The big profit gravy train where money makes money without any value being delivered is taking a hit. Main Street is the big winner.
General Electric is selling off G.E. Capital to rid itself of its financial services division. One of the great American industrial companies, one that helped build (and I do mean BUILD) the United States into the great economic power that it is today, is returning to its roots—as a manufacturing company.
Although GE had dabbled in finance for more then fifty years, the role that finance played was only peripheral to the company’s core operations. But in the Go-Go 80’s, as Jack Welch watched other high profile financial services executives making big money out of nothing (paper deals), he wanted a piece of the action, too. It was then that GE dramatically expanded into financial services.
Soon GE Capital had grown into one of the world’s largest financial services players. Their meteoric growth was substantially driven by deregulated guidelines that treated GE more like a manufacturer and less like a bank. Loose rules allowed GE to not only finance customers buying their appliances, but to get in on commercial real estate financing, auto loans, leveraged buyouts, the credit card racket, and even on the sub-prime mortgage scam.
The paper transactions that drove GE’s stock price higher and higher, was a bubble sure to burst. By 2000, GE Capital was responsible for more than 50% of GE’s total revenue. That’s right, revenues generated from manufacturing jet engines, trains, wind turbines, and medical devices seemed to be standing still compared to the money coming in from financial transactions.
The free-money game at GE came crashing down in 2008-09. And it almost took the rest of the company (divisions with honest earnings and healthy debt to income ratios, not withstanding) with it. If not for the Federal Reserve guarantee of over fifty billion dollars in unsecured debt, GE would probably have been sold off into pieces for a fraction of what it’s worth today.
It’s taken awhile for the smoke to clear after the economic fire storm of 2008-09. But now that it has, GE’s current CEO, Jeffrey Immelt, has made what many think is a bold decision to get rid of the financial services arm of the company. I don’t think it’s as bold as it is wise. GE was the quintessential prototype of the American maker- economy. It made products that people and industry needed to improve lives and raised the American standard of living for everyone, not just for a few people on Wall Street. Though I criticize Wall Street for many things, I give it credit for buying up GE stock and raising its value by 10% the day the sale of GE Capital was announced.
GE was the darling of Wall Street for awhile when Jack Welch was running the company, but that was because its stock holders were making lots of money. GE's decision to get back to its roots, to invest heavily in manufacturing, and to grow its business organically, may not make it the darling of Wall Street, again. But it will make a positive difference in the lives of thousands on Main Street. And that's good business!