I have followed the topic of Industrial Loan Companies (ILC) for a few years. Initially, these entities would show up in obscure places within annual reports. The financial risk presented by ILCs was invariably difficult to capture and the presence of one at Harley-Davidson was a primary reason for its lack of appeal.
In 2006, while we were purchasing Wal-Mart (WMT) stock, ILCs were headlined after WMT applied for a charter to process credit-card transactions. Even though WMT's major competitor Target had an ILC, WMT's application was denied by pressure from the banking industry. (You don't need competition when you're so good at destroying yourself without it!)
The legitimate complaint, then and now, is that ILCs get to use the government's FDIC guarantee without having the same regulatory oversight as banks. In 2007, the U.S. House passed a bill that would subject ILCs to greater federal oversight and bar the charters from being granted to nonfinancial firms. The bill died in the Senate. However, Geithner has resurrected the issue as a piece of addressing the patchwork of regulatory gaps.
This is a sound approach. Much of the current furor is nonsensical; companies complain that credit will be withdrawn because of regulation. In fact, if these companies are so poorly funded that capital requirements are excessive, they should not be in the lending business anyway.
