International BusinessKey messages
GE Capital: GE Capital is taking on the doubters. General Electric’s finance arm on Tuesday addressed investors sceptical of its fit within the industrial conglomerate. Chief among the messages: the business is adequately funded; it has enough capital to handle potential loan losses; and it is basically above average in what it does relative to big US banks. But if that’s all true, why does GE Capital need the special treatment it is fighting for on Capitol Hill?
- 52 US banks go belly up in 2009; 7 fail in a single day - 5 more US banks fail, toll mounts to 45 this year - Q1 sees 305 "problem" US banks; most in 15 yrs - Libor plunge: False profits - Rally makes life easier all round - Regulators seize 3 US banks
The Obama administration’s regulatory reform plans would ramp up the constraints on financial firms that are big enough to represent a systemic risk. But GE Capital is lobbying to exempt its $650 billion balance sheet from such a high level of oversight. But if it’s so good at what it does, it shouldn’t need that kind of help.
The full-court press the company is unleashing in Washington is also at odds with the what GE Capital itself conveyed to shareholders. The first slide of its 63-page manifesto says its loan portfolios are “performing as expected or slightly better” and exhibiting loss rates “most below the Federal Reserve Base Case”. It expects loan losses in 2010 to mirror those of the current year, and it doesn’t need more capital “even under adverse scenarios”.
GE Capital rolled out the numbers to buttress its above-average banking prowess. The company said it has $25 billion of financial receivables to US consumers, with reserves equal to 6.6 per cent of these loans — above the 6.1 per cent average held by the top three American banks. Similarly, it has reserves equal to 1.5 per cent of the $93 billion of loans extended to US businesses, higher than the 1.1 per cent held by the big banks.
But here’s the problem. If GE Capital really is adequately capitalised to handle rising defaults, manages to get more than rivals from customers who can’t pay their bills, and has enough funding to weather ructions in the capital markets, it makes special treatment as a non-bank financial institution seem unnecessary.
The company also considers itself to be an “important source of liquidity to US businesses and consumers”. GE Capital’s balance sheet would make it the country’s fifth-largest bank. So GE Capital is right that it’s an important player in the financial system. And that’s how it should be regulated.