"[GE Capital] seemed an easy way to make money...This thing looked like a 'gold mine' to me."
A good MBA finance curriculum might kick off with the Modigliani-Miller theorem (M&M), which basically says:
1. Theoretically, you can't create value through your mix of financing. It doesn't matter whether you use 100% equity, 100% debt, or 50/50, your mix of financing won't create value (unlike good R&D for example).
2. #1 above is predicated on the absence of tax incentives, bankruptcy costs, agency costs, and asymmetric information, and the market being efficient.
The creators of M&M believed that the assumptions in #2 are mostly false most of the time. The beauty of the theory is in the assumptions themselves. Prescriptively, it basically says that your mix of financing matters only insofar as the assumptions in #2 are false for your project at your company in your country. If you start a division like GE Finance, and you start using complicated financial derivatives, you have several things to prove. You have to show which M&M assumptions are false for your company, to what degree they are false, that your suggested method of financing will take advantage of the M&M violations, and that the magnitude of financing matches the magnitude of M&M assumption violation (this last bit is important, GE really went hog wild with derivatives in a way that was completely not justified). GE Capital never passed the M&M sniff test.
