GE,GE Capital: Parting Company?

Will the Obama administration's reforms of the financial system hurt retailers and manufacturers with lending arms?

The talk had become so fevered that on June 22nd Jeffrey Immelt, General Electric’s embattled boss, sent out a memo to all staff to quash it. “GE is and will remain committed to GE Capital,” he insisted. These words of reassurance were prompted by the financial-reform plan the Obama administration had unveiled earlier in the month, which many saw as heralding the dismemberment of America’s biggest conglomerate, with interests from nuclear power to financial services.

GE is not the only company in the line of fire. An array of retailers and manufacturers that provide customers with loans for purchases, from Target to Harley-Davidson, also face threats to their business if the proposed legislation makes it through Congress. That, as Mr. Immelt pointed out in his memo, is a big if: “it is very early in the process, and Congress will now spend months reviewing and drafting legislation.” During that period, GE will doubtless deploy its huge lobbying clout to argue that it should be left alone.

The administration’s proposals pose two main concerns for GE, of which much the greatest is the implication that GE Capital, the firm’s vast finance arm, would be considered a “Tier 1″ bank, meaning one that is so big and systemically important that it should be subjected to especially thorough scrutiny and tight controls. Restrictions on the industrial activities of such banks might force it and the rest of GE to part company.

Mr. Immelt rejects this prescription on the grounds that the combination of commerce and finance within the firm played no part in the financial crisis. Indeed, GE argues that the strong cash flow from its industrial businesses-aircraft engines, power-supply equipment, and so forth-actually protected its financial operations during the credit crunch, when stand-alone financial firms suddenly found they could no longer raise funds.

But GE did have difficulties raising money, which led it to turn in October for (expensive) help to Warren Buffett, a celebrated investor. The firm says it did not need assistance obtaining short-term commercial loans, and only took part in the Federal Reserve’s emergency scheme to provide such lending to demonstrate its support for the concept. But its struggles certainly added to the general sense of panic at the time. Had GE failed, it would have done significant damage to the financial system and the wider economy. If companies such as General Motors and Chrysler are “too big too fail,” then so is GE Capital, let alone the conglomerate as a whole. And it makes little sense to regulate GE Capital differently from any other big, risk-taking nancial business.

It is not clear, however, that GE’s industrial businesses added to the systemic risk posed by GE Capital, or to the difficulty of regulating it. Nevertheless, given the way the political wind is blowing, GE Capital should expect to feel a heavier regulatory hand on its shoulder in future. It is also likely that GE Capital will find it more expensive to borrow for some time to come. That may well make being in financial services less attractive to its shareholders, who have already successfully pressed for a paring down of GE Capital, partly in response to the firm’s plunging share price during Mr. Immelt’s eight-year reign. Some want GE to get out of finance altogether.

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