they will be on the list of companies that will be amongst the fallen. And this all wraps me up, as something I wanted to say last week too. Or reminds me of something our Crypto Capital editor Eric Wade has been saying for a while.
Like well in advance of this – a lot of people are getting caught up in the bankruptcies of these companies now – individuals, I'm saying, because they have their cryptos just sitting in these exchanges... these centralized exchanges, Eric calls them. So if you really want to have control of your crypto, you need to have them in these decentralized platforms, and really own them yourself.
Whether that's the cold storage or whether that's certain apps that, it's yours. Nobody else is controlling it. That is the main takeaway from all of this, for me, is all the people that don't know that and are, just have the 1,000 bucks or 2,000 bucks sitting in Coinbase now, I would make sure you have, make sure you own your cryptos. Not the other way around, that somebody owns them.
Dan Ferris: That's a great point. What was the first thing? Like one of the first things we heard from the FTX story was "oh, they've shut down the withdrawal." People withdrew $5 billion worth of stuff from their accounts, and they shut down the withdrawals. So then your assets get trapped.
Corey McLaughlin: Yeah, then you're stuck in this –
Dan Ferris: That's actually great advice.
Corey McLaughlin: You're stuck in this bankruptcy process, and who knows what you end up with. You know, that's out of your hands at that point.
Dan Ferris: Yep. Yeah. And you know what's his name, SBF was saying in the Twitter conversation that he regretted declaring Chapter 11, and if not, the customers would have been whole in another month or something. And the withdrawals would have opened up. I mean, of course, if he raised $8 billion.
Corey McLaughlin: Right, this is all ifs. And it's crazy. Celsius went bankrupt I don't know how many months ago, and they're still going through the whole bankruptcy process. And I don't think anybody's gotten anything back yet. That was another big crypto lending platform where you didn't have any idea where you know, they're offering these huge yields, which raises eyebrows and, you know, what's really going on here. They're basically just lending out your cryptos, was my point about if you have them yourself. That's not possible. So.
Dan Ferris: The most benign take that I've seen so far, benign reasonable take, was Matt Levine from Bloomberg. The way he framed it was like "I don't know if this is a fraud or not." But it sure is exactly what you would expect from a bunch of college bros who just kind of get together and share an apartment and get together and do something cool.
Like you know, they only want to do the cool stuff. They didn't want to do any of the boring compliance and accounting and all that stuff. And none of that got done, and the whole thing melted down. Who knows, maybe it really is – I have innocent in air quotes here – as that. But, ugh.
Corey McLaughlin: Yeah. It could be. But either way, I already saw that they're getting called before the financial services committee to talk about all this, which will then bring up the whole regulation piece in Congress, which you know, this was not where, I don't think Satoshi Nakamoto had in mind all the way back in the day when he wanted a peer to peer platform with no government interference. It became –
Dan Ferris: I know.
Corey McLaughlin: It went away from that. And we're seeing you know, the fallout from that right now.
Dan Ferris: Yeah, I have questions about that too. We need to get Eric Wade back on the show or something. Or maybe I need to talk to him offline and report a few facts or whatever. But it just seems like exchanges are centralized platforms, and the whole point of it was peer-to-peer decentralized commerce, that you know, went around all those financial institutions that had to be trusted. Right?
It was called the trustless, or no-trust system. And I'm like well people had to trust FTX, and they had to trust Celsius, and they had to trust you know, whoever else. All the rest of them. They have to trust Coinbase. They have to trust Binance. And yeah, I agree. I don't think that's what Satoshi had in mind.
Corey McLaughlin: I would love for Satoshi to talk by the way, if this message gets to Satoshi. Please. Show yourself.
Dan Ferris: Yeah, absolutely. Explain yourself and explain what you really had in mind because it couldn't have been this, right?
Corey McLaughlin: Yeah, I mean, that's why he got out of it, you know? Or went dark. He didn't want to, he saw where things were headed way back when.
Dan Ferris: Yeah, that's exactly right. He saw what happened during the financial crisis. How dependent the world was on enormous centralized institutions. Even governments and central banks, not just banks. And so he came out with this thing. It's in the white paper I think, that discussion. And now his thing got hijacked too. Like, I forget who it was said politics hijacks everything. And I would say politics centralizes everything.
And crypto is no different. But, one day, who knows? Maybe one day this will all get worked out. And I wonder what that day will look like. And I hope I live to see it, frankly. I mean, I hope this all does work. I hope bitcoin or Ethereum or whichever ones are going to survive and be something, you know, start to get on with it soon, because I would like to see it.
Corey McLaughlin: Yeah, me too. I mean, we can talk all day about the problems that central banks cause. And so, it would be nice to have some kind of alternative to that. And I'd still, yeah, given all of this, this calls into question a lot about cryptos, obviously. But the blockchain technology has not changed. All the stuff going on in these Ethereum and different networks that are tied to actual products or actual values, you know. That stuff, of course, I think still has potential.
This just got messy very quickly with leverage and trading and greed and everything. So. It's a stain on crypto. Like, this will be on the Wikipedia page on cryptos forever, as long as Wikipedia's around. This was the crisis that, whatever. But again, like you said, last week there were also specific circumstances here with the two, the CEO of Binance and FTX and all of that. So, people won't remember that, though. It will be, this was a sham and you know, don't trust anybody again. So. Which is a shame, because there is a lot of promise there.
Dan Ferris: Yeah, but if it works out, you know. If bitcoin becomes the Amazon.com of crypto, maybe we'll let the crisis fade as we've generally let the dot-com crisis fade. Like, we don't really remember. I mean, I guess I remember Peapod grocer dot-com, women dot-com, maybe a couple of others we could name that were just horrible business ideas and failed very quickly and rose spectacularly and crashed and all that. But like, we did, we got past it, right? Of course, we got past it because there was a new bubble right after it.
Corey McLaughlin: Well no, but that's a great point. You know, like the Internet's still around, right? After the dot-com bubble, 20 years later. And evolving still.
Dan Ferris: Some of the things that went on at that time, Amazon obviously became huge. Yahoo search didn't. It was the big search engine for a little while but then Google came along and took over. So, search became a very, very big deal. Like, we always sort of knew that. And you know, other things of course. And then we finally – like the promise of streaming came to fruition.
And you know, cool things happened. And I just, I can't imagine. Like, my imagination is just not good enough to project forward and figure out the few cool things that could come out or are going to come out of bitcoin. But I do hope, and I'll say this one more time. I do hope that it works. And that we live to see it.
Corey McLaughlin: Yeah, me too.
Dan Ferris: So speaking of scandals and wonderful things that crashed and burned, I had occasion to talk with William Cohan about his new book about General Electric, which is an incredible – it's like a mammoth book. He does these in-depth studies where he talks to everybody he can who is involved. He talked to Jack Welch. He met him and talked with him, and just did his usual thorough treatment. And we talked about that and a few other things when we got together in Boston recently.
And I really want you to, I really want everybody to listen to this and pay attention to it because of the lessons in it, you know. We're not necessarily talking about stuff that's going on right now. But the lessons in there, you'll be nodding your head through the whole thing because of everything that is happening right now. So it's kind of a perfect interview for you to hear right at this time in our history. So let's talk with William Cohan. Let's do it right now.
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William Cohan, welcome to the show.
William Cohan: Thank you, Dan. It's great to be here.
Dan Ferris: Yeah, it's good to have you back on the show. Last time, just for our listeners, we talked pretty much exclusively. We spent most of the conversation on your book The Last Tycoon about Lazard, which was a book I loved. It was just like, it reminded me of the TV show Dallas. I mean, the drama and the, you know, the melodrama, was pretty intense. Great story. And now, I've got here your newest book in front of me, which I have not read because it just came out. Power Failure: The Rise and Fall of an American Icon, all about GE.
William Cohan: Right. And it's actually not even out yet. It's not out until November 15. So these are special copies that we made available to you, Dan. And the people at this conference.
Dan Ferris: Oh, that's great. Well, thank you for that. I thought I had ordered it. I thought it hadn't come out yet, and then I saw it over there and I was like, what?
William Cohan: It's for special friends of Rick, we made, and as I was saying to you I don't even have my copies yet. So it's nice to see it over there. It's been a long time coming.
Dan Ferris: Yeah. Funny you should mention that because I have on my shelf at home – I just started House of Cards, your book about the financial crisis. And what else do I have? I have the book about Goldman.
William Cohan: Called Money and Power.
Dan Ferris: Money and Power. Yes, and Four Friends.
William Cohan: Yes, about four of my friends from high school, and what happened to them in their lives.
Dan Ferris: Yes.
William Cohan: Sounds like you're only missing the story called Price of Silence about the Duke lacrosse scandal.
Dan Ferris: Yes. I am missing that.
William Cohan: Another insane story.
Dan Ferris: Yeah, I bet. Maybe we can talk about some of those. But I had a question that I was thinking about this morning. And I'm glad I just remembered it. I wonder if you wouldn't mind talking for maybe a few minutes about your process because I'm serious, these books are epic. They are, I mean, the thing, it's thick. There's a lot here. But there are these epic tales that are just so deeply researched.
And as I read them, I was reading through just the beginning. I just started House of Cards literally like a day ago. And I was reading through the whole bit about Bear Stearns is really the story that starts that off. And I had the feeling like I was in the room with all these people. And I backed off from that. I was like, does he know all these people? How did he get all this conversation?
William Cohan: Well you know, part of my job is to not only research what I can from documents or memos or from the public information or from you know, previous journalism along the way. But part of my job also, I look, my self-described job, is to interview as many of the people who are actually involved in what I'm writing about as possible. And you know, knock wood, Dan. I've been blessed along the way with people pretty much cooperating with me. Some –
Dan Ferris: That's lucky, yeah.
William Cohan: It's very lucky because these are all sort of contemporary stories that are happening in real time. Whether it was the collapse of Bear Stearns, or you know, the rise and fall of GE obviously is an ongoing story. Except that we know the ending now, and it's happening in 2023 and 2024 when they split the company up. But I was fortunate enough in this case, at least, to spend a lot of time with Jack Welch before he passed away. And with Jeff Immelt, the CEO who followed him.
And many of the executives at GE were very generous to me with their time. And I always find it you know, a bit of a miracle that that happens. And that's happened in every one of my books. So, with one exception, well, not really an exception. But a different kind of dynamic with Four Friends, which was a book about four of my friends from high school and what happened to them. Unfortunately, all four died young and tragically. So I couldn't speak to them, obviously. But I spoke to their wives and girlfriends and friends, and just sort of talked to everybody I could about their lives after we left each other. You know, at 18 years old. Which was a long time ago.
And so I've had again a lot of cooperation all along the way, and it's truly a blessing. But you know, part of the, maybe the analogy I might make, or the metaphor, would be something like you know, I love to hike. And I've been to a lot of places hiking. And you get up to this you know, incredible meadow or you get up to some sort of rocky terrain or mountainous terrain. And you know, the expanse is gargantuan, right? It's just huge. I hiked up to Everest base camp, the base camp at Mount Everest once, after three weeks. And you know, the vista is just huge.
Dan Ferris: What's that, like 18,000 feet or something? Wow.
William Cohan: Yes. But you know, there's a path through it. So you collect all this information about GE or about Lazard or about the collapse of Bear Stearns, or about Goldman Sachs or about the Duke lacrosse scandal or even about your friends. And you know, it's my job as a writer to carve a path through all of this information, for the reader. I need to know pretty much everything.
But the reader doesn't need to have everything because that would be a book that's even bigger than this book. So that wouldn't do anybody any good. So my job as the writer is to carve that path through this incredibly beautiful terrain for the readers, and you know, things that really struck me as important are what I include. And things that you know, aren't necessarily that important or that central to the narrative have to be discarded.
But I know about them. And I can talk about them. And if people have questions, I can answer them. But I tried to create you know, in this book and in every book, sort of the best possible narrative I could for my readers, because I like books like this. You know, I like to read books like this. And some people say well, it's so long. Or it's, there's so much of it. Well, my feeling is, if I've got a book that I'm really enjoying about a topic that I really like, yeah, more is better, man. That's great.
Dan Ferris: Exactly.
William Cohan: You know, lay it on me. One of my favorite books was you know, Bad Blood, about the Theranos situation, which I loved. But I also felt that it was truncated. Like, I could have had more. I mean, I'm sure, it was a bestseller.
Dan Ferris: You know how publishers are about that.
William Cohan: Yeah, I do. My publishers have been nice to me and let me have my space. Not as much as I even wanted, but enough. We reached a nice compromise.
Dan Ferris: That's really cool. I went ahead and asked you to speak about this. Rather than keep my agenda a secret, which I feel like I should do, I'm just going to let you in. I was hoping that there's an investment analogy here because we spend all our time doing research on stocks, bonds, ETFs, etc. That's what we provide for our subscribers. And there's a process. And you are similarly you know, collecting all the choices together and cutting a path through the market.
William Cohan: I'm like this research analyst on steroids. That's really what I am. I do, part of it is, OK. There's a dead body on the floor. How did it get there? And I'm doing the autopsy. I'm doing a corporate autopsy. How did GE go from being the most valuable, most respected company in the world, to irrelevant, being broken up, being a fraction of both what it was worth and how you know, the respect that people had for it?
Or Bear Stearns... there's literally a dead company sitting there. It dissolved in a week. How did that happen? I mean, and I used to work on Wall Street. So the idea that Bear Stearns would disappear is like monumental. How did that happen? And why? So I'm like a forensic accountant, almost. But I'm also, so I want to understand the numbers and the reasons and the nuances and was it, you know, because of the way they financed themselves. Or they took too much risk, or they made bad decisions.
But I also want to tell a great story. So, I feel like you know, I spent 17 years as an M&A banker on Wall Street, as we've discussed before. And I feel like OK, there aren't many people who are writers who did that. So I really understand business. I really understand how, you know, and the business of America is business, right? As was once said, I think by the head of General Motors. But, you know, my job. I mean, I've, is I've decided, as I've figured out all these years, is to sort of translate those big events, or those incredible stories of companies, into a narrative that people can read and enjoy because there are these incredible characters doing these wild things that you can only imagine.
Truth is stranger than fiction, as we know. So, just going out and getting that story and bringing it back for people and putting it between those two covers, and getting to answers. You know, what the hell happened to GE? What the hell happened to Bear Stearns? How did Goldman Sachs survive the financial crisis when nobody else did? What the hell is Lazard all about this mysterious place? Or what happened in the Duke lacrosse scandal really, as opposed to what people think happened. That's my job.
Dan Ferris: That sounds like a pretty good gig.
William Cohan: And I'm my own boss, and I have my own equity in these projects, which I really like too.
Dan Ferris: That's great. As I was reading the beginning of House of Cards, you reminded me of that fairly famous quote at this point by Jim Cramer, about the franchise being strong at Bear Stearns. And you know, he made a very similar comment recently about UBS, I think it was. It echoed in my head. I thought oh yeah, you reminded me of it because you put it in the book. I was like, and I really had a moment there where I sat back and I was thinking about a financial institution as a franchise, right? As a brand.
And you know, I want you to tell me if you agree with this, Bill, because I came up with a truism. I was like you know, something leverage Trump's franchise. Leverage Trump's brand. And in our system, all financial institutions are leveraged. I mean, a really well-capitalized bank is like the 14% tier-one capital, right?
William Cohan: I mean, that's sound corporate finance -
Dan Ferris: Right.
William Cohan: Policy. Is to have a fairly large amount of debt.
Dan Ferris: Yeah.
William Cohan: But not too much.
Dan Ferris: Right, right. Not too much.
William Cohan: Not too much. Everything in moderation, as my mother used to say.
Dan Ferris: So the definition of too much mostly is OK, but every now and then the cycle changes and too much gets – it's a lot different than it was. You know?
William Cohan: Right, but the job of the CEO, the job of the CFO, the job of the board, is to you know, anticipate changes in the economic environment, and to make sure that that capital structure of the corporation is prudent to make it through those times. And if you're not doing your job, and frankly I don't think the board of GE and Jeff Immelt did their jobs on that score, because during the financial crisis, GE almost went down the tubes, although nobody realized it. Which is an important story I tell in the book.
Dan Ferris: Right. It's almost unfair of me. I mean, this book is another epic tale of yours. But you know, we should talk about some of what's in it.
William Cohan: Well, talk about what you want.
Dan Ferris: Yeah. You know, I don't want to try to reduce this epic tale. But my impression of GE was part of it, part of the problem seemed like a classic case of what Peter Lynch would call diworsification, right? Just starting out as one thing, and diversifying but diworsifying into other businesses that eventually became really inappropriate to be involved in. Valid point? No? Agree, disagree?
William Cohan: You know, I think the way I think about it after completing my autopsy, I, and this is sort of a truism. And it's not like a huge revelation. But it really is kind of meaningful and obvious if you think about it. Is the importance of the CEO selection. And you know, in a few minutes, I'm going to talk about this some more. But when I first met Jack Welch, the first thing out of his mouth, even before I sat down was that he made a big mistake in selecting his successor.
And he said to me, sort of on the record, and repeatedly, and it was basically the first time he admitted to anybody on the record. Or certainly any journalist. I'm sure he talked about it with lots of other people. But he had screwed up the choice of Jeff Immelt as his successor. So, the truth is that Jack made a lot of mistakes as the CEO of GE. But he figured out a way to overcome them. And you know, the bottom line is pretty clear, that it was a big success.
He took the company from a market value of $12 billion to a market value of over $650 billion. So from $12 billion to $650 billion, making it the most valuable company in the world, we talked about, and the most respected company. And he was like the manager of the century, right? He made mistakes. He wasn't a saint, by any stretch of the imagination. Probably wouldn't have lasted the 20 years he has lasted in our current MeToo era, because he misbehaved a lot.
But I think you know, and he chose Jeff Immelt as his successor, which is the most important decision a CEO makes is choosing his or her successor. And so he blew that decision, which is shocking. And Jeff Immelt of course on paper was outstanding. I mean, you know, went to Dartmouth... went to Harvard Business School. His father worked for GE in the aircraft engine division for his whole career. He grew up in Cincinnati where his father worked. His brother is a big-time lawyer in Washington.
But, he studied marketing at Harvard Business School, and not finance. And GE was you know, half of GE was one of the largest banks in the world. GE Capital. And he didn't understand finance. And so he didn't understand the risks that were buried inside of GE Capital. Or the way GE Capital financed itself. And the way GE financed itself... which is again, the same mistake I find so fascinating and nobody ever thinks of this in terms of GE.
But I mean, the things that brought Bear Stearns down, and the things that brought Merrill Lynch down, and the things that brought Lehman Brothers down, are basically the same things that brought GE down... because GE, half of GE was GE Capital, which of course Jack welch had brought up, but at least understood and knew how to manage. And Jeff I think pretended to understand what GE Capital was all about but didn't really understand it.
So when, excuse me, the shit hit the fan in 2008, he went into panic mode in ways that nobody really understood until I sort of dug all this up. And it's in the book. You know, needed, went hat in hand to Hank Paulson, the Treasury Secretary, and Sheila Bair, the head of the FDIC, to get bailed out, essentially. Even though GE wasn't part of the tarp. But GE availed itself, had no choice but to avail itself of many of the lines of credit that many other financial institutions availed themselves of. And then GE became, as a result of that, they became a SIFI, what was known as a structurally important financial institution.
Dan Ferris: Important, right.
William Cohan: I think that's the phrase. And Jeff Immelt hated being a SIFI. You know, not only did it bring the intense oversight from the Federal Reserve, and much more regulation, but you know, $2 billion more of costs, and they just weren't used to it. And then, the Fed and the regulators were starting to question what they were doing on the industrial side of the business. So Jeff Immelt decided to get rid of GE Capital. And I think that was a big mistake.
You know, I worked at GE Capital after I got out of business school, financing leveraged buyouts. And I worked for the Chief Credit Officer at GE Capital for a year. And Jack Welch and I talked about this. I mean, it's, what industry did the best after the financial crisis, ironically? Well, one of the industries that did the best after the financial crisis was the financial services industry. Wall Street... because it lost, I mean, Wall Street went, lost Bear Stearns as a competitor. Lost Lehman Brothers as a competitor. Merrill Lynch was subsumed into B of A, you know. Morgan Stanley almost went down the tubes but was rescued by the Japanese. Goldman was rescued by Warren Buffett, who also rescued GE.
And the Fed reduced interest rates to zero for a long time, as we know. So it was pretty easy to make money from money. And these banks with less competition and incredibly low cost of capital, you know, gushing money. I mean, last year, JPMorgan Chase made $40 billion of net income and basically Jamie Dimon has told me that you know, $36 billion of that $40 billion is kind of guaranteed every year. So this is, the variable is four billion depending on what our traders do or our investment bankers do or whatever.
I mean, that's a pretty nice franchise to have. That's why you know, JPMorgan Chase was a $300 or $400 billion market value company. You know, GE gets out of GE Capital, which was 50% of its profits. And has nothing to replace it with. GE's market cap now is $70 billion, and it's going to be divided into three pieces. So I think that's like an incredibly bad decision. Even if he didn't like it, and I know Jeff, because I talked to him about it, he says I didn't like being a SIFI. We didn't have our competitive advantage anymore. Our cost of capital was now higher because weren't triple-A anymore. Yeah, OK. So what. JPMorgan Chase isn't triple-A. Other banks aren't triple-A.
Dan Ferris: That's what he told you? That's the rationale?
William Cohan: Yeah. He didn't like it. And it was expensive. And they were encroaching into his territory and trying to start to tell him what he could do on the industrial side of the business. They didn't have the competitive advantage that they used to have. They had an absurd competitive advantage because they had a triple-A credit rating. I mean, their cost of capital was just above Treasurys. So they arbitraged that. And Jack loved that. He saw the arbitrage opportunity. So things got a little tougher. But you know, financial services industry was an incredible business after the financial crisis. He just stuck with it.
Dan Ferris: And then he let it go.
William Cohan: And not only broadcast that he was selling it, so that means you know, the Blackstones of the world picked his pocket. So, decisions like that.
Dan Ferris: Wow. OK, so that's a big one, considering what was lost.
William Cohan: Didn't have to be, either.
Dan Ferris: Is there another big one that comes to mind?
William Cohan: Oh sure. It didn't happen, it took a lot of big ones. You know, Jeff also didn't like, I mean, Jack bought RCA in 1986 for like $6.4 billion, which was the largest M&A deal to that time. That was front-page news. And of course, RCA owned NBC. Jack loved NBC. He sold off lots of parts of RCA. The RCA deal is one of the best deals in American corporate history in terms of GE's acquisition of it. You know, he ended up getting out of GE's, RCA's television manufacturing business, which they couldn't compete well against eh Japanese.
He swapped it with a company in France for their medical equipment business, which has become GE's, the basis of GE's very successful health care medical equipment business, which is about to be spun off in January. You know, he had NBC. He built it up. He created CNBC. He created MSNBC. You know, he gave birth to David Zaslav, who is now the head of Warner Brothers Discovery. He, Jeff actually, Immelt, to his credit, bought Universal and made it NBC Universal. Or some of the assets of Universal. But he didn't like the business, you know, the way, Jack loved going on CNBC.
And in the financial crisis... in addition to GE Capital almost filing for bankruptcy twice, which nobody realizes, going hat-in-hand to Hank Paulson to get a bailout and Sheila Bair having Warren Buffett come in and buying billions of dollars of equity and then selling more equity after he said he wouldn't. He then decided in March of 2009, GE's stock was trading at like $6.66 for some, I remember that because sign of the devil. And Keith Sherin, the CFO, went on CNBC to sort of defend the stock.
And he did a good job. But at the same time that Jeff was on CNBC, I mean that Keith was on CNBC defending the stock, Jeff was giving a talk at a JPMorgan Chase conference. And you know, had basically made the decision to sell NBCU. And instead of auctioning off NBCU, you know, he had gotten an incredible asset. NBC Universal. You should run an auction. He didn't. He just called up Brian Roberts at Comcast and said, you want to do a deal? Which is something they had talked about off and on for six months. And he sold it to him in pieces. And he sold it to him for about $30 billion in total.
And it's not worth quite as much today as it was a few years ago before the pandemic, but at one point, NBC Universal was worth $100 billion. So Jeff sells it in 2009, 2010 for $30 billion. And you know, Comcast got the steal of the century. So that's another example. He overpaid for Alstom. He overpaid for Amersham. He got out of the financial services business. He made, he brought in, Trian, the hedge fund. You know, and he thought they would be friendly. And then he promised that he was going to make $2 a share, and he never got there. And you know, the hedge fund blew him up.
Dan Ferris: Why did he hire him in the first place? Now I want to know what Welch says, you know, why did he make this mistake? Why did he choose him?
William Cohan: Well, I tell that story too. He made that mistake because Jack didn't like the way he was selected. So, Jack – and he didn't want to make, to do his selection process the same way he was selected. He was selected, he was forced to come to Fairfield, Connecticut along with the other four contenders of the job for two years before he was selected in 1980. And he didn't like that. He thought it was like a beauty contest.
He thought he was, everyone was competing and looking at each other, and he just felt very uncomfortable with that. So when it was his turn to do it, 20 years later, he decided to keep the three finalists out in the businesses they were running. So, Jim McNerney was like, in Cincinnati running the aircraft engine business. Robert Nardelli I think was in Schenectady running the power business. And Jeff Immelt was in Milwaukee or Chicago, wherever he was, running the health care equipment business.
So, he kept them out there. He didn't bring them into Fairfield. They would come to Fairfield because they were on the board of GE Capital or to make reports on a monthly or quarterly basis. And of course they knew they were finalists for the job. So what did they do? They were in total suck-up mode the entire time. So who's the best politician at that point? And the best politician was Jeff Immelt, because the guy was out of central casting. You know, football player. Very confident. Harvard Business School guy. And Jack just fell for it.
Dan Ferris: Wow. That is something. I can't wait to read this thing. We've actually been talking away here, and we're getting to the end of our time already. So I'd like to ask you my final question, which is the same for every guest. You actually, you have answered it once before. And it's just, if you could leave our listener with one thought today about anything at all, what would it be?
William Cohan: Well, given your listeners are sort of investor focused, I think I have to return to this idea of invest in companies that have the right CEO in the spot... who not only are good managers and inspire the troops to pull the boat all in the same direction but who really understand all aspects of their business and aren't sort of better at – and I don't mean this derogatorily – aren't better at bullshitting than they are at making considered decisions after listening to all the inputs and taking the advice of the people in the field who really know what's going on.
And I know that's hard for an investor to do. But because there are a lot of powers aligned against that. You know, because research analysts write their reports, or then the CEO goes on CNBC and you know, makes their – spins away and then the media helps them spin away. So it's hard for investors. And it's hard to do that research. So if you can't do it yourself, you should have an investment advisor who can do that work for you, and who takes that kind of responsibility seriously, and you know, have them be a fiduciary for you. And I'm not just saying that because you know, that may be something you guys do. I really believe that there's something to that.
Dan Ferris: All right, great answer. And thanks for being here, Bill. I really am super excited based on what you told me. I mean, it's this much, but I can't wait to dig into this book.
William Cohan: Appreciate it.
Dan Ferris: You bet. And just for the listener one more time, the book is called Power Failure: The Rise and Fall of an American Icon, by William D. Cohan. All right. We will hopefully talk to you again. I'm going to finish some of your books, and then we're going to have you back.
William Cohan: You just let me know. Any time you like.
Dan Ferris: One of the most successful entrepreneurs in America over the past 50 years is going public with his fourth and final prediction about a scenario he calls America's nightmare winter. Woo. You've probably never heard of Bill Bonner, but in addition to owning an interest in businesses all over the globe, he also owns more than 100,000 acres with massive properties in South America, Central America, and the U.S., plus three large properties in Europe. And I've been to one of them. It's gorgeous... gorgeous château. And I've known Bill for many, many years. He hired me into this business, and he says we're about to enter a very strange period in America which could result in the most difficult times we've seen in many, many years. And he's made three similar predictions in his 50-plus-year career, and each time it proved to be exactly right, although he was mocked each and every time, and I remember all of them.
This is why I strongly encourage you to read about Bonner's fourth and final prediction totally free today. It's all spelled out in a free report that we've put together called "America's Nightmare Winter." Get the facts yourself. Go to www.nightmarewinterscenario.com to get your free copy of this report. Even if he's only partially right, it'll dramatically affect you and your money. So again, go to www.nightmarewinterscenario for this free report.
Well, I have to say I'm biased here because William Cohan is one of my favorite all-time financial authors. The way that he digs super deep into any topic. He talks to everybody. And of course he has the experience from his career on Wall Street behind him. So he understands what's happening. And then he just digs and digs and digs until he finds out exactly what happened, what was said, who said it, when they said it. Everything. So it winds up reading like this, it's almost like the script of some epic film or the greatest Netflix series on that particular topic.
And I can't wait to dig into you know, the new book on GE. Power Failure. I'm moving through his books. They take a little time. They're longer than like a Michael Lewis book or something by 100 or so pages usually. But it's worth it. Like William said during the interview, once you get in there you don't want to get out. It's that kind of a read. You love being in that world. That's the kind of picture he paints. So any time that I get a chance to talk to him, I'm going to take it. And I love, love talking with him.
So that is another interview, and that is another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we did. We do provide a transcript for every episode. Just go to InvestorHour.com. Click on the episode you want, scroll all the way down, click on the word "transcript," and enjoy. If you like this episode and know anybody who might like it, tell them to check it out on their podcast app or at InvestorHour.com. And do me a favor, subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts.
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