The news that General Electric's (NYSE:GE) financial section, GE Capital, is currently under consideration by the federal government for categorization as a systemic risk to the economy must have made many GE investors groan in frustration.
For years, the powerful conglomerate has faced criticism and complaints from its investors regarding the size and influence of its financial services arm. Now, as the newly minted Financial Stability Oversight Council puts GE Capital in the same basket as some of the country's biggest banks, I wonder how the company's investors are taking the news.
A crisis-era Buffett bailout
The financial meltdown of 2008 hit GE hard, necessitating a $3 billion rescue package specially delivered from Warren Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B). At the time, the huge company could credit its GE Capital unit with providing approximately half the profits it made each year.
As the subprime mortgage crisis chipped away at the company's steller bond rating, GE turned to Berkshire, as it was considered ineligible for the government's Troubled Asset Relief Program -- even though it did dip into the Temporary Liquidity Guarantee Program, which threw some weight behind about $139 billion in GE Capital's debt.
Since then, GE has bolstered its financial unit, and it is once again healthy. But investors can't forget how GE Capital singed them, causing dividends to fall precipitously for several years. Still, a tug-of-war ensues as GE attempts to placate investors even as it bulks up its financial sidekick.
To cut or expand -- that is the question
Since 2009, GE has pared down its financial section, and has even considered selling off key operations, such as consumer financing. The fact remains, however, that the unit still delivers where it counts. It brings in nearly as much profit as it did in prior years, albeit with a slimmer asset portfolio. Even its commercial real estate department is once again making money.
Despite GE Capital's contribution to the company's bottom line -- including dividend payments -- investors still are uncomfortable with the unit. Many seem to prefer GE for its other, more industrial-based activities, and would prefer to see the money section just go away.
GE, at least, won't let the subsidiary die. In an attempt to bolster the unit's capital stance, it has entered into an agreement to purchase nearly $7 billion in deposits from another company that is just as happy to exit the banking business and the attendant federal scrutiny -- insurance behemoth MetLife (NYSE:MET).
One Fool's take
Will GE's attempt to shore up its capital unit appease investors? It seems unlikely, since a core issue seems to be that shareholders want a pure industrial play from their investment, not a financial one. Even the fact that the lion's share of funds for stock buybacks and dividend payments come from GE Capital doesn't seem able to bring about a change in attitude.
On the other hand, GE is apparently unwilling to dump the unit, and it's certainly not difficult to understand why. What company wouldn't want to hang onto a sector that just handed over a $4.5 billion dividend payment?
Unfortunately, a designation from the government as a systemic risk will surely dampen dividends by demanding higher capital backstops for the company. However, GE Capital looks like it will continue to be an integral part of GE, whether investors like it or not. They may not be able to love it, but investors in GE are also investors in its capital unit -- which, from the looks of it, is not a terrible thing, and is not going to change any time soon.