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GE and other manufacturers back exemption in financial regulation bill
GE and other manufacturers back exemption in financial regulation bill
By Jia Lynn Yang
Washington Post Staff Writer
Tuesday, May 18, 2010
A last-minute fight has emerged over a proposed amendment to the Senate's financial regulation bill that would limit the government's power to address high-risk financial practices at companies if their main business is manufacturing.
The amendment, which the Senate might vote on early this week, could make it difficult for federal regulators to address threats to the global financial system posed by such companies as the industrial giant General Electric, which extends tens of billions of dollars a year in customer loans through a subsidiary.
In recent days, GE and other manufacturers have ramped up their efforts to draw attention to how the Senate legislation affects industrial companies. GE has been discussing its concerns with other manufacturers, trade associations, lawmakers and their staff, a company spokesman said.
"This is a 'Save GE' kind of amendment," said Raj Date, executive director of the Cambridge Winter Center for Financial Institutions Policy. He said GE stands to benefit more than other industrial companies that also provide financial services -- for instance, Caterpillar and Harley-Davidson -- because the size and scale of GE's activities could potentially endanger the broader economy.
Under the bill being debated by the Senate, a council of federal regulators would examine all sorts of firms, banks and non-banks alike, to determine whether a company's business practices could pose a potential risk to the wider financial system. Those firms deemed systemically risky would be subject to tighter regulation by the Federal Reserve Board, which could, for instance, require them to reduce the amount of money they borrow or increase the amount of capital they hold against possible losses. Although this tighter oversight could reduce the chances of another financial crisis, the restrictions would cut into profits.
The amendment offered by Sen. David Vitter (R-La.) would exempt from this stricter oversight any companies that earn less than 85 percent of their revenue from financial services.
"I have a big concern about the bill overall, that it is overreaching and bringing in a lot of sectors of the economy way beyond true financial firms," he said. "My amendment is one attempt to correct that."
Supporters of the provision, which include the National Association of Manufacturers and the U.S. Chamber of Commerce, say the amendment makes common sense. They argue that companies such as John Deere and Harley-Davidson provide financing for their customers but should not be caught in the same net as, for instance, insurance giant American International Group.
Opponents of the amendment say a company's internal revenue breakdown is irrelevant to whether its banking business is critical to the economy. A manufacturing company, for instance, can build a banking business big enough to cause concern for regulators.
In the case of GE, its subsidiary, GE Capital, last year extended $72 billion in credit to commercial customers. Only a small percentage of the company's financing is for customers buying the company's locomotives, turbines and other products. Most of GE's lending and leasing is to small and mid-size firms that do not purchase GE equipment.
GE Capital is not legally considered a bank, a classification that has traditionally come with more stringent regulations. But it was considered such a vital part of the financial system that GE Capital has been a major beneficiary of emergency government help intended for the banking sector through the Federal Deposit Insurance Corp. The program, known was the Temporary Liquidity Guarantee Program, or TLGP, helped guarantee the firm's corporate debt.
Critics of the Vitter amendment say it would exempt GE Capital from being treated as a potential systemic risk because GE, the parent company, earned only 33 percent of its revenue in 2009 from its financial business.
GE and other manufacturers back exemption in financial regulation bill
But the reality is a little more complex. GE Capital is technically a separate business entity that reports on its own to the Securities and Exchange Commission. And because GE Capital earned more than 85 percent of its revenue from financial services, the subsidiary company could still come under scrutiny by the Financial Stability Oversight Council, the nine-member group that would decide which firms should be more tightly regulated by the Federal Reserve.
GE spokesman Russell Wilkerson said that the company is ready for GE Capital to face stricter regulation but that the parent company should not fall under the authority of the oversight council because GE is primarily commercial. If the Federal Reserve began regulating GE's non-banking ventures -- by adding capital requirements or limiting risk -- the firm's business costs could rise significantly, he said.
GE is not lobbying for Vitter's amendment, Wilkerson said, but is seeking to educate lawmakers.
Karen Petrou, managing partner of Federal Financial Analytics, offered a similar concern. "It's an ugly fate," she said. "The framework is not designed for non-financial companies."
But Date said that there's no fire wall between GE and GE Capital and that, in practice, they are intertwined. He noted that the people running GE Capital work for GE.
"The senators are indulging in a very theoretical exercise in which they pay unwarranted deference to a legalistic distinction between a wholly owned subsidiary and a parent," said Date. "That's simply not the way real companies are run."
The amendment's opponents also warn that it could allow companies to avoid systemic risk regulation by restructuring their businesses without reducing the potential threat. For instance, a firm that isn't a bank but engages in finance could acquire a commercial business with the aim of cutting the share of financial revenues to less than 85 percent.
"We don't want to have another financial crisis because a last-minute amendment unwound the entire regulatory framework," said Heather McGhee, director of the Washington office of Demos, a liberal think tank.
By Jia Lynn Yang
Washington Post Staff Writer
Tuesday, May 18, 2010
A last-minute fight has emerged over a proposed amendment to the Senate's financial regulation bill that would limit the government's power to address high-risk financial practices at companies if their main business is manufacturing.
The amendment, which the Senate might vote on early this week, could make it difficult for federal regulators to address threats to the global financial system posed by such companies as the industrial giant General Electric, which extends tens of billions of dollars a year in customer loans through a subsidiary.
In recent days, GE and other manufacturers have ramped up their efforts to draw attention to how the Senate legislation affects industrial companies. GE has been discussing its concerns with other manufacturers, trade associations, lawmakers and their staff, a company spokesman said.
"This is a 'Save GE' kind of amendment," said Raj Date, executive director of the Cambridge Winter Center for Financial Institutions Policy. He said GE stands to benefit more than other industrial companies that also provide financial services -- for instance, Caterpillar and Harley-Davidson -- because the size and scale of GE's activities could potentially endanger the broader economy.
Under the bill being debated by the Senate, a council of federal regulators would examine all sorts of firms, banks and non-banks alike, to determine whether a company's business practices could pose a potential risk to the wider financial system. Those firms deemed systemically risky would be subject to tighter regulation by the Federal Reserve Board, which could, for instance, require them to reduce the amount of money they borrow or increase the amount of capital they hold against possible losses. Although this tighter oversight could reduce the chances of another financial crisis, the restrictions would cut into profits.
The amendment offered by Sen. David Vitter (R-La.) would exempt from this stricter oversight any companies that earn less than 85 percent of their revenue from financial services.
"I have a big concern about the bill overall, that it is overreaching and bringing in a lot of sectors of the economy way beyond true financial firms," he said. "My amendment is one attempt to correct that."
Supporters of the provision, which include the National Association of Manufacturers and the U.S. Chamber of Commerce, say the amendment makes common sense. They argue that companies such as John Deere and Harley-Davidson provide financing for their customers but should not be caught in the same net as, for instance, insurance giant American International Group.
Opponents of the amendment say a company's internal revenue breakdown is irrelevant to whether its banking business is critical to the economy. A manufacturing company, for instance, can build a banking business big enough to cause concern for regulators.
In the case of GE, its subsidiary, GE Capital, last year extended $72 billion in credit to commercial customers. Only a small percentage of the company's financing is for customers buying the company's locomotives, turbines and other products. Most of GE's lending and leasing is to small and mid-size firms that do not purchase GE equipment.
GE Capital is not legally considered a bank, a classification that has traditionally come with more stringent regulations. But it was considered such a vital part of the financial system that GE Capital has been a major beneficiary of emergency government help intended for the banking sector through the Federal Deposit Insurance Corp. The program, known was the Temporary Liquidity Guarantee Program, or TLGP, helped guarantee the firm's corporate debt.
Critics of the Vitter amendment say it would exempt GE Capital from being treated as a potential systemic risk because GE, the parent company, earned only 33 percent of its revenue in 2009 from its financial business.
GE and other manufacturers back exemption in financial regulation bill
But the reality is a little more complex. GE Capital is technically a separate business entity that reports on its own to the Securities and Exchange Commission. And because GE Capital earned more than 85 percent of its revenue from financial services, the subsidiary company could still come under scrutiny by the Financial Stability Oversight Council, the nine-member group that would decide which firms should be more tightly regulated by the Federal Reserve.
GE spokesman Russell Wilkerson said that the company is ready for GE Capital to face stricter regulation but that the parent company should not fall under the authority of the oversight council because GE is primarily commercial. If the Federal Reserve began regulating GE's non-banking ventures -- by adding capital requirements or limiting risk -- the firm's business costs could rise significantly, he said.
GE is not lobbying for Vitter's amendment, Wilkerson said, but is seeking to educate lawmakers.
Karen Petrou, managing partner of Federal Financial Analytics, offered a similar concern. "It's an ugly fate," she said. "The framework is not designed for non-financial companies."
But Date said that there's no fire wall between GE and GE Capital and that, in practice, they are intertwined. He noted that the people running GE Capital work for GE.
"The senators are indulging in a very theoretical exercise in which they pay unwarranted deference to a legalistic distinction between a wholly owned subsidiary and a parent," said Date. "That's simply not the way real companies are run."
The amendment's opponents also warn that it could allow companies to avoid systemic risk regulation by restructuring their businesses without reducing the potential threat. For instance, a firm that isn't a bank but engages in finance could acquire a commercial business with the aim of cutting the share of financial revenues to less than 85 percent.
"We don't want to have another financial crisis because a last-minute amendment unwound the entire regulatory framework," said Heather McGhee, director of the Washington office of Demos, a liberal think tank.
I'm sure they do back exemptions....why wouldn't they? I am all for people making money and doing well, but not at the cost of everyone else's well being. Why can't people just be honest? I hope no one is excempted and everyone involved is called to task.
Aw come on, teko --- you know darn well they can't pass any kind of bill without exempting somebody that stands to lose. Seems like they just can't do anything without building in the loopholes...........just seems like the loopholes are never for we, the people!!!
I say no exemptions, period. If we are gonna do this, lets do it right the first time!
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