How Obama's New Financial Rules Might Bite GE

If you own GE stock, you might want to think over the implications of this little tidbit from the WSJ.

The new Obama regulations give the Fed regulatory authority over systemically important financial institutions. Given the size and reach of GE Capital it’s pretty much a foregone conclusion that GE would be viewed in the same light as a bank holding company and would be subject to regulation by the Fed.

From the Journal:

For GE Capital, the adjustment could be tricky. Perhaps the biggest potential headache for GE is a demand that regulatory supervision should cover any systemically important firm’s parent company and other subsidiaries. Under the proposed rules, these firms also would face restrictions on “nonfinancial activity.” Since GE would be unlikely to countenance limits on its industrial businesses, it might become necessary to split off GE Capital.

That would bring challenges. GE would have to ensure GE Capital had sufficient capital and stable funding to satisfy regulators and investors. In a recent presentation, it put its Tier 1 “common” ratio at a respectable 6.9% at the end of 2008. However, since it isn’t a bank, GE Capital doesn’t provide a standard Tier 1 capital ratio, the main regulatory measure. On this yardstick, it might fall below large banks.

When it comes to funding, the new regulations envision “rigorous liquidity requirements” for systemically important firms. One of GE Capital’s weaknesses going into the credit crunch was its reliance on short-term funding, underscored by its continuing use of government guarantees for some debt issues.

I don’t know if this should properly be labeled an unintended consequence or if in fact it might very well be intended. I’ve no doubt that GE and GE Capital make the financial regulators very nervous and who knows what discussions might have gone on in the depths of the crisis. What I do know is that there is going to be a lot more fallout that isn’t yet evident.

The moral? If you have investments that have any sort of exposure to the financial system take a hard look at them and think about what the implications of the new statutes might mean.

Comments

[danS:]

Can't you calculate what the Tier 1 ratio would be if it is a standard bank based on their current financial statements? Seems like it would be a straight forward calculation.

Jun 19 10:12 AM

[quoin:]

who the hell does this punk think he is...he's got to be stopped...where are the so called representatives of the people...this is starting to be a joke...after he gets rid of our cars and puts us in bumper cars from coney island...or back in horse drawn carriages...who's the czar who'll be in charge of manneur removal

Jun 19 10:13 AM

[303820:]

QUOIN...First let me refresh your memory...the one that got rid of our cars and put us in-to bumper cars was your buddy G.W. Bush with his $4.59gl gasoline. and second... who cares about G.E. they have been closing factories in the USA AND SHIPPING JOBS TO SLAVE LABOR COUNTRIES LIKE THEIR IS NO TOMORROW I'D SAY ...BOYCOTT G.E.!!!!!!!!!!!


On Jun 19 10:13 AM quoin wrote:

> who the hell does this punk think he is...he's got to be stopped...where
> are the so called representatives of the people...this is starting
> to be a joke...after he gets rid of our cars and puts us in bumper
> cars from coney island...or back in horse drawn carriages...who's
> the czar who'll be in charge of manneur removal

Jun 19 01:59 PM

[303820:]

SUPREME COMMANDER? HOW ABOUT YOUR PREVIEWS ADMINISTRATION WHO MANAGED TO DESTROY THE USA ECONOMY WITH ITS FREE TRADE AGREEMENTS.
(CLINTON SIGNED NAFTA AFTER THE BANKING SYSTEM TOLD HIM THAT JOBS WOULD BE REPLACED WITH EASY TO GET CREDIT AND EQUITY LOANS TO KEEP PEOPLE BUYING POWER GOING) HOW ABOUT G. BUSH SPENDING $10 BILLION A MONTH IN A WAR TO FREE PEOPLE THAT DON'T WANT TO BE FREE...I DON'T AGREE WITH SOME OF PR.OBAMA. DOINGS BUT I THANK GOD THAT WE DON'T HAVE ANOTHER TOYOTA REPUBLICAN RUNNING THIS COUNTRY!


On Jun 19 10:22 AM quoin wrote:

> He's about to ask congress to declare him "The SUPREME COMMANDER"
> ...throwing out the CABINET and declaring his CZARS as his ultimate
> replacement of CONGRESS...is he going to move the CAPITOL to CHICAGO...
>
>
> It's ok for that fag Barney Frank to stand up on the floor of congress
> and call out BUSH..never Mr. Bush never President Bush...and Boxer...how
> dare you call her maam...how about calling her cow!

Jun 19 02:10 PM

[Larry House:]

Easy folks. If I step into quick sand, my first thought is not how did I get here? It is how do I get out? I am much more concerned about the next eight years than I am about the past eight years.

Jun 19 05:04 PM

[AEF:]

This is Anne from GE. Thought I'd provide some company comment along the lines of what was provided for the story cited in this post.

GE supports the broad themes of the President’s plan and shares his objectives. We’ve been saying for some time we anticipate increased regulation of financial institutions coming out of the crisis and if done wisely, it should place the US financial system on firmer footings. We've been discussing themes included in the plan with policymakers since the crisis began and in fact have been increasing disclosures related to GE Capital over the past several years to provide greater transparency. However, many elements of the Administration's proposal are new and bear further scrutiny. It's important to realize the white paper released this week is a very early stage in a lengthy legislative process that will include significant public debate.

GE is opposed to any forced separation or the end of ILC and thrift charters. These had nothing to do with the crisis and will only harm sound and well managed sources of credit when the economy most needs them.

The company is committed to working constructively with Congress to address any concerns with the Administration's proposal and will support legislation that promotes sound credit markets and the provision of credit to support economic growth.

GE Capital is an important lender to small and medium U.S. businesses and to consumers. We believe any reforms enacted must recognize that fact and the importance of diverse sources of lending. GE is executing its plan to create a smaller and more focused financial services business, and nothing in the President's plan changes that approach.

GE is strongly capitalized and has strengthened its liquidity significantly (e.g. reducing leverage and long-term debt, raising $15 billion equity, reducing the dividend, participating in CPFF and TLGP, etc.) We demonstrated at our March 19 investor meeting concerning GE Capital, using comparable methodology to the bank stress tests, that we would remain strongly capitalized under the Federal Reserve stress conditions. GE remains and will continue to remain supportive of GE Capital.

Finally, Tier 1 criteria have yet to be established. We believe it's premature to speculate both on which provisions will ultimately be enacted into law and on the eventual impact of any such provisions.

Jun 19 05:32 PM

[buoy:]

GE will be fine.

Jun 20 08:52 AM

[wendling_r:]

While the government regulations may in the future have an effect on GE's price they don't now. The only factor affecting GE's price now is the specialist who runs the stock and his system which controls the DJIA.

They have conducted an accumulation phase in this issue recently and are now poised to move the stock higher along with the broader markets. For my latest report on GE and where i see it moving short term and what i base those opinions on go to the web page attached to this comment and click on the free reports section and then read the report on GE.

It costs you nothing except the amount of time it takes to read the report and any other information you find helpful to your investing future.

Richard w. Wendling

Jun 20 11:09 AM

[desicon:]

Immelt need to be fired for the following reasons:

1)GE's performance under his tenure. Don’t blame it on the broad market.
2)For chumming with the President to gain political cover for his failures, instead of stewarding the company to better future
3)Prostituting GE’s assets (NBC, MSNBC) to provide biased political coverage to save his rear end from getting kicked out of his CEO position
4)Making false statements about dividend payouts
5)Failure to demonstrate CEO skills to lead a large company like GE

Jun 22 01:00 PM