Twitter should note: Making money from money is difficult

The writer is a former investment banker and author of Power Failure: The Rise and Fall of an American Icon

Making money from money is not nearly as simple and riskless as people like to think it is. In fact, Wall Street has always been a very dangerous place.

Financial companies are forever taking risks that they think they can manage, only to find out, often too late, that they cannot. Just ask the former executives, as I have, of Bear Stearns, or Lehman Brothers, or Merrill Lynch. Or perhaps Sam Bankman-Fried, who has a lot of explaining to do about the business of trying to make money from money after the collapse of his crypto exchange FTX.

The story of GE and its late chief executive Jack Welch, once an icon of capitalism before the conglomerate’s fall, provide further testimony. Welch loved the business of making money from money at GE Capital, the conglomerate’s finance arm.

And why not? With a minimal amount of labour or technology, Welch could arbitrage GE’s AAA-credit rating by borrowing inexpensively — only slightly more than what it cost the US government to borrow — and lend it out day in and day out at a sizeable spread, often with valuable warrants to boot.

“I thought it was easier than bending metal,” Welch told me in one of our many conversations before he died in 2020. “Fooling with money. Get bright people. Find an edge. It was easier to make money. It was a home run.”

And for many years it was easy for GE to make money from money, certainly during Welch’s 20-year tenure as the chief executive of GE, right through the stock market crash of 1987 and the bursting of the dotcom bubble in 2000. By the time Welch retired from GE in September 2001, GE Capital was contributing 40 per cent of GE’s earnings. That percentage would grow to 50 per cent under Welch’s chosen successor, Jeff Immelt.

And then it all came to a brutal, sudden end. Although much of the world was focused on the riveting meltdown occurring on Wall Street throughout much of 2008, in the non-bank bank world, a similar story was being written at GE Capital.

In the weeks before the collapse of Lehman Brothers in September 2008, GE Capital was itself in financial distress. For years it had depended mostly upon the usually reliable short-term unsecured commercial paper market for its funding needs. With something like $150bn outstanding, GE Capital was once the largest issuer of commercial paper in the world. That was fine until September 2008 when Immelt discovered that the market for commercial paper had dried up and GE could no longer rollover its considerable balances.

Immelt quietly sought help from Henry Paulson, the US Treasury secretary. “This stunned me,” Paulson wrote in his 2010 memoir, On the Brink, “if GE couldn’t sell its paper, what did that mean for other US companies?” Paulson also told me that the symbolism of GE “going down” would have been monstrous. “This was American capitalism. GE was America,” he said.

In his own 2021 memoir and in conversations with me, Immelt would subsequently dispute Paulson’s recollection, claiming GE never had a problem rolling over its commercial paper. But to try to stem how the financial crisis was affecting GE, Immelt decided to raise $15bn in new equity — something he pledged only weeks earlier he would not do.

Thanks to that and a reluctant decision by the Federal Deposit Insurance Corporation to allow GE to participate in the same lines of credit and government guarantees the agency was affording traditional banks, the group avoided what surely would have been a Lehman-style bankruptcy filing for GE Capital. Years later, of course, Immelt decided to rid GE of its finance arm. And GE, under new leadership, will be breaking itself up into three companies, starting in January.

If GE came asunder in the money business, that should be a warning for the possible new entrants into finance like Elon Musk. The new Twitter owner suggested in early November that his social media network should get into the business of making money from money. Perhaps, he suggested, Twitter users could send each other money using an account established through paying for verification on the network via app stores.

In other words, maybe Twitter could become, you know, a bank, perhaps with less regulation than a Main Street lender. “And then add debit cards, checks and whatnot and . . . just basically make the system as useful as possible,” the world’s richest man said. “And the more useful and entertaining it is, the more people will use it.” What could possibly go wrong?