General Electric (GE) did not technically "collapse" into bankruptcy, but rather experienced a significant and prolonged decline, often described as a "brush with collapse" or a severe financial crisis that necessitated a massive restructuring and divestment of its core businesses. This profound downturn was primarily due to its overexpansion into financial services, particularly through its GE Capital division.
The Pivotal Role of GE Capital
For decades, GE was known as an industrial powerhouse, manufacturing everything from jet engines to medical imaging equipment. However, under previous leadership, the company significantly diversified into financial services, creating GE Capital. This division grew to become an enormous entity, often overshadowing the industrial segments in terms of revenue and profit. GE Capital offered a vast array of services, including:
- Commercial lending and leasing
- Consumer financing (credit cards, mortgages)
- Aircraft leasing
- Energy financing
While initially highly profitable, this expansion into high-risk financial products exposed GE to significant vulnerabilities, moving it away from its core industrial strengths.
Impact of the 2008 Financial Crisis
The excessive development and reliance on financial services through GE Capital proved to be GE's undoing, particularly during the 2008 financial crisis. As the global economy faltered and credit markets froze, GE Capital experienced enormous losses. Its extensive portfolio of loans, leases, and other financial assets became distressed, leading to a liquidity crunch and fears of insolvency.
The crisis highlighted several critical issues within GE's structure:
- Excessive Leverage: GE Capital operated with a high degree of leverage, making it extremely vulnerable to economic downturns.
- Lack of Transparency: The complexity of GE Capital's operations made it difficult for investors and even company executives to fully grasp its risk exposure.
- Capital Requirements: As a "too big to fail" institution during the crisis, GE Capital faced stringent new regulatory requirements, demanding more capital and limiting its ability to generate profits as it once did.
Consequences and Restructuring
The immense losses incurred by GE Capital forced GE to undergo a drastic transformation. The company had to divest the vast majority of GE Capital's assets, shedding billions of dollars in businesses and effectively dismantling the financial empire it had built. This strategic shift aimed to refocus GE on its core industrial roots, such as aviation, power, and renewable energy.
While GE managed to avoid bankruptcy, the crisis irrevocably altered its trajectory, leading to a significant reduction in its market capitalization, a series of leadership changes, and a long, arduous process of selling off assets to stabilize its balance sheet and simplify its operations. The "collapse" refers to this precipitous decline and the necessary dismantling of a once-diversified conglomerate, rather than a legal insolvency.
