Former GE CEO Welch Advises Immelt to Manipulate Earnings

Jack Welch was on CNBC this morning criticizing Immelt, claiming that he had a "credibility issue." Welch asserts that Immelt promised to deliver strong earnings three weeks ago and he didn't deliver on that promise. I believe what Welch is saying is that Immelt should have used some fancy accounting tricks to artificially boost earnings in order to satisfy Wall Street analysts, just like Welch did when he was CEO. Ever wonder how GE beat earnings by a penny for many years under Welch's reign and achieved spectacular returns? It under-reserved insurance reserves for years, thus artificially boosting earnings. Welch conveniently retired, taking an egregious retirement package which became public during divorce proceedings from his second wife who he left for a much younger woman. Immelt then had to boost reserves to an adequate level in order to sell the insurance arm, basically wiping out most of the earnings gains from Jack Welch's last five years in office.

Although GE's earnings were a disappointment, and Immelt should've been more conservative when giving guidance, he did the right thing by reporting lousy earnings. I'm not a huge fan of GE in particular, but I actually believe that Immelt is a much better CEO than Welch ever was. Welch was lucky, and crafty. In my opinion, he is also mostly responsible for the absurd CEO packages awarded to CEOs for doing mediocre work. When GE was picking a successor for Welch, Welch made certain all three contenders for his job received enormous retention bonuses at GE, thus forcing other companies who wanted to hire the losers to offer absurd guarantees. Who was one of those contenders? Our friend Robert Nardinelli, who was recently forced out of Home Depot with $200 million in pay that he felt he deserved. Shareholders and the board disagreed. Maybe it is Immelt who should be giving Welch some much-needed advice: Get a hobby and stop telling me how to do my job.

Mozilo Convinced Board He Was Grossly Underpaid

Does anyone actually know what corporate boards do?  If so, please explain, because I am perplexed.  While Countrywide Financial (CFC) was busy giving everyone in America a cash-out-refi-interest-only-no-doc-option-arm, what was CFC's Board doing?  They certainly weren't busy scrutinizing the company's moronic lending practices.  Just a quick look at CFC's REO portfolio of homes, which ranges from $40,000 houses in Sacramento to $3 million homes in ritzy parts of California, shows that they did not discriminate when it came to shoddy underwriting.  Well, as it turns out, they were busy hiring compensation consultants to try to figure out how much to pay CEO Angelo Mozilo.  According to the WSJ, the House Committee on Oversight and Government Reform is due to question Mozilo to figure out why, after two compensation consultants told the board to cut back Mozilo's pay, they opted to listen to Mozilo who asked for more.  According to an email Mozilo wrote to the board expressing his disappointment he claimed that "Boards have been placed under enormous pressure by the left wing antibusiness press and the envious leaders of unions..."  So, what did the Board do?  Instead of telling Mozilo to take a hike and hiring my 8 month old baby, who would have only asked for a stuffed frog as compensation, before running the company into the ground, the board opted to pay Mozilo $250m from 1998-2007 (not counting the $406 million from the sale of stock.)  Somehow I doubt that leaders of unions were personally calling the board and pressuring them, and suspect that Mozilo was the one doing the pressuring.  The good news is that Mozilo has been cordially invited to testify in front of the Committee and that might make for some good television...