"Too Big To Fail" has become an all-too-common Wall Street designation that many have grown to consider a form of investor repellant. And General Electric (GE) is among those corporations that have become restless under the financial encumbrances the Federal Reserve imposed as part of that designation, as Real Money has reported.
The global manufacturer long has been considered a nonbank "Systematically Important Financial Institution" by the Fed -- a designation that is an outgrowth of the 2010 passage of the Dodd-Frank Wall Street Reform Act. It earned that status after its lending arm, GE Capital, became ensnared in the 2007-2008 implosion of the subprime mortgage market.
But after long chafing under the Fed's restraints on its debt incurrence abilities, leverage capacity and reserve requirements, GE appears ready to throw off the SIFI shackles. That's evidenced with GE Capital's filing Thursday of a de-designation request with the Financial Stability Oversight Council. (GE shares are held in Jim Cramer's Action Alerts PLUS charitable trust.)
"Our submission details the complete transformation of GE Capital," said Keith Sherin, CEO of GE Capital, which has become a miniaturized version of its 2008 self since GE CEO Jeff Immelt embarked on a makeover last April in hopes of returning GE to its more industrial roots.
"Our plan to change our business model, shrink the company and reduce our risk profile has been successful," Sherin said. "We have completed over 80% of our projected asset reductions; exited leveraged lending and U.S. consumer lending; exited nearly all middle-market lending; reduced real estate debt by more than 75% and real estate equity by 100%; and reduced outstanding commercial paper almost 90%."
Just last year, Immelt signed off on $157 billion in asset sales tied to GE Capital. Those sales have continued at a steady clip in 2016, with the company selling $485 million in its asset management businesses and a $1.4 billion loan portfolio tied to hotel-franchising businesses.
Immelt has been counterbalancing those sales with an effort to ink industrial mega-deals in hopes of bolstering GE's global competitive advantages against rivals such as United Technologies (UTX) and Honeywell (HON). For instance, GE signed a $10 billion deal last fall to scoop up energy businesses from French turbine maker Alstom; that transaction has built GE's competitive clout on the European front against regional rivals Siemens and Mitsubishi.
GE shares have risen 29% over the past 12 months as Wall Street appears pleased with Immelt's campaign.
"All in, GE has completed over 80% of its projected asset reductions, exited leveraged lending and U.S. consumer lending, lowered outstanding commercial paper by almost 90%, and cut its real estate equity by 100%, among a litany of other major moves," Real Money's Jim Cramer said in a Thursday report. "As a result, GE has emerged smaller, simpler, and less intertwined with the U.S. financial system, removing any conceivable ties or threat to U.S. financial stability.
And the global manufacturer is not alone in its moves, as many financial titans on Wall Street also have worked to ditch the SIFI label.
On Wednesday, insurance giant MetLife (MET) netted approval from a federal judge to drop its nonbank SIFI status, resulting in a roughly 5% share spike.
Part of MetLife's success in its SIFI unwinding comes as the result of the offloading in February of its insurance unit, Premier Client Group, to MassMutual Financial Group, The Deal's Ronald Orol and Jennifer Tekneci wrote in a Thursday report.
Bill Goddard, a partners with Day Pitney, told The Deal that the MetLife decision may help facilitate a "wonderful change to begin a dialogue about insurance federalism."
"A number of Republican lawmakers in Washington quickly pointed to the [Federal Judge Rosemary] Collyer ruling as vindication of their opposition to the SIFI designations," Orol and Tekneci wrote. "However, since Collyer has yet to release her opinion, the full impact of the decision is unclear. In addition, the government has yet to appeal the decision."
Fellow insurance behemoth American International Group (AIG) also has been clamoring to nix its SIFI tag, and its CEO Peter Hancock has said he may see an open door in the MetLife ruling. But it's reasonable to expect that AIG will have more difficulty, then, say, Prudential (PRU) in scrapping the designation. That's because AIG has become to many a symbol of moral hazard and systemic risk ever since taking an colossal long positions against the bets of the subprime-mortgage bears in 2008, which resulted in a multibillion-dollar bailout and a hefty burden on U.S. taxpayers and the broader economy.
-- Ronald Orol and Jennifer Tekneci contributed to this report