General Electric Capital and the 2008 Financial Crisis

Table of Contents

Introduction
Problem Facing GE
My Response
GEs Response
Conclusion
Reference

Introduction

General Electric (GE) is a multinational corporation that operates in multiple industries including energy, home and business solutions, financial services, and technology infrastructure. Formed in 1878 as an electricity company, the corporation has since expanded its operation into various sectors spanning over a hundred countries (Hoffman, 2013). Its profitability can be attributed to strong leadership, constant innovation, and a large capital base. However, the company was significantly affected by the 2008 US housing crisis. GE made the mistake of overexpanding GE Capital, its financial services branch, resulting in billions of dollars in lost revenue during the financial crisis.

Problem Facing GE

One problem facing GE is how to recover from the 2008 financial crisis. This problem resulted from the accelerated growth of GE Capital, the companys strategic business unit concerned with providing financial services. When it was formed as GE Contracts in 1932, the unit only provided financing to customers to purchase GE products (Hoffman, 2013). By 2007, GE Capital had expanded its products and services to include insurance, commercial lending and leasing, and real estate (Hoffman, 2013). Although GE Capital contributed up to half of its parent companys profits, its operations greatly affected GE during the crisis. For instance, GE Capitals revenue dropped from $65.6 billion in 2007 to $45.7 billion in 2011, marking a 30% decrease (see table 1). Due to the size of GE Capitals operations, the losses suffered by both this subsidiary and its parent company during the 2008 crisis were massive.

My Response

In this situation, I would have limited the expansion of GE Capital. Prior to the financial crisis, there were warning signs that the housing market was in a bubble that would eventually burst. For instance, the easy availability of credit to customers to finance real estate purchases was an indication of a looming disaster. If I were part of the management team at GE or GE Capital, I would have advocated for GE Capital to finance investments other than real estate. I would also offload poor investments as soon as the crisis started. The hesitation to sell poor investments with the hope of the economy improving results in bigger losses during financial crises.

GEs Response

GE responded to the 2008 housing crisis in several ways. Some of the commendable actions it took include downsizing the GE Capital unit, exiting the mortgage market, and selling its insurance lines (Hoffman, 2013). These actions reduced GEs financial exposure and possibly reduced the amount of loss that GE could have incurred. However, one mistake the company made was failing to take these measures early enough. With the number of resources available to GE, the company should have foreseen the risk of loss even before the bubble burst. It should not have waited for the crisis to happen to reorganize GE Capital. By taking precautions to reduce risk in the event of financial depression, GE would not have been as affected by the crisis as it was.

Table 1: GE Capitals revenues and net income 2007-2011 (Hoffman, 2013)

Conclusion

In conclusion, GE Capital invested heavily in the real estate and mortgages industry, resulting in massive losses during the 2008 financial crisis. Although this strategic unit helped increase GEs profit years before the 2008 financial crisis, it also eroded a significant portion of the companys revenues during the recession that followed. GE could have reduced its financial exposure by limiting GE Capitals investment in the housing sector.