The Long Shadow of GE Capital Looms Over GE

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March 25, 2018 1:01 pm Published by

A decade after the financial crisis, investors in General Electric Co. GE -2.10% fear they don’t know what liabilities still lurk in its once-massive lending business.

GE sold off much of GE Capital, which at its peak in 2008 had more than $600 billion in assets from commercial real estate to Thai auto loans. But the unit is still holding an array of financial assets it couldn’t sell and could be on the hook for some it did unload after the 2008 crisis.

“It is not fully known what residual risks GE retained when it dismantled GE Capital,” said Martin Sankey, a senior research analyst at Neuberger Berman. The firm owns 3.4 million shares of GE in various mutual funds. “The question becomes, does GE Capital have any value at all.”

In January, the company shocked investors when it revealed a remnant of its insurance business needed to bolster reserves by $15 billion. Board members and senior executives were surprised by the shortfall, people familiar with the matter said, partly because the company sold most of its insurance businesses in 2004 and 2005.

“The insurance charge was a huge surprise,” said Bob Spremulli, a managing director at TIAA Investment, which is one of GE’s biggest shareholders. “It leaves uncertainty,” he said, regarding the rest of GE Capital. TIAA held 47 million GE shares at the end of 2017, mostly in index funds, and has been underweight the stock in its actively managed funds.

GE Capital still has about $157 billion in assets, including a large airplane leasing business. In addition to legacy insurance policies, it has exposure to subprime U.S. mortgages and unusual financial products, regulatory filings show, including $3.1 billion in floating-rate Polish residential mortgages that are mostly denominated in Swiss francs. GE acquired a bank in Poland in 2008 and sold everything but the mortgages in 2016.

GE continues to make heavy use of commercial paper, the type of short-term debt that caused a cash crunch for the company when the market froze in 2008. It ended 2017 with $3 billion in such paper outstanding, but the average balance was $17.3 billion during the fourth quarter, filings show. Recent quarters show a similar pattern.

“The company uses commercial paper to manage the timing of receipts and disbursements,” a spokeswoman said. GE is focused on strengthening its balance sheet, she said.

The company ended 2017 with $11.2 billion of cash, excluding its investment in Baker Hughes. Last year, GE slashed its dividend by half, saying it wasn’t generating enough cash to cover the payout.

Jamie Miller, who took over as GE’s finance chief in November, has been reviewing the company’s balance sheet. She has played down concerns about GE Capital while also pointing out potential risks. “We’ve got a good inventory of what we see,” she told investors in January, and said the reserves are appropriate for the risks.

Weeks later, Ms. Miller flagged the potential risk of a legacy GE Capital business called WMC Mortgage, which was a large home lender to people with low credit scores before the financial crisis. GE bought the subprime lender in 2004 and sold the operation in 2007 after racking up about $1 billion in losses in that year alone.

GE in February disclosed in its annual report that the Justice Department is likely to claim the business violated federal lending laws in 2006 and 2007. The operation is part of a larger, yearslong investigation by the Justice Department into the subprime mortgage crisis.

Major banks have paid billions in dollars in penalties to resolve allegations they understated the risk of mortgages bundled into securities that fueled a housing bubble and exacerbated the subsequent collapse. GE hasn’t paid any penalties related to the defunct WMC.

While many of the mortgage-related lawsuits were settled, one case against WMC went to trial in February in federal court in New Haven, Conn. Testimony included examples of individual loan applicants applying for multiple loans within weeks of each other, while showing drastically higher income or misrepresenting other information on applications.

One former WMC employee testified an applicant had listed their occupation as a museum curator, but it turned out the person worked in a hair salon. Loan applications known contain to incorrect information were still approved, according to testimony in the trial. GE declined to comment on the case. The two sides are scheduled to make closing arguments in coming months.

GE had reserves of $416 million at the end of 2017 to cover claims related to the WMC business, but there is nothing set aside for any potential fine or settlement from the Justice Department probe. Ms. Miller has said GE believes the existing reserves are adequate and noted she is watching the Justice Department process, which she described as being in “early days.”

“It is really hard to forecast” the liabilities that remain since GE is so large it doesn’t have to disclose many details about GE Capital, said Eric Ause, senior director of corporate ratings at Fitch Ratings. “We aren’t anticipating more, but there is always a risk there is going to be another charge.”

Some investors say the mortgage portfolio should have more of a backstop in terms of potential liabilities compared with the long-term-care insurance charge. They highlight that one of the largest remaining pieces of GE Capital is its successful airplane leasing operation, which has about $41 billion in assets. It accounted for more than half of GE Capital’s $9.1 billion in revenue last year.

Nicholas Heymann, an analyst at William Blair & Co., doesn’t expect major problems to arise at GE Capital, which continues to shrink and now focuses on financing the industrial equipment the company sells. “GE’s liquidity appears to be more than adequate,” he said.

Write to Thomas Gryta at and Ted Mann at


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