By Rachel Layne and Alison Vekshin
July 29 (Bloomberg) -- General Electric Co., Harley- Davidson Inc. and manufacturers with finance businesses should be allowed to keep the units under a revision of rules to govern banking, U.S. Representative Barney Frank said in an interview.
Companies that already have finance arms or industrial loan businesses known as ILCs should be able keep them without being subject to Federal Reserve oversight of their manufacturing operations, Frank said.
“The Fed was worried about being a regulator, about being held responsible for a lot of industrial activity,” said Frank, a Massachusetts Democrat and chairman of the U.S. House Financial Services Committee. “We will work with them to resolve that issue.”
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.
There are ways to allow companies like GE, which already exist as hybrids, 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.
Not the ‘Problem’
“This particular arrangement is not part of the problem,” Frank said. The administration’s problem “isn’t with the bank piece of it, it’s with the non-bank piece,” Frank said.
The Obama proposals call for strengthening the separation of banking and commerce. They also require companies that own industrial banks to become bank holding companies, a change that mandates regulation by the Fed in the same way the central bank now oversees New York-based Citigroup Inc. and Goldman Sachs Group Inc.
Supporters of the holding-company change say a loophole in federal law has allowed owners of these financial companies to escape the stricter federal scrutiny to which commercial banks are subject. Opponents say the proposed change will force companies that have financing arms to abandon them to avoid having a bank regulator examine their commercial operations.
Credit default swaps to protect against a default by GE Capital fell 15 basis points to 290 basis points as of 5:11 p.m. in New York, according to broker Phoenix Partners Group.
Investor Sentiment
The five-year contracts, which typically fall as investor sentiment improves, are trading at the lowest since Sept. 12, the last regular trading day before Lehman Brothers Holdings Inc. filed for bankruptcy and locked up credit markets.
There also was concern that larger companies with commercial holdings, like Warren Buffett’s Berkshire Hathaway Inc. and Boston-based Fidelity Investments, may have fallen under this portion of the regulations, Frank said.
GE, based in Fairfield, Connecticut, said on a conference call with investors yesterday 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 jet engines, turbines and medical imaging equipment. GE favors more systemic regulation, executives have said.
‘Systematic Regulation’
“We share Chairman Frank’s opposition to separation of banking and commerce and forced divestiture,” said Russell Wilkerson, a GE spokesman. “This model did not contribute to the financial crisis. We support systemic regulation and look forward to continuing work with Congress and the administration on meaningful financial-services reform.”
GE, Milwaukee-based Harley-Davidson and Stamford, Connecticut-based Pitney Bowes Inc., the world’s largest maker of postal meters, have industrial loan banks. Congressman Jim Himes, a Democrat who represents the area in southern Connecticut where GE and Pitney are based, said a forced separation may have restricted lending.
“It’s emblematic of the fact that we have to be very careful down here with what we do that could unduly restrict credit,” Himes aid. “Requiring GE to divest its GE capital sub would almost certainly lead to a reduction in lending.” Owning an ILC is also “integral” to Pitney Bowes because customers can’t legally own a postage meter and must lease it, Himes said.
“We are pleased to learn that Chairman Frank intends to retain the benefits of existing industrial loan companies,” Pitney spokesman Matt Border said.
Wal-Mart Bank
Wal-Mart Stores Inc. in 2005 filed an application with the Federal Deposit Insurance Corp. to open an industrial bank in Utah. The move by the world’s largest retailer prompted calls from the banking industry and lawmakers in Congress to end the policy that allows non-financial firms to run banks.
“We were worried about the expansion of the ILCs and I still am, we still want to curtail that,” Frank said. “But that doesn’t mean you undo what’s been done.”
Wal-Mart withdrew its application in 2007. Even then, Frank said, separation wasn’t “on the table.”
“Nobody has shown there was an existing problem,” he said. “There are cases where, even if you might have been for some divestiture three or four years ago, this is not the time to do it.”
Federal Reserve spokeswoman Susan Stawick, Harley-Davidson spokesman Bob Klein and Berkshire Hathaway spokeswoman Carrie Kizer didn’t immediately respond to requests for comment. Fidelity spokesman Adam Banker declined immediate comment.
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