Wealth Management

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January 26, 2009

Jack Welch blames the i-bankers

The major banks have taken the biggest hit from last year's financial crisis and they continue to feel the effects of it. The sheer numbers in terms of wealth destruction due to the ongoing de-leveraging process in the financial sector will blow your mind. Check out the financial rapidly dissolving value from a different perspective; thanks to a friend from JPMorgan who sent the above chart.
I was listening to a Businessweek podcast from Jack Welch, former CEO of GE, who said the banks used to be privately held with the result that the top executives - in the form of a Partnership - were lending their own money. They got the upside but they also got the downside.
Jack Welch says that if there is someone to blame for the financial mess, he would lay it at the front door of the i-bankers taking their companies public. Suddenly, they had access to other people's money to lend.
"This is like going to Vegas to gamble," says Welch. "If you get upside, you keep the gains but if you lose, well you come back and apologize."
Jack goes on to describe i-bankers coming to him at GE to invest in risky oil deals.
"If that had been their own money," says Jack, "They would not have risked it. They were looking for my deep balance sheet to take the hit for the risk."
Private equity will be coming into its own for exactly the reason Jack says - these are mostly privately held funds. The best funds will be those that risk the fund partners' money, not just yours. Otherwise, you can put your money back into the public market, but maybe you should head for Las Vegas instead.


Anonymous said...

Jack is Jack and no disrespect intended (I first hand witnessed how he could transform the people and process side of an organization) but GE practised and perhaps refined an art that has contributed greatly to this meltdown - the art of successfully putting a financial arm behind a manufacturing organization - GE Money and GE Capital (GE $) – they provided funding to, in part, aid other GE businesses in attracting customers. Buy our GE locomotives and GE $ can provide funding, purchase our GE Fanuc assembly equipment and GE $ can provide leasing options, expand your business - GE $ can back your expansion. And it isn’t only GE, GM did it with GMAC, Ford did it, almost everyone decided to provide funding for their customers to purchase their products – in essence creating a market that might not have been there otherwise. GE enjoyed the good years when the financial arm was ‘making’ revenue on lease payments and investments (how profitable were the other arms – appliances is for sale, consumer & industrial is upside down, plastics was sold), they (executives running organizations following this model) reaped big rewards and now who is paying the price – the shareholder, not the executives. In fact the entire economy is paying the price. You can’t blame anyone for taking an organization public – it’s form of raising capital – you have to blame unsustainable business models and organizations that put the quarter ahead of all else. Wasn’t GE Money, GE Capital an i-bank?

Michael @ nCompass

Jacoline Loewen said...

You are spot on!
I think Jack has a few people in mind when he talks about i-banks - Lehmanns, probably?
Interesting experience you have.