From Prince to Pariah

Back to basics (image from businesswire.com)

In the late 1990's GE Capital was "the largest single contributor to General Electric's earnings."

GE Capital was a colossus. Everyone in banking and financial services ran into them, as a competitor, lender, customer, investor, and sometimes all of the above. In aircraft leasing, where my division competed with it, GE Capital Aviation Services (GECAS) enjoyed the lowest borrowing costs as well as the lowest airplane prices from Airbus and Boeing. It owned more airplanes than the largest airline.

We and other lessors could not offer lower lease rates than GECAS and had to come up with creative ways to compete (betting that the models we ordered would be in greater demand than GE projected, flexible lease-extension options, absorbing interest-rate and/or credit risk, favorable return conditions, etc.)

After the financial crisis of 2008 GE Capital lost its AAA credit rating. The subsidiary had become a drag on the parent, instead of an earnings contributor.

Last Friday General Electric announced that, after selling off pieces over the past 11 years, it will rid itself of GE Capital almost completely by 2018. The final straw was likely GE Capital's upcoming regulation by the Federal Reserve as "a large nonbank financial company" that produced systemic risk.

Investors reacted positively to the news:

News of the dramatic shift sent shares up 10.8%, to $28.51, after a 3% rise on speculative buzz Thursday. The gain is well-deserved: GE is choosing a good time to sell, because the market for financial and real estate assets has rebounded sharply since the 2008-09 financial crisis.

Today's prince, tomorrow's pariah.