General Electric has announced it is selling off another set of assets from its finance division. Wells Fargo will purchase $32 billion worth of commercial loans and leases from GE Capital.
Ultimately the company has said it plans to unload most of its $500 billion worth of financial operations, which caused the company big trouble when the housing market crashed and the financial crisis hit in 2008. GE’s stock price has also languished as Wall Street investors look askance at the company’s continuing exposure in the financial sector, which is more risky and less rewarding following the recession and Congress’s passage of major banking regulation.
General Electric became a major financial player starting in the 1980s. After World War II, the company was an industrial powerhouse, making refrigerators, power generators, light bulbs and the like. Then legendary CEO Jack Welch took over in 1981. It was the era of financial deregulation and the ascendancy of Wall Street, said Jeff Madrick, author of the books “Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present” and “Seven Bad Ideas: How Mainstream Economists Have Damaged America and the World.”
“This was the light bulb that went off in Jack Welch’s head: ‘Why should be I be in the industrial business when I can make such a higher return on investment in finance with far fewer people?’” said Madrick. “And he started to move the company away from these industrial companies that were very people- and worker-intensive.”
Over the next few decades, GE Capital made a lot of money for the parent company — financing real estate, fast-food franchises, private equity, credit cards and the like.
But in 2008, the real estate market had crashed, the financial crisis hit and GE’s huge financial exposure led it to take government support (via the FDIC’s Temporary Liquidity Guarantee Program). GE’s financial businesses suffered as most banks’ did, but after the recession its asset pool still ranked the company equivalent to the seventh-biggest bank in the country.
Jeffrey Manns at George Washington University Law School explains what happened to GE next: “In 2013, the Financial Stability Oversight Council designated General Electric a ‘systemically important financial institution,’ equivalent of a bank holding company.” Manns said GE executives learned in the subsequent year that the designation would lead to stricter capital controls and regulatory oversight for the company under the Dodd-Frank financial reform legislation passed by Congress.
Jim Corridore, an equity analyst at S&P Capital IQ, said GE is now divesting its financial operations in order to reduce exposure to financial risk, and disqualify itself as a “systemically important financial institution.”
“The regulatory environment is very harsh” for the largest banks and bank-like institutions, said Corridore. “They spend a lot of time on compliance and they have a lot more government oversight as a financial company than they would as an industrial company, and that’s a big reason why they’re making this transition as well.”
Once GE completes its sell-off of financial businesses, Corridore said, the company will be able to focus more aggressively on growing its domestic and international business in core industrial products that remain highly profitable, such as aircraft engines, medical devices and power turbines. The limited financial operations that GE plans to keep under its corporate umbrella are directly related to financing customer purchases of those big-ticket items.
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