General Electric Co. is not primarily a financial services company, but on Friday it was easy to mistake it for one.
For some, that's exactly the problem.
Executives at GE, which reported second-quarter results Friday, spent much of a conference call that morning discussing the performance of its sprawling finance arm, GE Capital — and reiterating their commitment to keeping it, despite a regulatory reform proposal that, as currently written, would eventually force GE to sell or shutter the unit.
"We're able to play offense, and we are really committed to GE Capital," Jeffrey R. Immelt, GE's chairman and chief executive, said during the call. "We are strongly committed to our point of view and to a smaller, but still strong, GE Capital business."
But analysts were skeptical, both on the call and in interviews, about GE's ability to keep the finance arm in light of its performance and the regulatory momentum in Washington — not to mention the example set this week by CIT Group Inc., the commercial lender facing bankruptcy. GE Capital's days as a nonbank finance company are numbered, they said.
"There's no question in my mind that they'll have to become a bank" and separate from the parent company, said Nicholas P. Heymann, who follows GE as the head of global industrial infrastructure research for Sterne, Agee & Leach Inc. "You couldn't have a worse day for CIT to go flat, because they have the same structural problems — not the same exact business lines, some of them are similar and some aren't. But it was the same wholesale finance model and the same lack of customer deposits" that created trouble at CIT.
Steven E. Winoker, of Sanford C. Bernstein & Co., said he was more confident that with $636 billion in assets, GE Capital is unlikely to end up in the same bind as the $76 billion-asset CIT.
"There's an overlap in some businesses, but at the end of the day, just by size alone, you clearly have a situation where the federal government would not walk away from GE Capital," he said. "Therefore there's still liquidity, and therefore the rest of the issue is irrelevant."
Russell Wilkerson, a spokesman for GE, said, "There's a significant difference between CIT and GE Capital based on the size and diversity of our asset base, the quality of our credit rating and we are part of a diversified company that generates tremendous cash and has diversified funding."
On Friday, GE reported an 80% drop in GE Capital's second-quarter profit from a year earlier, to $590 million. The unit is "on track" to turn a profit for the full year, GE said. It also has completed its long-term debt funding plan for the year, as well as prefunding a third of its 2010 plan.
The unit's operations include GE Money Bank, which issues credit cards, as well as businesses ranging from equipment leasing to aircraft financing.
The Obama administration's regulatory reform proposals, released last month, would separate financial companies from nonfinancial ones.
"We're quite clearly opposed, as we said publicly, to this proposal," Brackett Denniston, GE's general counsel, said on the call. "These structures were certainly not a cause of the crisis, and the proposal would also unnecessarily affect important sources of lending at a time when the country needs lending."
Denniston said that any potential hard choices about GE Capital are many years away, as congressional debates over the proposals are expected to be "a long and complex process, probably lasting into 2010," and there would be a five-year window for compliance if the reforms were adopted.
He also said that in discussions with lawmakers, "we've heard considerable skepticism" about the part of the proposal severing banking from commerce, "and we've also heard considerable support for the idea of not breaking up the existing structures [and] grandfathering."
Ultimately, "more regulation is certainly something we prepare for," he said. And "nothing in the proposal changes our moving forward with a smaller, more focused GE Capital."
But as Winoker pointed out on the call, the regulatory reform proposals explicitly ban grandfathering. And Heymann called GE's hopeful tone lobbying at best — or "rubbish."
"They're digging into the water. I mean, come on, the grandfather clause?" he said. "They'd like to have you think this is going to take three years to go through Congress. But this is an administration, and a Congress … that knows how to move."
In addition to Denniston's presence on the call, there were other signs that the proposals have cast a large shadow over GE's dealings with investors. For example, GE will continue the discussion in greater detail with a follow-up "deep dive" conference call on GE Capital on July 28. (One analyst on Friday's call complimented the executives on the "firehose of information" they provided about all of their operations.)
Keith Sherin, the parent company's chief financial officer, took one analyst's question as an opportunity to defend the continued marriage of GE and its finance arm.
"Why is GE and GE Capital better than other financial institutions? We've been able to raise equity as a combined enterprise. We've been able to strengthen the balance sheet at GE Capital based on the strength of the GE business model and our cash flows," Sherin said. "The industrial combination with our financial services business has provided the strength for us to work our way through this crisis … and I think that's a pretty strong proof statement in one of the toughest environments that any business model has ever gone through."
Despite all the time spent discussing GE Capital, Immelt eventually tried to deflect some attention from its potential fate.
"I don't think this thing was targeted at GE Capital," he said in response to an analyst's question about the regulatory reform proposals. "I think this was a broader conceptual kind of thing. And so I don't buy into the notion that somehow this was targeted."