WASHINGTON --General Electric said Friday it will sell off most of its banking operations, an acknowledgment that the company needs to transform itself in the face of Wall Street reforms passed five years ago.
The move marks the most dramatic reshaping of the American financial system to occur as a direct result of the 2010 Dodd-Frank law, which required regulators to take a hard look at financial companies deemed too big to fail.
"GE’s decision today shows that some of the financial reform measures regulators have taken are working: firms that threaten America’s financial system – like Wall Street’s too-big-to-fail banks – have to be made to bear the costs of their risky business so taxpayers don’t have to pay the bill when their risks explode," Better Markets CEO Dennis Kelleher said in a written statement.
GE will sell off real estate assets to Wells Fargo and the private equity firm Blackstone. The industrial behemoth will retain its financing operations related to aircraft, energy and health care, but the overall value of its banking business will shrink to $90 billion, down from $538 billion in 2008 and $363 billion at the end of 2014.
In 2013, regulators designated GE as a “systemically important financial institution” under Dodd-Frank, a label that subjects the firm to tougher capital and regulatory standards. By shedding the bulk of its banking division, GE can make a stronger case that it no longer should have that label. The company said Friday it would “work closely” with regulators to take whatever action is needed to make that argument.
The banking exit marks the ultimate reversal of one of the most storied legacies in American business. While GE is best known in households for microwaves and refrigerators, its reputation as a global business titan was built largely in the 1980s on its banking wing, GE Capital. Then-CEO Jack Welch built impressive earnings numbers by aggressively managing GE Capital's accounting profits. The company eventually settled accounting fraud charges with the SEC, and by 2008, its subprime mortgage operations nearly toppled the firm. GE ultimately tapped the federal government for support, issuing over $70 billion in debt guaranteed by the Federal Deposit Insurance Corp.
Current CEO Jeff Immelt has worked to slim down the company's financial operations in the years since to focus on industrial activities. The company spun off its consumer finance operations last year, and the sales announced Friday will make the company less dependent on riskier short-term funding.
Financial watchdogs have long warned about the economic dangers of mixing banking activity with commercial and industrial operations. In 1933, the Glass-Steagall Act banned such hybrids, but regulators' exemptions over the years allowed some commercial firms to break into the financial world nevertheless. Banking is an inherently volatile industry, with a safety net provided by both the Federal Reserve and the FDIC. Allowing banks to merge with commercial institutions extends those risks deeper into the corporate world.
Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.) have introduced legislation that would pressure other financial institutions to follow GE's lead and split into multiple firms, limiting the potential fallout to the economic system from a failure. The bill, which would significantly increase capital standards on banks with more than $500 billion in assets, has not received a vote. A nonbinding budget resolution to fund the Brown-Vitter bill passed the Senate unanimously in late March.
"I see this as a win not just for too-big-to-fail, but for the extension of the regulatory perimeter in Dodd-Frank," said Marcus Stanley, policy director at Americans for Financial Reform. "You basically had one of the largest consumer and investment banks in the country stapled onto a major industrial corporation, and because it was part of this conglomerate, it wasn't being regulated like a major bank. When the Fed changed that regime, GE decided it wouldn't be as profitable."
GE said it will record a cost of $16 billion in the first quarter of 2015 as a result of the restructuring. The company sought to console shareholders by authorizing a plan to buy up $50 billion of its own stock, which will elevate share prices.
CORRECTION: An earlier version of this article misidentified David Vitter as a Democrat.