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Fifty billion reasons

29 June 2016 By Rob Cox

What’s the cost of being labeled a systemically important financial institution? In the case of General Electric, the magic number looks to be about $50 billion. The U.S. industrial conglomerate led by Jeff Immelt on Wednesday officially shook off the SIFI designation applied by the Financial Stability Oversight Council to its GE Capital finance unit. The market capitalization benefits of reduced financial significance have been accruing for some time.

America’s top financial watchdog made the designation three years ago, and the company decided to break the shackles in April last year. In what will go down as a very swift exercise in dismantling a lending business, GE has jettisoned some $200 billion of assets. It seems to have achieved the fire-sale pace while avoiding singeing shareholders with low prices.

Since GE announced its plans to offload almost all GE Capital’s assets – it’s keeping a few operations involved in financing big-ticket items like energy turbines – the company’s stock has added about $5.25 a share, or roughly $50 billion in overall market capitalization. While GE’s stock is up more than 20 percent, the S&P 500 Index has gone nowhere. Shares of United Technologies, with which GE competes in aerospace, are around 15 percent less valuable. There are other factors involved in GE’s performance, but escaping SIFI-dom is the biggest.

As GE has rebounded, Morgan Stanley, Citigroup and Goldman Sachs have all lost more than a fifth of their former value. Tossing the SIFI label would be harder for these institutions without breaking themselves up. But GE’s example offers 50 billion reasons why their shareholders should do the arithmetic.


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