No special treatment for GE Capital

(breakingviews.com) -- GE Capital is taking on the doubters. The finance arm of General Electric (GE, Fortune 500) on Tuesday addressed investors skeptical of its fit within the industrial conglomerate.

Chief among the messages: The business is adequately funded; it has enough capital to handle potential loan losses; and it is basically above average in what it does relative to big U.S. banks. But if that's all true, why does GE Capital need the special treatment it is fighting for on Capitol Hill?

The Obama administration's regulatory reform plans would ramp up the constraints on financial firms that are big enough to represent a systemic risk. But GE Capital is lobbying to exempt its $650 billion balance sheet from such a high level of oversight. But if it's so good at what it does, it shouldn't need that kind of help.

The full-court press the company is unleashing in Washington is also at odds with what GE Capital itself conveyed to shareholders. The first slide of its 63-page manifesto says its loan portfolios are "performing as expected or slightly better" and exhibiting loss rates "most below the Federal Reserve Base Case." It expects loan losses in 2010 to mirror those of the current year, and it doesn't need more capital "even under adverse scenarios."

GE Capital rolled out the numbers to buttress its above-average banking prowess. The company said it has $25 billion of financial receivables to U.S. consumers, with reserves equal to 6.6% of these loans -- above the 6.1% average held by the top three American banks. Similarly, it has reserves equal to 1.5% of the $93 billion of loans extended to U.S. businesses, higher than the 1.1% held by the big banks.

But here's the problem. If GE Capital really is adequately capitalized to handle rising defaults, manages to get more than rivals from customers who can't pay their bills, and has enough funding to weather ructions in the capital markets, it makes special treatment as a non-bank financial institution seem unnecessary.

The company also considers itself to be an "important source of liquidity to U.S. businesses and consumers." GE Capital's balance sheet would make it the country's fifth-largest bank. So GE Capital is right that it's an important player in the financial system. And that's how it should be regulated.