Vitters 4003: A GE Capital Regulatory Arbitrage Amendment?

GE Capital

People who know me well know that I am obsessed with GE Capital as being one of the key stories of the change in the American economy of the late 20th century, a story I hope to develop more 3 or 4 projects from now. GE Capital was founded in 1932 to finance dealer inventories and consumer purchases. People made things in a factory and bought things from a factory and GE Capital helped provide both a burgeoning middle class and the businesses that served it with sufficient lines of credit.

Starting in the 1960s it began to provide leasing and financial services to other large Fordist-Keynesian style businesses. And then starting in the 1980s during the financial deregulatory wave it expanded rapidly into one of the world’s premiere shadow banks: it was the single largest issuer of commercial paper in the United States before the crisis, with $620 billion in assets at the end of 2007.

Did you ever listen to the Giant Pool of Money epsiodes of This American Life? (You must have.) If you remember it, during the episode you meet rising subprime mortgage star Glen Pizzolorusso, who was an area sales manager at an outfit called WMC mortgage in upstate New York. He made over $1 million dollars a year handling the subprime market and spent like mad on cars, real estate, and impressing celebrities. Here’s his description, from the transcript:

Glen Pizzolorusso: What is that movie? Boiler Room? That’s what it’s like…We lived mortgage. That’s all we did. This deal, that deal. How we gonna get it funded? What’s the problem with this one? That’s all everyone’s talking about…

We rolled up to Marquee at midnight with a line, 500 people deep out front. Walk right up to the door: Give me my table. Sitting next to Tara Reid and a couple of her friends…We ordered 3, 4 bottles of Cristal at $1000 per bottle. You know so you order 3 or 4 bottles of those and they’re walking through the crowd and everyone’s like: Whoa, who’s the cool guys? We were the cool guys.

He then losses it all during the crash and has to move back home. (He has since joined the Tea Party.) Now WMC sounds like a fly-by-night operation in the episode until you go and look and find out it was part of the mortgage wing of GE Capital. And sadly, GE Capital could not move back home when the capitals market collapsed; it received $50 billion dollars in bailouts from taxpayers and was the second-largest beneficiary of the FDIC debt guarantee program.

So there’s a story about how GE Capital went from helping grow and finance expanding industries and expanding middle-classes to being a fly-by-night subprime dealing shadow bank. And I think that this story, about how GE Capital went from building a broad-based prosperity through financing refrigerator purchases and other middle-class durable goods to a story about churning home equity and piling debt on a wage-stagnating population while inequality balloons and all you get to show for it is one random dude trying to impress Tara Reid with fancy champagne, this Post-Fordist transition story, is really the story of our times.

Vitters 4003 Amendment

Oh right, amendments. Sorry to get off track. So remember, one reason GE Capital could do all this was because it was a shadow bank involved in commercial banking without having to be regulated like a commercial bank. This is a regulatory arbitrage, it is unfair to regular banks and dangerous to have gigantic shadow banks subject to a liquidity run this way.

There’s an amendment, Vitters 4003. It says that financial part of a multi-part firm has to “constitute 85 percent or more of the total consolidated revenues of such company” to qualify for regulation. That immediately causes two big problems: it keeps some our most notorious shadow banks outside of the regulatory umbrella, which is the whole point of doing what we are doing. If we could have done resolution on GE Capital if necessary, taxpayers wouldn’t have had to step into the fire.

The other problem is that this encourages a firm like Goldman to add a 15% non-financial business line in order to avoid regulation. Which would encourage inappropriate mergers and expansion of business scope for the sole purpose of avoiding regulation. Which is even worse than just not regulating.

Keep an eye out for this shadow bank exempting amendment. If we’ve learned one thing from this crisis, it’s that shadow banks need real regulation too.

This entry was posted in Uncategorized. Bookmark the permalink.

3 Responses to Vitters 4003: A GE Capital Regulatory Arbitrage Amendment?

  1. nadezhda says:

    Wow! Let’s remove the final fig-leaf of the original objectives of Glass-Steagall while we’re doing all this reform. Not just allow financial and commercial/industrial businesses to sit in the same corporate family, but actually encourage financial firms to get into commercial businesses? Just wow!

  2. financeguy says:

    Looking forward to your telling of the GE Capital story. You’re doing a great job of tracking what’s happening with this evolving legislation — thank God someone is doing it, because as we’ve seen, seemingly subtle word changes have huge implications.

  3. Jon H says:

    Amazing. The asshat is now complaining about the government cleaning up the mess he made. (Elsewhere on his blog he, of course, blames CRA.)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s