Not So Risky Business: GE Forms a More Conservative Financial Plan
While many have urged GE (NYSE:GE) to break ties with its finance unit, GE CEO Jeffrey Immelt isn’t selling. The financial crisis took its toll on GE Capital, which in turn brought down GE as a whole, but Immelt would rather restructure the finance arm rather than lose it completely. GE Capital now has three main goals: convince investors that it’s not a rogue risk taker, guard itself against another financial crisis and send a message of reform to its regulator, the Federal Reserve.
Bloomberg Businessweek cites GE Capital (NYSE:GE) CEO Michael Neal who says their strategy for trimming the fat is very simple: businesses that tie up too much capital or have been deemed too risky are on their way out. So far Neal has felt that U.S. residential mortgages, a leasing business in South Korea and consumer banks in Latvia, Argentina and Brazil fall into this category.
One of the largest cuts made to GE Capital’s portfolio has been the discontinuation of issuance of commercial paper, described as “potentially volatile short-term unsecured debt issued by businesses” by Bloomberg BusinessWeek. Conversely, Neal is focusing on business segments that include aircraft leasing, private-label credit cards, franchise financing, and most importantly commercial lending and leasing for midsize companies.
The sixth largest U.S. Bank — behind monsters Bank of America (NYSE:BAC), Citigroup (NYSE:C), JP Morgan (NYSE:JPM), and Wells Fargo (NYSE:WFC) — is already down to $425 billion in net investments verses $550 billion in 2006 when the financial crisis hit. The goal is for the finance unit to make up only a third of GE’s total profits, down from a half in 2006.
GE Capital has cut borrowing 60% and built up $83 billion in liquid assets. The company also plans to refinance or retire $81 billion in bonds coming due in 2012. Bloomberg Businessweek quoted Neal who said of the GE Capital reform, “We’ve armored the place. We’ve double-hulled it.”