Thursday, April 14, 2011

Week 6 - Blog #5 - G.E. Capital and GMAC

Introduction:
The recent economic downturn that started in 2008 saw many companies tumble from greatness and others completely vanish while the rest struggled to keep their doors open for business. General Electric and General Motors were caught up in that maelstrom. Both companies were known for their production prowess. However, both companies had large financial wings as well. General Electric had, and still has, G.E. Capital while General Motors had GMAC - the banking unit is now called Ally Bank and GMAC is no longer a wholly owned subsidiary of GM.

Relevancy:
Jeffrey Immelt, the CEO of General Electric, had to steer the ship in the right direction to get G.E. back on its feet. G.E. Capital, at its height, was responsible for "nearly half of G.E.'s overall profits. However, this finance wing also exposed the company to a lot of risky assets that hurt the overall company during the financial downturn. G.E. stock fell to as low as $7.60 in March 2009. This scenario is very similar to what happened with GMAC and General Motors.

General Motors was the largest automobile company in the world. Even though quality issues and declining profits started to tarnish the image of GM it was still the largest automobile manufacturer and an admired company. When the economic downturn hit GMAC exposed GM to a lot of risky assets and helped to almost doomed the company. General Motors stock hit as low as $1.00 in December 2009.

Jeffery Immelt has put the clamps on the financial division and has tried to move G.E. back to its roots - which is building things. Although, the stock of G.E. is still only hovering around $20.00 currently it seems that since Mr. Immelt has simplified the business structure of this manufacturing behemoth that things are turning around for the company. As new products come to market and investors are lured back into the fold, G.E. can regain its old glory.

General Motors, needless to say, had a tough time during the economic downturn. However, the company has been able to pay back all its TARP funds and its stock price has rebounded handsomely - hovering around $30.00 currently. It is still yet to be seen if General Motors can fully recover and focus on what it is supposed to do - which is build cars.

Question(s):
1. Would these companies have faired so poorly during the economic crisis of 2008 if they did not have financial wings that exposed the overall to company to huge losses from risky assets?
2. Will Jeffery Immelt's strategy of "going back to the future" work?
3. Should GM follow G.E.'s example and go back to the basics as well?

References:
1. Lohr, Steve. "G.E. Goes With What It Knows: Making Stuff." The New York Times. 12/4/2010
2. http://www.cheap-credit-cards.org/online-banking/us-banks/gmacfinancialservices/
3. http://money.cnn.com/2009/05/13/news/companies/gm_stock/index.htm
4. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aeOBIWcuQXCQ&refer=news

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