The Slimming Down of GE Capital
For years, General Electric could count on its finance unit, GE Capital, to provide some earnings muscle when other divisions at the industrial giant wavered. But when the financial crisis hit in 2008, rightly or wrongly, GE Capital—by then with assets equaling those of the sixth-largest U.S. bank—found itself lumped in with Wall Street banks and other complex financial companies.
Ever since, GE Capital’s heavy exposure to finance has weighed on the parent’s share price, still down almost two-thirds from its 2007 high. Some investors have hinted GE would be better off financing only its own products and selling the bulk of the finance unit. That, Chief Executive Officer Jeffrey Immelt has made clear, won’t happen. “Everybody’s going to have their own point of view on GE Capital and the financial crisis,” says Immelt. “I look at it in a macro sense and say we never had an unprofitable quarter. We came out of it as best we could.”
Determined to hold on to the lucrative business, GE now must rein in the finance unit by making it smaller, less risky, and more obviously different from Wall Street banks. GE Capital CEO Michael A. Neal says the approach is as simple as stop and go: Businesses that tie up too much capital or don’t fit the profile of a more conservative portfolio have been designated as red. Red businesses are on the way out. Those already jettisoned include U.S. residential mortgages, a leasing business in South Korea, and consumer banks in Latvia, Argentina, and Brazil. “We looked hard at our businesses that consumed a lot of capital to grow,” explains Bill Cary, GE Capital’s chief operating officer.
Neal is expanding operations he has labeled green, including such GE strongholds as aircraft leasing, private-label credit cards, and franchise financing. GE Capital’s largest business, commercial lending and leasing for midsize companies, is its biggest and most important keeper. GE Capital has already shrunk to about $452 billion in ending net investments, a measure of assets, down from more than $550 billion when the financial crisis hit. As GE’s industrial divisions grow, GE Capital should soon provide only about a third of the parent’s profits, vs. half in 2006.
One big change is the drop in the unit’s issuance of commercial paper, potentially volatile short-term unsecured debt issued by businesses. GE Capital has scaled back such borrowing by 60 percent, to $41 billion. It has built up an $83 billion cash balance and is refinancing or retiring $81 billion of its bonds coming due in 2012. The strategy is twofold: to convince investors that GE Capital is not an undisciplined risk taker, and to bulletproof it against another financial crisis. “We’ve armored the place,” says Neal. “We’ve double-hulled it.”
Neal also wants to send that message to his unit’s new regulator, the Federal Reserve. (In July, GE Capital’s former regulator, the Office of Thrift Supervision, was shut down.) Fed staffers are currently reviewing GE Capital’s operations, because the unit’s secured lending businesses differ from those of banks. Since the financial crisis, GE Capital has voluntarily halted what was known as its internal dividend—a percentage of its profits that it sent up to the parent company. In good years, that could account for up to 40 percent of GE Capital profits. Even today, the potential benefit for the parent company is huge; for the first nine months of 2011, GE Capital earned about $5 billion. If the Fed gives the O.K., billions of dollars could start flowing again, giving Immelt more flexibility to spend on acquisitions, share buybacks, and new plants.