FAIRFIELD, Conn. (
) -- Change is coming to
financial services unit -- the company just hopes to put it off as long as possible.
One way of buying time is to recognize losses later, rather than sooner. That is what Barclays Capital analyst Robert Cornell concluded GE is up to, following the release of its second-quarter earnings on July 17.
As a result, when GE Capital reported fewer writedowns than Cornell had in his 2009 estimates, he merely added to his 2010 loss estimates.
GE has raised suspicions among investors and analysts as it has reported relatively small losses in areas like real estate and consumer lending that have stung banks like
Bank of America
. GE has said this is because it has more conservative underwriting standards.
GE has little to gain from taking its medicine now. The company is under pressure to separate its industrial unit from its GE Capital financial division, as the Obama administration made clear in a white paper on regulatory reform that it wants to "re-affirm and strengthen" existing policies of separating banking and commerce.
While GE hopes to avoid such a move, its nearer term strategy appears to be to delay it as long as possible. Sterne Agee analyst Nick Heymann thinks GE will ultimately have to find a large deposit-taking institution to take a substantial stake in GE Capital. That will be an easier sell for GE if it has succeeded in its plan of shrinking the business. Otherwise, it may be too big for any institution to take on -- especially given that potential candidates like
are probably too busy fixing their own balance sheets to take on any major acquisitions at the moment.
That is why Heymann thinks the intended audience for Tuesdays call is, above all, regulators in Washington. Presenting the strongest picture it can of its financial unit may buy GE some time.
"This isn't any more about a decision: it's about when it's implemented," Heymann says.
On the other hand, Sanford Bernstein analyst Steven Winoker is not convinced GE will be forced to separate the two units.
"The Treasury suggestions are just that, so far, with new regulatory rules probably several iterations away from a final version," Winoker wrote in a recent report. He also notes that even if it is forced to separate the units, GE would have five years in which to do so -- a point GE emphasized in its latest earnings report.
--Reported by Dan Freed in New York