GE GE Aerospace

By Ted Mann and Ryan Tracy 

General Electric Co.'s lending arm became the first big financial institution to escape stricter postcrisis rules by dramatically shrinking its business, a strategic pivot in sync with regulators' demands for firms to reduce risk-taking.

GE has chopped away at its financial business since last April, when the company announced it was moving away from an operation that once had more than $660 billion in assets -- underwriting everything from credit cards to oil rigs -- and generated as much as half of GE's annual profit.

Because GE had shrunk and restructured the business, the U.S. Financial Stability Oversight Council said Wednesday it had voted to remove GE's designation as a "systemically important" financial institution, a label that had required the company to submit to stricter rules and supervision by the Federal Reserve. The decision frees up the manufacturer to borrow up to $20 billion for further stock buybacks, GE executives have said.

Since deciding to wind down the finance arm, GE Capital has signed agreements for the sale of about $180 billion of businesses and has closed about $156 billion of those transactions. The head of GE Capital, Keith Sherin, said the FSOC's decision is a result of the transformation of GE Capital into a "smaller, safer financial-services company."

GE's case marks the first time the oversight council has removed a "systemically important" designation since the tag was created under the 2010 Dodd-Frank financial overhaul law. For the oversight council, the change is a significant response to critics who have said its process for labeling firms as "systemically important" is opaque and doesn't give firms a clear road map on how to reduce risk.

"It proves something that we have believed for a long time: that this is an analytic process; that it fact driven; and if a firm changes its business line and its profile, there's [an] exit path from the designation," Treasury Secretary Jacob Lew said in an interview.

It was an orderly process at a time when FSOC -- a committee made up of senior U.S. regulators and officials -- is caught in the middle of both legal and political battles challenging its authority.

On the legal front, the council is appealing a federal judge's ruling nullifying its decision to apply the SIFI label to MetLife Inc. The stakes are seen as so high that the government case has drawn supporting briefs from an all-star cast of financial-crisis-era policy makers, including former Federal Reserve Chairmen Ben Bernanke and Paul Volcker, and former lawmakers Chris Dodd and Barney Frank.

On the political side, Republicans in Congress are pushing for legislation that would replace Dodd-Frank, including provisions that would scale back FSOC's authority to designate firms as possessing risks that could endanger the entire financial system. Wednesday's announcement leaves two other nonbank firms with the SIFI label: Prudential Financial Inc. and American International Group Inc.

While GE Capital has shown it is possible to convince regulators to rescind the SIFI label, the specifics of its case don't necessarily apply to others. For example, regulators liked that GE decided to guarantee GE Capital's debt. Its restructuring also came on a massive scale that may not be an option for insurers such as Prudential or AIG, though activist investor Carl Icahn has pressured AIG to explore a breakup.

"We're unique. We have a big industrial parent," GE Capital's Mr. Sherin said Wednesday. "If you're only in financial services, your decision is -- maybe to split up and go into pieces."

The FSOC vote clears the way for GE to borrow and spend like an industrial company again, a potential boon to investors who have cheered Chief Executive Jeff Immelt's decision to move back toward the company's roots as a manufacturer of high-tech machines like wind turbines, locomotives and medical scanners. Shares of GE gained 2% to $30.55 on Wednesday.

It is a swift comedown for GE Capital, a business that grew to be among the biggest lenders in the country. Even after the financial crisis, and despite years of clamoring from investors who wanted GE to reduce its exposure to financial risk, the company had $500 billion in assets at the end of 2014.

Months later, though, sparked by declining returns from lending and rising regulatory costs which Mr. Sherin estimated at $1 billion a year, the company launched Project Hubble -- its top-secret plan to drastically shrink GE Capital. The goal was to sell around $260 billion in total assets by the end of 2017, a mark the company could beat by almost a year.

Overall, 90% of employees from businesses that were sold went along to new jobs at the acquiring firms, Mr. Sherin said. GE has shifted 1,000 GE Capital employees to other jobs in the company, and is helping its regulatory and compliance staff find jobs elsewhere in the industry, he said.

Even once it has shrunk GE Capital, major financial-services operations will remain. The reconfigured operation will have less than $200 billion in assets including cash. It is holding on to its profitable business that leases aircraft and finances jet engine purchases. It also will retain its energy finance unit and a unit that will handle capital needs for the company's manufacturing businesses.

Without the tough rules from federal banking regulators, GE will have more leeway to add debt to its balance sheet, something Nelson Peltz's Trian Fund Management LP called for when the activist investor took a $2.5 billion stake in the conglomerate last year. Executives have been waiting to get out from under Fed oversight to explore such moves.

"We very may well decide to add additional leverage to the company, and we talked about something like $20 billion of potential capacity over time, which gives us a lot more flexibility around how we think about M&A as well," Chief Financial Officer Jeffrey Bornstein said last week.

Write to Ryan Tracy at ryan.tracy@wsj.com and Ted Mann at ted.mann@wsj.com

(END) Dow Jones Newswires

June 29, 2016 19:26 ET (23:26 GMT)

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