On August 30, 2013, I cheered the announcement that General Electric Co. (NYSE:GE) was planning to shed its financial business. See "General Electric: A Good Decision!" Now, "General Electric has confirmed pans to spin off its North American retail financial services business as a separate company, starting with an initial public offering next year." This comes from Ed Crooks and Camilla Hall of the Financial Times.
I think this is an excellent move for GE and an excellent move for the shareholders. This move is "intended to be the industrial group's last large-scale disposal under a restructuring to sharpen its focus on manufacturing operations."
The plans … up to 20 percent of the business will be sold off in the IPO in 2014. Then in 2015, it will be completely separated off through a share distribution to its investors. The concept: Jeff Immelt, CEO of GE, wants to cut the manufacturing company's "reliance on financial services earnings from about 45 percent of the group's total last year to about 30 percent."
At one time in the 1990s and beyond, General Electric was earning more than 50 percent of its profits from its financial services wing. In the latter half of the twentieth century, General Electric did what a lot of other manufacturing companies did … get into financial services.
The times called for this move. Credit inflation, beginning in the early 1960s, began to dominate many of the large manufacturing firms in the United States. These companies saw that profits could be driven by providing the financial services, consumer debt and credit card debt, to finance retail purchases and support the goods that were being produced on the production line.
GE, like General Motors (NYSE:GM) and others, took on more risk, financed the risk with more and more leverage, and also mis-matched the maturities of assets and liabilities in order to squeeze as much out of the effort as possible. The company did very well with the exception of the 2008-2009 period in which it suffered large losses. These loses contributed to the fact that GE had to cut its dividend and also contributed to the loss of its triple A credit rating.
GE Capital, the financial wing of GE, is large enough that, alone, it would be the fifth largest commercial bank in the United States. Two closing points on this move: first, this is an excellent move for General Electric. It will allow GE to focus on what it should focus on … its manufacturing operations.
Second, this move brings to an end General Electric's playing with the "incentives" set up by the federal government. A period of more and more credit inflation, like the one we experienced for the past fifty years, produces an euphoric environment that thrives on financial risk taking and financial innovation. General Electric and many other organizations were drawn into this environment, prospered in it, and then lost direction with its core business because of the distractions set up by the government. Now, GE is moving to regain control over its future, once again.