General Electric (GE) began the sale process Monday for its lending business, bringing it that much closer to getting out of federal oversight as a systemically important financial institution.
Once GE Capital is gone, GE believes it can excel as a much smaller, pure-play industrial. GE Capital once contributed as much as half of GE’s profits, but it has been an albatross since the financial crisis.
GE Capital threatened to scuttle the wider company, and even came under the Federal Reserve’s oversight. If that weren’t enough, the lending business can’t even justify its cost of capital these days.
It’s possible GE would choose to try and fix GE Capital if it hadn’t been designated as a systemically important financial institution, but no one wants the Fed looking into everything the lender wants to do.
The nation’s banks have to get a green light from federal regulators just to hike a dividend. Laboring under similar constraints puts GE at a distinct advantage.
GE’s plan sounds like a good one, and the market sure appears to like it. GE stock rallied on the news when it came out in April and it has held on to most of those gains. GE stock is up 8.5% for the year-to-date, beating the S&P 500 by 6 percentage points. Prior to the announcement, GE stock was lagging the broader market in 2015.
GE Gets the Ball Rolling
With about $580 billion in assets, GE has a lot of work to do, but the company is making good process. The Wall Street Journal reports that GE is taking bids for a $40-billion slice of its commercial lending unit. Get ready for liftoff.
GE already made strides in ditching its financial operation, but this latest move really gets the process rolling. GE cut Synchrony Financial (SYF) loose earlier this year, spinning off the personal finance business in an initial public offering.
The real estate stuff — office buildings and commercial real estate debt — is going to Blackstone Group LP (BX) and Wells Fargo & Co (WFC), among others, for $26.5 billion.
But those were small steps compared to what’s left. The WSJ reports that the unit providing financing for the private-equity industry could be sold as early as next week. And, then, like dominoes, the rest of lending operations should fall.
At this rate, GE may finish selling the financial arm ahead of its two-year schedule, which is fine news for shareholders. The sooner the company stops being a behind-the-times conglomerate, the better — both in the shorter and longer term.
In addition to putting tens of billions of cash directly into investors’ pockets — which is almost always good for some immediate upside — GE stock will make a lot more sense as a long-term holding. It will be an industrial stock, trading on sales of things like jet engines, turbines and CAT scanners.
As a hybrid financial-industrial play, GE didn’t really fit in with either sector. The two don’t even offset each other when the business cycle turns down. The market likes clarity — that’s why conglomerates have all but disappeared — and GE will benefit from that.
For the first time in a long time, GE stock looks like a long-term market beater. By turning back the clock, GE will finally put the financial crisis behind it.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
