GE Casting Off Lending Business in Return to Its Industrial Roots

(Los Angeles Times/TNS) -

General Electric said it is selling the bulk of its GE Capital unit, in a dramatic refocusing of the company and a watershed moment in the wake of the financial crisis.

The Fairfield, Conn., conglomerate, a symbol of U.S. manufacturing prowess for much of the 20th century, said it was shifting away from lending and returning to its roots as a “simpler” industrial company.

In a first step, GE said it would sell the bulk of its assets in GE Capital Real Estate for $26.5 billion to funds managed by New York private-equity giant Blackstone Group, Wells Fargo & Co. and other buyers. GE Capital Real Estate owns mostly office buildings and commercial real-estate debt.

GE said it has decided that “market conditions are favorable” to pursue the sale of most of GE Capital’s business, aside from those that relate directly to its industrial businesses, in the next two years.

“The business model for financial services has certainly changed,” GE’s chairman and chief executive, Jeff Immelt, said in an interview on CNBC. “We’ve been working this way since the financial crisis.”

GE’s expansion into financial services symbolized broader shifts in the U.S. economy in the 1980s that saw the influence of finance and Wall Street rise while the manufacturing sector shrank.

While GE has a long history of providing financing for its industrial operations, the company’s expansion into finance as a profit center began under Jack Welch, GE’s influential chief executive from 1981 to 2001.

Welch pushed the company into such areas as reinsurance and investment banking with the purchase of Kidder Peabody in 1986. (GE sold Kidder in 1994 after a bond-trading scandal.)

Under Immelt, GE Capital expanded again with the 2004 acquisition of WMC Mortgage Corp., which became one of the leaders of the subprime mortgage industry, as well as major purchases of U.S. commercial real estate and debt. At its height in 2008, GE Capital had $538 billion in assets.

While immensely profitable, GE Capital was marked by volatility and risk. WMC was quietly shuttered in 2007, with GE taking a $1 billion charge, and later became the subject of scathing exposes about its pre-crisis-era lending practices.

During the financial crisis of 2008, GE Capital became one of the top beneficiaries of the Temporary Liquidity Guarantee Program, which offered loan guarantees from the Federal Deposit Insurance Corp. GE Capital had become so large it was designated a “systemically important financial institution” by U.S. regulators, requiring heightened regulatory scrutiny.

GE said Friday that it was working with regulators to shed the “SIFI” designation as part of its plan to dramatically reduce its finance business.

In 2014, GE Capital had assets of $363 billion and still provided 42 percent of GE’s net income.

The company said it planned stock buybacks of up to $50 billion with the sale of its financial assets and said it will concentrate on its “vertical” financing businesses GE Capital Aviation Services, Energy Financial Services and Healthcare Equipment Finance that relate to its core industrial businesses.