martes, 14 de abril de 2015

martes, abril 14, 2015
Review & Outlook

The Humbling of Big Finance

GE balks at the costs of being too big to fail.

April 10, 2015 6:54 p.m. ET
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   Photo: Tim Brakemeier/Zuma Press

General Electric GE 10.80 % ’s decision Friday to shed most of its finance business marks a strategic shift for one of America’s marquee companies. But it may be more important as a symbol of how the U.S. economy is adapting to the new era of financial regulation and too-big-to-fail supervisión.

GE surprised markets by saying it would “create a simpler, more valuable company by reducing the size of its financial businesses through the sale of most GE Capital assets” and by focusing on its industrial businesses. The company has struck deals to sell $26.5 billion in real-estate assets, and aims to sell all of its commercial and consumer banking businesses. It intends to keep financing arms for its aviation, energy and health-care units.

While GE Capital earned $7 billion last year—42% of GE’s overall profits—the unit’s earnings were down 12% and its returns on capital have been lackluster. GE’s long-time CEO, Jeff Immelt, added by way of explanation that “the business model for large, wholesale-funded financial companies has changed, making it increasingly difficult to generate acceptable returns going forward.”

Political translation: Getting money out of GE Capital as a dividend to the parent company in the future would depend on the mood of regulators at the Federal Reserve. Investors loved the move, sending GE shares up 11%, among the biggest one-day gains in a Dow Jones-index stock in years.

GE also wasted no time saying it wants to get out from under its designation as a “systemically important financial institution.” The SIFI label is what the federal Financial Stability Oversight Council now slaps on too-big-to-fail companies, and GE was one of the first to earn the honor. This reflects its size, as well as its near-failure during the financial panic when it needed federal debt guarantees and commercial paper assistance.

The trouble is that the SIFI label comes with enormous new costs and supervision. The exact costs aren’t clear, but note that GE is so eager to escape the Fed that it is willing to pay $6 billion in taxes to repatriate cash from overseas as part of its financial shrinkage.

Note too the way GE highlighted its financial unit in the illustrations that accompanied Mr. Immelt’s letter to shareholders in its recent annual report. A photo of GE’s executive team was included, along with shots of the management teams for industrial units. But for GE Capital the smiling group was captioned as the “Regulatory Team.” Regulatory compliance is a cost center, not a profit opportunity.

Many in Washington will claim that GE’s move is healthy if it means less financial risk-taking, and they have a point—up to a point. The financial system did become too large during the mania of the 2000s, thanks mainly to the Fed’s subsidy for credit and laws that over-promoted housing. Bankers took advantage by taking too much risk, and the mania turned to panic and bailout.

It thus might help the entire economy if GE’s financial assets can be dispersed and better managed by smaller companies. It would help even more if those companies fall outside the regulatory maw created by Dodd-Frank. This would shrink the taxpayer safety net, while also allowing for more financial innovation.

The GE decision might even be followed by other too-big-to-fail giants if they find their return on capital suffering under the regulatory yoke. This would be the market’s way of adapting to new regulation.

This assumes that the Fed and Treasury won’t go after the buyers of bank assets and attempt to tag them as SIFIs. Fed officials love to warn about “shadow banking”—which means the financial companies they don’t control—but the history of finance is that it always adapts to escape excessive regulation. The mistake is assuming the regulators are so all-seeing they can prevent a future crisis.

What Washington should promote—and what would be the antithesis of Dodd-Frank—is clear and simple rules. Banks that accept taxpayer-protected deposits need supervision and high capital levees.

The rest of the financial system needs to be allowed to take risks—and fail without federal help. Perhaps GE’s financial selloff is the market’s way of beginning to break free from the Dodd-Frank model of finance as a public utility.

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