Questions Again Raised On A GE Capital Spin-Off (GE)

The Wall Street Journal is out with another article discussing that General Electric Co. (NYSE: GE) may be forced by the Obama administration's financial system reforms to spin-off its beleaguered GE Capital unit and turn it into a bank holding company with tighter regulation, higher capital ratios and bigger loan-loss reserves.

The article discusses that one way GE Capital could avoid being classified as a 'Tier 1 financial holding company' is to shrink its $613 billion balance sheet. While regulators haven't said how small a firm must be to avoid Tier 1 FHC, firm's with as little as $200 billion in assets were recently stress-tested by the government so this could be the benchmark.

The article said a split of GE Capital looks more likely and Moody's said a standalone GE Capital would have just a single-A credit rating. This would be a significant downgrade from the current AA-rating which is largely supported by the GE parent company. A downgrade to that level could trigger large collateral calls, the article claims. GE Capital may also have to pare back assets that banks typically aren't allowed to hold in size, like real-estate equity investments.

General Electric has thus far resisted a move to spin-off GE Capital. When StreetInsider.com asked GE CEO Jeff Immelt at a conference recently why the company would resist a spin-off of GE Capital, all Immelt would say was "nice to meet you" clearly avoiding the question.

Maybe the credit rating downgrade has something to do with this effort to keep GE Capital. Our view is that splitting-off GE Capital could benefit the shares as it would give investors a clear way to value the separate entities. Currently, the market is valuing GE Capital at $10-$20 billion, according to recent comments from Immelt on Charlie Rose. On the show, Immelt said at its peak the market was valuing GE Capital between $150-$200 billion and now the market is valuing it at $10-$20 billion. Immelt said maybe it is not worth $200 billion, but it is definitely worth more than $20 billion.

Well Mr. Immelt, maybe you should let the market decide what the unit is really worth by spinning it off.

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