Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: ChanceIs who wrote (209627)	7/8/2009 8:26:00 AM
From: ChanceIs	Read Replies (1) \| Respond to of 306849

GE Capital's Political Minefield >>>It isn't clear to me how much a failure of split off GE Capital will affect the industrial side of the house. The question for today is whether the current stock price discounts GE capital as an asset or liability. I guess as an asset, which implies that GE will take a dive if/when GE Cap is cut loose.<<< By PETER EAVIS General Electric is used to dealing with political risk in developing markets. Not so much at home in the U.S. But amid the fallout from the financial crisis, that is where it faces the greatest challenge. The reason: The Obama administration's financial-system reforms. These could push GE to spin off its large lending subsidiary, GE Capital, and turn it into a bank-holding company, with tighter regulation, higher capital ratios and bigger loan-loss reserves. Heard on the Street Columnist Peter Eavis explains to Dow Jones Newswires' Simon Constable how the government may force big changes at General Electric's finance unit, including a possible spinoff. Granted, the administration's proposals could change significantly before they become law. Even if they don't, some believe that GE has the influence to secure an exception for itself. But since a central aim of the reforms is to close regulatory exemptions, it is hard to see how GE Capital stays unchanged. Investors have to think hard about its future. One option might be to shrink GE Capital's balance sheet from the current level of $613 billion. That could persuade regulators not to classify it as a "Tier 1 financial holding company." That's the term given to systemically important firms that will have to hold extra capital and face stricter supervision. A much smaller GE Capital might then be allowed to remain as a subsidiary of GE. However, regulators haven't said how small a firm must be to avoid Tier 1 FHC status. If all 19 firms recently stress-tested by the government become Tier 1 FHCs, it could include firms with as little as $200 billion in assets. For GE Capital to become that small would mean much lower earnings and perhaps selling assets below par. [General Electric share performance] A split looks more likely and could cause immediate challenges. Moody's Investors Service says a stand-alone GE Capital, without support from the GE parent, would be rated single-A. Being downgraded to that level could trigger large collateral calls. GE Capital also may have to reduce assets that banks typically aren't allowed to hold in size, like real-estate equity investments, which totaled more than $36 billion at the end of 2008. Another big question is what happens to capital and reserves. GE Capital hasn't given a number for its standard Tier 1 capital ratio, the key regulatory measure. It did say its "Tier 1 common" ratio was 6.9% at the end of last year. Since it has no preferred equity, its standard Tier 1 ratio was also likely 6.9%. That would put it well below the 10.4% average for the largest four U.S. banks. On loan-loss reserves, meanwhile, GE Capital's reserves are equivalent to 1.59% of loans. That is far below 3.6% at the top four banks, even though nonperforming loans are higher, as a percentage of loans, at GE Capital. GE says this comparison can be misleading because of big differences in loan books. Maybe so, but if President Barack Obama's reforms go through, bank regulators may have the final say.