Jack Welch on investment bankers

The biggest regret Jack Welch had was buying an investment bank, according to his autobiography.

While not a brand new book, Jack Welch's autobiography proved interesting Xmas reading. Published last year, "Jack: Straight from the Gut" has its more gushing moments- which normally involve self-congratulation, and references to hugging people. Nevertheless it is required reading for anyone who works in business.

What makes the book highly worthwhile, and is proof of why Welch has been the most successful manager in history, are the moments of brutal honesty and self-criticism. In this regard, the most enjoyable section starts on page 217 in a chapter called "Too full of myself". Here the prose become particularly lucid on what Welch regards as the single biggest mistake of his career. And guess what it is? Buying an investment bank.

The investment bank in question was Kidder Peabody, which Welch bought in 1986. He did this against the advice of GE board member, Walter Wriston (ex-Citibank boss) who said to Welch, "The talent goes up and down the elevator every day and can go in a heartbeat. All you're buying is the furniture."

As Welch was to find out eight months later, it was worse than that. On February 12, 1987 Kidder's offices were raided by the SEC. Kidder's star investment banker, Marty Siegel had been trading share tips with Ivan Boesky, and later pleased guilty to two felonies.

This all happened before GE bought the bank, but as Welch says: "We ended up paying fines of $26 million, shutting down Kidder's risk arbitrage department, and agreeing to put in better controls and procedures. While all that was going on, Ralph De Nunzio [Kidder's chairman] and several of his key people decided to leave. As a far as senior management was concerned, this left us with little more than the furniture Wriston warned us about." Welch put his own manager into Kidder but found that the best people on the trading floor had worshipped Siegel. And that the place was about as far from manufacturing as you could get.

"When the new CEO [Si Cathcart] asked about purchasing - a question someone from manufacturing might ask - no one knew who ran the department or where it was."

Welch found much to be critical of as the owner of an investment bank. And Welch is voraciously critical of the investment banking bonus system.

"When Si went through his first bonus exercise, he'd ask everyone at Kidder to give him a list of his or her accomplishments for the year. Inevitably, he'd have six people claiming credit for being the key player on the same deal. Every one of them believed they made the deal happen. The attitudes were symbolic of the problem: an entitlement culture where every player overvalued themselves."

He adds: "Si remembers that on the day Kidder employees got their bonus checks, the place would clear out in an hour. 'You could almost shoot a cannon off without hitting anyone,' he told me." It may not surprise you that Welch should thus surmise: "There are more mediocre people making more money on Wall Street than any other place on earth. Sure, there are some stars, and some earn every nickel they make. The crowd they carry along is something else."

"The outrageous pay in a good year was bad enough. It really drove me nuts in a bad year. That's when the argument would go something like this: "Yeah, we had a tough year, but you've got to give them at least as much as they made last year or they'll go across the street."

"This place had the perfect we-win, you-lose game."

Kidder's profitability gradually recovered but Welch was desperate to sell the firm, and was even more so when rogue trader, Joseph Jett caused the firm to make a $350 million loss.

"Actually, it was my own worst nightmare. I had made a terrible mistake in buying Kidder in the first place. It had been nothing but a headache and an embarrassment from the start - and now this."

And here's the rub. "The response of our [14 GE] business leaders to the crisis was typical of the GE culture. Even though the books had closed on the quarter, many immediately offered to pitch in to cover the Kidder gap. Some said they could find an extra $10 million, $20 million and even $30 million from their businesses to offset the surprise. Though it was too late, their willingness to help was a dramatic contrast to the excuses I had been hearing from the Kidder people.

"Instead of pitching in, they complained about how this disaster was going to affect their incomes. The two cultures and their differences never stood out so clearly in my mind. All I heard was, 'I didn't do it. I never saw it. I never met with him. I didn't talk to him.' No one seemed to know anyone or work for anyone. It was disgusting."

Welch says he feels investment banks were better places when they were partnerships, and everyone had a stake in the gains and losses of the firm. But owning an investment bank? That's a mistake he says he will regret till the end.

Welch takes us through some other failures (there were a few amid the vast number of successes), and what he learned from them. This is all informative and little wonder Warren Buffett says on the cover: "Listen carefully to what he has to say."

There are also some nice anecdotes. One good one is about former GE Capital boss, Gary Wendt: "Gary lived for the deal, and everything with Gary was a negotiation. Denis Nayden remembers the time he and Gary were in Hong Kong and Gary went into a shop to buy a radio. He haggled with the salesperson for what seemed like an hour to get the price down and left happy with his bargain. Down the street, Gary nearly died when he spotted the same radio he had just bought in the window with a price tag lower than his highly negotiated purchase. It drove him nuts over the weekend."

Some you win, some you lose. On the other hand, Wendt was very happy with the $1.1 billion of Thai auto loans he bought.

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