If you own GE stock, you might want to think over the implications of this little tidbit from the WSJ.
The new Obama regulations give the Fed regulatory authority over systemically important financial institutions. Given the size and reach of GE Capital it’s pretty much a foregone conclusion that GE would be viewed in the same light as a bank holding company and would be subject to regulation by the Fed.
From the Journal:
For GE Capital, the adjustment could be tricky. Perhaps the biggest potential headache for GE is a demand that regulatory supervision should cover any systemically important firm’s parent company and other subsidiaries. Under the proposed rules, these firms also would face restrictions on “nonfinancial activity.” Since GE would be unlikely to countenance limits on its industrial businesses, it might become necessary to split off GE Capital.
That would bring challenges. GE would have to ensure GE Capital had sufficient capital and stable funding to satisfy regulators and investors. In a recent presentation, it put its Tier 1 “common” ratio at a respectable 6.9% at the end of 2008. However, since it isn’t a bank, GE Capital doesn’t provide a standard Tier 1 capital ratio, the main regulatory measure. On this yardstick, it might fall below large banks.
When it comes to funding, the new regulations envision “rigorous liquidity requirements” for systemically important firms. One of GE Capital’s weaknesses going into the credit crunch was its reliance on short-term funding, underscored by its continuing use of government guarantees for some debt issues.
I don’t know if this should properly be labeled an unintended consequence or if in fact it might very well be intended. I’ve no doubt that GE and GE Capital make the financial regulators very nervous and who knows what discussions might have gone on in the depths of the crisis. What I do know is that there is going to be a lot more fallout that isn’t yet evident.
The moral? If you have investments that have any sort of exposure to the financial system take a hard look at them and think about what the implications of the new statutes might mean.
Disclaimer: This page contains affiliate links. If you choose to make a purchase after clicking a link, we may receive a commission at no additional cost to you. Thank you for your support!
Leave a Reply