GE Capital: Imagine Jeffrey Immelt, chief executive of General Electric, could remake the conglomerate's troubled finance unit from scratch. Ideally he'd narrow its focus to businesses related to GE's core industrial strengths - and the size of its balance sheet to around $360 billion in assets. Imagining, though, illustrates just how difficult it will be to tame GE Capital to a manageable size.
Immelt has already taken out the hatchet. But his aim of chopping GE Capital’s balance sheet down from $631 billion, by about a quarter across most areas, is going to take time. Immelt has 2012 in his sights to achieve this ambition – something he is likely to reiterate at his annual investor presentation Tuesday. That could seem like an eternity to investors who have seen GE’s market value shrink by more than $240 billion since the credit crisis erupted.
If it were possible for Immelt to hit the reset button on GE Capital, it’s not difficult to see what would disappear first: commercial real estate. The market for office properties and securities backed by them is in a shambles and GE Capital, as both lender and landlord, is heavily exposed. The company recently raised to $7 billion its estimate of unrealized losses on underwater properties. The trouble is that most experts predict asset values for everything from apartment buildings to skyscrapers have further to fall.
A GE Capital without its current real estate portfolio would be $78 billion lighter in assets, according to the company’s latest quarterly filing. There would also be other benefits. The company would save the incalculable management hours needed to clean up the current mess. It would also help simplify GE Capital’s portfolio, helping to woo back GE’s stock investors who have been turned off by the finance unit’s complexity factor.
In an ideal world, GE could just accelerate a sale of its real estate assets. But because property values have cratered, dumping them into the market would require the company to take big losses for which it has not set aside a corresponding amount of capital.
Consumer lending, which includes financing for credit cards that shoppers get from their favorite retailers and mortgages for homeowners in the UK would be the logical next piece of the GE Capital business to go. While these businesses might have grown out of GE’s one-time desire to finance appliance purchases, it’s not clear how they are core to the company’s global industrial reach today.
Yet this segment takes up $136 billion of the balance sheet. Take this out along with commercial real estate and GE Capital’s assets shrink to $416 billion. Finally, there’s the cash cushion GE has built up to reassure investors it has enough liquid assets on hand should borrowing in credit markets seize up again or losses prove steeper than expected. That liquidity luxury stood at $56 billion at the end of the third quarter. Without this, the balance sheet would be down to around $360 billion, though some portion of that cash would still probably be needed in a slimmed-down GE Capital.
Even after winnowing down GE Capital in this imaginary exercise, the group would still have a $146 billion commercial lending and leasing arm, a business that GE has been in for more than a quarter of a century. This operation is where GE built its reputation as expert in assessing the value and risks of collateral backing a broad array of loans, and isn’t far off from its business of financing customers of the conglomerate’s leading manufacturing activities, from jet engines to hospital equipment to energy turbines.
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Though not a perfect match with its parent's business lines, that would be a much better starting point than today’s balance sheet, which is bogged down by assets that are difficult to value, hard to unload and of little interest to investors seeking exposure to GE's world-class global infrastructure business.
Of course, fantasy-land thinking goes only so far. Even if GE Capital could shrink overnight by more than 40 per cent, that doesn’t mean it would escape what is sure to be a longer reach by regulators looking to protect the financial system. A GE Capital with a $360 billion balance sheet would still be too big to fail.
