It took five years after passing a massive regulatory reform bill, but policymakers finally succeeded Friday in forcing a large financial company to break itself up.
General Electric Chief Executive Jeffrey Immelt announced plans to sell most of the assets in the company's financial arm, GE Capital, over the next 18-24 months.
Once that process is finished, less than 10% of GE's operating earnings are expected to come from its finance arm, down from 57% in 2007, as the company refocuses on its industrial roots.
Immelt said one of his goals was to have regulators remove the "systemically important financial institution" label they slapped on GE after passage of the Dodd-Frank Act.Treasury Secretary Jack Lew, who chairs the Financial Stability Oversight Council, told lawmakers last month that any SIFI designation can be removed if a company no longer poses a potential threat to the economy.
"This is exactly what was envisioned by the FSOC process," Immelt said during a conference call.
Another factor in GE's decision was the recent performance of its spun-off consumer finance arm, Synchrony Financial. Synchrony's stock price has risen by more than 30% since its initial public offering last summer. GE now seems to believe that many of its other financial assets may also be worth more if they're owned by someone else.
Under the plan announced Friday, GE expects about $35 billion in capital to be returned to the parent company by 2018.
"So we are trying to achieve an objective that is good for the financial system that is also really good for our shareholders," GE Capital CEO Keith Sherin said during Friday's conference call, "and I think we have found that sweet spot here."
GE shareholders liked what they heard, sending the company's stock price up more than 8% in midday trading Friday.
The question now is whether GE's big move will offer a roadmap for other SIFIs. The firm's go-along approach stands in contrast with the more defiant postures of some of its fellow heavyweights.
MetLife Inc. is suing the FSOC in an effort to have its SIFI designation overturned. JPMorgan Chase has been pugnacious in response to analysts who wonder whether the company might be worth more if it were split into separate pieces.
Karen Shaw Petrou, managing principal at Federal Financial Analytics, said Friday that GE, with its mix of financial and industrial businesses on a massive scale, is one-of-a-kind. Other SIFIs are either banks or insurance companies like MetLife, Prudential and AIG.
"GE was unique before the crisis, through it, and now," Petrou said.
She added that it would have been "very expensive" for General Electric to continue operating as a SIFI, based on the supervision plans laid out by the Federal Reserve Board.
"That made it very clear not only to GE, but to any nonfinancial SIFI, that being under the Fed aegis is absolutely no fun at all," she said. "GE is very wise, with that warning indication, to take the strategic action it contemplates."
GE's move comes at a time when lawmakers have been pressuring regulators to clarify under what circumstances FSOC would "de-register" a firm as a SIFI. While under Dodd-Frank, FSOC is free to de-register a company, it's not clear under what circumstances it would do so.
None other than Sen. Elizabeth Warren, D-Mass., a hero to progressives, urged Lew during a hearing to lay out a process "because it would allow businesses to find the most efficient way of reducing the risks that they pose to the economy."
Lew said a firm would have to make "some pretty dramatic decisions about business structure" to be de-registered, but some observers suggested Friday GE's decision would likely qualify once it becomes effective.
In many ways, GE has been in policymakers' sights since the financial crisis. Amid the breakneck collapse of the global financial system in September 2008, it looked like perhaps the next domino to fall.
Shortly before Treasury Secretary Henry Paulson cooked up the idea of a $700 billion bailout, he spoke with Immelt, who feared that his company's reliance on short-term commercial paper might cripple its ability to fund its day-to-day operations.
As Andrew Ross Sorkin wrote in "Too Big To Fail," "Paulson was no longer worried just about the investment banks; he was worried about General Electric, the world's largest company and an icon of American innovation."
That searing experience led directly to the passage of the Troubled Asset Relief Program, and nearly two years later, the Dodd-Frank Act. That law invented the concept of a SIFI.
The implicit aim of branding companies as SIFIs, and thereby subjecting them to additional regulation, was to make it more cost-effective for the behemoths to break themselves up.
Twenty months ago, GE became one of the first two nonbanks to be formally designated as SIFIs by the FSOC. (The company that got the biggest bailout of all, American International Group, was the other.)
GE's decision to retreat from its financial businesses may not presage a wave of divestments by its fellow SIFIs. But it demonstrates that Washington remains wary about the commingling of finance and commerce. The pressure that big banks face to unload their physical commodities businesses is another example of that skepticism.
"Congress is very uncomfortable with the integration of banking and commerce," said Petrou. "Wal-Mart has been blocked, but GE has been the poster child for its creative use of all those loopholes that remain in the law to be a banking powerhouse. With these changes, it does make it very difficult to be a conglomerate with both financial and industrial operations."
Whether FSOC agrees to de-designate GE Capital as a SIFI is unclear. The council in February published a series of changes to its nonbank designation process that include a more robust process for de-designating companies already deemed to be SIFIs. That process involves an annual appraisal and a more detailed reassessment every five years.
Justin Schardin, associate director of the Bipartisan Policy Center's Financial Reform Initiative, said "nobody knows" whether FSOC's revisions will actually result in an easier and successful de-designation process, but with GE's announcement there will at least be a first attempt. If the process is successful, it will give other companies at least some framework to follow if they choose to follow a similar path. If it is not successful, the level of detail that FSOC provides the company about why it remains a designated SIFI could either help the company try again or lead to further changes in the de-designation process.
"It's not clear whether an institution can actually get out from underneath a SIFI designation, so this will be a great test to see whether one can or not," Schardin said.
John Heltman contributed to this article.