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Industry Seven—Manufacturing

CASE 32
General Electric, GE Capital, and
the Financial Crisis of 2008:
THE BEST OF THE WORST IN THE FINANCIAL SECTOR?
Alan N. Hoffman
Bentley University

Company Background
C
For more than a century, General Electric (GE), has been a global leader and iconic
brand known for innovation and leadership in a wide range of endeavors. Its diver-
sified portfolio of products is organized into four strategic business units: energy,
technology infrastructure, GE Capital, and home and business solutions.
GE began in 1878 when Thomas Edison formed the Edison General Electric
Company (EGEC). Though Edison was best known for inventing the first incan-
descent light bulb, he also pioneered systems design for generating and distributing
electricity, eventually holding over 1000 patents. Within a few years, the rival Thomas
Houston Company, which held key patents in the same area, challenged EGEC’s posi-
tion in the marketplace. In 1892, the two companies merged, forming General Electric.
GE then parlayed the demand for electricity into the invention of home heating, stoves
and other appliances, and refrigeration, transforming American households, and went on
to become an innovator in myriad fields, from medicine, aviation, and transportation to
plastics and financial services. GE created the GE Credit Corporation (later GE Capi-
tal) in the wake of the Great Depression to facilitate the sale of household appliances
and provide the option of extended payments for consumers. Innovation defined the
organization, and the commitment to research and development remained key.1

The authors would like to thank Barbara Gottfried, Patrick DeCourcy, Keith Dugas, Kaitlin Mackie, Desiree
Ouellette, Jason Tate, and Will Hoffman for their research and contributions to this case.
Please address all correspondence to: Dr. Alan N. Hoffman, Dept. of Management, Bentley Univer-
sity, 175 Forest Street, Waltham, MA 02452-4705, voice (781) 891-2287, [email protected]. Printed by
permission of Alan N. Hoffman.
32-1
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32-2 CA S E 3 2 General Electric, GE Capital, and the Financial Crisis of 2008

GE was one of the original 12 companies that formed the Dow Jones Industrial
Average, and the only one of those companies that was still part of the DJIA in 2012.
GE was also recognized for cultivating leaders such as Charles Wilson, Ralph Cordiner,
Fred Borch, Reginald Jones, and John Welch.2 In the early 1970s under Fred Borch, GE
was one of the first companies with a diversified infrastructure to formalize strategic
planning at both corporate and business unit levels with its creation of strategic busi-
ness units.3
GE always saw itself as striving to create a world that worked better, “making what
few in the world can, but everyone needs.”4 The company’s strategic philosophy centered
on innovation, superior technology, and demonstrating leadership in growth markets.
GE sought to maintain a strong competitive advantage through innovation, smart capital
allocation, and solidifying customer relationships. The strategy also included transition-
ing from an industrial conglomerate to an infrastructure leader to maximize the core
strengths of its existing businesses. Diversification and expansion of its business port-
folio was a central focus, designed to minimize volatility and create stability through
varying growth cycles. Another facet of GE’s strategy was to invest for the long-term in
high-growth market opportunities that were closely related to its core businesses. For
instance, in 2010 the company launched the GE Advantage Program that focused on
process excellence and innovation to improve margins in industrial projects.5
One of GE’s biggest operational strengths lay in its ability to cut costs and maxi-
mize return for shareholders. In the 1990s, GE CEO Jack Welch implemented the Six
Sigma approach to business management. This approach helped decrease variability and
errors to help cut down waste and build a consistent product, one of the many ways GE
trained employees to succeed and build their expertise. GE was also able to cut costs
because its reputation as a market leader with a large network of businesses and strong
alliances with other major corporations enabled it to leverage long-standing relation-
ships to employ the best human, equipment, and capital resources to ensure quality and
consistency at a low cost. It acquired many businesses that provided useful resources,
and sold off business units that did not contribute to its success.
In 2011, GE’s strategic accomplishments included 22% growth (defined as a 22%
increase in operating EPS excluding impact of the preferred stock redemption) and a
20% rise in operating earnings. Over the two-year period through 2011, GE’s dividends
increased a total of 70%. GE was positioned for continued success in 2012 with a record
industrial backlog of US$200 billion, US$85 billion cash, and equivalents offering sig-
nificant financial flexibility. Internationally, GE saw 18% growth in industrial revenue,
and U.S. exports were up US$1 billion from 2010. At the same time, GE’s management
demonstrated their continued commitment to innovation by investing 6% of the firm’s
industrial revenue in R&D.6 General Electric was divided into six Operating Segments
(five Industrial): Aviation, Energy Infrastructure, Healthcare, Home & Business Solu-
tions, Transportation, and GE Capital.
By 2012, under the leadership of Jeffrey Immelt, General Electric was a powerful
conglomerate employing approximately 300,000 people globally and operating in more
than 100 countries,7 ranked the sixth-largest American corporation and the 14th most
profitable by Forbes. Immelt had replaced the highly regarded Jack Welch as CEO and
Chairman of the Board in 2001 and had been named as one of the “World’s Best CEOs”
three times by Barron’s. GE’s board of directors was composed of 17 members, of whom
two-thirds were considered to be “independent.” The board was in continuous dialogue
with GE’s top management. Together they emphasized strategy and risk management
while monitoring strategic initiatives personally through site visits.
Fast Company ranked GE the 19th most innovative company; Fortune listed GE
as the 15th most admired company; and Interbrand cited GE as the number 5 best
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CAS E 3 2 General Electric, GE Capital, and the Financial Crisis of 2008 32-3

global brand.8 General Electric’s objectives were, and continued to be, earnings growth,
increasing margins, and returning cash to investors, as well as organic growth, increased
financial flexibility, and larger U.S. exports. While pursuing these ambitious objectives,
GE, at the same time, committed itself to social and environmental responsibility

GE’s Diversified Industrial Products Competitors

Diversified international industrial conglomerates, such as GE, have by definition many
strong, direct competitors spanning many industries, as the total market capitalization
for this industry is over US$137 billion.9 Aside from GE, the three industrial conglomer-
ates with the best relative performance (based on fundamental and technical strength)
were Siemens, Phillips Electronics, and 3M.10
Siemens AG, the largest European electronic engineering and manufacturing con-
glomerate, based in Munich, Germany, and operating worldwide,11 is split into four
sectors: Energy, Healthcare, Industry, and Infrastructure and Cities, yielding 19 divi-
sions with over 360,000 employees and €73.5 billion (US$96.2 billion) in sales in 2011.
Its focus is on sustainable value creation, innovation-driven growth markets, customer
relations, and capitalizing on core competencies.
Royal Phillips Electronics, based in the Netherlands, is split into three overlapping
sectors: Healthcare, Lighting, and Consumer Lifestyle, with many subdivisions in 60
countries,12 over 125,000 employees, and €20.1 billion (US$26.3 billion) in sales in 2011.
Phillips’ focus is on improving people’s lives through meaningful innovation, delivering
a quality product, and building value for customers and shareholders.
3M, based in Minnesota, operates in the markets of consumer goods, office sup-
plies, display and graphics, health care, industrial goods, transportation goods, and safety,
security, and protection services. With over 80,000 employees and a presence in more
than 65 countries, 3M amassed more than US$27 billion of sales revenue in 2011. As
a diversified technology company, 3M focuses on ingenious, innovative products and
building global market share.13

GE Capital
GE Capital, the largest of GE’s four strategic business units in 2012, was created in 1932
as GE Contracts, an internal business unit to help finance consumer purchases of GE
appliances (see Exhibits 1 and 2).14 Particularly in the midst of the Great Depression,
EXHIBIT 1
GE Capital
(in millions) 2011 2010 2009 2008 2007
Revenues 45,730 46,422 48,906 65,900 65,625
Net Income 6,549 3,158 1,325 7,841 12,179

EXHIBIT 2
GE (Parent
Company)
(in millions) 2011 2010 2009
Revenues 147,300 149,593 154,438
Net Income 13,120 11,344 10,725
32-4 CA S E 3 2 General Electric, GE Capital, and the Financial Crisis of 2008

consumers were hesitant to invest in what at the time were considered superfluous
products. To encourage consumers, GE Contracts offered comparatively low monthly
payments to make its parent company’s products more affordable.
Renamed GE Capital in 1987, the former appliance financing unit grew to incor-
porate interests beyond those of its GE corporate parent, such as investment banking,
retail stores, television channels, and auto/truck leasing. It also acquired a significant
market share in private-label credit cards, including those of JCPenney, Montgomery
Ward, and Wal-Mart. Early on in its history, GE Capital benefited particularly from its
association with its GE parent’s strong asset base and creditworthiness, garnering both
lower borrowing rates and easy access to cheap capital to generate investment beyond
its profits. Through the early 2000s, GE Capital continued to expand its product lines,
delving into property and casualty insurance, life insurance, mortgages, and real estate.15
As the unit grew, GE Capital became an increasingly significant contributor to its
GE parent’s success. While in the past most people had thought of GE as an industrial
company, GE Capital, a finance company, grew to represent nearly half of its GE par-
ent’s annual profits.16 As of 2012, there were five major components of GE Capital:17
1. Commercial Lending and Leasing: This division provides loans to outside busi-
nesses for a range of uses, including company acquisition, internal restructuring,
and even leasing office space. Additionally, the Commercial Lending unit maintains
fleets of cars and heavy industrial equipment available for leasing.
2. Consumer Financing: Within the U.S., GE Capital’s retail financing arm repre-
sents their private-label credit card interests, and retail purchase financing that
includes automobiles, furniture, and other costly items consumers often don’t pay
for with cash.
3. Energy Financial Services: GE Energy owned stakes in energy interests worldwide,
providing financing for companies to invest and expand, often in conjunction with
its GE parent’s efforts to educate and supply companies with necessary equipment.
4. Aviation Services: GE Capital Aviation is involved in passenger aircraft purchasing
and leasing, and aircraft part financing, including various engines that its GE parent
produced, and airport expansion financing.
5. Real Estate: GE Capital Real Estate specializes in various real estate transactions,
including property acquisition, debt refinancing, and joint venture investments.
Many of its properties are office buildings, but it also owns stakes in multi-family
developments and hotels.

GE Capital’s Strategic Direction

GE Capital’s main expertise is in mid-market banking, providing financing for a range
of industries from aviation and energy to health care, and for the purchase, lease, dis-
tribution, and maintenance of large fleets and equipment.18 It also provides capital for
corporate acquisitions and restructuring. It is GE Capital’s vision to be more than just
a banker—to align itself with GE’s corporate objective of supporting growth not simply
by providing capital, but by helping customers invent more and build more19 through
leveraging its global experience and industry expertise.20
However, the financial services industry was, by definition, volatile, and GE Capital
was particularly hard hit by the economic recession of 2008. With the credit markets
illiquid and financial markets falling, GE Capital found that it was overexposed to com-
mercial real estate and foreign residential mortgages. At this point, GE’s parent corpo-
ration stepped in, began reorganizing GE Capital, and significantly downsized the unit.
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CAS E 3 2 General Electric, GE Capital, and the Financial Crisis of 2008 32-5

GE Capital sold most of its insurance lines, completely left the U.S. mortgage market,
and substantially tightened its consumer underwriting guidelines. However, the com-
pany still was on the lookout for under-priced assets, and purchased several lending lines
from even more troubled Citigroup, as well as a large commercial real estate portfolio
from Merrill Lynch financing.
By 2012, GE Capital was smaller, leaner, and more focused on specialty financing
especially mid-market lending and leasing.21 However, like its parent company, GE
Capital hoped to see continued sustainable earnings growth with growing margins and
lower portfolio risk, and to return money to investors and resume paying dividends to
its parent company.22

GE Capital’s Competitors
GE Capital’s main competition came primarily from specialty corporate financial lend-
ers, such as CIT Group, and larger companies that offered diverse and comprehensive
financial services, such as Bank of America and Citigroup, according to Hoovers.23
In 2012, Bank of America24 was one of the largest and most identifiable banks in the
United States with over US$2.1 trillion in assets. Its goal was to be accessible to every
sort of customer at any stage of their financial lives by offering both a variety of products
and easy accessibility with over 5700 locations and 17,000 ATMs. Beyond the arena of
specialty lending, Bank of America served consumers and companies ranging from small
sole proprietorships to multinational global corporations with banking, investments, and
asset management. While the company was successful in building market share, it faced
a multitude of difficulties from major lawsuits deriving from its acquisitions of Country-
wide and Merrill Lynch, and from its “robo-signing” foreclosure practices.
Bank of America attempted to return to profitability after declaring a US$2.2 billion
loss in 2010 and only a US$1.5 billion profit in 2011, focusing on strengthening its capital
reserves and integrating lean initiatives to cut costs and improve efficiency. However,
legislation that reduced its two major sources of revenue, interest earnings and fee rev-
enue, in conjunction with depressed consumer and investor confidence levels, heralded
a difficult road ahead for the company.
Like Bank of America, Citigroup is a behemoth in the financial services industry,
made up of a number of units including brokerage, investment bank, and wealth man-
agement and consumer lending divisions, with over US$1.9 trillion in total assets and
maintaining more than 200 million customer accounts in over 160 countries. The 2008
financial crisis and its aftermath hit Citigroup very hard, resulting in US$90 billion in
losses, which led to selling off or divesting from underperforming industries. Citigroup
then sold several commercial lending lines to GE Capital, fully exited the student loan
market, and planned to sell its CitiMortgage and CitiFinancial divisions. Going forward,
Citigroup refocused on traditional banking and continued unloading toxic assets and
non-core business units.
Perhaps most similar to GE Capital, CIT Group Inc25 specialized in commercial
lending and financing for small and mid-sized businesses, managing US$45 billion in
total assets. In addition to its general corporate finance arm, CIT group offered trans-
portation equipment financing, vendor finance, and a smaller branch of consumer lend-
ing. Hit severely by the financial crisis, CIT Group briefly declared chapter 11 in 2009,
stemming from extreme losses in its subprime mortgage and student loan portfolios. It
subsequently improved its balance sheet and reduced debt obligations, refocusing on
its commercial lending division by building up its loan and lease accounts and hoping
to increase deposit accounts by acquiring already established banks.
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32-6 CA S E 3 2 General Electric, GE Capital, and the Financial Crisis of 2008

Financials
With operations in over 100 countries and 53% of its revenues coming from outside the
United States, GE’s growth depended on its ability to successfully navigate the politi-
cal risks associated with international business dealings that could affect its growth and
profitability.26
Change and instability in the financial markets had a significant effect on GE, espe-
cially GE Capital. Historically, GE had relied on commercial paper and long-term debt
as major sources of its funding, but the increasing difficulty and cost of obtaining those
sources of funding potentially threatened GE’s ability to grow and maintain its level
of profitability.27 After the financial crisis of 2008, the deterioration of the real estate
market, for example, adversely affected GE Capital. GE Capital subsequently tried to
secure other sources of funding, including bank deposits, securitization, and other asset-
based funding to mitigate its risks. These economic setbacks affected not only GE and
GE Capital, but trickled down to the corporations, large and small, they did business
with, along with GE’s governmental customers around the world.
Nevertheless, GE’s credit rating with the major analysts helped stem the tide of
negativity and control the costs of funds, margins, and access to capital markets. As of
2012, GE boasted a AA+ Rating (2nd out of 21 ratings) from Standard and Poor’s and
an Aa2 rating (3rd out of 21 ratings) from Moody’s, solidifying its rating with the major
analysts. Any reduction in these ratings would negatively impact GE’s profitability.28
In the three years after the financial crisis, from 2009 to 2011, both GE and GE
Capital’s sales revenue declined sharply (see also Exhibits 3 thru 8).
Consistent quarterly revenue losses slightly rebounded beginning in Q1 2010
(from double-digit to single-digit losses in both GE and GE Capital), yet sales rev-
enue at GE Capital declined again from US$12.814 billion to US$10.745 billion from

EXHIBIT 3
Quarterly Sales Quarterly Sales Growth
Growth50 Year GE GE Capital
2008 Q1 7.7% 3.2%
Q2 13.3% 10.4%
Q3 10.8% 1.7%
Q4 −3.2% −18.4%
2009 Q1 −8.7% −19.9%
Q2 −15.5% −29.3%
Q3 −20.0% −30.8%
Q4 −10.8% −14.5%
2010 Q1 −6.0% −11.5%
Q2 −6.2% −5.0%
Q3 −5.8% −5.1%
Q4 −1.1% −5.1%
2011 Q1 −4.8% −4.6%
Q2 −4.5% −9.1%
Q3 −1.1% −7.9%
Q4 −7.8% −16.1%
2012 Q1 3.4% −6.6%
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CAS E 3 2 General Electric, GE Capital, and the Financial Crisis of 2008 32-7

EXHIBIT 4
Quarterly Net Quarterly Net Income Growth
Income Growth51
Year GE GE Capital
2008 Q1 −11.7% −27.9%
Q2 −3.5% 14.8%
Q3 −12.4% −37.6%
Q4 −43.4% −84.2%
2009 Q1 −34.5% −60.1%
Q2 −46.6% −86.8%
Q3 −45.2% −94.4%
Q4 −21.6% −79.2%
2010 Q1 −19.4% −48.7%
Q2 11.3% 100.0%
Q3 26.6% 590.3%
Q4 28.7% 807.2%
2011 Q1 47.0% 252.2%
Q2 10.5% 117.0%
Q3 3.7% 86.3%
Q4 0.6% 60.7%
2012 Q1 −11.2% 1.4%

EXHIBIT 5
Quarterly Net Profit Quarterly Net Profit Margins
Margins52
Year GE GE Capital
2007 Q1 12.7% 19.5%
Q2 13.7% 14.0%
Q3 12.1% 17.8%
Q4 14.3% 17.4%
2008 Q1 10.4% 13.6%
Q2 11.7% 14.6%
Q3 9.6% 10.9%
Q4 8.3% 3.4%
2009 Q1 7.5% 6.8%
Q2 7.4% 2.7%
Q3 6.6% 0.9%
Q4 7.3% 0.8%
2010 Q1 6.4% 3.9%
Q2 8.8% 5.7%
Q3 8.8% 6.4%
Q4 9.5% 7.9%
2011 Q1 9.9% 14.5%
Q2 10.1% 13.7%
Q3 9.3% 13.0%
Q4 10.4% 15.1%
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32-8 CA S E 3 2 General Electric, GE Capital, and the Financial Crisis of 2008

EXHIBIT 6
GE Income
Period Ending 31-Dec-11 31-Dec-10 31-Dec-09
Statement53
(All numbers in Total Revenue 147,300,000 149,593,000 154,438,000
thousands) Cost of Revenue 71,190,000 74,725,000 78,938,000
Gross Profit 76,110,000 74,868,000 75,500,000
Operating Expenses
Research and Development — — —
Selling, General, and Administrative 37,384,000 38,054,000 37,354,000
Non-recurring 4,083,000 7,176,000 10,585,000
Others — — —
Total Operating Expenses — — —
Operating Income or Loss 34,643,000 29,638,000 27,561,000
Income from Continuing Operations
Total Other Income/Expenses Net — — —
Earnings Before Interest and Taxes 34,643,000 29,638,000 27,561,000
Interest Expense 14,545,000 15,553,000 17,697,000
Income Before Tax 20,098,000 14,085,000 9,864,000
Income Tax Expense 5,732,000 1,033,000 −1,142,000
Minority Interest −292,000 −535,000 −200,000
Net Income From Continuing Ops 14,366,000 13,052,000 11,006,000
Non-recurring Events
Discontinued Operations 77,000 −873,000 219,000
Extraordinary Items — — —
Effect of Accounting Changes — — —
Other Items — — —
Net Income 14,151,000 11,644,000 11,025,000
Preferred Stock and Other Adjustments −1,031,000 −300,000 −300,000
Net Income Applicable to Common
Shares 13,120,000 11,344,000 10,725,000

NOTE: Currency in USD.

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CAS E 3 2 General Electric, GE Capital, and the Financial Crisis of 2008 32-9

EXHIBIT 7
GE Balance Sheet54 Period Ending 30-Dec-11 30-Dec-10 30-Dec-09
(All numbers in
thousands) Assets
Current Assets
Cash and Cash Equivalents 84,501,000 78,943,000 70,488,000
Short-Term Investments 47,374,000 43,938,000 51,343,000
Net Receivables 307,470,000 329,204,000 30,514,000
Inventory 13,792,000 11,526,000 11,987,000
Other Current Assets — — —
Total Current Assets 453,137,000 463,611,000 164,332,000
Long-Term Investments — — 319,247,000
Property, Plant, and Equipment 66,450,000 103,099,000 103,081,000
Goodwill 72,625,000 64,388,000 65,076,000
Intangible Assets 12,068,000 9,971,000 11,751,000
Accumulated Amortization — — —
Other Assets 112,962,000 106,724,000 118,414,000
Deferred Long-Term Asset Charges — — —
Total assets 717,242,000 747,793,000 781,901,000
Liabilities
Current Liabilities
Accounts Payable 58,373,000 56,943,000 32,860,000
Short/Current Long-Term Debt 166,869,000 147,977,000 129,869,000
Other Current Liabilities 59,891,000 67,328,000 50,788,000
Total Current Liabilities 285,133,000 272,248,000 213,517,000
Long-Term Debt 243,459,000 293,323,000 336,172,000
Other Liabilities 70,647,000 55,271,000 104,995,000
Deferred Long-Term Liability Charges −131,000 2,753,000 2,081,000
Minority Interest 1,696,000 5,262,000 7,845,000
Negative Goodwill — — —
Total liabilities 600,804,000 628,857,000 664,610,000

Stockholders’ equity
Misc Stocks Options Warrants — — —
Redeemable Preferred Stock — — —
Preferred Stock — — —
Common Stock 702,000 702,000 702,000
Retained Earnings 137,786,000 131,137,000 126,363,000
Treasury Stock −31,769,000 −31,938,000 −32,238,000
Capital Surplus — — —
Other Stockholder Equity 9,719,000 19,035,000 22,464,000
Total stockholder equity 116,438,000 118,936,000 117,291,000

Net tangible assets 31,745,000 44,577,000 40,464,000

NOTE: Currency in USD.

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32-10 CA S E 3 2 General Electric, GE Capital, and the Financial Crisis of 2008

EXHIBIT 8 Summary of Operating Segments55 (In millions)

General Electric Company and consolidated affiliates

2011 2010 2009 2008 2007
Revenues
Energy infrastructure $ 43,694 $ 37,514 $ 40,648 $ 43,046 $ 34,880
Aviation 18,859 17,619 18,728 19,239 16,819
Healthcare 18,083 16,897 16,015 17,392 16,997
Transportation 4,885 3,370 3,827 5,016 4,523
Home & business solutions 8,465 8,648 8,443 10,117 11,026
Total industrial revenues 93,986 84,048 87,661 94,810 84,245
GE Capital 45,730 46,422 48,906 65,900 65,625
Total segment revenues 139,716 130,470 136,567 160,710 149,870
(a)
Corporate items and eliminations 7,584 19,123 17,871 19,127 20,094
Consolidated revenues $147,300 $149,593 $154,438 $179,837 $169,964
Segment profit
Energy infrastructure $ 6,650 $ 7,271 $ 7,105 $ 6,497 $ 5,238
Aviation 3,512 3,304 3,923 3,684 3,222
Healthcare 2,803 2,741 2,420 2,851 3,056
Transportation 757 315 473 962 936
Home & business solutions 300 457 370 365 983
Total industrial segment profit 14,022 14,088 14,291 14,359 13,435
GE Capital 6,549 3,158 1,325 7,841 12,179
Total segment profit 20,571 17,246 15,616 22,200 25,614
Corporate items and eliminations(a) (359) (1,105) (593) 1,184 1,441
GE interest and other financial charges (1,299) (1,600) (1,478) (2,153) (1,993)
GE provision for income taxes (4,839) (2,024) (2,739) (3,427) (2,794)
Earnings from continuing operations 14,074 12,517 10,806 17,804 22,268
Earnings (loss) from discontinued opera-
tions, net of taxes 77 (873) 219 (394) (60)

Consolidated net earnings

attributable to the company $ 14,151 $ 11,644 $ 11,025 $ 17,410 $ 22,208

NOTE:
See accompanying notes to consolidated financial statements in Part II, Item 8. “Financial Statements and Supple-
mentary Data” of this Form 10-K Report.
(a)
Includes the result of NBCU, our formerly consolidated subsidiary, and our current equity method investment
in NBCUniversal LLC.

Q4 2010 to Q4 2011, marking a return to double-digit quarterly revenue losses. GE

Capital’s Q1 2012 revenue loss shrank again to single digits at 6.6%, while revenue
grew at GE as a whole in Q1 2012 by 3.4% from the industrial division’s strong per-
formance (14% quarterly revenue growth).29 Annually from 2010 to 2011, GE and
GE Capital respectively reported 1.9% and 1.5% sales revenue losses. Much of the
poor performance was attributable to macroeconomic risk factors, causing unstable
demand for the products of the industrial business units, as well as restrictions in the
CAS E 3 2 General Electric, GE Capital, and the Financial Crisis of 2008 32-11

global credit markets, which severely hampered GE Capital’s ability to perform as it

did prior to the recession (US$65.435 billion revenue in FY 2007, US$45.730 billion in
FY 2011). From FY2009 on, GE Capital began strategically transforming its portfolio
to be less focused on risky lending and more focused on middle market lending and
specialty finance to industrial division customers.30 This strategy required reducing
leverage, improving liquidity, and shedding assets—all of which cut into previous top-
line sales revenue performance.31
Despite the overall top-line losses, GE was organized as a global corporation that
generated revenue in a number of regions worldwide. Although U.S. revenues were
down 7.9% in 2011 (from US$75.8 billion in FY2010 to US$69.8 billion in FY2011)
and Western European revenues decreased 12%, global revenues (excluding the U.S.)
increased 4% overall, from US$74.5 billion in 2010 to US$77.5 billion in 2011.32 The
strong international performance was tied to revenue growth in emerging markets such
as Latin America (29%), China (28%), and Australia (46%).
GE recorded massive net income losses from FY2007 to FY2009, peaking between
FY2008 and FY2009 (with net income losses of 38% for GE and 78.3% for GE Capital),
driven by the global financial crisis and recession. The performance of GE as a whole
was largely tied to that of GE Capital, its largest and formerly most profitable business
unit. GE Capital had become deeply ensnared in both the collapse of the credit markets
through the excessive use of leverage leading up to FY2009 and the subprime mortgage
crisis because it had bought a subprime mortgage company and heavily invested in
commercial real estate.33
GE Capital had made some ill-advised marketing decisions prior to the financial
collapse in 2008. Rather than retaining its focus on middle market and specialty finance
for GE industrial product customers, GE Capital began to market itself as a credit card
financing entity as well as a mortgage financier.34 Financing subprime mortgages and
commercial real estate soon followed, and eventually GE Capital was engaging in the
financing of very risky assets, including derivatives and credit default swaps. This market
strategy led to the highly leveraged structure that almost caused the entire corporation
to collapse in 2008 during the financial crisis.
GE’s long-term debt began growing in FY2007 and hit a high of US$377 billion in
2009, but was reduced slightly in FY2010 and FY2011, resulting in flat growth for the
five years from 2007–12. Most of the debt on GE’s balance sheet was from GE Capi-
tal. During the financial crisis of 2008–09, GE Capital’s highly leveraged structure—
combined with its risky ventures in interest rate swaps, subprime mortgages, commercial
real estate, and massive commercial paper—almost led to the financial collapse of the
entire GE Corporation.35 A record influx of equity capital and the sale of preferred
stock stabilized a 10% daily hemorrhage in the stock price that began on October 1,
2008. After that, GE capital aggressively cut its long-term debt from US$304 billion in
FY2007 to US$234 billion in FY2011 through strategic de-leveraging and restructuring
of the scope of its financing activities.
Both GE and GE capital also took steps to significantly increase their cash bal-
ances to better manage risk. From FY2007 to FY2011, GE increased its cash balance
from US$18 billion to US$87 billion, and GE Capital’s increased from US$11 billion to
US$43 billion. However, as of 2012, neither GE nor GE Capital was on completely solid
footing, with a LT debt-to-equity ratio of 2.67 and 2.93, respectively.
GE Capital had been forced to scale back in the wake of the recession, and due to
pressures to meet stricter regulatory standards. These strictures streamlined GE Capi-
tal’s operations, helping it better understand its best practices for lending and its other
financial endeavors. GE Capital also moved to expand its operational base in the after-
math of the recession by creating new partnerships with companies like Ducati and
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32-12 CA S E 3 2 General Electric, GE Capital, and the Financial Crisis of 2008

Sophos. These new partnerships were important to GE Capital’s operations to offset

“shrinking its asset base and tightening underwriting standards.”36 Nevertheless, the
decrease in year-over-year earnings was evidence that GE Capital had to operate with
fewer resources and adjust its internal infrastructure to utilize more limited resource
availability.
GE Capital returned some of its profits to its GE parent company through the issu-
ance of a dividend. GE Capital resumed paying a dividend to GE in May 2012.

New Directions for Growth:

Green Energy and Health Care
In the new millennium, General Electric was uniquely positioned to take advantage
of financial incentives, subsidies, and lucrative partnerships available for innovators
in the green energy sector.37 It was spurred both by an interest in the environment,
and the desire for financial security due to volatility in fossil fuel prices and concerns
over climate change. Having spent more money than any other single corporation on
governmental lobbying, General Electric used its political capital for growth opportu-
nities.38 For example, GE, especially its electrical energy divisions, was able to leverage
its political strength to benefit from tax incentives associated with the green energy
movement.
In addition, the GE Energy Group took a leadership role in the manufacture and
distribution of wind turbines—a critical component of the renewable energy sector,
particularly in Oregon, where the largest wind turbine farm in the United States was
powered entirely by GE-built wind turbines.39 GE also branched out into the man-
agement and financing of solar energy projects, including a solar farm in Australia
developed by a consortium of companies, including GE.40 GE was one of the lead-
ing manufacturers of LED lighting and had signed a distribution deal with Marriot
hotels that saved it 66% in power use for lighting, without compromising on the look
or quality of the light.41 GE perceived the opportunity to become the best-in-class
manufacturer and distributor of certain elements of clean energy infrastructure, as
well as other innovative forms of clean energy, and is poised to continue to innovate
as the sector grows.
Over the past decade GE Healthcare Group established itself as a leading inno-
vator in emerging health care technology. Diagnostic medicine became a key area of
health care sector investment—the market is projected to grow 11% annually from
US$232 billion,42 and GE developed some creative tools for diagnostic imaging, includ-
ing a handheld ultrasound device, with which primary care doctors could be more
accurate in their initial diagnoses, prior to ordering expensive follow up diagnostics.43
GE also launched a US$100 million open innovation competition related to cancer
diagnostics44 and invested in life science offerings, with a US$4 billion portfolio that
projects to double over the next few years.45 As the Baby Boomer generation entered
retirement age, the health care demand began to rise, expanding the need for new
health care technologies. GE Healthcare was poised to capitalize on this new demand.

Core Competencies
General Electric’s key strengths—its operational efficiencies, sheer size, history,
and reputation—all worked to create competitive advantages for GE. One of GE’s
biggest operational strengths lay in its ability to cut costs and maximize return
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CAS E 3 2 General Electric, GE Capital, and the Financial Crisis of 2008 32-13

for shareholders, as with GE CEO Jack Welch’s implementation of the Six Sigma
approach in the 1990s to business management, as mentioned earlier. GE was also
able to cut costs because its reputation as a market leader, its large network of busi-
nesses, and its strong alliances with other major corporations, enabled it to lever-
age long-standing relationships to employ the best human, equipment, and capital
resources to ensure quality and consistency at a low cost. It acquired many businesses
that provided useful resources, and sold off business units that did not contribute to
its success. In addition, GE’s history of innovation, from Edison inventing the light
bulb to its pioneering of green energy medical diagnostic technology contributed to
GE’s long-term success.
In addition to the operational excellence that came from GE’s experience and
unparalleled commitment to growth, the sheer size of GE also created a tremendous
competitive advantage, from distribution channels in over a hundred companies to doz-
ens of lines of business. Few other companies were big enough to compete with the
variety and breadth of resources GE brought to the table.
Globally recognized and ubiquitous in American homes, GE’s history and reputa-
tion was also a key competitive advantage. Its reputation and political influence gar-
nered favorable treatment from the U.S. and other governments. Smaller firms tried to
compete with GE in individual industries, but GE’s reputation and brand awareness
made it difficult for them to succeed.
Finally, GE’s strong company culture empowered and motivated employees, creat-
ing a workforce that stayed with the company long-term and moved internally, building
a strong, knowledgeable employee base, and its focus on sustainability and the greater
community helped inspire employees and improve GE’s image overall.

Challenges Facing GE
By the end of 2012, GE faced many challenges. First, the parent company’s comfort in
mature industries such as industrial appliances and jet engines rendered it reluctant to
explore different markets, or identify and move into innovative industries at the begin-
ning of their life cycles when potential growth and earnings are greatest. While this
defensive strategy was more pronounced with former CEO Jack Welch, under whose
direction GE maintained a near-zero marketing budget and focus on efficiency, many
within the company perceived that there was still room for growth in innovative markets,
particularly the green energy market, where GE could utilize its strength of scalability
to establish a competitive advantage.
Second, for many years, GE relied on its staunch traditional methods to train work-
ers, especially general managers. Throughout the 1990s, CEO Jack Welch focused on
the bottom line through lean practices and overall cost cutting, creating an extremely
efficient, process-conscious organization that prioritized meeting budgets, but lagged in
innovation. While these strategies did increase net earnings, it became clear that they
would not yield sustainable growth, as cutting additional costs began to outweigh the
savings. GE began to see that the long-term solution was to train employees and man-
agement to focus on creating new technology and products that both earn profitable
returns and open new growth opportunities.
GE also needed to acknowledge potential weaknesses stemming from being such
a large and diverse organization. For instance, it occasionally underperformed in Asian
and European markets. Greater understanding of the operational differences and dif-
ference in business practices between the U.S. and these countries could explain in part
why GE’s growth there did not meet projections.
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32-14 CA S E 3 2 General Electric, GE Capital, and the Financial Crisis of 2008

Another challenge for GE was potential changes to the tax code. In 2012, GE filed
a 57,000-page tax return, the single largest tax return in the United States.46 While GE
benefited from a number of tax incentives, tax code reform constantly loomed on the
horizon, and GE would be one of the companies most affected by changes to the tax
code.
Although GE had a strong global brand associated with product excellence and
market leadership in several industrial categories, it came under attack for being syn-
onymous with corporate greed. GE was accused of not paying its fair share of taxes, and
protestors forcefully interrupted Jeff Immelt’s speeches alleging that47 using legitimate
accounting techniques to pay lower effective tax rates, GE only paid an effective tax rate
of 2.3% for more than 10 years, and that GE realized US$14 billion in profits yet paid no
taxes in 2011.48 Also, GE was the recipient of a US$140 billion bailout in 2008, to cover
massive losses at GE Capital.49 These allegations did not help their name, tarnishing
the reputation of an otherwise well-managed brand. Furthermore, GE was the fourth-
largest producer air and water pollution globally. Although top management’s focus on
sustainability was considered a strength, GE needed to develop ways to become more
“green” without hurting its bottom line.

What to Do with GE Capital?

Despite General Electric’s market-leading portfolio and strong brand-name recognition,
in the recent financial crisis, the dangers of a company’s reliance on financial services
became apparent. What had begun as a financing arm to catalyze GE appliance sales
had grown into a dominating financial services company that surpassed the earnings of
the rest of the company to account for over 50% of GE’s total net income.
This concentration of resources in GE Capital paid excellent dividends during
strong economic times, yet the financial sector’s volatility rendered GE Capital vul-
nerable to large, rapid losses. Unless GE hedged against financial slowdowns by reduc-
ing its exposure to GE Capital, it might occasionally suffer losses that could put the
company as a whole at risk. Further, like many financial firms, GE Capital was tempted
by the large potential returns of what were later seen as risky investments, such as
mortgage-backed securities and real estate. Unless GE Capital decreased its portfolio
of risky assets, it could be prone to future losses that might have a negative impact on
its GE parent.
In the years leading up to the financial crisis, GE, according to some industry ana-
lysts, had become complacent, and corporate growth and earnings consequently stag-
nated. GE focused too heavily on cutting costs and relied too heavily on the fortunes of
GE Capital, which suffered from massive losses during the 2008–2009 financial crisis.
When the recession forced GE to reduce the scope of GE Capital’s activities, GE was
not able to invest and innovate elsewhere to bolster its financials and satisfy stockhold-
ers. GE also did not have enough significant new ideas to mitigate GE Capital’s financial
setback, such that GE Capital’s losses had a major negative impact on the growth and
earnings of the corporation as a whole.
The key question facing GE’s top management and board of directors at the
end of 2012 was to what degree should they reduce GE Capital as a percentage of
the entire company. Or, more to the point, should GE Capital be spun off altogether
to allow the GE parent corporation to focus on the industrial products segment it
had historically excelled in and where there is less competition and government
regulation?
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CAS E 3 2 General Electric, GE Capital, and the Financial Crisis of 2008 32-15

NOTES
1. “Explore GE Innovations by Title.” General Electric Com- 24. Ramirez, Diane. “Bank of America Corporation Pro-
pany. Web. 21 Apr. 2012. http://www.ge.com/innovation file.” Hoovers D&B Company. http://www.hoovers.com
/timeline/index.html. /company/Bank_of_America_Corporation/.
2. “GE Past Leaders.” General Electric Company. Web. 25. Ramirez, Diane. “CIT Group IncProfile.” Hoovers
21 Apr. 2012. http://www.ge.com/company/history/past D&B Company. http://www.hoovers.com/company
_leaders.html. /CIT_Group_Inc.
3. Joseph, John and Ocasio, William. Rise and Fall-or Trans- 26. GE 2011 Annual Report. http://www.ge.com/ar2011/pdf
formation? The evolution of Strategic Planning at the Gen- /GE_AR11_EntireReport.pdf.
eral Electric Company. http://www.elsevier.com/locate/lrp. 27. Ibid.
4. GE 2011 Annual Report. http://www.ge.com/ar2011/pdf 28. GE 2011 Annual Report. http://www.ge.com/ar2011/pdf
/GE_AR11_EntireReport.pdf. /GE_AR11_EntireReport.pdf.
5. Ibid. 29. General Electric. GE Q1’12 Earnings. Www.ge.com.
6. GE 2011 Annual Report. http://www.ge.com/ar2011/pdf General Electric Company, 20 Apr. 2012. Web. 25 Apr.
/GE_AR11_EntireReport.pdf. 2012. http://www.ge.com/pdf/investors/events/04202012/ge
7. GE 2011 Annual Report. http://www.ge.com/ar2011/pdf _webcast_pressrelease_04202012.pdf.
/GE_AR11_EntireReport.pdf. 30. Protess, Ben. “Revenue Drops at GE Capital.” The
8. “General Electric.” Wikipedia. Wikimedia Foundation, 05 New York Times. The New York Times Company,
Apr. 2012. Web. 21 Apr. 2012. http://en.wikipedia.org/wiki 20 Apr. 2012. Web. 23 Apr. 2012. http://dealbook.nytimes
/General_Electric. .com/2012/04/20/revenues-drop-at-ge-capital/.
9. “Industrial Conglomerates Industry Snapshot - NYTimes 31. GE 2011 Annual Report. Page 5 http://www.ge.com/ar2011
.com.” NYTimes.com. New York Times, 02 May 2012. /pdf/GE_AR11_EntireReport.pdf.
Web. 02 May 2012. http://markets.on.nytimes.com 32. Ibid., page 47.
/research/markets/usmarkets/industry.asp?industry=52311. 33. Protess, Ben. “Revenue Drops at GE Capital.” The
10. Stone, Mallory. “Top 5 Companies in the Industrial Con- New York Times. The New York Times Company, 20
glomerates Industry with the Best Relative Performance Apr. 2012. Web. 23 Apr. 2012. http://dealbook.nytimes
(SI, GE, PHG, MMM, TYC).” Comtex News Network. .com/2012/04/20/revenues-drop-at-ge-capital/.
Comcast, 16 Mar. 2012. Web. 02 May 2012. http://finance 34. Colvin, Geoffrey. “GE under Siege (pg. 2).” CNNMoney.
.comcast.net/stocks/news_body.html?ID_OSI=85473. Cable News Network, 10 Oct. 2008. Web. 23 Apr. 2012.
11. Siemens USA. Web. 05 May 2012. http://www.usa.siemens http://money.cnn.com/2008/10/09/news/companies/colvin
.com/entry/en/. _ge.fortune/index2.htm.
12. Phillips Global. Web. 05 May 2012. http://www.philips.com 35. Ibid.
/global/index.page. 36. Andrejczak, Matt. “Industrial Operations Key to GE Earn-
13. 3M Global. Web. 05 May 2012. http://www.3m.com/. ings Report.” Market Watch. The Wall Street Journal, 19
14. Ramirez, Diane. “General Electric Capital Corporation Apr. 2012. Web. 29 Apr. 2012. http://articles.marketwatch
Profile.” Hoovers D&B Company. http://www.hoovers .com/2012-04-19/industries/31366115_1_ge-capital-ge
.com/company/General_Electric_Capital_Corporation/. -shares-chief-executive-jeff-immelt.
15. Ramirez, Diane. “General Electric Capital Corporation 37. “DSIRE: DSIRE Home.” DSIRE USA. Web. 28 Apr.
Profile.” Hoovers D&B Company. http://www.hoovers 2012. http://www.dsireusa.org/.
.com/company/General_Electric_Capital_Corporation/ 38. Mosk, Matthew. “General Electric Wages Never-Say-Die
16. Colvin, Geoffrey. “GE under Siege (pg. 2).” CNNMoney. Campaign for Jet Engine Contract.” ABD News 7 March
Cable News Network, 10 Oct. 2008. Web. 23 Apr. 2012. 2012.
http://money.cnn.com/2008/10/09/news/companies/colvin 39. GE 2011 Annual Report. Page 18 http://www.ge.com
_ge.fortune/index2.htm /ar2011/pdf/GE_AR11_EntireReport.pdf.
17. GE Capital: Our Businesses. 2012. General Electric. 40. “GE Set to Soar on Clean Energy Projects—Seeking
http://www.gecapital.com/en/our-company/our-businesses Alpha.” Stock Market News & Financial Analysis. 17
.html?gemid2=gtnav0502 Apr. 2012. Web. 28 Apr. 2012. http://seekingalpha.com
18. “Start Building.” GE Capital Business Model & Fact Sheet. /article/503701-ge-set-to-soar-on-clean-energy-projects.
Web. 21 Apr. 2012. http://www.gecapital.com/en/our 41. Ibid.
-company/company-overview.html?gemid2=gtnav0501. 42. “$232 Billion Personalized Medicine Market to Grow 11
19. “GE Capital: The Capital Difference.” Fact Sheet. Gen- Percent Annually, Says PricewaterhouseCoopers.” NEW
eral Electric Company. Web. 21 Apr. 2012. http://www YORK, Dec. 8/ PRNewswire/. Web. 28 Apr. 2012. http://www
.gecapital.com/en/pdf/GE_Capital_Fact_Sheet.pdf. prnewswire.com/news-releases/232-billion-personalized
20. Ibid. -medicine-market-to-grow-11-percent-annually-says
21. GE 2011 Annual Report. http://www.ge.com/ar2011/pdf -pricewaterhousecoopers-78751072.html.
/GE_AR11_EntireReport.pdf. 43. “DOTmed.com - GE Launches Handheld Ultrasound
22. Ibid. Tool.” Dotmed.com. 2010. Web. 28 Apr. 2012. http://www
23. Ramirez, Diane. “General Electric Capital Corporation .dotmed.com/news/story/11669.
Profile.” Hoovers D&B Company. http://www.hoovers 44. GE 2011 Annual Report. Page 27 http://www.ge.com
.com/company/General_Electric_Capital_Corporation/. /ar2011/pdf/GE_AR11_EntireReport.pdf.
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32-16 CA S E 3 2 General Electric, GE Capital, and the Financial Crisis of 2008

45. Ibid., page 5. /ge-filed-57000-page-tax-return-paid-no-taxes-14-billion-

46. McCormack, John. “GE Filed 57,000-Page Tax Return, profits_609137.html.
Paid No Taxes on $14 Billion in Profits.” Weekly Standard. 49. Hill, Vernon. “General Electric Gets a $140B Bailout -
17 November 2011. What’s the Point of AAA? - Seeking Alpha.” Stock Mar-
47. Shepardson, David. “GE CEO Defends Tax Rate after ket News & Financial Analysis. 14 Nov. 2008. Web. 24
Protestors Disrupt Speech.” The Detroit News. 24 Apr. Apr. 2012. http://seekingalpha.com/article/105984-general
2012. Web. 24 Apr. 2012. http://www.detroitnews.com -electric-gets-a-140b-bailout-what-s-the-point-of-aaa.
/article/20120424/BIZ/204240397/GE-CEO-defends-tax 50. Source: http://www.ge.com/ar2011/.
-rate-after-protesters-disrupt-speech?odyssey=tabltopnew 51. Ibid.
sltextlFRONTPAGE. 52. Ibid.
48. “GE Filed 57,000-Page Tax Return, Paid No Taxes on $14 53. Ibid.
Billion in Profits.” The Weekly Standard. 17 Nov. 2011. 54. Ibid.
Web. 24 Apr. 2012. http://www.weeklystandard.com/blogs 55. Ibid.