GE stock rises after Barney Frank says it should keep finance unit
By: Rachel Layne and Alexis Xydias
July 30, 2009
General Electric Co. rose the most in three months after U.S. Representative Barney Frank said manufacturers that already own finance businesses should be allowed to keep the units under revised banking rules.
GE increased 92 cents, or 7.5 percent, to $13.18 at 10:27 a.m. in New York Stock Exchange composite trading. The shares earlier climbed 8.8 percent, the biggest intraday gain since April 13.
GE, Harley-Davidson Inc. and companies that already have finance arms or industrial-loan businesses known as ILCs should be able to retain them without being subject to Federal Reserve oversight of their manufacturing operations, Frank said in an interview with Bloomberg News yesterday. Frank, a Massachusetts Democrat, heads the U.S. House Financial Services Committee.
“While numerous uncertainties remain, we are reducing our probability assumption for a costly separation to 25 percent from 50 percent and this drives our higher target,” Terry Darling, an analyst with Goldman Sachs Group Inc., wrote today in a report. “Greater potential for a manageable regulatory outcome should prompt investors to focus on longer-term benefits of economic and credit stabilization to GE shares.”
Darling raised his 12-month share-price estimate for GE to $15 from $13 and changed his rating to “buy” from “neutral.”
GE, the world’s biggest non-bank financial company, said July 28 during a Webcast meeting with analysts that it has been “very active” in opposing any rules that might force it to split off its GE Capital finance unit, which has $557 billion in assets. GE is also the world’s biggest maker of power-plant turbines, locomotives, medical-imaging machines and jet engines.
Steven Winoker, an analyst at Sanford C. Bernstein & Co. in New York, raised his estimate for GE’s 2009 per-share profit by 3 cents to 99 cents. He lowered his 2010 estimate by 3 cents to 94 cents a share on concerns profit growth in the non-finance divisions may slow.
“The risk/reward balance is improving over a longer, about three-year, time horizon,” Winoker wrote in a note to clients today. “However, we believe the stock is likely to remain range-bound in the near term due to skepticism concerning GE’s earnings power and the potential for dilution.”
Credit-default swaps protecting against a default by GE Capital fell 35 basis points to 260 basis points, according to CMA DataVision.
President Barack Obama’s administration is seeking to tighten regulation of the financial industry to reduce the likelihood that any one company’s potential failure would hurt the broader markets and economy. Frank, a leader in Congress in transforming Obama’s plan into legislation, said this week he plans to get the bill through the House by October and to Obama for his signature before the end of the year.
“The Fed was worried about being a regulator, about being held responsible for a lot of industrial activity,” Frank said. “We will work with them to resolve that issue.”
There are ways to allow companies like GE to stay intact and have their finance arms regulated more closely, Frank said. The structure didn’t cause the financial crisis, and it shouldn’t be an obstacle to regulation, Frank said.
“This particular arrangement is not part of the problem,” Frank said.
To contact the reporters on this story: Rachel Layne in Boston at firstname.lastname@example.org; Alexis Xydias in London at email@example.com.