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Jack Welch Sees a ‘Bathtub’ U-Shaped Recession

September 26 2008 by JP Donlon

“We’re in a recession and I don’t see a V-shaped recovery–more like a bathtub U-shaped recovery which will last deep into the second half of 2009 before we start to come out of it,” said former GE CEO Jack Welch speaking at the World Business Forum in New York City. In a 40 minute on stage conversation with The Wall Street Journal’s Alan Murray at Radio City Music Hall before 4500 attendees, the man who led GE for over 20 years said that “the fourth quarter of this year and the first half of 2009 will be brutal.” But he added that there is an opportunity for business leaders amid the bad news. “Take care of your best people. Put a little pot of money aside for them because some of your best people-the top 20 percent of talent-will likely miss their numbers, but this is not a time to lose your best soldiers. You will need them when for the next fight when you emerge on the other side.” Welch opined that amidst the chaos competitors with cash will come poaching for the best people among companies that are struggling or laying off people. He advised CEOs to cut costs immediately and “get it over with sooner rather than later.”

Welch attributed the current financial meltdown to many causes, saying money was essentially free and that interest rates were negative causing many to “roll the dice not once but many times.” He compared those responsible to suspects on Agatha Christie’s “Murder On the Orient Express,” where every character on the train had a motive to game the system and share the blame. Switching metaphors, he added that the situation was comparable to people going to Las Vegas but gambling with their neighbors money, not their own. “It’s a crazy system when the only penalty for losing is getting a cut in your bonus instead of one on the head.” 

Welch recalled “one of my worst decisions” in the 1980s when GE acquired the investment house Kidder Peabody. “We didn’t own this outfit more than seven days when I had several guys in my office proposing a $400 million deal using GE’s balance sheet as leverage.” He recalls being so apoplectic that he “nearly lost my teeth.” If earnings “seem too good to be true, it’s because they are,” he added. 

Murray asked Welch about the failure of leadership during the current crisis. Certainly there is enough blame to go around Welch agreed, but it extends beyond mortgage lenders and those who created instruments where risk was disaggregated from the asset. Members of Congress who encouraged Fannie Mae and Freddie Mac to use the U.S. Treasury as a piggy bank were also contributors to the problem, he believes. However, Welch is encouraged by the actions of Fed chairman Ben Bernanke and Treasury secretary Hank Paulson, who “didn’t let ideology get in the way.” “We’re damn lucky we have these guys,” he added. “The deal isn’t perfect but we must act now.” In addition, Welch praised New York Senator Chuck Schumer for making the connection between the need to shore up the financial system as the best way to help main street.  Had Japan had a Bernanke and Paulson during that country’s financial crisis in the early 1990s, he said, it would not have been as protracted as it ultimately proved to be. 

The former GE chief, himself generously compensated said he had no problem with imposing limits on compensation or separation on CEOs as part of the anticipated bailout package of concerned financial institutions. 

Pressed on his political views, Welch said the U.S. system works best under divided government pointing to the years in which President Reagan battled a Democrat controlled Congress and when President Clinton had to contend with a Republican Congress led by Newt Gingrich. Asked why he supported John McCain over rival Barack Obama, Welch shook his head, his voice rising with the broad “As” in his Boston accent becoming broader still. “I don’t think you can be a businessman and support someone who wants to increase taxes in a recession and who want to unionize America. I believe in jobs and creating businesses-you can tax fat cats like me all you want-but when you tax small and medium business owners you will kill of jobs. Also, we can’t have a President who is in the pocket of the unions.” 

Welch identified the pending Employee Free Choice Act (EFCA) as the single greatest hazard facing business leaders today apart from the credit crisis. Under EFCA, an employer is duty bound to recognize one-or many-unions which have obtained authorization cards from 50 percent plus 1 of the workers in any given bargaining unit.  At no point in the process will the National Labor Relations Board organize and oversee any election for unit members to determine whether employees actually want union representation.  “If business leaders are not aware of this terrible piece of legislation, they should be. It would hurt us dramatically in our ability to be competitive globally.  Think about it,” he added,  “When was the last time you heard a CEO say, “‘I wish we had a union.’” 

Welch sidestepped questions about how his successor Jeff Immelt was performing at the helm of GE, saying he was responding to many challenges and operating in a different environment. He praised Immelt’s eco-imagination strategy saying it isn’t necessary for business leaders to believe in whether global climate change was real or not because there is a market for green products and services that ought to be served. 

Asked by a World Business Forum audience member what his definition of CSR (corporate social responsibility) is, he replied dismissively, “Winning!”