gecc10q63009.htm
WASHINGTON,
D.C. 20549
(Mark
One)
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þ
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE
SECURITIES EXCHANGE ACT OF 1934
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For
the quarterly period ended June
30, 2009
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OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
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For
the transition period from ___________to ___________
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_____________________________
Commission
file number 1-6461
_____________________________
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GENERAL ELECTRIC CAPITAL
CORPORATION
(Exact
name of registrant as specified in its
charter)
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Delaware
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13-1500700
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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3135
Easton Turnpike, Fairfield, Connecticut
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06828-0001
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(Address
of principal executive offices)
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(Zip
Code)
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(Registrant’s
telephone number, including area code) (203)
373-2211
(Former
name, former address and former fiscal year,
if
changed since last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes þ No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer ¨
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Accelerated
filer ¨
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Non-accelerated
filer þ
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Smaller
reporting company ¨
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No þ
At July
31, 2009, 3,985,404 shares of voting common stock, which constitute all of the
outstanding common equity, with a par value of $14 per share were
outstanding.
REGISTRANT
MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF
FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED
DISCLOSURE FORMAT.
General
Electric Capital Corporation
Part
I – Financial Information
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Page
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Item
1.
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Financial
Statements
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3
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Condensed Statement of Current
and Retained Earnings
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3
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Condensed Statement of Financial
Position
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4
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Condensed Statement of Cash
Flows
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5
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Notes to Condensed, Consolidated
Financial Statements (Unaudited)
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6
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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39
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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60
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Item
4.
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Controls
and Procedures
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60
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Part
II – Other Information
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Item
6.
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Exhibits
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60
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Signatures
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61
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Forward-Looking
Statements
This
document contains “forward-looking statements”- that is, statements related to
future, not past, events. In this context, forward-looking statements often
address our expected future business and financial performance and financial
condition, and often contain words such as “expect,” “anticipate,” “intend,”
“plan,” “believe,” “seek,” “see,” or “will.” Forward-looking statements by their
nature address matters that are, to different degrees, uncertain. For us,
particular uncertainties that could cause our actual results to be materially
different than those expressed in our forward-looking statements include: the
severity and duration of current economic and financial conditions, including
volatility in interest and exchange rates, commodity and equity prices and the
value of financial assets; the impact of U.S. and foreign government programs to
restore liquidity and stimulate national and global economies; the impact of
conditions in the financial and credit markets on the availability and cost of
our funding and on our ability to reduce our asset levels and commercial paper
exposure as planned; the impact of conditions in the housing market and
unemployment rates on the level of commercial and consumer credit defaults; our
ability to maintain our current credit rating and the impact on our funding
costs and competitive position if we do not do so; the soundness of other
financial institutions with which we do business; the level of demand and
financial performance of the major industries we serve, including, without
limitation, real estate and healthcare; the impact of regulation and regulatory,
investigative and legal proceedings and legal compliance risks, including the
impact of proposed financial services regulation; strategic actions, including
acquisitions and dispositions and our success in integrating acquired
businesses; and numerous other matters of national, regional and global scale,
including those of a political, economic, business and competitive nature. These
uncertainties may cause our actual future results to be materially different
than those expressed in our forward-looking statements. We do not undertake to
update our forward-looking statements.
Part
I. Financial Information
Item
1. Financial Statements.
General
Electric Capital Corporation and consolidated affiliates
Condensed
Statement of Current and Retained Earnings
(Unaudited)
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Three
months ended
June
30
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Six
months ended
June
30
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(In
millions)
|
2009
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2008
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|
2009
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2008
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Revenues
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Revenues
from services (Note 9)
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$
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12,357
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$
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17,621
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$
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25,693
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$
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34,377
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Sales
of goods
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205
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528
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478
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895
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Total revenues
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12,562
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18,149
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26,171
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35,272
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Costs
and expenses
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Interest
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4,436
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6,267
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9,526
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12,346
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Operating
and administrative
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3,454
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4,834
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7,312
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9,366
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Cost
of goods sold
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164
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461
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388
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778
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Investment
contracts, insurance losses and
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|
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insurance annuity
benefits
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45
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122
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118
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265
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Provision
for losses on financing receivables
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2,815
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1,470
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5,137
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2,803
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Depreciation
and amortization
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1,939
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2,136
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4,112
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4,257
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Total costs and
expenses
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12,853
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15,290
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26,593
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29,815
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Earnings
(loss) from continuing operations before
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income taxes
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(291
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)
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2,859
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(422
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)
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5,457
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Benefit
(provision) for income taxes
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695
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(46
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)
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1,850
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(127
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)
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Earnings
from continuing operations
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404
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2,813
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1,428
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5,330
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Loss
from discontinued operations, net of taxes (Note 2)
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(194
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)
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(336
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)
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(197
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)
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|
(382
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)
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Net
earnings
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210
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|
|
2,477
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1,231
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4,948
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Less
net earnings attributable to noncontrolling interests
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29
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63
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79
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|
99
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Net
earnings attributable to GECC
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181
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2,414
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1,152
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4,849
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Dividends
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−
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(889
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)
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−
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(2,019
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)
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Retained
earnings at beginning of period(a)
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46,468
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41,818
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45,497
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40,513
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Retained
earnings at end of period
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$
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46,649
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$
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43,343
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$
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46,649
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$
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43,343
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Amounts
attributable to GECC
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|
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Earnings
from continuing operations
|
$
|
375
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$
|
2,750
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$
|
1,349
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$
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5,231
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Loss
from discontinued operations, net of taxes
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|
(194
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)
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|
(336
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)
|
|
(197
|
)
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|
(382
|
)
|
Net
earnings attributable to GECC
|
$
|
181
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$
|
2,414
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$
|
1,152
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$
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4,849
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|
|
|
|
|
|
|
|
|
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(a)
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Included
a cumulative effect adjustment to increase retained earnings by $25
million in 2009.
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See
Note 3 for other-than-temporary impairment amounts.
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See
accompanying notes.
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General
Electric Capital Corporation and consolidated affiliates
Condensed
Statement of Financial Position
(In
millions)
|
June
30,
2009
|
|
December
31,
2008
|
|
|
(Unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash
and equivalents
|
$
|
49,141
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|
$
|
36,430
|
|
Investment
securities (Note 3)
|
|
20,817
|
|
|
19,318
|
|
Inventories
|
|
73
|
|
|
77
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|
Financing
receivables – net (Note 4)
|
|
358,006
|
|
|
370,592
|
|
Other
receivables
|
|
21,784
|
|
|
22,175
|
|
Property,
plant and equipment, less accumulated amortization of
$26,315
|
|
|
|
|
|
|
and $29,026
|
|
58,618
|
|
|
64,043
|
|
Goodwill
(Note 5)
|
|
27,160
|
|
|
25,204
|
|
Other
intangible assets – net (Note 5)
|
|
3,541
|
|
|
3,174
|
|
Other
assets
|
|
84,849
|
|
|
84,201
|
|
Assets
of businesses held for sale
|
|
232
|
|
|
10,556
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|
Assets
of discontinued operations (Note 2)
|
|
1,462
|
|
|
1,640
|
|
Total
assets
|
$
|
625,683
|
|
$
|
637,410
|
|
|
|
|
|
|
|
|
Liabilities
and equity
|
|
|
|
|
|
|
Short-term
borrowings (Note 6)
|
$
|
168,029
|
|
$
|
188,601
|
|
Accounts
payable
|
|
13,184
|
|
|
14,863
|
|
Long-term
borrowings (Note 6)
|
|
330,067
|
|
|
321,755
|
|
Investment
contracts, insurance liabilities and insurance annuity
benefits
|
|
9,526
|
|
|
11,403
|
|
Other
liabilities
|
|
24,058
|
|
|
30,629
|
|
Deferred
income taxes
|
|
5,961
|
|
|
8,112
|
|
Liabilities
of businesses held for sale
|
|
196
|
|
|
636
|
|
Liabilities
of discontinued operations (Note 2)
|
|
913
|
|
|
799
|
|
Total
liabilities
|
|
551,934
|
|
|
576,798
|
|
|
|
|
|
|
|
|
Capital
stock
|
|
56
|
|
|
56
|
|
Accumulated other comprehensive
income – net(a)
|
|
|
|
|
|
|
Investment
securities
|
|
(1,497
|
)
|
|
(2,013
|
)
|
Currency translation
adjustments
|
|
370
|
|
|
(1,337
|
)
|
Cash flow hedges
|
|
(1,937
|
)
|
|
(3,253
|
)
|
Benefit plans
|
|
(376
|
)
|
|
(367
|
)
|
Additional
paid-in capital
|
|
28,419
|
|
|
19,671
|
|
Retained
earnings
|
|
46,649
|
|
|
45,472
|
|
Total
GECC shareowner’s equity
|
|
71,684
|
|
|
58,229
|
|
Noncontrolling
interests(b)
|
|
2,065
|
|
|
2,383
|
|
Total
equity
|
|
73,749
|
|
|
60,612
|
|
Total
liabilities and equity
|
$
|
625,683
|
|
$
|
637,410
|
|
|
|
|
|
|
|
|
(a)
|
The
sum of accumulated other comprehensive income − net was
$(3,440) million and $(6,970) million at June 30, 2009 and December 31,
2008, respectively.
|
|
(b)
|
Included
accumulated other comprehensive income attributable to noncontrolling
interests of $(120) million and $(181) million at June 30, 2009 and
December 31, 2008, respectively.
|
|
See
accompanying notes.
General
Electric Capital Corporation and consolidated affiliates
Condensed
Statement of Cash Flows
(Unaudited)
|
Six
months ended
June
30
|
|
(In
millions)
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
Cash
flows – operating activities
|
|
|
|
|
|
|
Net
earnings attributable to GECC
|
$
|
1,152
|
|
$
|
4,849
|
|
Loss
from discontinued operations
|
|
197
|
|
|
382
|
|
Adjustments
to reconcile net earnings attributable to GECC
|
|
|
|
|
|
|
to cash provided from operating
activities
|
|
|
|
|
|
|
Depreciation and amortization
of property, plant and equipment
|
|
4,112
|
|
|
4,257
|
|
Increase (decrease) in accounts
payable
|
|
(1,789
|
)
|
|
1,949
|
|
Provision for losses on
financing receivables
|
|
5,137
|
|
|
2,803
|
|
All other operating
activities
|
|
(11,484
|
)
|
|
(1,851
|
)
|
Cash
from (used for) operating activities – continuing
operations
|
|
(2,675
|
)
|
|
12,389
|
|
Cash
from (used for) operating activities – discontinued
operations
|
|
(26
|
)
|
|
474
|
|
Cash
from (used for) operating activities
|
|
(2,701
|
)
|
|
12,863
|
|
|
|
|
|
|
|
|
Cash
flows – investing activities
|
|
|
|
|
|
|
Additions
to property, plant and equipment
|
|
(3,269
|
)
|
|
(6,519
|
)
|
Dispositions
of property, plant and equipment
|
|
2,631
|
|
|
5,332
|
|
Increase
in loans to customers
|
|
(114,353
|
)
|
|
(191,176
|
)
|
Principal
collections from customers – loans
|
|
132,489
|
|
|
165,348
|
|
Investment
in equipment for financing leases
|
|
(4,609
|
)
|
|
(13,460
|
)
|
Principal
collections from customers – financing leases
|
|
9,818
|
|
|
12,098
|
|
Net
change in credit card receivables
|
|
2,046
|
|
|
(468
|
)
|
Proceeds
from principal business dispositions
|
|
8,846
|
|
|
4,422
|
|
Payments
for principal businesses purchased
|
|
(5,637
|
)
|
|
(12,762
|
)
|
All
other investing activities
|
|
2,928
|
|
|
(1,638
|
)
|
Cash
from (used for) investing activities – continuing
operations
|
|
30,890
|
|
|
(38,823
|
)
|
Cash
from (used for) investing activities – discontinued
operations
|
|
30
|
|
|
(438
|
)
|
Cash
from (used for) investing activities
|
|
30,920
|
|
|
(39,261
|
)
|
|
|
|
|
|
|
|
Cash
flows – financing activities
|
|
|
|
|
|
|
Net
increase (decrease) in borrowings (maturities of 90 days or
less)
|
|
(34,239
|
)
|
|
8,395
|
|
Newly
issued debt
|
|
|
|
|
|
|
Short-term (91 to 365
days)
|
|
2,804
|
|
|
313
|
|
Long-term (longer than one
year)
|
|
47,792
|
|
|
61,026
|
|
Non-recourse, leveraged
lease
|
|
−
|
|
|
57
|
|
Repayments
and other debt reductions
|
|
|
|
|
|
|
Short-term (91 to 365
days)
|
|
(35,656
|
)
|
|
(33,251
|
)
|
Long-term (longer than one
year)
|
|
(2,866
|
)
|
|
(859
|
)
|
Non-recourse, leveraged
lease
|
|
(470
|
)
|
|
(429
|
)
|
Dividends
paid to shareowner
|
|
−
|
|
|
(2,019
|
)
|
Capital
contribution and share issuance
|
|
8,750
|
|
|
−
|
|
All
other financing activities
|
|
(1,619
|
)
|
|
95
|
|
Cash
from (used for) financing activities – continuing
operations
|
|
(15,504
|
)
|
|
33,328
|
|
Cash
used for financing activities – discontinued operations
|
|
−
|
|
|
(3
|
)
|
Cash
from (used for) financing activities
|
|
(15,504
|
)
|
|
33,325
|
|
|
|
|
|
|
|
|
Increase
in cash and equivalents
|
|
12,715
|
|
|
6,927
|
|
Cash
and equivalents at beginning of year
|
|
36,610
|
|
|
8,907
|
|
Cash
and equivalents at June 30
|
|
49,325
|
|
|
15,834
|
|
Less
cash and equivalents of discontinued operations at June 30
|
|
184
|
|
|
333
|
|
Cash
and equivalents of continuing operations at June 30
|
$
|
49,141
|
|
$
|
15,501
|
|
|
|
|
|
|
|
|
See
accompanying notes.
Notes
to Condensed, Consolidated Financial Statements (Unaudited)
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
All of
the outstanding common stock of General Electric Capital Corporation (GE Capital
or GECC) is owned by General Electric Capital Services, Inc. (GECS), all of
whose common stock is owned by General Electric Company (GE Company or GE). Our
financial statements consolidate all of our affiliates – companies that we
control and in which we hold a majority voting interest. We also consolidate the
economic interests we hold in certain businesses within companies in which we
hold a voting equity interest and are majority owned by our ultimate parent, but
which we have agreed to actively manage and control. See Note 1 to the
consolidated financial statements in our Annual Report on Form 10-K for the year
ended December 31, 2008 (2008 Form 10-K), which discusses our consolidation and
financial statement presentation. GECC includes Commercial Lending and Leasing
(CLL), Consumer (formerly GE Money), Real Estate, Energy Financial Services and
GE Capital Aviation Services (GECAS). During the first quarter of 2009, we
transferred Banque Artesia Nederland N.V. (Artesia) from CLL to Consumer.
Details of total revenues and segment profit by operating segment can be found
on page 42 of this report. We have reclassified certain prior-period amounts to
conform to the current-period’s presentation. Unless otherwise indicated,
information in these notes to condensed, consolidated financial statements
relates to continuing operations.
Accounting
Changes
Effective
January 1, 2008, we adopted Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) 157, Fair Value Measurements, for
all financial instruments and non-financial instruments accounted for at fair
value on a recurring basis. Effective January 1, 2009, we adopted SFAS 157 for
all non-financial instruments accounted for at fair value on a non-recurring
basis. SFAS 157 establishes a new framework for measuring fair value and expands
related disclosures. See Note 10.
On
January 1, 2009, we adopted SFAS 141(R), Business Combinations. This
standard significantly changes the accounting for business acquisitions both
during the period of the acquisition and in subsequent periods. Among the more
significant changes in the accounting for acquisitions are the
following:
·
|
Acquired
in-process research and development (IPR&D) is accounted for as an
asset, with the cost recognized as the research and development is
realized or abandoned. IPR&D was previously expensed at the time of
the acquisition.
|
·
|
Contingent
consideration is recorded at fair value as an element of purchase price
with subsequent adjustments recognized in operations. Contingent
consideration was previously accounted for as a subsequent adjustment of
purchase price.
|
·
|
Subsequent
decreases in valuation allowances on acquired deferred tax assets are
recognized in operations after the measurement period. Such changes were
previously considered to be subsequent changes in consideration and were
recorded as decreases in goodwill.
|
·
|
Transaction
costs are expensed. These costs were previously treated as costs of the
acquisition.
|
In April
2009, the FASB issued FASB Staff Position (FSP) FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies, which amends the accounting in SFAS 141(R) for assets and
liabilities arising from contingencies in a business combination. The FSP is
effective January 1, 2009, and requires pre-acquisition contingencies to be
recognized at fair value, if fair value can be reasonably determined during the
measurement period. If fair value cannot be reasonably determined, the FSP
requires measurement based on the recognition and measurement criteria of SFAS
5, Accounting for
Contingencies.
On
January 1, 2009, we adopted SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51, which
requires us to make certain changes to the presentation of our financial
statements. This standard requires us to classify noncontrolling interests
(previously referred to as “minority interest”) as part of consolidated net
earnings ($29 million and $63 million for the three months ended June 30, 2009
and 2008, respectively, and $79 million and $99 million for the six months ended
June 30, 2009 and 2008, respectively) and to include the accumulated amount of
noncontrolling interests as part of shareowner’s equity ($2,065 million and
$2,383 million at June 30, 2009 and December 31, 2008, respectively). The net
earnings amounts we have previously reported are now presented as "Net earnings
attributable to GECC". Similarly, in our presentation of shareowner’s
equity, we distinguish between equity amounts attributable to the GECC
shareowner and amounts attributable to the noncontrolling interests – previously
classified as minority interest outside of shareowner’s equity. Beginning
January 1, 2009, dividends to noncontrolling interests are classified as
financing cash flows. In addition to these financial reporting changes, SFAS 160
provides for significant changes in accounting related to noncontrolling
interests; specifically, increases and decreases in our controlling financial
interests in consolidated subsidiaries will be reported in equity similar to
treasury stock transactions. If a change in ownership of a consolidated
subsidiary results in loss of control and deconsolidation, any retained
ownership interests are remeasured with the gain or loss reported in net
earnings.
Effective
April 1, 2009, we adopted FASB FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly. Adoption of
the FSP had an insignificant effect on our financial statements.
Effective
April 1, 2009, we adopted FASB FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. See Note 3. The FSP modifies the
existing model for recognition and measurement of impairment for debt
securities. The two principal changes to the impairment model for securities are
as follows:
·
|
Recognition
of an other-than-temporary impairment charge for debt securities is
required if any of these conditions are met: (1) we do not expect to
recover the entire amortized cost basis of the security, (2) we intend to
sell the security or (3) it is more likely than not that we will be
required to sell the security before we recover its amortized cost
basis.
|
·
|
If
the first condition above is met, but we do not intend to sell and it is
not more likely than not that we will be required to sell the security
before recovery of its amortized cost basis, we would be required to
record the difference between the security’s amortized cost basis and its
recoverable amount in earnings and the difference between the security’s
recoverable amount and fair value in other comprehensive income. If either
the second or third criteria are met, then we would be required to
recognize the entire difference between the security’s amortized cost
basis and its fair value in
earnings.
|
Interim
Period Presentation
The
condensed, consolidated financial statements and notes thereto are unaudited.
These statements include all adjustments (consisting of normal recurring
accruals) that we considered necessary to present a fair statement of our
results of operations, financial position and cash flows. We have evaluated
subsequent events that have occurred through August 3, 2009, the date of
financial statement issuance. The results reported in these condensed,
consolidated financial statements should not be regarded as necessarily
indicative of results that may be expected for the entire year. It is suggested
that these condensed, consolidated financial statements be read in conjunction
with the financial statements and notes thereto included in our 2008 Form 10-K.
We label our quarterly information using a calendar convention, that is, first
quarter is labeled as ending on March 31, second quarter as ending on June 30,
and third quarter as ending on September 30. It is our longstanding practice to
establish interim quarterly closing dates using a fiscal calendar, which
requires our businesses to close their books on either a Saturday or Sunday,
depending on the business. The effects of this practice are modest and only
exist within a reporting year. The fiscal closing calendar from 1993 through
2013 is available on our website, www.ge.com/secreports.
2. DISCONTINUED
OPERATIONS
Discontinued
operations comprised GE Money Japan (our Japanese personal loan business, Lake,
and our Japanese mortgage and card businesses, excluding our investment in GE
Nissen Credit Co., Ltd.), our U.S. mortgage business (WMC), GE Life and Genworth
Financial, Inc. (Genworth). Associated results of operations, financial position
and cash flows are separately reported as discontinued operations for all
periods presented.
GE
Money Japan
During
the third quarter of 2007, we committed to a plan to sell Lake upon determining
that, despite restructuring, Japanese regulatory limits for interest charges on
unsecured personal loans did not permit us to earn an acceptable return. During
the third quarter of 2008, we completed the sale of GE Money Japan, which
included Lake, along with our Japanese mortgage and card businesses, excluding
our investment in GE Nissen Credit Co., Ltd. As a result, we recognized an
after-tax loss of $908 million in 2007 and an incremental loss in 2008 of $361
million. In connection with the transaction, GE Money Japan reduced the proceeds
on the sale for estimated interest refund claims in excess of the statutory
interest rate. Proceeds from the sale may be increased or decreased based on the
actual claims experienced in accordance with terms specified in the agreement,
and will not be adjusted unless claims exceed approximately $2,800 million.
During the second quarter of 2009, we accrued $132 million, which represents the
amount by which we expect claims to exceed those levels and is based on our
historical and recent claims experience and the estimated future requests,
taking into consideration the ability and likelihood of customers to make claims
and other industry risk factors. Uncertainties around the status of laws and
regulations and lack of certain information related to the individual customers
make it difficult to develop a meaningful estimate of the aggregate claims
exposure. We will continue to review our estimated exposure quarterly, and make
adjustments when required. GE Money Japan revenues from discontinued operations
were an insignificant amount and $261 million in the second quarters of 2009 and
2008, respectively, and an insignificant amount and $551 million in the first
six months of 2009 and 2008, respectively. In total, GE Money Japan losses from
discontinued operations, net of taxes, were $136 million and $311 million in the
second quarters of 2009 and 2008, respectively, and $132 million and $348
million in the first six months of 2009 and 2008, respectively.
WMC
During
the fourth quarter of 2007, we completed the sale of our U.S. mortgage business.
In connection with the transaction, WMC retained certain obligations related to
loans sold prior to the disposal of the business, including WMC’s contractual
obligations to repurchase previously sold loans as to which there was an early
payment default or with respect to which certain contractual representations and
warranties were not met. Reserves related to these obligations were $243 million
at June 30, 2009, and $244 million at December 31, 2008. The amount of these
reserves is based upon pending and estimated future loan repurchase requests,
the estimated percentage of loans validly tendered for repurchase, and our
estimated losses on loans repurchased. Based on our historical experience, we
estimate that a small percentage of the total loans we originated and sold will
be tendered for repurchase, and of those tendered, only a limited amount will
qualify as “validly tendered,” meaning the loans sold did not satisfy specified
contractual obligations. The amount of our current reserve represents our best
estimate of losses with respect to our repurchase obligations. However, actual
losses could exceed our reserve amount if actual claim rates, valid tenders or
losses we incur on repurchased loans are higher than historically observed. WMC
revenues from discontinued operations were $(2) million and $(62) million in the
second quarters of 2009 and 2008, respectively, and $(9) million and $(57)
million in the first six months of 2009 and 2008, respectively. In total, WMC’s
losses from discontinued operations, net of taxes, were $5 million and $20
million in the second quarters of 2009 and 2008, respectively, and $11 million
and $27 million in the first six months of 2009 and 2008,
respectively.
Summarized
financial information for discontinued operations is shown below.
|
Three
months ended June 30
|
|
Six
months ended June 30
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
$
|
(2
|
)
|
$
|
199
|
|
$
|
(8
|
)
|
$
|
494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations before income taxes
|
$
|
(101
|
)
|
$
|
(204
|
)
|
$
|
(112
|
)
|
$
|
(282
|
)
|
Income
tax benefit
|
|
38
|
|
|
101
|
|
|
42
|
|
|
133
|
|
Loss
from discontinued operations, net of taxes
|
$
|
(63
|
)
|
$
|
(103
|
)
|
$
|
(70
|
)
|
$
|
(149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on disposal before income taxes
|
$
|
(130
|
)
|
$
|
(224
|
)
|
$
|
(123
|
)
|
$
|
(224
|
)
|
Income
tax expense
|
|
(1
|
)
|
|
(9
|
)
|
|
(4
|
)
|
|
(9
|
)
|
Loss
on disposal, net of taxes
|
$
|
(131
|
)
|
$
|
(233
|
)
|
$
|
(127
|
)
|
$
|
(233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of taxes
|
$
|
(194
|
)
|
$
|
(336
|
)
|
$
|
(197
|
)
|
$
|
(382
|
)
|
|
At
|
|
(In
millions)
|
June
30,
2009
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Cash
and equivalents
|
$
|
184
|
|
$
|
180
|
|
Other
assets
|
|
13
|
|
|
19
|
|
Other
|
|
1,265
|
|
|
1,441
|
|
Assets
of discontinued operations
|
$
|
1,462
|
|
$
|
1,640
|
|
|
At
|
|
(In
millions)
|
June
30,
2009
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Liabilities
of discontinued operations
|
$
|
913
|
|
$
|
799
|
|
Assets at
June 30, 2009 and December 31, 2008, primarily comprised a deferred tax asset
for a loss carryforward, which expires in 2015, related to the sale of our GE
Money Japan business.
3. INVESTMENT
SECURITIES
The vast
majority of our investment securities are classified as available-for-sale and
comprise mainly investment-grade debt securities supporting obligations to
holders of guaranteed investment contracts.
|
At
|
|
June
30, 2009
|
|
December
31, 2008
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
Amortized
|
|
unrealized
|
|
unrealized
|
|
Estimated
|
|
Amortized
|
|
unrealized
|
|
unrealized
|
|
Estimated
|
(In
millions)
|
cost
|
|
gains
|
|
losses
|
|
fair
value
|
|
cost
|
|
gains
|
|
losses
|
|
fair
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate
|
$
|
3,927
|
|
$
|
53
|
|
$
|
(514
|
)
|
$
|
3,466
|
|
$
|
4,456
|
|
$
|
54
|
|
$
|
(637
|
)
|
$
|
3,873
|
State and
municipal
|
|
1,204
|
|
|
4
|
|
|
(216
|
)
|
|
992
|
|
|
915
|
|
|
5
|
|
|
(70
|
)
|
|
850
|
Residential mortgage-backed(a)
|
|
3,526
|
|
|
20
|
|
|
(994
|
)
|
|
2,552
|
|
|
4,228
|
|
|
9
|
|
|
(976
|
)
|
|
3,261
|
Commercial
mortgage-backed
|
|
1,649
|
|
|
−
|
|
|
(487
|
)
|
|
1,162
|
|
|
1,664
|
|
|
−
|
|
|
(509
|
)
|
|
1,155
|
Asset-backed
|
|
2,920
|
|
|
25
|
|
|
(345
|
)
|
|
2,600
|
|
|
2,922
|
|
|
2
|
|
|
(668
|
)
|
|
2,256
|
Corporate –
non-U.S.
|
|
707
|
|
|
14
|
|
|
(48
|
)
|
|
673
|
|
|
608
|
|
|
6
|
|
|
(23
|
)
|
|
591
|
Government –
non-U.S.
|
|
1,490
|
|
|
6
|
|
|
(20
|
)
|
|
1,476
|
|
|
936
|
|
|
2
|
|
|
(15
|
)
|
|
923
|
U.S. government and federal
agency
|
|
71
|
|
|
2
|
|
|
−
|
|
|
73
|
|
|
26
|
|
|
3
|
|
|
−
|
|
|
29
|
Retained
interests(b)(c)
|
|
6,154
|
|
|
167
|
|
|
(62
|
)
|
|
6,259
|
|
|
5,144
|
|
|
73
|
|
|
(136
|
)
|
|
5,081
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
867
|
|
|
78
|
|
|
(25
|
)
|
|
920
|
|
|
1,023
|
|
|
22
|
|
|
(134
|
)
|
|
911
|
Trading
|
|
644
|
|
|
−
|
|
|
−
|
|
|
644
|
|
|
388
|
|
|
−
|
|
|
−
|
|
|
388
|
Total
|
$
|
23,159
|
|
$
|
369
|
|
$
|
(2,711
|
)
|
$
|
20,817
|
|
$
|
22,310
|
|
$
|
176
|
|
$
|
(3,168
|
)
|
$
|
19,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Substantially
collateralized by U.S. mortgages.
|
|
(b)
|
Included
$1,861 million and $1,752 million of retained interests at June 30, 2009
and December 31, 2008, respectively, accounted for in accordance with SFAS
155, Accounting for
Certain Hybrid Financial Instruments. See Note12.
|
|
(c)
|
Amortized
cost and estimated fair value included $5 million of trading securities at
June 30, 2009.
|
|
The
following tables present the estimated fair values and gross unrealized losses
of our available-for-sale investment securities.
|
In
loss position for
|
|
|
Less
than 12 months
|
|
12
months or more
|
|
(In
millions)
|
Estimated
fair
value
|
|
Gross
unrealized
losses
|
|
Estimated
fair
value
|
|
Gross
unrealized
losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate
|
$
|
478
|
|
$
|
(44
|
)
|
$
|
1,474
|
|
$
|
(470
|
)
|
State and
municipal
|
|
318
|
|
|
(135
|
)
|
|
283
|
|
|
(81
|
)
|
Residential
mortgage-backed
|
|
126
|
|
|
(39
|
)
|
|
1,713
|
|
|
(955
|
)
|
Commercial
mortgage-backed
|
|
−
|
|
|
−
|
|
|
1,155
|
|
|
(487
|
)
|
Asset-backed
|
|
65
|
|
|
(7
|
)
|
|
1,369
|
|
|
(338
|
)
|
Corporate –
non-U.S.
|
|
198
|
|
|
(27
|
)
|
|
260
|
|
|
(21
|
)
|
Government –
non-U.S.
|
|
447
|
|
|
(3
|
)
|
|
280
|
|
|
(17
|
)
|
U.S. government and federal
agency
|
|
−
|
|
|
−
|
|
|
−
|
|
|
−
|
|
Retained
interests
|
|
204
|
|
|
(5
|
)
|
|
182
|
|
|
(57
|
)
|
Equity
|
|
91
|
|
|
(23
|
)
|
|
5
|
|
|
(2
|
)
|
Total
|
$
|
1,927
|
|
$
|
(283
|
)
|
$
|
6,721
|
|
$
|
(2,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate
|
$
|
1,152
|
|
$
|
(397
|
)
|
$
|
1,253
|
|
$
|
(240
|
)
|
State and
municipal
|
|
302
|
|
|
(21
|
)
|
|
278
|
|
|
(49
|
)
|
Residential
mortgage-backed
|
|
1,216
|
|
|
(64
|
)
|
|
1,534
|
|
|
(912
|
)
|
Commercial
mortgage-backed
|
|
285
|
|
|
(85
|
)
|
|
870
|
|
|
(424
|
)
|
Asset-backed
|
|
903
|
|
|
(406
|
)
|
|
1,031
|
|
|
(262
|
)
|
Corporate –
non-U.S.
|
|
60
|
|
|
(7
|
)
|
|
265
|
|
|
(16
|
)
|
Government –
non-U.S.
|
|
−
|
|
|
−
|
|
|
275
|
|
|
(15
|
)
|
U.S. government and federal
agency
|
|
−
|
|
|
−
|
|
|
−
|
|
|
−
|
|
Retained
interests
|
|
1,246
|
|
|
(61
|
)
|
|
238
|
|
|
(75
|
)
|
Equity
|
|
200
|
|
|
(132
|
)
|
|
6
|
|
|
(2
|
)
|
Total
|
$
|
5,364
|
|
$
|
(1,173
|
)
|
$
|
5,750
|
|
$
|
(1,995
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We
adopted FASB FSP FAS 115-2 and 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments, and recorded a cumulative effect
adjustment to increase retained earnings as of April 1, 2009 of $25
million.
We
regularly review investment securities for impairment using both qualitative and
quantitative criteria. We presently do not intend to sell our debt securities
and believe that it is not more likely than not that we will be required to sell
these securities that are in an unrealized loss position before recovery of our
amortized cost. We believe that the unrealized loss associated with our equity
securities will be recovered within the foreseeable future.
The vast
majority of our U.S. corporate debt securities are rated investment grade by the
major rating agencies. The unrealized loss on these securities at June 30, 2009
largely reflects changes in interest rates and higher spreads driven by the
challenging conditions in the credit markets. We evaluate U.S. corporate debt
securities based on a variety of factors such as the financial health of and
specific prospects for the issuer, including whether the issuer is in compliance
with the terms and covenants of the security. In the event a U.S. corporate debt
security is deemed to be other-than-temporarily impaired, in accordance with the
FSP, we isolate the credit portion of the impairment by comparing the present
value of our expectation of cash flows to the amortized cost of the security. We
discount the cash flows using the original effective interest rate of the
security.
The vast
majority of our residential mortgage-backed securities (RMBS) have
investment-grade credit ratings from the major rating agencies and are in a
senior position in the capital structure of the deal. Of our total RMBS at June
30, 2009 and December 31, 2008, approximately $1,116 million and $1,284 million,
respectively, relate to residential subprime credit, primarily supporting our
guaranteed investment contracts. These are collateralized primarily by pools of
individual, direct mortgage loans (a majority of which were originated in 2006
and 2005), not other structured products such as collateralized debt
obligations. In addition, of the total residential subprime credit exposure at
June 30, 2009 and December 31, 2008, approximately $962 million and $1,089
million, respectively, was insured by monoline insurers.
Substantially
all of our commercial mortgage-backed securities (CMBS) also have
investment-grade credit ratings from the major rating agencies and are in a
senior position in the capital structure of the deal. Our CMBS investments are
collateralized by both diversified pools of mortgages that were originated for
securitization (conduit CMBS) and pools of large loans backed by high quality
properties (large loan CMBS), a majority of which were originated in 2006 and
2007.
For
asset-backed securities, including RMBS, we estimate the portion of loss
attributable to credit using a discounted cash flow model that considers
estimates of cash flows generated from the underlying collateral. Estimates of
cash flows consider internal credit risk, interest rate and prepayment
assumptions that incorporate management’s best estimate of key assumptions,
including default rates, loss severity and prepayment rates. For CMBS, we
estimate the portion of loss attributable to credit by evaluating potential
losses on each of the underlying loans in the security. Collateral cash flows
are considered in the context of our position in the capital structure of the
deal. Assumptions can vary widely depending upon the collateral type, geographic
concentrations and vintage.
If there
has been an adverse change in cash flows for RMBS, management considers credit
enhancements such as monoline insurance (which are features of a specific
security). In evaluating the overall credit worthiness of the Monoline, we use
an analysis that is similar to the approach we use for corporate bonds,
including an evaluation of the sufficiency of the Monoline’s cash reserves and
capital, ratings activity, whether the Monoline is in default or default appears
imminent, and the potential for intervention by an insurance or other
regulator.
During
the three months ended June 30, 2009, we recorded pre-tax, other-than-temporary
impairments of $132 million, of which $57 million was recorded through earnings
($15 million relates to equity securities), and $75 million was recorded in
Accumulated Other Comprehensive Income (AOCI). Had we not adopted FASB FSP FAS
115-2 and 124-2, other-than-temporary impairments recorded to earnings would
have been $121 million in the second quarter of 2009.
Under the
new standard, previously recognized other-than-temporary impairments related to
credit on securities still held at April 1, 2009 were $101 million. During the
quarter, first time credit and incremental impairments were both $21 million.
There were no securities sold that had previously been impaired.
Supplemental
information about gross realized gains and losses on available-for-sale
investment securities follows.
|
Three
months ended June 30
|
|
Six
months ended June 30
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
$
|
19
|
|
$
|
55
|
|
$
|
27
|
|
$
|
107
|
|
Losses,
including impairments
|
|
(58
|
)
|
|
(62
|
)
|
|
(204
|
)
|
|
(100
|
)
|
Net
|
$
|
(39
|
)
|
$
|
(7
|
)
|
$
|
(177
|
)
|
$
|
7
|
|
In the
ordinary course of managing our investment securities portfolio, we may sell
securities prior to their maturities for a variety of reasons, including
diversification, credit quality, yield and liquidity requirements and the
funding of claims and obligations to policyholders.
Proceeds
from investment securities sales and early redemptions by the issuer totaled
$1,313 million and $1,031 million in the second quarters of 2009 and 2008,
respectively, and $3,278 million and $1,290 million in the first six months of
2009 and 2008, respectively, principally from the sales and maturities of
short-term securities in our bank subsidiaries.
We
recognized pre-tax gains on trading securities of $204 million and $167 million
in the second quarters of 2009 and 2008, respectively, and $244 million and $387
million in the first six months of 2009 and 2008, respectively. Investments in
retained interests increased by $172 million and decreased by $93 million during
the first six months of 2009 and 2008, respectively, reflecting changes in fair
value accounted for in accordance with SFAS 155.
4. FINANCING
RECEIVABLES AND ALLOWANCE FOR LOSSES ON FINANCING RECEIVABLES
Financing
receivables – net, consisted of the following.
|
At
|
(In
millions)
|
June
30,
2009
|
|
December
31,
2008
|
|
|
|
|
|
|
|
Loans,
net of deferred income
|
$
|
305,003
|
|
$
|
308,821
|
|
Investment
in financing leases, net of deferred income
|
|
59,593
|
|
|
67,077
|
|
|
|
364.596
|
|
|
375,898
|
|
Less
allowance for losses
|
|
(6,590
|
)
|
|
(5,306
|
)
|
Financing
receivables – net(a)
|
$
|
358,006
|
|
$
|
370,592
|
|
|
|
|
|
|
|
|
(a)
|
Included
$4,967 million and $6,461 million related to consolidated, liquidating
securitization entities at June 30, 2009 and December 31, 2008,
respectively. In addition, financing receivables at June 30, 2009 and
December 31, 2008 included $3,011 million and $2,736 million,
respectively, relating to loans that had been acquired and accounted for
in accordance with SOP 03-3, Accounting for Certain Loans
or Debt Securities Acquired in a Transfer.
|
|
We
adopted SFAS 141(R) on January 1, 2009. As a result of this adoption, loans
acquired in a business acquisition are recorded at fair value, which
incorporates our estimate at the acquisition date of the credit losses over the
remaining life of the portfolio. As a result, the allowance for loan losses is
not carried over at acquisition. This may result in lower reserve coverage
ratios prospectively. Details of financing receivables – net
follow.
|
At
|
(In
millions)
|
June
30,
2009
|
|
December
31,
2008
|
|
|
|
|
|
|
|
CLL(a)
|
|
|
|
|
|
|
Americas
|
$
|
96,352
|
|
$
|
104,462
|
|
Europe
|
|
40,549
|
|
|
36,972
|
|
Asia
|
|
14,057
|
|
|
16,683
|
|
Other
|
|
751
|
|
|
786
|
|
|
|
151,709
|
|
|
158,903
|
|
Consumer(a)
|
|
|
|
|
|
|
Non-U.S.
residential mortgages(b)
|
|
62,587
|
|
|
60,753
|
|
Non-U.S.
installment and revolving credit
|
|
25,485
|
|
|
24,441
|
|
U.S.
installment and revolving credit
|
|
23,939
|
|
|
27,645
|
|
Non-U.S.
auto
|
|
14,853
|
|
|
18,168
|
|
Other
|
|
13,218
|
|
|
11,541
|
|
|
|
140,082
|
|
|
142,548
|
|
|
|
|
|
|
|
|
Real
Estate
|
|
46,018
|
|
|
46,735
|
|
|
|
|
|
|
|
|
Energy
Financial Services
|
|
8,471
|
|
|
8,355
|
|
|
|
|
|
|
|
|
GECAS(c)
|
|
14,992
|
|
|
15,326
|
|
|
|
|
|
|
|
|
Other(d)
|
|
3,324
|
|
|
4,031
|
|
|
|
364,596
|
|
|
375,898
|
|
Less
allowance for losses
|
|
(6,590
|
)
|
|
(5,306
|
)
|
Total
|
$
|
358,006
|
|
$
|
370,592
|
|
|
|
|
|
|
|
|
(a)
|
During
the first quarter of 2009, we transferred Artesia from CLL to Consumer.
Prior-period amounts were reclassified to conform to the current-period’s
presentation.
|
|
(b)
|
At
June 30, 2009, net of credit insurance, approximately 26% of this
portfolio comprised loans with introductory, below market rates that are
scheduled to adjust at future dates; with high loan-to-value ratios at
inception; whose terms permitted interest-only payments; or whose terms
resulted in negative amortization. At the origination date, loans with an
adjustable rate were underwritten to the reset value.
|
|
(c)
|
Included
loans and financing leases of $12,901 million and $13,078 million at June
30, 2009 and December 31, 2008, respectively, related to commercial
aircraft at Aviation Financial Services.
|
|
(d)
|
Consisted
of loans and financing leases related to certain consolidated, liquidating
securitization entities.
|
|
Individually
impaired loans are defined by GAAP as larger balance or restructured loans for
which it is probable that the lender will be unable to collect all amounts due
according to original contractual terms of the loan agreement. An analysis of
impaired loans and specific reserves follows.
|
At
|
(In
millions)
|
June
30,
2009
|
|
December
31,
2008
|
|
|
|
|
|
|
|
Loans
requiring allowance for losses
|
$
|
5,657
|
|
$
|
2,712
|
|
Loans
expected to be fully recoverable
|
|
2,425
|
|
|
871
|
|
Total
impaired loans
|
$
|
8,082
|
|
$
|
3,583
|
|
|
|
|
|
|
|
|
Allowance
for losses (specific reserves)
|
$
|
1,321
|
|
$
|
635
|
|
Average
investment during the period
|
|
5,836
|
|
|
2,064
|
|
Interest
income earned while impaired(a)
|
|
55
|
|
|
48
|
|
|
|
|
|
|
|
|
(a)
|
Recognized
principally on cash basis.
|
Allowance
for Losses on Financing Receivables
|
Balance
January
1,
2009
|
|
Provision
charged
to
operations
|
|
Other(a)
|
|
Gross
write-offs
|
|
Recoveries
|
|
Balance
June
30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLL(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
824
|
|
$
|
720
|
|
$
|
(35
|
)
|
$
|
(435
|
)
|
$
|
42
|
|
$
|
1,116
|
|
Europe
|
|
288
|
|
|
290
|
|
|
(1
|
)
|
|
(139
|
)
|
|
10
|
|
|
448
|
|
Asia
|
|
163
|
|
|
120
|
|
|
(6
|
)
|
|
(85
|
)
|
|
7
|
|
|
199
|
|
Other
|
|
2
|
|
|
3
|
|
|
2
|
|
|
(1
|
)
|
|
−
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgages
|
|
383
|
|
|
561
|
|
|
59
|
|
|
(231
|
)
|
|
59
|
|
|
831
|
|
Non-U.S.
installment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and revolving
credit
|
|
1,051
|
|
|
900
|
|
|
65
|
|
|
(1,098
|
)
|
|
229
|
|
|
1,147
|
|
U.S.
installment and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revolving
credit
|
|
1,700
|
|
|
1,729
|
|
|
(497
|
)
|
|
(1,438
|
)
|
|
81
|
|
|
1,575
|
|
Non-U.S.
auto
|
|
222
|
|
|
245
|
|
|
13
|
|
|
(302
|
)
|
|
91
|
|
|
269
|
|
Other
|
|
226
|
|
|
180
|
|
|
(2
|
)
|
|
(205
|
)
|
|
51
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate
|
|
301
|
|
|
344
|
|
|
10
|
|
|
(85
|
)
|
|
−
|
|
|
570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
58
|
|
|
32
|
|
|
1
|
|
|
−
|
|
|
−
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GECAS
|
|
60
|
|
|
1
|
|
|
−
|
|
|
−
|
|
|
−
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
28
|
|
|
12
|
|
|
1
|
|
|
(14
|
)
|
|
−
|
|
|
27
|
|
Total
|
$
|
5,306
|
|
$
|
5,137
|
|
$
|
(390
|
)
|
$
|
(4,033
|
)
|
$
|
570
|
|
$
|
6,590
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Other
primarily included the effects of securitization activity and currency
exchange.
|
(b)
|
During
the first quarter of 2009, we transferred Artesia from CLL to Consumer.
Prior-period amounts were reclassified to conform to the current-period’s
presentation.
|
|
Balance
January
1,
2008
|
|
Provision
charged
to
operations
|
|
Other(a)
|
|
Gross
write-offs
|
|
Recoveries
|
|
Balance
June
30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLL(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
451
|
|
$
|
251
|
|
$
|
49
|
|
$
|
(239
|
)
|
$
|
32
|
|
$
|
544
|
|
Europe
|
|
230
|
|
|
94
|
|
|
(38
|
)
|
|
(82
|
)
|
|
17
|
|
|
221
|
|
Asia
|
|
226
|
|
|
49
|
|
|
(8
|
)
|
|
(162
|
)
|
|
3
|
|
|
108
|
|
Other
|
|
3
|
|
|
1
|
|
|
(2
|
)
|
|
−
|
|
|
−
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgages
|
|
246
|
|
|
61
|
|
|
33
|
|
|
(62
|
)
|
|
41
|
|
|
319
|
|
Non-U.S.
installment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and revolving
credit
|
|
1,371
|
|
|
847
|
|
|
77
|
|
|
(1,265
|
)
|
|
436
|
|
|
1,466
|
|
U.S.
installment and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revolving
credit
|
|
985
|
|
|
1,144
|
|
|
(304
|
)
|
|
(952
|
)
|
|
132
|
|
|
1,005
|
|
Non-U.S.
auto
|
|
324
|
|
|
154
|
|
|
(37
|
)
|
|
(299
|
)
|
|
144
|
|
|
286
|
|
Other
|
|
167
|
|
|
119
|
|
|
83
|
|
|
(149
|
)
|
|
33
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate
|
|
168
|
|
|
34
|
|
|
14
|
|
|
(8
|
)
|
|
1
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
19
|
|
|
1
|
|
|
2
|
|
|
−
|
|
|
−
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GECAS
|
|
8
|
|
|
38
|
|
|
−
|
|
|
(1
|
)
|
|
−
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
18
|
|
|
10
|
|
|
−
|
|
|
(8
|
)
|
|
−
|
|
|
20
|
|
Total
|
$
|
4,216
|
|
$
|
2,803
|
|
$
|
(131
|
)
|
$
|
(3,227
|
)
|
$
|
839
|
|
$
|
4,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Other
primarily included the effects of securitization activity, currency
exchange, dispositions and acquisitions.
|
(b)
|
During
the first quarter of 2009, we transferred Artesia from CLL to Consumer.
Prior-period amounts were reclassified to conform to the current-period’s
presentation.
|
5. GOODWILL
AND OTHER INTANGIBLE ASSETS
Goodwill
and other intangible assets – net, consisted of the following.
|
At
|
(In
millions)
|
June
30,
2009
|
|
December
31,
2008
|
|
|
|
|
|
|
|
Goodwill
|
$
|
27,160
|
|
$
|
25,204
|
|
|
|
|
|
|
|
|
Other
intangible assets
|
|
|
|
|
|
|
Intangible assets subject to
amortization
|
$
|
3,541
|
|
$
|
3,174
|
|
|
|
|
|
|
|
|
Changes
in goodwill balances follow.
(In
millions)
|
Balance
January
1,
2009
|
|
Acquisitions/
acquisition
accounting
adjustments
|
|
Dispositions,
currency
exchange
and
other
|
|
Balance
June
30,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLL
|
$
|
12,321
|
(a)
|
$
|
839
|
|
$
|
(351
|
)
|
$
|
12,809
|
|
Consumer
|
|
9,407
|
(a)
|
|
1,352
|
|
|
138
|
|
|
10,897
|
|
Real
Estate
|
|
1,159
|
|
|
(7
|
)
|
|
26
|
|
|
1,178
|
|
Energy
Financial Services
|
|
2,162
|
|
|
(4
|
)
|
|
(39
|
)
|
|
2,119
|
|
GECAS
|
|
155
|
|
|
−
|
|
|
2
|
|
|
157
|
|
Total
|
$
|
25,204
|
|
$
|
2,180
|
|
$
|
(224
|
)
|
$
|
27,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Reflected
the transfer of Artesia during the first quarter of 2009, resulting in a
related movement of beginning goodwill balance of $326
million.
|
Goodwill
related to new acquisitions in the first six months of 2009 was $1,952 million
and included acquisitions of BAC Credomatic (BAC) ($1,309 million) at GE Money
and Interbanca S.p.A. (Interbanca) ($643 million) at CLL. During the first six
months of 2009, the goodwill balance increased by $228 million related to
acquisition accounting adjustments for prior-year acquisitions. The most
significant of these adjustments was an increase of $177 million associated with
the 2008 acquisition of CitiCapital at CLL. Also during the first six months of
2009, goodwill balances decreased $224 million, primarily as a result of the
deconsolidation of Penske Truck Leasing Co., L.P. (PTL) ($634 million) at CLL,
partially offset by an increase of $449 million as a result of the weaker U.S.
dollar.
On June
25, 2009, we increased our ownership in BAC from 49.99% to 75% for a purchase
price of $623 million, in accordance with terms of a previous agreement. We
remeasured our previously held equity investment to fair value, resulting in a
pre-tax gain of $343 million, which is reported in Revenues from
services.
We test
goodwill for impairment annually and more frequently if circumstances warrant.
Given the significant decline in GE’s stock price in the first quarter of 2009
and market conditions in the financial services industry at that time, we
conducted an additional impairment analysis of the reporting units during the
first quarter of 2009 using data as of January 1, 2009.
We
determined fair values for each of the reporting units using an income approach.
When available and as appropriate, we used comparative market multiples to
corroborate discounted cash flow results. For purposes of the income approach,
fair value was determined based on the present value of estimated future cash
flows, discounted at an appropriate risk-adjusted rate. We use our internal
forecasts to estimate future cash flows and include an estimate of long-term
future growth rates based on our most recent views of the long-term outlook for
each business. Actual results may differ from those assumed in our forecasts. We
derive our discount rates by applying the capital asset pricing model (i.e., to
estimate the cost of equity financing) and analyzing published rates for
industries relevant to our reporting units. We used discount rates that are
commensurate with the risks and uncertainty inherent in the financial markets
generally and in our internally developed forecasts. Discount rates used in
these reporting unit valuations ranged from 11.5% to 13.0%. Valuations using the
market approach reflect prices and other relevant observable information
generated by market transactions involving financial services
businesses.
Compared
to the market approach, the income approach more closely aligns the reporting
unit valuation to a company’s or business’ specific business model, geographic
markets and product offerings, as it is based on specific projections of the
business. Required rates of return, along with uncertainty inherent in the
forecasts of future cash flows are reflected in the selection of the discount
rate. Equally important, under this approach, reasonably likely scenarios and
associated sensitivities can be developed for alternative future states that may
not be reflected in an observable market price. A market approach allows for
comparison to actual market transactions and multiples. It can be somewhat more
limited in its application because the population of potential comparables (or
pure plays) is often limited to publicly-traded companies where the
characteristics of the comparative business and ours can be significantly
different, market data is usually not available for divisions within larger
conglomerates or non-public subsidiaries that could otherwise qualify as
comparable, and the specific circumstances surrounding a market transaction
(e.g., synergies between the parties, terms and conditions of the transaction,
etc.) may be different or irrelevant with respect to our business. It can also
be difficult under the current market conditions to identify orderly
transactions between market participants in similar financial services
businesses. We assess the valuation methodology based upon the relevance and
availability of data at the time of performing the valuation and weight the
methodologies appropriately.
In
performing the valuations, we updated cash flows to reflect management’s
forecasts and adjusted discount rates to reflect the risks associated with the
current market. Based on the results of our testing, the fair values of these
reporting units exceeded their book values; therefore, the second step of the
impairment test (in which fair value of each of the reporting units assets and
liabilities are measured) was not required to be performed and no goodwill
impairment was recognized. Estimating the fair value of reporting units involves
the use of estimates and significant judgments that are based on a number of
factors including actual operating results, future business plans, economic
projections and market data. Actual results may differ from forecasted results.
While no impairment was noted in our step one impairment tests, goodwill in our
Real Estate reporting unit may be particularly sensitive to further
deterioration in economic conditions. If current conditions persist longer or
deteriorate further than expected, it is reasonably possible that the judgments
and estimates described above could change in future periods.
Intangible
Assets Subject to Amortization
|
At
|
|
June
30, 2009
|
|
December
31, 2008
|
(In
millions)
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Net
|
|
Gross
carrying
amount
|
|
Accumulated
amortization
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related
|
$
|
1,774
|
|
$
|
(711
|
)
|
$
|
1,063
|
|
$
|
1,790
|
|
$
|
(616
|
)
|
$
|
1,174
|
Patents,
licenses and trademarks
|
|
564
|
|
|
(417
|
)
|
|
147
|
|
|
564
|
|
|
(460
|
)
|
|
104
|
Capitalized
software
|
|
2,262
|
|
|
(1,591
|
)
|
|
671
|
|
|
2,148
|
|
|
(1,463
|
)
|
|
685
|
Lease
valuations
|
|
1,748
|
|
|
(702
|
)
|
|
1,046
|
|
|
1,761
|
|
|
(594
|
)
|
|
1,167
|
All
other
|
|
878
|
|
|
(264
|
)
|
|
614
|
|
|
233
|
|
|
(189
|
)
|
|
44
|
Total
|
$
|
7,226
|
|
$
|
(3,685
|
)
|
$
|
3,541
|
|
$
|
6,496
|
|
$
|
(3,322
|
)
|
$
|
3,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
related to intangible assets subject to amortization was $236 million and $207
million for the quarters ended June 30, 2009 and 2008, respectively.
Amortization related to intangible assets subject to amortization for the six
months ended June 30, 2009 and 2008, was $410 million and $402 million,
respectively.
6. BORROWINGS
Borrowings
are summarized in the following table.
|
At
|
(In
millions)
|
June
30,
2009
|
|
December
31,
2008
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
paper
|
|
|
|
|
|
|
U.S.
|
|
|
|
|
|
|
Unsecured(a)
|
$
|
35,162
|
|
$
|
57,665
|
|
Asset-backed(b)
|
|
3,032
|
|
|
3,652
|
|
Non-U.S.
|
|
9,356
|
|
|
9,033
|
|
Current
portion of long-term debt(a)(c)(d)
|
|
82,417
|
|
|
69,680
|
|
Bank
deposits(e)
|
|
26,959
|
|
|
29,634
|
|
Bank
borrowings(f)
|
|
3,475
|
|
|
10,028
|
|
GE
Interest Plus notes(g)
|
|
5,964
|
|
|
5,633
|
|
Other
|
|
1,664
|
|
|
3,276
|
|
Total
|
|
168,029
|
|
|
188,601
|
|
|
|
|
|
|
|
|
Long-term
borrowings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
notes
|
|
|
|
|
|
|
Unsecured(a)(d)(h)
|
|
306,053
|
|
|
299,651
|
|
Asset-backed(i)
|
|
4,558
|
|
|
5,002
|
|
Subordinated
notes(j)
|
|
2,475
|
|
|
2,567
|
|
Subordinated
debentures(k)
|
|
7,534
|
|
|
7,315
|
|
Bank
deposits(l)
|
|
9,447
|
|
|
7,220
|
|
Total
|
|
330,067
|
|
|
321,755
|
|
Total
borrowings
|
$
|
498,096
|
|
$
|
510,356
|
|
|
|
|
|
|
|
|
(a)
|
GE
Capital had issued and outstanding $69,132 million ($21,132 million
commercial paper and $48,000 million long-term borrowings) and $35,243
million ($21,823 million commercial paper and $13,420 million long-term
borrowings) of senior, unsecured debt that was guaranteed by the Federal
Deposit Insurance Corporation (FDIC) under the Temporary Liquidity
Guarantee Program at June 30, 2009 and December 31, 2008, respectively. GE
Capital and GE are parties to an Eligible Entity Designation Agreement and
GE Capital is subject to the terms of a Master Agreement, each entered
into with the FDIC. The terms of these agreements include, among other
things, a requirement that GE and GE Capital reimburse the FDIC for any
amounts that the FDIC pays to holders of GE Capital debt that is
guaranteed by the FDIC.
|
(b)
|
Consists
entirely of obligations of consolidated, liquidating securitization
entities. See Note 12.
|
(c)
|
Included
$222 million and $326 million of asset-backed senior notes, issued by
consolidated, liquidating securitization entities at June 30, 2009 and
December 31, 2008, respectively.
|
(d)
|
Included
$1,632 million ($113 million short-term and $1,519 million long-term) of
borrowings under European government-sponsored programs at June 30,
2009.
|
(e)
|
Included
$18,757 million and $11,793 million of deposits in non-U.S. banks at June
30, 2009 and December 31, 2008, respectively, and included certificates of
deposits distributed by brokers of $8,202 million and $17,841 million at
June 30, 2009 and December 31, 2008, respectively.
|
(f)
|
Term
borrowings from banks with an original term to maturity of less than 12
months.
|
(g)
|
Entirely
variable denomination floating rate demand notes.
|
(h)
|
Included
borrowings from GECS affiliates of $1,010 million and $1,006 million at
June 30, 2009 and December 31, 2008, respectively.
|
(i)
|
Included
$1,309 million and $2,104 million of asset-backed senior notes, issued by
consolidated, liquidating securitization entities at June 30, 2009 and
December 31, 2008, respectively. See Note 12.
|
(j)
|
Included
$117 million and $450 million of subordinated notes guaranteed by GE at
June 30, 2009 and December 31, 2008, respectively.
|
(k)
|
Subordinated
debentures receive rating agency equity credit and were hedged at issuance
to the U.S. dollar equivalent of $7,725 million.
|
(l)
|
Included
certificates of deposits distributed by brokers with maturities greater
than one year of $9,069 million and $6,699 million at June 30, 2009 and
December 31, 2008, respectively.
|
7. INCOME
TAXES
During
the first quarter of 2009, following the change in our external credit ratings,
funding actions taken and review of our operations, liquidity and funding, we
determined that undistributed prior-year earnings of non-U.S. subsidiaries of
GECC, on which we had previously provided deferred U.S. taxes, would be
indefinitely reinvested outside the U.S. This change increased the amount of
prior-year earnings indefinitely reinvested outside the U.S. by approximately $2
billion (to $52 billion), resulting in an income tax benefit of $700 million in
the first quarter of 2009.
The
balance of “unrecognized tax benefits,” the amount of related interest and
penalties we have provided and what we believe to be the range of reasonably
possible changes in the next 12 months, were:
|
At
|
|
(In
millions)
|
June
30,
2009
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
Unrecognized
tax benefits
|
$
|
3,590
|
|
$
|
3,454
|
|
Portion that, if recognized,
would reduce tax expense and
|
|
|
|
|
|
|
effective tax rate(a)
|
|
1,853
|
|
|
1,734
|
|
Accrued
interest on unrecognized tax benefits
|
|
719
|
|
|
693
|
|
Accrued
penalties on unrecognized tax benefits
|
|
71
|
|
|
65
|
|
Reasonably
possible reduction to the balance of unrecognized
|
|
|
|
|
|
|
tax benefits in succeeding 12
months
|
|
0-150
|
|
|
0-350
|
|
Portion that, if recognized,
would reduce tax expense
|
|
|
|
|
|
|
and effective tax rate(a)
|
|
0-50
|
|
|
0-50
|
|
|
|
|
|
|
|
|
(a)
|
Some
portion of such reduction might be reported as discontinued
operations.
|
|
The IRS
is currently auditing the GE consolidated income tax returns for 2003-2007, a
substantial portion of which include our activities. In addition, certain other
U.S. tax deficiency issues and refund claims for previous years remain
unresolved. It is reasonably possible that the 2003-2005 U.S. audit cycle will
be completed during the next 12 months, which could result in a decrease in our
balance of unrecognized tax benefits. We believe that there are no other
jurisdictions in which the outcome of unresolved issues or claims is likely to
be material to our results of operations, financial position or cash flows. We
further believe that we have made adequate provision for all income tax
uncertainties.
GE and
GECC file a consolidated U.S. federal income tax return. The GECC provision for
current tax expense includes its effect on the consolidated return. The effect
of GECC on the consolidated liability is settled in cash as GE tax payments are
due.
8. SHAREOWNER’S
EQUITY
A summary
of increases (decreases) in GECC shareowner’s equity that did not result
directly from transactions with the shareowner, net of income taxes,
follows.
|
Three
months ended June 30
|
|
Six
months ended June 30
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings attributable to GECC
|
$
|
181
|
|
$
|
2,414
|
|
$
|
1,152
|
|
$
|
4,849
|
|
Investment
securities – net
|
|
556
|
|
|
(240
|
)
|
|
516
|
|
|
(741
|
)
|
Currency
translation adjustments – net
|
|
4,731
|
|
|
(320
|
)
|
|
1,707
|
|
|
789
|
|
Cash
flow hedges – net
|
|
593
|
|
|
1,792
|
|
|
1,316
|
|
|
114
|
|
Benefit
plans – net
|
|
(17
|
)
|
|
5
|
|
|
(9
|
)
|
|
18
|
|
Total
|
$
|
6,044
|
|
$
|
3,651
|
|
$
|
4,682
|
|
$
|
5,029
|
|
Changes
to noncontrolling interests during the second quarter of 2009 resulted from net
earnings ($29 million), dividends ($(26) million), AOCI ($(16) million) and
other ($(19) million). Changes to the individual components of AOCI attributable
to noncontrolling interests were primarily related to changes in currency
translation adjustments ($(54) million, partially offset by cash flow hedges
($37 million).
Changes
to noncontrolling interests during the first six months of 2009 resulted from
net earnings ($79 million), dividends ($(53) million), the effects of
deconsolidating PTL ($(331) million, including $101 million of AOCI), other AOCI
($(40) million) and other ($27 million). Changes to the individual components of
AOCI attributable to noncontrolling interests were primarily related to changes
in currency translation adjustments ($(76) million).
During
the first quarter of 2009, GE made a $9,500 million capital contribution to
GECS, of which GECS subsequently contributed $8,250 million to us. In addition,
we issued one share of common stock (par value $14) to GECS for $500
million.
9. REVENUES
FROM SERVICES
Revenues
from services are summarized in the following table.
|
Three
months ended June 30
|
|
Six
months ended June 30
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on loans
|
$
|
5,008
|
|
$
|
6,675
|
|
$
|
10,053
|
|
$
|
13,105
|
|
Equipment
leased to others
|
|
2,916
|
|
|
3,896
|
|
|
6,389
|
|
|
7,691
|
|
Fees
|
|
1,100
|
|
|
1,399
|
|
|
2,259
|
|
|
2,731
|
|
Financing
leases
|
|
825
|
|
|
1,190
|
|
|
1,726
|
|
|
2,339
|
|
Real
estate investments
|
|
369
|
|
|
1,133
|
|
|
715
|
|
|
2,290
|
|
Associated
companies
|
|
309
|
|
|
647
|
|
|
474
|
|
|
1,116
|
|
Investment
income(a)
|
|
599
|
|
|
597
|
|
|
924
|
|
|
1,146
|
|
Net
securitization gains
|
|
360
|
|
|
273
|
|
|
640
|
|
|
622
|
|
Other
items(b)(c)
|
|
871
|
|
|
1,811
|
|
|
2,513
|
|
|
3,337
|
|
Total
|
$
|
12,357
|
|
$
|
17,621
|
|
$
|
25,693
|
|
$
|
34,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Included
net other-than-temporary impairments on investment securities of $57
million and $62 million in the second quarters of 2009 and 2008,
respectively, and $198 million and $97 million in the first six months of
2009 and 2008, respectively. See Note 3.
|
|
(b)
|
Included
a gain on the sale of a limited partnership interest in PTL and a related
gain on the remeasurement of the retained investment to fair value
totaling $296 million in the first quarter of 2009. See Note
12.
|
|
(c)
|
Included
a gain of $343 million on the remeasurement to fair value of our equity
method investment in BAC, following our acquisition of a controlling
interest in the second quarter of 2009. See Note 5.
|
|
10. FAIR
VALUE MEASUREMENTS
Effective
January 1, 2008, we adopted SFAS 157, Fair Value Measurements, for
all financial instruments and non-financial instruments accounted for at fair
value on a recurring basis. Effective January 1, 2009, we adopted SFAS 157 for
all non-financial instruments accounted for at fair value on a non-recurring
basis. SFAS 157 establishes a new framework for measuring fair value and expands
related disclosures. Broadly, the SFAS 157 framework requires fair value to be
determined based on the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants. SFAS 157 establishes a three-level valuation hierarchy
based upon observable and non-observable inputs.
For
financial assets and liabilities, fair value is the price we would receive to
sell an asset or pay to transfer a liability in an orderly transaction with a
market participant at the measurement date. In the absence of active markets for
the identical assets or liabilities, such measurements involve developing
assumptions based on market observable data and, in the absence of such data,
internal information that is consistent with what market participants would use
in a hypothetical transaction that occurs at the measurement date.
Observable
inputs reflect market data obtained from independent sources, while unobservable
inputs reflect our market assumptions. Preference is given to observable inputs.
These two types of inputs create the following fair value
hierarchy:
Level 1 –
|
Quoted
prices for identical instruments in active
markets.
|
Level 2 –
|
Quoted
prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and
model-derived valuations whose inputs are observable or whose significant
value drivers are observable.
|
Level 3 –
|
Significant
inputs to the valuation model are
unobservable.
|
We
maintain policies and procedures to value instruments using the best and most
relevant data available. In addition, we have risk management teams that review
valuation, including independent price validation for certain instruments.
Further, in other instances, we retain independent pricing vendors to assist in
valuing certain instruments.
The
following section describes the valuation methodologies we use to measure
different financial instruments at fair value on a recurring basis. There has
been no change to the valuation methodologies during 2009.
Investments
in Debt and Equity Securities
When
available, we use quoted market prices to determine the fair value of investment
securities, and they are included in Level 1. Level 1 securities primarily
include publicly-traded equity securities.
When
quoted market prices are unobservable, we obtain pricing information from an
independent pricing vendor. The pricing vendor uses various pricing models for
each asset class that are consistent with what other market participants would
use. The inputs and assumptions to the model of the pricing vendor are derived
from market observable sources including: benchmark yields, reported trades,
broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and
other market-related data. Since many fixed income securities do not trade on a
daily basis, the methodology of the pricing vendor uses available information as
applicable such as benchmark curves, benchmarking of like securities, sector
groupings, and matrix pricing. The pricing vendor considers all available market
observable inputs in determining the evaluation for a security. Thus, certain
securities may not be priced using quoted prices, but rather determined from
market observable information. These investments are included in Level 2 and
primarily comprise our portfolio of corporate fixed income, and government,
mortgage and asset-backed securities. In infrequent circumstances, our pricing
vendors may provide us with valuations that are based on significant
unobservable inputs, and in those circumstances we classify the investment
securities in Level 3.
Annually
since our adoption of SFAS 157, we have conducted reviews of our primary pricing
vendor, with the assistance of an accounting firm, to validate that the inputs
used in that vendor’s pricing process are deemed to be market observable as
defined in the standard. While we were not provided access to proprietary models
of the vendor, our reviews have included on-site walk-throughs of the pricing
process, methodologies and control procedures for each asset class and levels
for which prices are provided. Our review also included an examination of the
underlying inputs and assumptions for a sample of individual securities across
asset classes, credit rating levels and various durations, a process we continue
to perform for each reporting period. In addition, the pricing vendor has an
established challenge process in place for all security valuations, which
facilitates identification and resolution of potentially erroneous prices. We
believe that the prices received from our pricing vendor are representative of
exit prices in accordance with SFAS 157, as amended, and are classified
appropriately in the SFAS 157 hierarchy.
We use
non-binding broker quotes as our primary basis for valuation when there is
limited, or no, relevant market activity for a specific instrument or for other
instruments that share similar characteristics. We have not adjusted the prices
we have obtained. Investment securities priced using non-binding broker quotes
are included in Level 3. As is the case with our primary pricing vendor,
third-party brokers do not provide access to their proprietary valuation models,
inputs and assumptions. Accordingly, our risk management personnel conduct
internal reviews of pricing for all such investment securities quarterly to
ensure reasonableness of valuations used in our financial statements. These
reviews are designed to identify prices that appear stale, those that have
changed significantly from prior valuations, and other anomalies that may
indicate that a price may not be accurate. Based on the information available,
we believe that the fair values provided by the brokers are consistent with the
principles of SFAS 157. Level 3 investment securities valued using non-binding
broker quotes totaled $620 million and $556 million at June 30, 2009 and
December 31, 2008, respectively, and were classified as available-for-sale
securities.
Retained
interests in securitizations are valued using a discounted cash flow model that
considers the underlying structure of the securitization and estimated net
credit exposure, prepayment assumptions, discount rates and expected
life.
Private
equity investments held in investment company affiliates are initially valued at
cost. Valuations are reviewed at the end of each quarter utilizing available
market data to determine whether or not any fair value adjustments are
necessary. Such market data include any comparable public company trading
multiples. Unobservable inputs include company-specific fundamentals and other
third-party transactions in that security. These investments are generally
included in Level 3.
Derivatives
We use
closing prices for derivatives included in Level 1, which are traded either on
exchanges or liquid over-the-counter markets.
The
majority of our derivatives portfolio is valued using internal models. The
models maximize the use of market observable inputs including interest rate
curves and both forward and spot prices for currencies and commodities.
Derivative assets and liabilities included in Level 2 primarily represent
interest rate swaps, cross-currency swaps and foreign currency and commodity
forward and option contracts.
Derivative
assets and liabilities included in Level 3 primarily represent interest rate
products that contain embedded optionality or prepayment features.
The
following tables present our assets and liabilities measured at fair value on a
recurring basis. Included in the tables are investment securities of $7,276
million and $8,190 million at June 30, 2009 and December 31, 2008, respectively,
supporting obligations to holders of guaranteed investment contracts. Such
securities are mainly investment grade.
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Residential
mortgage-backed
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Commercial
mortgage-backed
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Residential
mortgage-backed
|
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Commercial
mortgage-backed
|
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(a)
|
FASB
Interpretation (FIN) 39, Offsetting of Amounts Related
to Certain Contracts, permits the netting of derivative receivables
and payables when a legally enforceable master netting agreement exists.
Included fair value adjustments related to our own and counterparty credit
risk.
|
(b)
|
The
fair value of derivatives included an adjustment for non-performance risk.
At June 30, 2009 and December 31, 2008, the cumulative adjustment was a
gain of $78 million and $164 million, respectively.
|
(c)
|
Included
private equity investments and loans designated under the fair value
option.
|
The
following tables present the changes in Level 3 instruments measured on a
recurring basis for the three months ended June 30, 2009 and 2008, and the six
months ended June 30, 2009 and 2008. The majority of our Level 3 balances
consist of investment securities classified as available-for-sale with changes
in fair value recorded in shareowner’s equity.
Changes
in Level 3 Instruments for the Three Months Ended June 30, 2009
(In
millions)
|
|
|
|
|
Net
realized/
|
|
|
|
|
|
|
|
|
Net
change
|
|
|
|
|
|
|
unrealized
|
|
|
|
|
|
|
|
|
in
unrealized
|
|
|
|
|
|
|
gains
(losses)
|
|
|
|
|
|
|
|
|
gains
(losses)
|
|
|
|
|
Net
realized/
|
|
included
in
|
|
|
|
|
|
|
|
|
|
relating
to
|
|
|
|
|
unrealized
|
|
accumulated
|
|
Purchases,
|
|
Transfers
|
|
|
|
|
instruments
|
|
|
|
|
gains(losses)
|
|
other
|
|
issuances
|
|
in
and/or
|
|
|
|
|
still
held at
|
|
|
April
1,
|
|
included
in
|
|
comprehensive
|
|
and
|
|
out
of
|
|
June
30,
|
|
|
June
30,
|
|
|
2009
|
|
earnings
|
(a)
|
income
|
|
settlements
|
|
Level
3
|
(b)
|
2009
|
|
|
2009
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate
|
$
|
1,376
|
|
$
|
4
|
|
$
|
105
|
|
$
|
57
|
|
$
|
4
|
|
$
|
1,546
|
|
|
$
|
−
|
|
State and
municipal
|
|
89
|
|
|
−
|
|
|
45
|
|
|
(2
|
)
|
|
25
|
|
|
157
|
|
|
|
−
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgage-backed
|
|
58
|
|
|
−
|
|
|
−
|
|
|
−
|
|
|
(7
|
)
|
|
51
|
|
|
|
−
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgage-backed
|
|
50
|
|
|
−
|
|
|
−
|
|
|
−
|
|
|
−
|
|
|
50
|
|
|
|
−
|
|
Asset-backed
|
|
1,550
|
|
|
1
|
|
|
117
|
|
|
90
|
|
|
(10
|
)
|
|
1,748
|
|
|
|
−
|
|
Corporate –
non-U.S.
|
|
444
|
|
|
(5
|
)
|
|
47
|
|
|
(34
|
)
|
|
−
|
|
|
452
|
|
|
|
−
|
|
Government
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
– non-U.S.
|
|
124
|
|
|
−
|
|
|
15
|
|
|
3
|
|
|
−
|
|
|
142
|
|
|
|
−
|
|
U.S. government
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
federal agency
|
|
−
|
|
|
−
|
|
|
−
|
|
|
−
|
|
|
−
|
|
|
−
|
|
|
|
−
|
|
Retained
interests
|
|
5,420
|
|
|
327
|
|
|
157
|
|
|
355
|
|
|
−
|
|
|
6,259
|
|
|
|
124
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
15
|
|
|
1
|
|
|
1
|
|
|
(1
|
)
|
|
−
|
|
|
16
|
|
|
|
−
|
|
Trading
|
|
−
|
|
|
−
|
|
|
−
|
|
|
−
|
|
|
−
|
|
|
−
|
|
|
|
−
|
|
Derivatives(d)(e)
|
|
398
|
|
|
52
|
|
|
(22
|
)
|
|
(60
|
)
|
|
12
|
|
|
380
|
|
|
|
(35
|
)
|
Other
|
|
512
|
|
|
(9
|
)
|
|
28
|
|
|
40
|
|
|
−
|
|
|
571
|
|
|
|
(11
|
)
|
Total
|
$
|
10,036
|
|
$
|
371
|
|
$
|
493
|
|
$
|
448
|
|
$
|
24
|
|
$
|
11,372
|
|
|
$
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Earnings
effects are primarily included in the “Revenues from services” and
“Interest” captions in the Condensed Statement of Current and Retained
Earnings.
|
(b)
|
Transfers
in and out of Level 3 are considered to occur at the beginning of the
period. Transfers out of Level 3 were a result of increased use of quotes
from independent pricing vendors based on recent trading
activity.
|
(c)
|
Represented
the amount of unrealized gains or losses for the period included in
earnings.
|
(d)
|
Gains
from derivatives were partially offset by $15 million in losses from
related derivatives included in Level 2.
|
(e)
|
Represented
derivative assets net of derivative liabilities and included cash accruals
of $49 million not reflected in the fair value hierarchy
table.
|
Changes
in Level 3 Instruments for the Three Months Ended June 30, 2008
(In
millions)
|
|
|
|
|
Net
realized/
|
|
|
|
|
|
|
|
|
Net
change
|
|
|
|
|
|
|
unrealized
|
|
|
|
|
|
|
|
|
in
unrealized
|
|
|
|
|
|
|
gains
(losses)
|
|
|
|
|
|
|
|
|
gains
(losses)
|
|
|
|
|
Net
realized/
|
|
included
in
|
|
|
|
|
|
|
|
|
|
relating
to
|
|
|
|
|
unrealized
|
|
accumulated
|
|
Purchases,
|
|
Transfers
|
|
|
|
|
instruments
|
|
|
|
|
gains(losses)
|
|
other
|
|
issuances
|
|
in
and/or
|
|
|
|
|
still
held at
|
|
|
April
1,
|
|
included
in
|
|
comprehensive
|
|
and
|
|
out
of
|
|
June
30,
|
|
|
June
30,
|
|
|
2008
|
|
earnings
|
(a)
|
income
|
|
settlements
|
|
Level
3
|
(b)
|
2008
|
|
|
2008
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,894
|
|
$
|
227
|
|
$
|
3
|
|
$
|
185
|
|
$
|
488
|
|
$
|
9,797
|
|
|
$
|
6
|
|
|
|
489
|
|
|
15
|
|
|
(31
|
|
|
(59
|
|
|
|
|
|
414
|
|
|
|
(15
|
|
|
|
714
|
|
|
10
|
|
|
(5
|
|
|
(55
|
|
|
|
|
|
715
|
|
|
|
10
|
|
|
|
10,097
|
|
|
252
|
|
|
(33
|
|
|
71
|
|
|
|
|
|
10,926
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Earnings
effects are primarily included in the “Revenues from services” and
“Interest” captions in the Condensed Statement of Current and Retained
Earnings.
|
(b)
|
Transfers
in and out of Level 3 are considered to occur at the beginning of the
period.
|
(c)
|
Represented
the amount of unrealized gains or losses for the period included in
earnings.
|
(d)
|
Represented
derivative assets net of derivative liabilities and includes cash accruals
of $12 million not reflected in the fair value hierarchy
table.
|
Changes
in Level 3 Instruments for the Six Months Ended June 30, 2009
(In
millions)
|
|
|
|
|
Net
realized/
|
|
|
|
|
|
|
|
|
Net
change
|
|
|
|
|
|
|
unrealized
|
|
|
|
|
|
|
|
|
in
unrealized
|
|
|
|
|
|
|
gains
(losses)
|
|
|
|
|
|
|
|
|
gains
(losses)
|
|
|
|
|
Net
realized/
|
|
included
in
|
|
|
|
|
|
|
|
|
|
relating
to
|
|
|
|
|
unrealized
|
|
accumulated
|
|
Purchases,
|
|
Transfers
|
|
|
|
|
instruments
|
|
|
|
|
gains(losses)
|
|
other
|
|
issuances
|
|
in
and/or
|
|
|
|
|
still
held at
|
|
|
January
1,
|
|
included
in
|
|
comprehensive
|
|
and
|
|
out
of
|
|
June
30,
|
|
|
June
30,
|
|
|
2009
|
|
earnings
|
(a)
|
income
|
|
settlements
|
|
Level
3
|
(b)
|
2009
|
|
|
2009
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate
|
$
|
1,640
|
|
$
|
12
|
|
$
|
−
|
|
$
|
(3
|
)
|
$
|
(103
|
)
|
$
|
1,546
|
|
|
$
|
−
|
|
State and
municipal
|
|
247
|
|
|
−
|
|
|
(107
|
)
|
|
(8
|
)
|
|
25
|
|
|
157
|
|
|
|
−
|
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgage-backed
|
|
118
|
|
|
−
|
|
|
(9
|
)
|
|
(20
|
)
|
|
(38
|
)
|
|
51
|
|
|
|
−
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgage-backed
|
|
57
|
|
|
−
|
|
|
(7
|
)
|
|
−
|
|
|
−
|
|
|
50
|
|
|
|
−
|
|
Asset-backed
|
|
1,580
|
|
|
8
|
|
|
218
|
|
|
83
|
|
|
(141
|
)
|
|
1,748
|
|
|
|
−
|
|
Corporate –
non-U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
|
|
472
|
|
|
(15
|
)
|
|
(12
|
)
|
|
47
|
|
|
(40
|
)
|
|
452
|
|
|
|
−
|
|
– non-U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
federal agency
|
|
418
|
|
|
−
|
|
|
(4
|
)
|
|
3
|
|
|
(275
|
)
|
|
142
|
|
|
|
−
|
|
Retained
interests
|
|
5,081
|
|
|
606
|
|
|
198
|
|
|
374
|
|
|
−
|
|
|
6,259
|
|
|
|
198
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
17
|
|
|
−
|
|
|
−
|
|
|
(1
|
)
|
|
−
|
|
|
16
|
|
|
|
−
|
|
Trading
|
|
−
|
|
|
−
|
|
|
−
|
|
|
−
|
|
|
−
|
|
|
−
|
|
|
|
−
|
|
Derivatives(d)(e)
|
|
401
|
|
|
77
|
|
|
(66
|
|
|
(67
|
|
|
|
|
|
380
|
|
|
|
(28
|
|
Other
|
|
551
|
|
|
(19
|
|
|
10
|
|
|
29
|
|
|
|
|
|
571
|
|
|
|
(21
|
|
Total
|
$
|
10,582
|
|
|
669
|
|
$
|
221
|
|
$
|
437
|
|
$
|
|
|
$
|
11,372
|
|
|
$
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Earnings
effects are primarily included in the “Revenues from services” and
“Interest” captions in the Condensed Statement of Current and Retained
Earnings.
|
(b)
|
Transfers
in and out of Level 3 are considered to occur at the beginning of the
period. Transfers out of Level 3 were a result of increased use of quotes
from independent pricing vendors based on recent trading
activity.
|
(c)
|
Represented
the amount of unrealized gains or losses for the period included in
earnings.
|
(d)
|
Gains
from derivatives were partially offset by $44 million in losses from
related derivatives included in Level 2 and $5 million in losses from
qualifying fair value hedges.
|
(e)
|
Represented
derivative assets net of derivative liabilities and included cash accruals
of $49 million not reflected in the fair value hierarchy
table.
|
Changes
in Level 3 Instruments for the Six Months Ended June 30, 2008
(In
millions)
|
|
|
|
|
Net
realized/
|
|
|
|
|
|
|
|
|
Net
change
|
|
|
|
|
|
|
unrealized
|
|
|
|
|
|
|
|
|
in
unrealized
|
|
|
|
|
|
|
gains
(losses)
|
|
|
|
|
|
|
|
|
gains
(losses)
|
|
|
|
|
Net
realized/
|
|
included
in
|
|
|
|
|
|
|
|
|
|
relating
to
|
|
|
|
|
unrealized
|
|
accumulated
|
|
Purchases,
|
|
Transfers
|
|
|
|
|
instruments
|
|
|
|
|
gains(losses)
|
|
other
|
|
issuances
|
|
in
and/or
|
|
|
|
|
still
held at
|
|
|
January
1,
|
|
included
in
|
|
comprehensive
|
|
and
|
|
out
of
|
|
June
30,
|
|
|
June
30,
|
|
|
2008
|
|
earnings
|
(a)
|
income
|
|
settlements
|
|
Level
3
|
(b)
|
2008
|
|
|
2008
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,329
|
|
$
|
381
|
|
$
|
(99
|
)
|
$
|
698
|
|
$
|
488
|
|
$
|
9,797
|
|
|
$
|
(28
|
)
|
|
|
200
|
|
|
290
|
|
|
26
|
|
|
(102
|
|
|
|
|
|
414
|
|
|
|
272
|
|
|
|
689
|
|
|
(8
|
|
|
28
|
|
|
(45
|
|
|
|
|
|
715
|
|
|
|
(9
|
|
|
|
9,218
|
|
|
663
|
|
|
(45
|
|
|
551
|
|
|
|
|
|
10,926
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Earnings
effects are primarily included in the “Revenues from services” and
“Interest” captions in the Condensed Statement of Current and Retained
Earnings.
|
(b)
|
Transfers
in and out of Level 3 are considered to occur at the beginning of the
period.
|
(c)
|
Represented
the amount of unrealized gains or losses for the period included in
earnings.
|
(d)
|
Earnings
from derivatives were partially offset by $36 million in losses from
related derivatives included in Level 2 and $57 million in losses from
qualifying fair value hedges.
|
(e)
|
Represented
derivative assets net of derivative liabilities and includes cash accruals
of $12 million not reflected in the fair value hierarchy
table.
|
Non-Recurring
Fair Value Measurements
Certain
assets are measured at fair value on a non-recurring basis. These assets are not
measured at fair value on an ongoing basis but are subject to fair value
adjustments only in certain circumstances. These include certain loans that are
written down to fair value when they are held for sale or when they are written
down to the fair value of their underlying collateral when deemed impaired, cost
and equity method investments that are written down to fair value when their
declines are determined to be other-than-temporary, long-lived assets that are
written down to fair value when they are held for sale or determined to be
impaired and the remeasurement of retained investments in formerly consolidated
subsidiaries. At June 30, 2009 and December 31, 2008, these assets totaled $253
million and $48 million, identified as Level 2, and $11,620 million and $3,100
million, identified as Level 3, respectively. These Level 3 assets primarily
comprised our retained investment in PTL ($6,125 million), financing receivables
and loans held for sale ($2,911 million), long-lived assets ($1,689 million),
primarily real estate held for investment and equipment leased to others, and
cost and equity method investments ($743 million) at June 30, 2009.
The
following describes the valuation methodologies we use to measure non-financial
instruments accounted for at fair value on a non-recurring basis. There has been
no change to the valuation methodologies during 2009.
Loans
When
available, we use observable market data, including pricing on recent closed
market transactions, to value loans which are included in Level 2. When this
data is unobservable, we use valuation methodologies using current market
interest rate data adjusted for inherent credit risk, and such loans are
included in Level 3. When appropriate, loans are valued using collateral values
as a practical expedient.
Long-lived
Assets
Long-lived
assets, including aircraft and real estate, may be measured at fair value if
such assets are held for sale or when there is a determination that the asset is
impaired. The determination of fair value is based on the best information
available, including internal cash flow estimates discounted at an appropriate
interest rate, quoted market prices when available, market prices for similar
assets and independent appraisals, as appropriate. For real estate, cash flow
estimates are based on current market estimates that reflect current and
projected lease profiles and available industry information about expected
trends in rental, occupancy and capitalization rates.
Investments
in Subsidiaries and Formerly Consolidated Subsidiaries
Upon a
change in control that results in deconsolidation of a subsidiary, a fair value
measurement may be required if we sell a controlling interest and retain a
noncontrolling stake in the entity. Such investments are valued using a
discounted cash flow model, comparative market multiples or a combination of
both approaches as appropriate. In applying these methodologies, we rely on a
number of factors, including actual operating results, future business plans,
economic projections and market data.
The
following table represents the fair value adjustments to assets measured at fair
value on a non-recurring basis and still held at June 30, 2009 and June 30,
2008.
|
Three
months ended June 30
|
|
Six
months ended June 30
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
receivables and loans held for sale
|
$
|
(429
|
)
|
$
|
(269
|
)
|
$
|
(715
|
)
|
$
|
(424
|
)
|
Cost
and equity method investments
|
|
(256
|
)
|
|
(76
|
)
|
|
(479
|
)
|
|
(142
|
)
|
Long-lived
assets(a)
|
|
(180
|
)
|
|
(7
|
)
|
|
(303
|
)
|
|
(35
|
)
|
Retained
investments in formerly consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
subsidiaries(a)
|
|
11
|
|
|
−
|
|
|
237
|
|
|
−
|
|
Total
|
$
|
(854
|
)
|
$
|
(352
|
)
|
$
|
(1,260
|
)
|
$
|
(601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
SFAS
157 was adopted for non-financial assets valued on a non-recurring basis
as of January 1, 2009.
|
11.
FINANCIAL INSTRUMENTS
On April
1, 2009, we adopted FSP FAS 107-1 and APB 28-1, Interim Disclosure about Fair Value
of Financial Instruments. The FSP amends SFAS 107, Disclosures about Fair Value of
Financial Instruments, to require interim disclosures about the fair
value of financial instruments. The following table provides information about
the assets and liabilities not carried at fair value in our Statement of
Financial Position. Consistent with SFAS 107, the table excludes financing
leases and non-financial assets and liabilities. Apart from certain of our
borrowings and certain marketable securities, few of the instruments identified
below are actively traded and their fair values must often be determined using
financial models. Realization of the fair value of these instruments depends
upon market forces beyond our control, including marketplace liquidity. For a
description on how we estimate fair value, see Note 20 to the consolidated
financial statements in our 2008 Form 10-K.
|
At
|
|
|
June
30, 2009
|
|
December
31, 2008
|
|
|
|
|
Assets
(liabilities)
|
|
|
|
Assets
(liabilities)
|
|
(In
millions)
|
Notional
amount
|
|
Carrying
amount
(net)
|
|
Estimated
fair
value
|
|
Notional
amount
|
|
Carrying
amount
(net)
|
|
Estimated
fair
value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
$
|
(a)
|
|
$
|
298,978
|
|
$
|
282,491
|
|
$
|
(a)
|
|
$
|
304,010
|
|
$
|
291,465
|
|
Other commercial
mortgages
|
|
(a)
|
|
|
355
|
|
|
355
|
|
|
(a)
|
|
|
374
|
|
|
374
|
|
Loans held for
sale
|
|
(a)
|
|
|
1,791
|
|
|
1,841
|
|
|
(a)
|
|
|
3,640
|
|
|
3,670
|
|
Other
financial instruments(b)
|
|
(a)
|
|
|
2,424
|
|
|
2,499
|
|
|
(a)
|
|
|
2,609
|
|
|
2,781
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings(c)(d)
|
|
(a)
|
|
|
(498,096
|
)
|
|
(486,675
|
)
|
|
(a)
|
|
|
(510,356
|
)
|
|
(491,240
|
)
|
Guaranteed investment
contracts
|
|
(a)
|
|
|
(9,136
|
)
|
|
(9,054
|
)
|
|
(a)
|
|
|
(10,828
|
)
|
|
(10,677
|
)
|
Insurance – credit life(e)
|
|
1,364
|
|
|
(62
|
)
|
|
(42
|
)
|
|
1,052
|
|
|
(46
|
)
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
These
financial instruments do not have notional amounts.
|
|
(b)
|
Principally
cost method investments.
|
|
(c)
|
See
Note 6.
|
|
(d)
|
Fair
values exclude interest rate and currency derivatives designated as hedges
of borrowings. Had they been included, the fair value of borrowings at
June 30, 2009 and December 31, 2008 would have been reduced by $425
million and $3,776 million, respectively.
|
|
(e)
|
Net
of reinsurance of $2,500 million and $3,100 million at June 30, 2009 and
December 31, 2008, respectively.
|
|
Loan
Commitments
|
Notional
amount at
|
|
(In
millions)
|
June
30,
2009
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
|
|
Ordinary course of business
lending commitments(a)(b)
|
$
|
10,703
|
|
$
|
8,507
|
|
|
Unused revolving credit
lines(c)
|
|
|
|
|
|
|
|
Commercial
|
|
30,732
|
|
|
26,300
|
|
|
Consumer − principally
credit cards
|
|
244,176
|
|
|
252,867
|
|
|
|
|
|
|
|
|
|
(a)
|
Excluded
investment commitments of $2,612 million and $3,501 million as of June 30,
2009 and December 31, 2008, respectively.
|
|
(b)
|
Included
a $1,053 million and $1,067 million commitment as of June 30, 2009 and
December 31, 2008, respectively, associated with a secured financing
arrangement that can increase to a maximum of $4,943 million based on the
asset volume under the arrangement.
|
|
(c)
|
Excluded
inventory financing arrangements, which may be withdrawn at our option, of
$13,427 million and $14,503 million as of June 30, 2009 and December 31,
2008, respectively.
|
|
Derivatives
and Hedging
On
January 1, 2009, we adopted SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities – An Amendment of FASB Statement No.
133. The standard supplements the required disclosures provided under
SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, as amended, with
additional qualitative and quantitative information. Accordingly, the
disclosures that follow should be read in the context of our existing disclosure
in Note 20 to the consolidated financial statements in our 2008 Form
10-K.
We use
derivatives for risk management purposes. As a matter of policy, we do not use
derivatives for speculative purposes. A key risk management objective for our
financial services businesses is to mitigate interest rate and currency risk by
seeking to ensure that the characteristics of the debt match the assets they are
funding. If the form (fixed versus floating) and currency denomination of the
debt we issue do not match the related assets, we typically execute derivatives
to adjust the nature and tenor of debt funding to meet this objective. The
determination of whether a derivative is used to achieve this objective depends
on a number of factors, including customer needs for specific types of
financing, and market factors affecting the type of debt we can
issue.
Of the
outstanding notional amount of $322,000 million, approximately 99%, or $320,000
million, is associated with reducing or eliminating the interest rate, currency
or market risk between financial assets and liabilities in our financial
services businesses. The remaining derivatives activity primarily relates to
hedging against adverse changes in currency exchange rates and commodity prices
related to anticipated sales and purchases. These activities are designated as
hedges in accordance with SFAS 133, when practicable. When it is not possible to
apply hedge accounting, or when the derivative and the hedged item are both
recorded in earnings currently, the derivatives are accounted for as economic
hedges and hedge accounting is not applied. This most frequently occurs when we
hedge a recognized foreign currency transaction (e.g., a receivable or payable)
with a derivative. Since the effects of changes in exchange rates are reflected
currently in earnings for both the derivative and the underlying, the economic
hedge does not require hedge accounting.
The
following table provides information about the fair value of our derivatives, by
contract type, separating those accounted for as hedges under SFAS 133 and those
that are not.
|
At
June 30, 2009
|
|
|
Fair
value
|
|
(In
millions)
|
Assets
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivatives
accounted for as hedges under SFAS 133
|
|
|
|
|
|
|
Interest
rate contracts
|
$
|
3,870
|
|
$
|
4,348
|
|
Currency
exchange contracts
|
|
3,714
|
|
|
3,689
|
|
Other
contracts
|
|
32
|
|
|
7
|
|
|
|
7,616
|
|
|
8,044
|
|
|
|
|
|
|
|
|
Derivatives
not accounted for as hedges under SFAS 133
|
|
|
|
|
|
|
Interest
rate contracts
|
|
891
|
|
|
812
|
|
Currency
exchange contracts
|
|
1,318
|
|
|
417
|
|
Other
contracts
|
|
251
|
|
|
76
|
|
|
|
2,460
|
|
|
1,305
|
|
FIN
39 netting adjustment(a)
|
|
(4,900
|
)
|
|
(4,978
|
)
|
|
|
|
|
|
|
|
Total
|
$
|
5,176
|
|
$
|
4,371
|
|
|
|
|
|
|
|
|
Derivatives
are classified in the captions “Other assets” and “Other liabilities” in
our financial statements.
|
(a)
|
FIN
39 permits
the netting of derivative receivables and payables when a legally
enforceable master netting agreement exists. Amounts included fair value
adjustments related to our own and counterparty credit risk. At June 30,
2009 and December 31, 2008, the cumulative adjustment for non-performance
risk was a gain of $78 million and $164 million,
respectively.
|
Earnings
Effects of Derivatives on the Statement of Current and Retained
Earnings
For
relationships designated as fair value hedges, which relate entirely to hedges
of debt, changes in fair value of the derivatives are recorded in earnings along
with offsetting adjustments to the carrying amount of the hedged debt. Through
June 30, 2009, such adjustments increased the carrying amount of debt
outstanding by $2,481 million. The following table provides information about
the earnings effects of our fair value hedging relationships for the three and
six months ended June 30, 2009.
|
|
|
|
|
Three
months ended
June
30, 2009
|
|
|
Six
months ended
June
30, 2009
|
|
(In
millions)
|
|
Financial
statement caption
|
|
|
Gain
(loss)
on
hedging
derivatives
|
|
|
Gain
(loss)
on
hedged
items
|
|
|
Gain
(loss)
on
hedging
derivatives
|
|
|
Gain
(loss)
on
hedged
items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
Interest
|
|
$
|
(4,243
|
)
|
$
|
4,260
|
|
$
|
(5,180
|
)
|
$
|
5,246
|
|
Currency
exchange
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
contracts
|
|
Interest
|
|
|
(91
|
)
|
|
83
|
|
|
(1,058
|
)
|
|
1,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value hedges resulted in $9 million and $40 million of ineffectiveness of
which $(48) million and $(75) million reflects amounts excluded from the
assessment of effectiveness for the three and six months ended June 30,
2009, respectively.
|
For
derivatives that are designated in a cash flow hedging relationship, the
effective portion of the change in fair value of the derivative is reported in
the cash flow hedges subaccount of AOCI and reclassified into earnings
contemporaneously with the earnings effects of the hedged transaction. Earnings
effects of the derivative and the hedged item are reported in the same caption
in the Statement of Current and Retained Earnings. Hedge ineffectiveness and
components of changes in fair value of the derivative that are excluded from the
assessment of effectiveness are recognized in earnings each reporting
period.
For
derivatives that are designated as hedges of net investment in a foreign
operation, we assess effectiveness based on changes in spot currency exchange
rates. Changes in spot rates on the derivative are recorded in the currency
translation adjustments subaccount of AOCI until such time as the foreign entity
is substantially liquidated or sold. The change in fair value of the forward
points, which reflects the interest rate differential between the two countries
on the derivative, are excluded from the effectiveness assessment and are
recorded currently in earnings.
The
following tables provide additional information about the financial statement
effects related to our cash flow hedges and net investment hedges for the three
and six months ended June 30, 2009.
Three
months ended June 30, 2009
|
|
Gain
(loss)
recognized
in
OCI
|
|
Financial
statement caption
|
|
Gain
(loss)
reclassified
from
AOCI
into
earnings
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow hedges
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
$
|
632
|
|
Interest
|
|
$
|
(603
|
)
|
Currency
exchange contracts
|
|
|
1,553
|
|
Interest
|
|
|
997
|
|
|
|
|
|
|
Revenues
from services
|
|
|
273
|
|
Commodity
contracts
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,199
|
|
|
|
$
|
667
|
|
|
|
Gain
(loss)
recognized
in
CTA
|
|
|
|
Gain
(loss)
reclassified
from
CTA
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment hedges
|
|
|
|
|
|
|
|
|
|
Currency
exchange contracts
|
|
$
|
(5,485
|
)
|
Revenues
from services
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended June 30, 2009
|
|
Gain
(loss)
recognized
in
OCI
|
|
Financial
statement caption
|
|
Gain
(loss)
reclassified
from
AOCI
into
earnings
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow hedges
|
|
|
|
|
|
|
|
|
|
Interest
rate contracts
|
|
$
|
773
|
|
Interest
|
|
$
|
(1,090
|
)
|
Currency
exchange contracts
|
|
|
2,122
|
|
Interest
|
|
|
996
|
|
|
|
|
|
|
Revenues
from services
|
|
|
4
|
|
Commodity
contracts
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,910
|
|
|
|
$
|
(90
|
)
|
|
|
Gain
(loss)
recognized
in
CTA
|
|
|
|
Gain
(loss)
reclassified
from
CTA
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment hedges
|
|
|
|
|
|
|
|
|
|
Currency
exchange contracts
|
|
$
|
(3,159
|
)
|
Revenues
from services
|
|
$
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
Of
the total pre-tax amount recorded in AOCI, $3,258 million related to cash
flow hedges of forecasted transactions of which we expect to transfer
$1,750 million to earnings as an expense in the next 12 months
contemporaneously with the earnings effects of the related forecasted
transactions. In the first six months of 2009, we recognized insignificant
gains and losses related to hedged forecasted transactions and firm
commitments that did not occur by the end of the originally specified
period. At June 30, 2009, the maximum term of derivative instruments that
hedge forecasted transactions was 27 years and related to hedges of
anticipated interest payments associated with external
debt.
|
|
For cash
flow hedges, the amount of ineffectiveness in the hedging relationship and
amount of the changes in fair value of the derivative that are not included in
the measurement of ineffectiveness are both reflected in earnings each reporting
period. These amounts totaled $9 million and $2 million for the three and six
months ended June 30, 2009, respectively, and primarily appear in Revenues from
services. Ineffectiveness from net investment hedges was $(167) million and
$(557) million for the three and six months ended June 30, 2009, respectively,
which primarily related to changes in value of the forward points that under our
hedge accounting designations are excluded from the assessment of effectiveness
and recorded directly into earnings. These amounts appear in the “Interest”
caption in the Statement of Current and Retained Earnings.
Changes
in the fair value of derivatives that are not designated as hedges are recorded
in earnings each period. As discussed above, these derivatives are entered into
as economic hedges of changes in interest rates, currency exchange rates,
commodity prices and other market risks. Gains or losses related to the
derivative are recorded in predefined captions in the Statement of Current and
Retained Earnings, typically “Revenues from services”, based on our accounting
policy. In general, the earnings effects of the item that represents the
economic risk exposure is recorded in the same caption as the derivative. Gains
for the first six months of 2009 on derivatives not designated as hedges,
without considering the offsetting earnings effects from the item representing
the economic risk exposure, were $233 million, related to interest rate
contracts of $224 million, currency exchange contracts of $(66) million and
equity, credit and commodity derivatives of $75 million.
Counterparty
Credit Risk
To lower
our exposure to credit risk, our standard master agreements typically contain
mutual downgrade provisions that provide the ability of each party to require
assignment or termination if the long-term credit rating of the counterparty
were to fall below A-/A3. In certain of these master agreements, each party also
has the ability to require assignment or termination if the short-term rating of
the counterparty were to fall below A-1/P-1. The net derivative liability
subject to these provisions was approximately $1,895 million at June 30, 2009.
In addition to these provisions, in certain of these master agreements, we also
have collateral arrangements that provide us with the right to hold collateral
(cash or U.S. Treasuries or other highly-rated securities) when the current
market value of derivative contracts exceeds a specified
limit. We
also have a limited number of such collateral agreements under which we must
post collateral. Under these agreements and in the normal course of business,
the fair value of collateral posted by counterparties at June 30, 2009 was
approximately $5,405 million, of which $1,651 million was held in cash and
$3,754 million represented pledged securities. The fair value of collateral
posted by us was approximately $2,068 million, of which $676 million was cash
and $1,392 million represented securities repledged.
More
information regarding our counterparty credit risk and master agreements can be
found in Note 20 to the consolidated financial statements in our 2008 Form
10-K.
Guarantees
of Derivatives
We do not
sell credit default swaps; however, as part of our risk management services, we
provide certain performance guarantees to third-party financial institutions
related to plain vanilla interest rate swaps on behalf of some customers related
to variable rate loans we have extended to them. The fair value of such
guarantees was $30 million at June 30, 2009. The aggregate fair value of
customer derivative contracts in a liability position at June 30, 2009, was $314
million before consideration of any offsetting effect of collateral. At June 30,
2009, collateral value was sufficient to cover the loan amount and the fair
value of the customer’s derivative, in the event we had been called upon to
perform under the derivative. Given our strict underwriting criteria, we believe
the likelihood that we will be required to perform under these guarantees is
remote.
12. OFF-BALANCE
SHEET ARRANGEMENTS
We
securitize financial assets and arrange other forms of asset-backed financing in
the ordinary course of business to improve shareowner returns. The
securitization transactions we engage in are similar to those used by many
financial institutions. Beyond improving returns, these securitization
transactions serve as funding sources for a variety of diversified lending and
securities transactions. Historically, we have used both GE-supported and
third-party Variable Interest Entities (VIEs) to execute off-balance sheet
securitization transactions funded in the commercial paper and term markets. The
largest single category of VIEs that we are involved with are Qualifying Special
Purpose Entities (QSPEs), which meet specific characteristics defined in U.S.
GAAP that exclude them from the scope of consolidation standards. Investors in
these entities only have recourse to the assets owned by the entity and not to
our general credit, unless noted below. We did not provide non-contractual
support to any consolidated VIE, unconsolidated VIE or QSPE in the six months
ended June 30, 2009. We do not have implicit support arrangements with any VIE
or QSPE.
Variable
Interest Entities
When
evaluating whether we are the primary beneficiary of a VIE, and must therefore
consolidate the entity, we perform a qualitative analysis that considers the
design of the VIE, the nature of our involvement and the variable interests held
by other parties. If that evaluation is inconclusive as to which party absorbs a
majority of the entity’s expected losses or residual returns, a quantitative
analysis is performed to determine who is the primary beneficiary.
Consolidated
Variable Interest Entities
For
additional information about our consolidated VIEs, see Note 21 to the
consolidated financial statements in our 2008 Form 10-K. Consolidated VIEs at
June 30, 2009 and December 31, 2008 follow:
|
At
|
|
|
June
30, 2009
|
|
December
31, 2008
|
|
(In
millions)
|
Assets
|
|
Liabilities
|
|
Assets
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated, liquidating
securitization entities(a)
|
$
|
3,271
|
|
$
|
3,141
|
|
$
|
4,000
|
|
$
|
3,868
|
|
Trinity(b)
|
|
7,720
|
|
|
9,341
|
|
|
9,192
|
|
|
11,623
|
|
Penske Truck Leasing Co., L.P.
(PTL)(c)
|
|
−
|
|
|
−
|
|
|
7,444
|
|
|
1,339
|
|
Other(d)
|
|
3,636
|
|
|
2,644
|
|
|
4,503
|
|
|
3,329
|
|
|
$
|
14,627
|
|
$
|
15,126
|
|
$
|
25,139
|
|
$
|
20,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
If
the short-term credit rating of GE Capital or these entities were reduced
below A–1/P–1, we could be required to provide substitute liquidity for
those entities or provide funds to retire the outstanding commercial
paper. The maximum net amount that we could be required to provide in the
event of such a downgrade is determined by contract and totaled $3,120
million at June 30, 2009. The borrowings of these entities are reflected
in our Statement of Financial Position.
|
(b)
|
If
the long-term credit rating of GE Capital were to fall below AA-/Aa3 or
its short-term credit rating were to fall below A-1+/P-1, GE Capital could
be required to provide approximately $2,802 million to such entities as of
June 30, 2009 pursuant to letters of credit issued by GE Capital. To the
extent that the entities’ liabilities exceed the ultimate value of the
proceeds from the sale of their assets and the amount drawn under the
letters of credit, GE Capital could be required to provide such excess
amount. The borrowings of these entities are reflected in our Statement of
Financial Position.
|
(c)
|
In
the first quarter of 2009, we sold a 1% limited partnership interest in
PTL, a previously consolidated VIE, to Penske Truck Leasing Corporation,
the general partner of PTL, whose majority shareowner is a member of GE’s
Board of Directors. The disposition of the shares, coupled with our
resulting minority position on the PTL advisory committee and related
changes in our contractual rights, resulted in the deconsolidation of PTL.
We recognized a pre-tax gain on the sale of $296 million, including a gain
on the remeasurement of our retained investment of $189 million. The
measurement of the fair value of our retained investment in PTL was based
on a methodology that incorporated both discounted cash flow information
and market data. In applying this methodology, we utilized different
sources of information, including actual operating results, future
business plans, economic projections and market observable pricing
multiples of similar businesses. The resulting fair value reflected our
position as a noncontrolling shareowner at the conclusion of the
transaction.
|
(d)
|
A
majority of the remaining assets and liabilities of VIEs that are included
in our consolidated financial statements were acquired in transactions
subsequent to adoption of FIN 46(R) on January 1, 2004. Assets of these
entities consist of amortizing securitizations of financial assets
originated by acquirees in Australia and Japan, and real estate
partnerships. We have no recourse arrangements with these
entities.
|
Unconsolidated
Variable Interest Entities
Our
involvement with unconsolidated VIEs consists of the following activities:
assisting in the formation and financing of an entity, providing recourse and/or
liquidity support, servicing the assets and receiving variable fees for services
provided. The classification in our financial statements of our variable
interests in these entities depends on the nature of the entity. As described
below, our retained interests in securitization-related VIEs and QSPEs is
reported in financing receivables or investment securities depending on its
legal form. Variable interests in partnerships and corporate entities would be
classified as either equity method or cost method investments.
In the
ordinary course of business, we make investments in entities in which we are not
the primary beneficiary, but may hold a variable interest such as limited
partner equity interests or mezzanine debt investment. These investments are
classified in two captions in our financial statements: “Other assets” for
investments accounted for under the equity method, and “Financing receivables”
for debt financing provided to these entities.
Investments
in unconsolidated VIEs at June 30, 2009 and December 31, 2008
follow:
|
At
|
(In
millions)
|
June
30,
2009
|
|
December
31,
2008
|
|
|
|
|
|
|
|
Other assets(a)
|
$
|
8,171
|
|
$
|
1,897
|
|
Financing
receivables
|
|
525
|
|
|
974
|
|
Total
investment
|
|
8,696
|
|
|
2,871
|
|
Contractual
obligations to fund new investments
|
|
1,487
|
|
|
1,159
|
|
Maximum
exposure to loss
|
$
|
10,183
|
|
$
|
4,030
|
|
|
|
|
|
|
|
|
(a)
|
At
June 30, 2009, our remaining investment in PTL of $6,126 million comprised
a 49.9% partnership interest of $973 million and loans and advances of
$5,153 million.
|
Other
than those entities described above, we also hold passive investments in RMBS,
CMBS and asset-backed securities issued by entities that may be either VIEs or
QSPEs. Such investments were, by design, investment grade at issuance and held
by a diverse group of investors. As we have no formal involvement in such
entities beyond our investment, we believe that the likelihood is remote that we
would be required to consolidate them. Further information about such
investments is provided in Note 3.
Securitization
Activities
We
transfer assets to QSPEs in the ordinary course of business as part of our
ongoing securitization activities. In our securitization transactions, we
transfer assets to a QSPE and receive a combination of cash and retained
interests in the assets transferred. The QSPE sells beneficial interests in the
assets transferred to third-party investors, to fund the purchase of the
assets.
The
financing receivables in our QSPEs have similar risks and characteristics to our
on-book financing receivables and were underwritten to the same standard.
Accordingly, the performance of these assets has been similar to our on-book
financing receivables; however, the blended performance of the pools of
receivables in our QSPEs reflects the eligibility screening requirements that we
apply to determine which receivables are selected for sale. Therefore, the
blended performance can differ from the on-book performance.
When we
securitize financing receivables we retain interests in the transferred
receivables in two forms: a seller’s interest in the assets of the QSPE, which
we classify as financing receivables, and subordinated interests in the assets
of the QSPE, which we classify as investment securities. In certain credit
card receivables trusts, we are required to maintain minimum fee equity
(subordinated interest) of 4% or 7% depending on the credit rating of GE
Capital.
Financing
receivables transferred to securitization entities that remained outstanding and
our retained interests in those financing receivables at June 30, 2009 and
December 31, 2008 follow.
(In
millions)
|
Equipment
|
(a)(b)
|
Commercial
real
estate
|
|
Credit
card
receivables
|
(b)
|
Other
assets
|
|
Total
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
amount outstanding
|
$
|
11,396
|
|
$
|
7,634
|
|
$
|
23,806
|
|
$
|
1,976
|
|
$
|
44,812
|
|
Included
within the amount above are
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
retained interests
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
receivables(c)
|
|
−
|
|
|
−
|
|
|
2,565
|
|
|
−
|
|
|
2,565
|
|
Investment
securities
|
|
219
|
|
|
13
|
|
|
5,940
|
|
|
48
|
|
|
6,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
amount outstanding
|
$
|
13,298
|
|
$
|
7,970
|
|
$
|
26,046
|
|
$
|
2,782
|
|
$
|
50,096
|
|
Included
within the amount above are
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
retained interests
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
receivables(c)
|
|
−
|
|
|
–
|
|
|
3,802
|
|
|
–
|
|
|
3,802
|
|
Investment
securities
|
|
148
|
|
|
16
|
|
|
4,806
|
|
|
61
|
|
|
5,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Included
inventory floorplan receivables.
|
(b)
|
As
permitted by the terms of the applicable trust documents, in June 2009, we
transferred $268 million of floorplan financing receivables to the GE
Dealer Floorplan Master Note Trust and $145 million of credit card
receivables to the GE Capital Credit Card Master Note Trust in exchange
for additional subordinated interests. These actions had the effect of
maintaining the ‘Aaa’ ratings of the securities issued by these
entities.
|
(c)
|
Uncertificated
seller’s interests.
|
Retained
Interests in Securitization Transactions
When we
transfer financing receivables, we determine the fair value of retained
interests received as part of the securitization transaction in accordance with
SFAS 157. Further information about how fair value is determined is presented in
Note 10. Retained interests in securitized receivables that are classified as
investment securities are reported at fair value in each reporting period. These
assets decrease as cash is received on the underlying financing receivables.
Retained interests classified as financing receivables are accounted for in a
similar manner to our on-book financing receivables.
Key
assumptions used in measuring the fair value of retained interests classified as
investment securities and the sensitivity of the current fair value to changes
in those assumptions related to all outstanding retained interests at June 30,
2009 and December 31, 2008 follow.
(In
millions)
|
Equipment
|
|
Commercial
real
estate
|
|
Credit
card
receivables
|
|
Other
assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate(a)
|
|
10.7
|
%
|
|
57.4
|
%
|
|
11.6
|
%
|
|
9.2
|
%
|
|
|
|
Effect
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10%
adverse change
|
$
|
(5
|
)
|
$
|
(1
|
)
|
$
|
(51
|
)
|
$
|
−
|
|
|
|
|
20%
adverse change
|
|
(9
|
)
|
|
(2
|
)
|
|
(100
|
)
|
|
−
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepayment
rate(a)(b)
|
|
6.00
|
%
|
|
0.7
|
%
|
|
8.9
|
%
|
|
37.8
|
%
|
|
|
|
Effect
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10%
adverse change
|
$
|
−
|
|
$
|
−
|
|
$
|
(72
|
)
|
$
|
−
|
|
|
|
|
20%
adverse change
|
|
(1
|
)
|
|
−
|
|
|
(138
|
)
|
|
−
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimate
of credit losses(a)
|
|
0.4
|
%
|
|
5.9
|
%
|
|
15.5
|
%
|
|
0.2
|
%
|
|
|
|
Effect
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10%
adverse change
|
$
|
−
|
|
$
|
−
|
|
$
|
(216
|
)
|
$
|
−
|
|
|
|
|
20%
adverse change
|
|
(1
|
)
|
|
−
|
|
|
(428
|
)
|
|
−
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
weighted average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
asset
lives (in months)
|
|
15
|
|
|
79
|
|
|
10
|
|
|
2
|
|
|
|
|
Net
credit losses for the quarter
|
$
|
−
|
|
$
|
14
|
|
$
|
860
|
|
$
|
−
|
|
|
|
|
Delinquencies
|
|
−
|
|
|
12
|
|
|
1,362
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate(a)
|
|
16.7
|
%
|
|
54.2
|
%
|
|
15.1
|
%
|
|
13.4
|
%
|
|
|
|
Effect
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10%
adverse change
|
$
|
(6
|
)
|
$
|
(1
|
)
|
$
|
(53
|
)
|
$
|
−
|
|
|
|
|
20%
adverse change
|
|
(12
|
)
|
|
(2
|
)
|
|
(105
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepayment
rate(a)(b)
|
|
10.0
|
%
|
|
1.5
|
%
|
|
9.6
|
%
|
|
43.8
|
%
|
|
|
|
Effect
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10%
adverse change
|
$
|
(1
|
)
|
$
|
−
|
|
$
|
(60
|
)
|
$
|
–
|
|
|
|
|
20%
adverse change
|
|
(1
|
)
|
|
−
|
|
|
(118
|
)
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimate
of credit losses(a)
|
|
0.4
|
%
|
|
4.9
|
%
|
|
16.2
|
%
|
|
0.1
|
%
|
|
|
|
Effect
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10%
adverse change
|
$
|
(1
|
)
|
$
|
−
|
|
$
|
(223
|
)
|
$
|
–
|
|
|
|
|
20%
adverse change
|
|
(3
|
)
|
|
−
|
|
|
(440
|
)
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
weighted average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
asset
lives (in months)
|
|
20
|
|
|
70
|
|
|
10
|
|
|
3
|
|
|
|
|
Net
credit losses for the year
|
$
|
4
|
|
$
|
7
|
|
$
|
1,512
|
|
$
|
−
|
|
|
|
|
Delinquencies
|
|
27
|
|
|
58
|
|
|
1,833
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Based
on weighted averages.
|
(b)
|
Represented
a payment rate on credit card receivables, inventory financing receivables
(included within equipment) and trade receivables (included within other
assets).
|
Activity
related to retained interests classified as investment securities in our
consolidated financial statements for the three and six months ended June 30,
2009 and 2008 follows.
|
Three
months ended June 30
|
|
Six
months ended June 30
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows on transfers
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from new transfers
|
$
|
3,200
|
|
$
|
2,333
|
|
$
|
3,200
|
|
$
|
3,656
|
|
Proceeds
from collections reinvested
|
|
|
|
|
|
|
|
|
|
|
|
|
in revolving period
transfers
|
|
10,086
|
|
|
14,832
|
|
|
21,313
|
|
|
29,532
|
|
Cash
flows on retained interests recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
as investment
securities
|
|
1,140
|
|
|
1,002
|
|
|
2,017
|
|
|
1,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
on Revenues from services
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
gain on sale
|
$
|
360
|
|
$
|
273
|
|
$
|
640
|
|
$
|
622
|
|
Change
in fair value of retained interests
|
|
|
|
|
|
|
|
|
|
|
|
|
recorded in
earnings
|
|
85
|
|
|
(18
|
)
|
|
172
|
|
|
(93
|
)
|
Other-than-temporary
impairments
|
|
(8
|
)
|
|
(1
|
)
|
|
(16
|
)
|
|
(1
|
)
|
Derivative
Activities
Our QSPEs
use derivatives to eliminate interest rate risk between the assets and
liabilities. At inception of the transaction, the QSPE will enter into
derivative contracts to receive a floating rate of interest and pay a fixed rate
with terms that effectively match those of the financial assets held. In some
cases, we are the counterparty to such derivative contracts, in which case a
second derivative is executed with a third party to substantially eliminate the
exposure created by the first derivative. The fair value of such derivative
contracts was $153 million and $205 million at June 30, 2009 and December 31,
2008, respectively. We have no other derivatives arrangements with QSPEs or
other VIEs.
Servicing
Activities
The
amount of our servicing assets and liabilities was insignificant at June 30,
2009 and December 31, 2008. We received servicing fees from QSPEs of $148
million and $160 million, respectively, for the three months ended June 30, 2009
and 2008, and $303 million and $324 million, respectively, for the first six
months ended June 30, 2009 and 2008.
At June
30, 2009 and December 31, 2008, accounts payable included $3,452 million and
$3,456 million, respectively, representing obligations to QSPEs for collections
received in our capacity as servicer from obligors of the QSPEs.
Included
in other receivables at June 30, 2009 and December 31, 2008, were $2,540 million
and $2,346 million, respectively, relating to amounts owed by QSPEs to GECC,
principally for the purchase of financial assets.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
A.
Results of Operations
In the
accompanying analysis of financial information, we sometimes use information
derived from consolidated financial information but not presented in our
financial statements prepared in accordance with U.S. generally accepted
accounting principles (GAAP). Certain of these data are considered “non-GAAP
financial measures” under the U.S. Securities and Exchange Commission (SEC)
rules. For such measures, we have provided supplemental explanations and
reconciliations in Exhibit 99 to this Form 10-Q Report.
Unless
otherwise indicated, we refer to captions such as revenues and earnings from
continuing operations attributable to GECC simply as “revenues” and “earnings”
throughout this Management’s Discussion and Analysis. Similarly, discussion of
other matters in our condensed, consolidated financial statements relates to
continuing operations unless otherwise indicated.
Overview
Revenues
for the second quarter of 2009 were $12.6 billion, a $5.6 billion (31%) decrease
from the second quarter of 2008. Revenues for the second quarter of 2009
included $1.1 billion of revenue from acquisitions, and in 2009 were reduced by
$1.6 billion as a result of dispositions. Revenues for the quarter also
decreased $5.1 billion compared with the second quarter of 2008 as a result of
organic revenue declines and the stronger U.S. dollar. Organic revenue growth
excludes the effects of acquisitions, business dispositions (other than
dispositions of businesses acquired for investment) and currency exchange rates.
Earnings were $0.4 billion, down 86% from $2.8 billion in the second quarter of
2008.
Revenues
for the first six months of 2009 were $26.2 billion, a $9.1 billion (26%)
decrease from the first six months of 2008. Revenues for the first six months of
2009 and 2008 included $1.8 billion and $0.2 billion of revenue from
acquisitions, respectively, and in 2009 were reduced by $2.3 billion as a result
of dispositions. Revenues for the first six months of 2009 also decreased $8.4
billion compared with the first six months of 2008 as a result of organic
revenue declines and the stronger U.S. dollar. Organic revenue growth excludes
the effects of acquisitions, business dispositions (other than dispositions of
businesses acquired for investment) and currency exchange rates. Earnings were
$1.3 billion, down 74% from $5.2 billion in the first six months of
2008.
Overall,
acquisitions contributed $1.1 billion to total revenues in both the second
quarters of 2009 and 2008. Our earnings in the second quarter of 2009 and 2008
included approximately $0.4 billion and $0.2 billion, respectively, from
acquired businesses. We integrate acquisitions as quickly as possible. Only
revenues and earnings from the date we complete the acquisition through the end
of the fourth following quarter are attributed to such businesses. Dispositions
also affected our operations through lower revenues of $1.6 billion and $0.1
billion in the second quarters of 2009 and 2008, respectively. The effect of
dispositions on earnings was an insignificant amount in both the second quarters
of 2009 and 2008.
Acquisitions
contributed $1.8 billion and $2.2 billion to total revenues in the first six
months of 2009 and 2008, respectively. Our earnings in the first six months of
2009 and 2008 included approximately $0.5 billion and $0.2 billion,
respectively, from acquired businesses. We integrate acquisitions as quickly as
possible. Only revenues and earnings from the date we complete the acquisition
through the end of the fourth following quarter are attributed to such
businesses. Dispositions also affected our operations through lower revenues of
$1.7 billion in the first six months of 2009 compared with higher revenues of
$0.4 billion in the first six months of 2008. The effect of dispositions on
earnings was an increase of $0.3 billion in both the first six months of 2009
and 2008.
The most
significant acquisitions affecting results in the first six months of 2009 were
CitiCapital and Interbanca S.p.A. at Commercial Lending and Leasing (CLL); and
BAC Credomatic (BAC) and Bank BPH at Consumer (formerly GE Money).
The
provision for income taxes was a benefit of $0.7 billion for the second quarter
of 2009 (effective tax rate of 238.8%), compared with an insignificant expense
for the second quarter of 2008 (effective tax rate of 1.6%). The second quarter
2009 tax benefit when compared to the pre-tax loss results in a positive rate
for the quarter. The tax rate increased primarily because of a reduction of
income in higher-taxed jurisdictions. This had the effect of increasing the
relative impact on the rate of tax benefits from lower-taxed global operations
that more than offset the decline in those benefits.
The
provision for income taxes was a benefit of $1.9 billion for the first six
months of 2009 (effective tax rate of 438.4%), compared with $0.1 billion
expense for the first six months of 2008 (effective tax rate of 2.3%). The tax
benefit when compared to the pre-tax loss results in a positive rate for the
first six months of 2009. The tax rate increased primarily because of a
reduction of income in higher-taxed jurisdictions. This had the effect of
increasing the relative impact on the rate of tax benefits from lower-taxed
global operations that more than offset the decline in those benefits.
Mitigating the decline in current year tax benefits from lower-taxed global
operations, were increased benefits from management’s decision (discussed below)
in the first quarter to indefinitely reinvest outside the U.S. prior year
earnings.
During
the first quarter of 2009, following the change in our external credit ratings,
funding actions taken and our continued review of our operations, liquidity and
funding, we determined that undistributed prior-year earnings of non- U.S.
subsidiaries of General Electric Capital Corporation (GE Capital or GECC), on
which we had previously provided deferred U.S. taxes, would now be indefinitely
reinvested outside the U.S. This change increased the amount of prior-year
earnings indefinitely reinvested outside the U.S. by approximately $2 billion
(to $52 billion), resulting in an income tax benefit of $0.7 billion in the
first quarter of 2009.
During
the first six months of 2009, GE Capital provided $34 billion of new financings
in the U.S. to various companies, infrastructure projects and municipalities.
Additionally, we extended $35 billion of credit to approximately 50 million U.S.
consumers. GE Capital provided credit to approximately 16,000 new commercial
customers and 23,000 new small businesses during the first six months of 2009 in
the U.S. and ended the period with outstanding credit to more than 330,000
commercial customers and 145,000 small businesses through retail programs in the
U.S.
Segment
Operations
Operating
segments comprise our five businesses focused on the broad markets they serve:
CLL, Consumer, Real Estate, Energy Financial Services and GE Capital Aviation
Services (GECAS). The Chairman allocates resources to, and assesses the
performance of, these five businesses. We also provide a one-line reconciliation
to GECC-only results, the most significant component of these reconciliations is
the exclusion of the results of businesses which are not subsidiaries of GECC
but instead are direct subsidiaries of General Electric Capital Services (GECS).
In addition to providing information on GECS segments in their entirety, we have
also provided supplemental information for the geographic regions within the CLL
segment for greater clarity.
GECC
corporate items and eliminations include the effects of eliminating transactions
between operating segments; results of our run-off insurance operations
remaining in continuing operations attributable to GECC; underabsorbed corporate
overhead; certain non-allocated amounts determined by the Chairman; and a
variety of sundry items. GECC corporate items and eliminations is not an
operating segment. Rather, it is added to operating segment totals to reconcile
to consolidated totals on the financial statements.
Segment
profit is determined based on internal performance measures used by the Chairman
to assess the performance of each business in a given period. In connection with
that assessment, the Chairman may exclude matters such as charges for
restructuring; rationalization and other similar expenses; in-process research
and development and certain other acquisition-related charges and balances;
technology and product development costs; certain gains and losses from
acquisitions or dispositions; and litigation settlements or other charges,
responsibility for which preceded the current management team.
Segment
profit always excludes the effects of principal pension plans, results reported
as discontinued operations, earnings attributable to noncontrolling interests of
consolidated subsidiaries and accounting changes. Segment profit, which we
sometimes refer to as “net earnings”, includes interest and income
taxes.
We have
reclassified certain prior-period amounts to conform to the current period’s
presentation.
Summary
of Operating Segments
|
Three
months ended
June
30
(Unaudited)
|
|
Six
months ended
June
30
(Unaudited)
|
|
(In
millions)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
CLL(a)
|
$
|
5,219
|
|
$
|
7,217
|
|
$
|
10,797
|
|
$
|
13,823
|
|
Consumer(a)
|
|
4,883
|
|
|
6,656
|
|
|
9,630
|
|
|
13,096
|
|
Real
Estate
|
|
1,013
|
|
|
1,964
|
|
|
1,988
|
|
|
3,847
|
|
Energy
Financial Services
|
|
490
|
|
|
989
|
|
|
1,134
|
|
|
1,759
|
|
GECAS
|
|
1,192
|
|
|
1,155
|
|
|
2,336
|
|
|
2,425
|
|
Total segment
revenues
|
|
12,797
|
|
|
17,981
|
|
|
25,885
|
|
|
34,950
|
|
GECC
corporate items and eliminations
|
|
(119
|
)
|
|
202
|
|
|
504
|
|
|
510
|
|
Total
revenues
|
|
12,678
|
|
|
18,183
|
|
|
26,389
|
|
|
35,460
|
|
Less
portion of revenues not included in GECC
|
|
(116
|
)
|
|
(34
|
)
|
|
(218
|
)
|
|
(188
|
)
|
Total
revenues in GECC
|
$
|
12,562
|
|
$
|
18,149
|
|
$
|
26,171
|
|
$
|
35,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
CLL(a)
|
$
|
232
|
|
$
|
908
|
|
$
|
454
|
|
$
|
1,596
|
|
Consumer(a)
|
|
243
|
|
|
1,065
|
|
|
970
|
|
|
2,056
|
|
Real
Estate
|
|
(237
|
)
|
|
484
|
|
|
(410
|
)
|
|
960
|
|
Energy
Financial Services
|
|
65
|
|
|
167
|
|
|
140
|
|
|
300
|
|
GECAS
|
|
287
|
|
|
279
|
|
|
555
|
|
|
670
|
|
Total segment
profit
|
|
590
|
|
|
2,903
|
|
|
1,709
|
|
|
5,582
|
|
GECC corporate items and
eliminations(b)(c)
|
|
(171
|
)
|
|
(92
|
)
|
|
(279
|
)
|
|
(267
|
)
|
Less
portion of segment profit not included in GECC
|
|
(44
|
)
|
|
(61
|
)
|
|
(81
|
)
|
|
(84
|
)
|
Earnings
from continuing operations attributable to GECC
|
|
375
|
|
|
2,750
|
|
|
1,349
|
|
|
5,231
|
|
Loss
from discontinued operations, net of taxes,
|
|
|
|
|
|
|
|
|
|
|
|
|
attributable to
GECC
|
|
(194
|
)
|
|
(336
|
)
|
|
(197
|
)
|
|
(382
|
)
|
Total
net earnings attributable to GECC
|
$
|
181
|
|
$
|
2,414
|
|
$
|
1,152
|
|
$
|
4,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
During
the first quarter of 2009, we transferred Banque Artesia Nederland N.V.
(Artesia) from CLL to Consumer. Prior-period amounts were reclassified to
conform to the current-period’s presentation.
|
|
(b)
|
Included
restructuring and other charges of $0.1 billion in both the first six
months of 2009 and 2008, primarily related to CLL and
Consumer.
|
|
(c)
|
Included
$0.1 billion and an insignificant amount during the first six months of
2009 and 2008, respectively, of net losses, related to our treasury
operations.
|
|
See
accompanying notes to condensed, consolidated financial
statements.
|
|
CLL
|
Three
months ended
June
30
|
|
Six
months ended
June
30
|
|
(In
millions)
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
5,219
|
|
$
|
7,217
|
|
$
|
10,797
|
|
$
|
13,823
|
|
Less
portion of CLL not included in GECC
|
|
(101
|
)
|
|
(27
|
)
|
|
(196
|
)
|
|
(187
|
)
|
Total revenues in
GECC
|
$
|
5,118
|
|
$
|
7,190
|
|
$
|
10,601
|
|
$
|
13,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
$
|
232
|
|
$
|
908
|
|
$
|
454
|
|
$
|
1,596
|
|
Less
portion of CLL not included in GECC
|
|
(35
|
)
|
|
(54
|
)
|
|
(70
|
)
|
|
(81
|
)
|
Total segment profit in
GECC
|
$
|
197
|
|
$
|
854
|
|
$
|
384
|
|
$
|
1,515
|
|
|
At
|
|
(In
millions)
|
June
30,
2009
|
|
June
30,
2008
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
219,378
|
|
$
|
241,375
|
|
$
|
228,176
|
|
Less
portion of CLL not included in GECC
|
|
(2,146
|
)
|
|
(1,506
|
)
|
|
(2,015
|
)
|
Total assets in
GECC
|
$
|
217,232
|
|
$
|
239,869
|
|
$
|
226,161
|
|
|
Three
months ended
June
30
|
|
Six
months ended
June
30
|
|
(In
millions)
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
2,699
|
|
$
|
3,049
|
|
$
|
4,981
|
|
$
|
6,030
|
|
Europe
|
|
1,324
|
|
|
1,545
|
|
|
2,465
|
|
|
2,962
|
|
Asia
|
|
586
|
|
|
796
|
|
|
1,090
|
|
|
1,413
|
|
Other
|
|
610
|
|
|
1,827
|
|
|
2,261
|
|
|
3,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
169
|
|
$
|
534
|
|
$
|
156
|
|
$
|
1,106
|
|
Europe
|
|
138
|
|
|
218
|
|
|
202
|
|
|
410
|
|
Asia
|
|
36
|
|
|
174
|
|
|
46
|
|
|
219
|
|
Other
|
|
(111
|
)
|
|
(18
|
)
|
|
50
|
|
|
(139
|
)
|
|
At
|
|
(In
millions)
|
June
30,
2009
|
|
June
30,
2008
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
126,215
|
|
$
|
135,435
|
|
$
|
135,253
|
|
Europe
|
|
53,723
|
|
|
60,072
|
|
|
49,734
|
|
Asia
|
|
20,353
|
|
|
25,261
|
|
|
23,127
|
|
Other
|
|
19,087
|
|
|
20,607
|
|
|
20,062
|
|
CLL
revenues decreased 28% and net earnings decreased 74% compared with the second
quarter of 2008. Revenues for the second quarter of 2009 included $0.7 billion
from acquisitions, and were reduced by $1.2 billion from dispositions, primarily
related to the deconsolidation of Penske Truck Leasing Co., L.P. (PTL). Revenues
for the quarter also decreased $1.5 billion compared with the second quarter of
2008 as a result of organic revenue declines ($1.1 billion) and the stronger
U.S. dollar ($0.4 billion). Net earnings decreased by $0.7 billion in the second
quarter of 2009, resulting from higher provisions for losses on financing
receivables ($0.3 billion), lower gains ($0.2 billion) and declines in
lower-taxed earnings from global operations ($0.1 billion), partially offset by
acquisitions ($0.2 billion).
CLL
revenues decreased 22% and net earnings decreased 72% compared with the first
six months of 2008. Revenues for the first six months of 2009 and 2008 included
$1.2 billion and $0.1 billion from acquisitions, respectively, and were reduced
by $1.2 billion from dispositions, primarily related to the deconsolidation of
PTL. Revenues for the first six months of 2009 also included $0.3 billion
related to a gain on the partial sale of a limited partnership interest in PTL
and remeasurement of our retained investment. Revenues for the first six months
decreased $3.2 billion compared with the first six months of 2008 as a result of
organic revenue declines ($2.5 billion) and the stronger U.S. dollar ($0.7
billion). Net earnings decreased by $1.1 billion in the first six months of
2009, resulting from higher provisions for losses on financing receivables ($0.5
billion), lower gains ($0.4 billion), declines in lower-taxed earnings from
global operations ($0.2 billion) and lower investment income ($0.1 billion),
partially offset by acquisitions ($0.3 billion). Net earnings also included
mark-to-market losses and other-than-temporary impairments ($0.2 billion) and
the absence of the 2008 Genpact gain ($0.3 billion), partially offset by the
gain on PTL sale and remeasurement ($0.3 billion).
Consumer
|
Three
months ended
June
30
|
|
Six
months ended
June
30
|
|
(In
millions)
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
4,883
|
|
$
|
6,656
|
|
$
|
9,630
|
|
$
|
13,096
|
|
Less
portion of Consumer not included in GECC
|
|
−
|
|
|
−
|
|
|
−
|
|
|
−
|
|
Total revenues in
GECC
|
$
|
4,883
|
|
$
|
6,656
|
|
$
|
9,630
|
|
$
|
13,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
$
|
243
|
|
$
|
1,065
|
|
$
|
970
|
|
$
|
2,056
|
|
Less
portion of Consumer not included in GECC
|
|
(8
|
)
|
|
(5
|
)
|
|
(9
|
)
|
|
(7
|
)
|
Total segment profit in
GECC
|
$
|
235
|
|
$
|
1,060
|
|
$
|
961
|
|
$
|
2,049
|
|
|
At
|
|
(In
millions)
|
June
30,
2009
|
|
June
30,
2008
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
180,538
|
|
$
|
226,283
|
|
$
|
187,927
|
|
Less
portion of Consumer not included in GECC
|
|
(167
|
)
|
|
135
|
|
|
(167
|
)
|
Total assets in
GECC
|
$
|
180,371
|
|
$
|
226,418
|
|
$
|
187,760
|
|
Consumer
revenues decreased 27% and net earnings decreased 77% compared with the second
quarter of 2008. Revenues for the second quarter of 2009 included $0.4 billion
from acquisitions (including a gain of $0.3 billion on the remeasurement of our
previously held equity investment in BAC related to the acquisition of a
controlling interest in BAC (BAC acquisition gain)) and were reduced by $0.4
billion as a result of dispositions. Revenues for the quarter decreased $1.8
billion compared with the second quarter of 2008 as a result of organic revenue
declines ($1.1 billion) and the stronger U.S. dollar ($0.7 billion). The
decrease in net earnings resulted from core declines ($1.2 billion), partially
offset by the BAC acquisition gain ($0.2 billion) and higher securitization
income ($0.1 billion). Core declines primarily resulted from lower results in
the U.S. and U.K., reflecting higher provisions for losses on financing
receivables ($0.7 billion), a decline in lower-taxed earnings from global
operations ($0.3 billion) and higher impairments ($0.1 billion).
Consumer
revenues decreased 26% and net earnings decreased 53% compared with the first
six months of 2008. Revenues for the first six months of 2009 included $0.5
billion from acquisitions (including the BAC acquisition gain of $0.3 billion)
and were reduced by $0.9 billion as a result of dispositions, and the lack of a
current-year counterpart to the 2008 gain on sale of our Corporate Payment
Services (CPS) business ($0.4 billion). Revenues for the first six months
decreased $2.7 billion compared with the first six months of 2008 as a result of
the stronger U.S. dollar ($1.4 billion) and organic revenue declines ($1.3
billion). The decrease in net earnings resulted primarily from core declines
($1.2 billion) and the lack of a current-year counterpart to the 2008 gain on
sale of our CPS business ($0.2 billion). These decreases were partially offset
by higher securitization income ($0.1 billion) and the BAC acquisition gain
($0.2 billion). Core declines primarily resulted from lower results in the U.S.
& U.K., reflecting higher provisions for losses on financing receivables
($1.2 billion) and higher impairments ($0.1 billion), partially offset by growth
in lower-taxed earnings from global operations ($0.1 billion). The first six
months of 2009 benefit from lower-taxed earnings from global operations included
$0.5 billion from the decision to indefinitely reinvest prior-year earnings
outside the U.S.
Real
Estate
|
Three
months ended
June
30
|
|
Six
months ended
June
30
|
|
(In
millions)
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,013
|
|
$
|
1,964
|
|
$
|
1,988
|
|
$
|
3,847
|
|
Less
portion of Real Estate not included in GECC
|
|
(13
|
)
|
|
(7
|
)
|
|
(19
|
)
|
|
−
|
|
Total revenues in
GECC
|
$
|
1,000
|
|
$
|
1,957
|
|
$
|
1,969
|
|
$
|
3,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
$
|
(237
|
)
|
$
|
484
|
|
$
|
(410
|
)
|
$
|
960
|
|
Less
portion of Real Estate not included in GECC
|
|
−
|
|
|
(1
|
)
|
|
(1
|
)
|
|
6
|
|
Total segment profit in
GECC
|
$
|
(237
|
)
|
$
|
483
|
|
$
|
(411
|
)
|
$
|
966
|
|
|
At
|
|
(In
millions)
|
June
30,
2009
|
|
June
30,
2008
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
83,960
|
|
$
|
90,611
|
|
$
|
85,266
|
|
Less
portion of Real Estate not included in GECC
|
|
(155
|
)
|
|
(131
|
)
|
|
(357
|
)
|
Total assets in
GECC
|
$
|
83,805
|
|
$
|
90,480
|
|
$
|
84,909
|
|
Real
Estate revenues decreased 48% and net earnings decreased 149% compared with the
second quarter of 2008. Revenues for the quarter decreased $1.0 billion compared
with the second quarter of 2008 as a result of organic revenue declines ($0.8
billion), primarily as a result of a decrease in sales of properties, and the
stronger U.S. dollar ($0.1 billion). Real Estate net earnings decreased $0.7
billion compared with the second quarter of 2008, primarily from a decrease in
gains on sales of properties as compared to the prior period ($0.4 billion) and
an increase in provisions for losses on financing receivables and impairments
($0.4 billion). Depreciation expense on real estate equity investments totaled
$0.3 billion in both the second quarters of 2009 and 2008.
Real
Estate revenues decreased 48% and net earnings decreased 143% compared with the
first six months of 2008. Revenues for the first six months decreased $1.9
billion compared with the first six months of 2008 as a result of organic
revenue declines ($1.7 billion), primarily as a result of a decrease in sales of
properties, and the stronger U.S. dollar ($0.2 billion). Real Estate net
earnings decreased $1.4 billion compared with the first six months of 2008,
primarily from a decrease in gains on sales of properties as compared to the
prior period ($0.9 billion) and an increase in provisions for losses on
financing receivables and impairments ($0.5 billion). Depreciation expense on
real estate equity investments totaled $0.6 billion in both the first six
months of 2009 and 2008.
Energy
Financial Services
|
Three
months ended
June
30
|
|
Six
months ended
June
30
|
|
(In
millions)
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
490
|
|
$
|
989
|
|
$
|
1,134
|
|
$
|
1,759
|
|
Less
portion of Energy Financial Services not included in GECC
|
|
(1
|
)
|
|
1
|
|
|
(2
|
)
|
|
−
|
|
Total revenues in
GECC
|
$
|
489
|
|
$
|
990
|
|
$
|
1,132
|
|
$
|
1,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
$
|
65
|
|
$
|
167
|
|
$
|
140
|
|
$
|
300
|
|
Less
portion of Energy Financial Services not included in GECC
|
|
−
|
|
|
1
|
|
|
−
|
|
|
1
|
|
Total segment profit in
GECC
|
$
|
65
|
|
$
|
168
|
|
$
|
140
|
|
$
|
301
|
|
|
At
|
|
(In
millions)
|
June
30,
2009
|
|
June
30,
2008
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
22,956
|
|
$
|
21,580
|
|
$
|
22,079
|
|
Less
portion of Energy Financial Services not included in GECC
|
|
(70
|
)
|
|
(52
|
)
|
|
(54
|
)
|
Total assets in
GECC
|
$
|
22,886
|
|
$
|
21,528
|
|
$
|
22,025
|
|
Energy
Financial Services revenues decreased 50% and net earnings decreased 61%
compared with the second quarter of 2008. Revenues for the quarter decreased
$0.5 billion compared with the second quarter of 2008 as a result of organic
declines ($0.5 billion), primarily as a result of the effects of lower energy
commodity prices and a decrease in gains on sales of assets. The decrease in net
earnings resulted primarily from core declines, including a decrease in gains on
sales of assets as compared to the prior period.
Energy
Financial Services revenues decreased 36% and net earnings decreased 53%
compared with the first six months of 2008. Revenues for the first six months of
2009 included $0.1 billion of gains from dispositions. Revenues for the first
six months also decreased $0.7 billion compared with the first six months of
2008 as a result of organic declines ($0.7 billion), primarily as a result of
the effects of lower energy commodity prices and a decrease in gains on sales of
assets. The decrease in net earnings resulted primarily from core declines,
including a decrease in gains on sales of assets as compared to the prior period
and the effects of lower energy commodity prices.
GECAS
|
Three
months ended
June
30
|
|
Six
months ended
June
30
|
|
(In
millions)
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
1,192
|
|
$
|
1,155
|
|
$
|
2,336
|
|
$
|
2,425
|
|
Less
portion of GECAS not included in GECC
|
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
Total revenues in
GECC
|
$
|
1,191
|
|
$
|
1,154
|
|
$
|
2,335
|
|
$
|
2,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
$
|
287
|
|
$
|
279
|
|
$
|
555
|
|
$
|
670
|
|
Less
portion of GECAS not included in GECC
|
|
(1
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
(3
|
)
|
Total segment profit in
GECC
|
$
|
286
|
|
$
|
277
|
|
$
|
554
|
|
$
|
667
|
|
|
At
|
|
(In
millions)
|
June
30,
2009
|
|
June
30,
2008
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
50,337
|
|
$
|
48,383
|
|
$
|
49,455
|
|
Less
portion of GECAS not included in GECC
|
|
(197
|
)
|
|
(232
|
)
|
|
(198
|
)
|
Total assets in
GECC
|
$
|
50,140
|
|
$
|
48,151
|
|
$
|
49,257
|
|
GECAS
revenues increased 3% and net earnings increased 3% compared with the second
quarter of 2008. The increase in revenues resulted primarily from organic
revenue growth, partially offset by lower asset sales. The increase in net
earnings resulted primarily from core growth, partially offset by lower asset
sales.
GECAS
revenues decreased 4% and net earnings decreased 17% compared with the first six
months of 2008. The decrease in revenues resulted primarily from lower asset
sales ($0.2 billion), partially offset by organic revenue growth ($0.1 billion).
The decrease in net earnings resulted primarily from lower asset sales ($0.1
billion), partially offset by core growth.
Discontinued
Operations
|
Three
months ended
June
30
|
|
Six
months ended
June
30
|
|
(In
millions)
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued
|
|
|
|
|
|
|
|
|
|
|
|
|
operations, net of
taxes
|
$
|
(194
|
)
|
$
|
(336
|
)
|
$
|
(197
|
)
|
$
|
(382
|
)
|
Discontinued
operations comprised GE Money Japan (our Japanese personal loan business, Lake,
and our Japanese mortgage and card businesses, excluding our investment in GE
Nissen Credit Co., Ltd.), our U.S. mortgage business (WMC), GE Life, and
Genworth Financial, Inc. Results of these businesses are reported as
discontinued operations for all periods presented.
Loss from
discontinued operations, net of taxes, for the second quarter and the first six
months of 2009, primarily reflected the incremental loss ($0.1 billion) related
to our sale of GE Money Japan.
Loss from
discontinued operations, net of taxes, for the second quarter and the first six
months of 2008, primarily reflected the estimated incremental loss on disposal
($0.2 billion) and the loss from operations ($0.1 billion) at GE Money
Japan.
For
additional information related to discontinued operations, see Note 2 to the
condensed, consolidated financial statements.
B.
Statement of Financial Position
Overview
of Financial Position
Major
changes in our financial position in the first six months of 2009 resulted from
the following:
·
|
We
completed the exchange of our Consumer businesses in Austria and Finland,
the credit card and auto businesses in the U.K., and the credit card
business in Ireland for a 100% ownership interest in Interbanca S.p.A., an
Italian corporate bank;
|
·
|
In
order to improve tangible capital and reduce leverage, General Electric
Company (GE), our ultimate parent, contributed $9.5 billion to GECS, of
which $8.8 billion was subsequently contributed to
us;
|
·
|
The
U.S. dollar was weaker at June 30, 2009 than at December 31, 2008,
increasing the translated levels of our non-U.S. dollar assets and
liabilities;
|
·
|
We
deconsolidated PTL following our partial sale during the first quarter of
2009;
|
·
|
We
purchased a controlling interest in BAC in the second quarter of 2009;
and
|
·
|
At
GECS, collections on financing receivables exceeded originations by
approximately $25 billion in the first half of
2009.
|
Cash
Flows
GECC cash
and equivalents aggregated $49.1 billion at June 30, 2009, compared with $15.5
billion at June 30, 2008. GECC cash used for operating activities totaled $2.7
billion for the first six months of 2009, compared with cash from operating
activities of $12.4 billion for the first six months of 2008. This decrease was
primarily due to an overall decline in net earnings, decreases in cash
collateral held from counterparties on derivative contracts and declines in
volume resulting in a reduction of accounts payable.
Consistent
with our plan to reduce GECC asset levels, cash from investing activities was
$30.9 billion during the first six months of 2009. $25.4 billion resulted from a
reduction in financing receivables, primarily from collections exceeding
originations and $8.8 billion resulted from proceeds from business dispositions,
including the consumer businesses in Austria and Finland, the credit card and
auto businesses in the U.K., the credit card business in Ireland and a portion
of our Australian residential mortgage business. These sources were partially
offset by cash used for acquisitions of $5.6 billion, primarily for the
acquisition of Interbanca S.p.A.
GECC cash
used for financing activities in the first six months of 2009 related primarily
to a $34.2 billion reduction in borrowings (maturities 90 days or less) and $1.6
billion of net redemptions of investment contracts, partially offset by $11.6
billion of new issuances on borrowings (maturities longer than 90 days)
exceeding repayments and a capital contribution and share issuance totaling $8.8
billion.
Fair
Value Measurements
Effective
January 1, 2008, we adopted Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) 157, Fair Value Measurements, for
all financial instruments and non-financial instruments accounted for at fair
value on a recurring basis. Effective January 1, 2009, we adopted SFAS 157 for
all non-financial instruments accounted for at fair value on a non-recurring
basis. Adoption of SFAS 157 did not have a material effect on our financial
position or results of operations. During the first six months of 2009, there
were no significant changes in our methodology for measuring fair value of
financial instruments as compared to prior quarters. Additional information
about our application of SFAS 157, as amended, is provided in Note 10 to the
condensed, consolidated financial statements.
At June
30, 2009, the aggregate amount of investments that are measured at fair value
through earnings totaled $7.3 billion and consisted primarily of retained
interests in securitizations, equity investments, as well as various assets held
for sale in the ordinary course of business, such as credit card
receivables.
C.
Financial Services Portfolio Quality
Investment securities comprise
mainly investment-grade debt securities supporting obligations to holders of
guaranteed investment contracts (GICs). The fair value of investment securities
totaled $20.8 billion at June 30, 2009, compared with $19.3 billion at December
31, 2008. Of the amount at June 30, 2009, we held debt securities with an
estimated fair value of $13.0 billion, which included corporate debt securities,
residential mortgage-backed securities (RMBS) and commercial mortgage-backed
securities (CMBS) with estimated fair values of $4.1 billion, $2.6 billion and
$1.2 billion, respectively. Unrealized losses on debt securities were $2.6
billion and $2.9 billion at June 30, 2009 and December 31, 2008, respectively.
This amount included unrealized losses on corporate debt securities, RMBS and
CMBS of $0.6 billion, $1.0 billion and $0.5 billion, respectively, at June 30,
2009, as compared with $0.7 billion, $1.0 billion and $0.5 billion,
respectively, at December 31, 2008.
Of the
$2.6 billion of RMBS, our exposure to subprime credit was approximately $1.1
billion, and these securities are primarily held to support obligations to
holders of GICs. A majority of these securities have received investment-grade
credit ratings from the major rating agencies. We purchased no such securities
in the first six months of 2009 and 2008. These investment securities are
collateralized primarily by pools of individual direct mortgage loans, and do
not include structured products such as collateralized debt obligations.
Additionally, a majority of exposure to residential subprime credit related to
investment securities backed by mortgage loans originated in 2006 and
2005.
We
regularly review investment securities for impairment. Our review uses both
qualitative and quantitative criteria. FASB Staff Position (FSP) FAS 115-2 and
FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments, was effective for us on
April 1, 2009 and modified the requirements for recognizing and measuring
other-than-temporary impairment for debt securities. The FSP did not have a
material impact on our results of operations. We presently do not intend to sell
our debt securities and believe that it is not more likely than not that we will
be required to sell these securities that are in an unrealized loss position
before recovery of our amortized cost. If we do not intend to sell the security
and it is not more likely than not we will be required to sell the security
before recovery of our amortized cost, we evaluate other qualitative criteria to
determine whether a credit loss exists, such as the financial health of and
specific prospects for the issuer, including whether the issuer is in compliance
with the terms and covenants of the security. Quantitative criteria include
determining whether there has been an adverse change in expected future cash
flows. With respect to corporate bonds we placed greater emphasis on the credit
quality of the issuer. With respect to RMBS and CMBS, we placed greater emphasis
on our expectations with respect to cash flows from the underlying collateral
and with respect to RMBS, we considered other features of the security,
principally monoline insurance. For equity securities, our criteria include the
length of time and magnitude of the amount that each security is in an
unrealized loss position. Our other-than-temporary impairment reviews involve
our finance, risk and asset management functions as well as the portfolio
management and research capabilities of our internal and third-party asset
managers.
Monoline
insurers (Monolines) provide credit enhancement for certain of our investment
securities. The credit enhancement is a feature of each specific security that
guarantees the payment of all contractual cash flows, and is not purchased
separately by GE. At June 30, 2009, our investment securities insured by
Monolines totaled $2.3 billion, including $1.0 billion of our $1.1 billion
investment in subprime RMBS. The Monoline industry continues to experience
financial stress from increasing delinquencies and defaults on the individual
loans underlying insured securities. In evaluating whether a security with
Monoline credit enhancement is other-than-temporarily impaired, we first
evaluate whether there has been an adverse change in estimated cash flows as
determined in accordance with Emerging Issues Task Force (EITF) Issue 99-20,
Recognition of Interest Income
and Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets. If
there has been an adverse change in estimated cash flows, we then evaluate the
overall credit worthiness of the Monoline using an analysis that is similar to
the approach we use for corporate bonds. This includes an evaluation of the
following factors: sufficiency of the Monoline’s cash reserves and capital,
ratings activity, whether the Monoline is in default or default appears
imminent, and the potential for intervention by an insurance or other regulator.
At June 30, 2009, the unrealized loss associated with securities subject to
Monoline credit enhancement for which there is an expected loss was $0.6
billion, of which $0.3 billion relates to expected credit losses and the
remaining $0.3 billion relates to other market factors.
Total
pre-tax other-than-temporary impairment losses during the three months ended
June 30, 2009 were $0.2 billion of which, $0.1 billion was recognized in
earnings and primarily relates to credit losses on retained interests in our
securitization arrangements and RMBS, and $0.1 billion primarily relates to
non-credit related losses on RMBS and is included within accumulated other
comprehensive income.
Our
qualitative review attempts to identify issuers’ securities that are “at-risk”
of other-than-temporary impairment, that is, for securities that we do not
intend to sell and it is not more likely than not that we will be required to
sell before recovery of our amortized cost, whether there is a possibility of
credit loss that would result in an other-than-temporary impairment recognition
in the following 12 months. Securities we have identified as “at-risk” primarily
relate to investments in RMBS securities, corporate debt securities across a
broad range of industries and retained interest in our securitization
arrangements. The amount of associated unrealized loss on these securities at
June 30, 2009 is $0.8 billion. Credit losses that would be recognized in
earnings are calculated when we determine the security to be
other-than-temporarily impaired. Continued uncertainty in the capital markets
may cause increased levels of other-than-temporary impairments.
At June
30, 2009, unrealized losses on investment securities totaled $2.7 billion,
including $2.4 billion aged 12 months or longer, compared with unrealized losses
of $3.2 billion, including $2.0 billion aged 12 months or longer, at December
31, 2008. Of the amount aged 12 months or longer at June 30, 2009, more than 70%
of our debt securities were considered to be investment-grade by the major
rating agencies. In addition, of the amount aged 12 months or longer, $1.8
billion and $0.5 billion related to structured securities (mortgage-backed,
asset-backed and securitization retained interests) and corporate debt
securities, respectively. With respect to our investment securities that are in
an unrealized loss position at June 30, 2009, the vast majority relate to debt
securities held to support obligations to holders of GICs. We presently do not
intend to sell our debt securities and believe that it is not more likely than
not that we will be required to sell these securities that are in an unrealized
loss position before recovery of our amortized cost. The fair values used to
determine these unrealized gains and losses are those defined by relevant
accounting standards and are not a forecast of future gains or losses. For
additional information, see Note 3 to the condensed, consolidated financial
statements.
Financing receivables is our
largest category of assets and represents one of our primary sources of
revenues. A discussion of the quality of certain elements of the financing
receivables portfolio follows. For purposes of that discussion, “delinquent”
receivables are those that are 30 days or more past due based on their
contractual terms; and “nonearning” receivables are those that are 90 days or
more past due (or for which collection has otherwise become doubtful).
Nonearning receivables exclude loans purchased at a discount (unless they have
deteriorated post acquisition) under SOP 03-3, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer, these loans are initially recorded at
fair value, and accrete interest income over the estimated life of the loan
based on reasonably estimable cash flows even if the underlying loans are
contractually delinquent at acquisition. In addition, nonearning receivables
exclude loans which are paying currently under a cash accounting basis, but
classified as impaired under SFAS 114, Accounting by Creditors for
Impairment of a Loan.
Our
portfolio of financing receivables is diverse and not directly comparable to
major U.S. banks. Historically, we have had less consumer exposure, which over
time has had higher loss rates than commercial exposure. Our consumer exposure
is largely non-U.S. and primarily comprises mortgage, sales finance, auto and
personal loans in various European and Asian countries. Our U.S. consumer
financing receivables comprise 7% of our total portfolio. Of those,
approximately 40% relate primarily to credit cards, which are often subject to
profit and loss sharing arrangements with the retailer (the results of which are
reflected in GECC revenues), and have a smaller average balance and lower loss
severity as compared to bank cards. The remaining 60% are sales finance
receivables, which provide electronics, recreation, medical and home improvement
financing to customers. In 2007, we exited the U.S. mortgage business and we
have no U.S. auto or student loans.
Our
commercial portfolio primarily comprises senior, secured positions with
comparatively low loss history. The secured receivables in this portfolio are
collateralized by a variety of asset classes, including industrial-related
facilities and equipment; commercial and residential real estate; vehicles,
aircraft, and equipment used in many industries, including the construction,
manufacturing, transportation, telecommunications and healthcare industries.
Substantially all of this portfolio is secured.
Losses on
financing receivables are recognized when they are incurred, which requires us
to make our best estimate of probable losses inherent in the portfolio. Such
estimate requires consideration of historical loss experience, adjusted for
current conditions, and judgments about the probable effects of relevant
observable data, including present economic conditions such as delinquency
rates, financial health of specific customers and market sectors, collateral
values, and the present and expected future levels of interest rates. Our risk
management process includes standards and policies for reviewing major risk
exposures and concentrations, and evaluates relevant data either for individual
loans or financing leases, or on a portfolio basis, as appropriate. We adopted
SFAS 141(R), Business
Combinations, on January 1, 2009. As a result of this adoption, loans
acquired in a business acquisition are recorded at fair value, which
incorporates our estimate at the acquisition date of the credit losses over the
remaining life of the portfolio. As a result, the allowance for loan losses is
not carried over at acquisition. This may result in lower reserve coverage
ratios prospectively.
|
Financing
receivables at
|
|
Nonearning
receivables at
|
|
Allowance
for losses at
|
|
(In
millions)
|
June
30,
2009
|
|
December
31,
2008
|
|
June
30,
2009
|
|
December
31,
2008
|
|
June
30,
2009
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLL(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
$
|
96,352
|
|
$
|
104,462
|
|
$
|
3,023
|
|
$
|
1,944
|
|
$
|
1,116
|
|
$
|
824
|
|
Europe
|
|
40,549
|
|
|
36,972
|
|
|
1,065
|
|
|
345
|
|
|
448
|
|
|
288
|
|
Asia
|
|
14,057
|
|
|
16,683
|
|
|
533
|
|
|
306
|
|
|
199
|
|
|
163
|
|
Other
|
|
751
|
|
|
786
|
|
|
15
|
|
|
2
|
|
|
6
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgages
|
|
62,587
|
|
|
60,753
|
|
|
4,878
|
|
|
3,321
|
|
|
831
|
|
|
383
|
|
Non-U.S.
installment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
revolving credit
|
|
25,485
|
|
|
24,441
|
|
|
524
|
|
|
413
|
|
|
1,147
|
|
|
1,051
|
|
U.S.
installment and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revolving
credit
|
|
23,939
|
|
|
27,645
|
|
|
818
|
|
|
758
|
|
|
1,575
|
|
|
1,700
|
|
Non-U.S.
auto
|
|
14,853
|
|
|
18,168
|
|
|
84
|
|
|
83
|
|
|
269
|
|
|
222
|
|
Other
|
|
13,218
|
|
|
11,541
|
|
|
289
|
|
|
175
|
|
|
250
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate(b)
|
|
46,018
|
|
|
46,735
|
|
|
1,325
|
|
|
194
|
|
|
570
|
|
|
301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
8,471
|
|
|
8,355
|
|
|
241
|
|
|
241
|
|
|
91
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GECAS
|
|
14,992
|
|
|
15,326
|
|
|
204
|
|
|
146
|
|
|
61
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
3,324
|
|
|
4,031
|
|
|
70
|
|
|
38
|
|
|
27
|
|
|
28
|
|
Total
|
$
|
364,596
|
|
$
|
375,898
|
|
$
|
13,069
|
|
$
|
7,966
|
|
$
|
6,590
|
|
$
|
5,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
During
the first quarter of 2009, we transferred Artesia from CLL to Consumer.
Prior-period amounts were reclassified to conform to the current-period’s
presentation.
|
|
(b)
|
Financing
receivables included $660 million and $731 million of construction loans
at June 30, 2009 and December 31, 2008, respectively.
|
|
|
Nonearning
receivables as
a
percent of financing receivables
|
|
Allowance
for losses as a percent of nonearning
receivables
|
|
Allowance
for losses as a percent of total financing
receivables
|
|
|
June
30,
2009
|
|
December
31,
2008
|
|
June
30,
2009
|
|
December
31,
2008
|
|
June
30,
2009
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLL(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
3.1
|
%
|
|
1.9
|
%
|
|
36.9
|
%
|
|
42.4
|
%
|
|
1.2
|
%
|
|
0.8
|
%
|
Europe
|
|
2.6
|
|
|
0.9
|
|
|
42.1
|
|
|
83.5
|
|
|
1.1
|
|
|
0.8
|
|
Asia
|
|
3.8
|
|
|
1.8
|
|
|
37.3
|
|
|
53.3
|
|
|
1.4
|
|
|
1.0
|
|
Other
|
|
2.0
|
|
|
0.3
|
|
|
40.0
|
|
|
100.0
|
|
|
0.8
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgages
|
|
7.8
|
|
|
5.5
|
|
|
17.0
|
|
|
11.5
|
|
|
1.3
|
|
|
0.6
|
|
Non-U.S.
installment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
revolving credit
|
|
2.1
|
|
|
1.7
|
|
|
218.9
|
|
|
254.5
|
|
|
4.5
|
|
|
4.3
|
|
U.S.
installment and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
revolving
credit
|
|
3.4
|
|
|
2.7
|
|
|
192.5
|
|
|
224.3
|
|
|
6.6
|
|
|
6.1
|
|
Non-U.S.
auto
|
|
0.6
|
|
|
0.5
|
|
|
320.2
|
|
|
267.5
|
|
|
1.8
|
|
|
1.2
|
|
Other
|
|
2.2
|
|
|
1.5
|
|
|
86.5
|
|
|
129.1
|
|
|
1.9
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate
|
|
2.9
|
|
|
0.4
|
|
|
43.0
|
|
|
155.2
|
|
|
1.2
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
Financial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
2.8
|
|
|
2.9
|
|
|
37.8
|
|
|
24.1
|
|
|
1.1
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GECAS
|
|
1.4
|
|
|
1.0
|
|
|
29.9
|
|
|
41.1
|
|
|
0.4
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
2.1
|
|
|
0.9
|
|
|
38.6
|
|
|
73.7
|
|
|
0.8
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(b)
|
|
3.6
|
|
|
2.1
|
|
|
50.4
|
|
|
66.6
|
|
|
1.8
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
During
the first quarter of 2009, we transferred Artesia from CLL to Consumer.
Prior-period amounts were reclassified to conform to the current-period’s
presentation.
|
|
(b)
|
Excluding
the effects of the acquisitions of Interbanca S.p.A. and BAC, the ratio of
allowance for losses as a percent of total financing receivables would
have been 1.9% at June 30, 2009.
|
|
Further
information on the determination of the allowance for losses on financing
receivables is provided in the Critical Accounting Estimates section in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations and Note 1 to the consolidated financial statements in our Annual
Report on Form 10-K for the year ended December 31, 2008.
The
portfolio of financing receivables, before allowance for losses, was $364.6
billion at June 30, 2009, and $375.9 billion at December 31, 2008. Financing
receivables, before allowance for losses, decreased $11.3 billion from December
31, 2008, primarily as a result of core declines ($19.2 billion) and commercial
and equipment securitization and sales ($11.4 billion), partially offset by
acquisitions ($12.3 billion) and the weaker U.S. dollar ($8.5
billion).
Related
nonearning receivables totaled $13.1 billion (3.6% of outstanding receivables)
at June 30, 2009, compared with $8.0 billion (2.1% of outstanding receivables)
at December 31, 2008. Nonearning receivables increased from December 31, 2008,
primarily in connection with the challenging global economic environment,
increased deterioration in the real estate markets and rising
unemployment.
The
allowance for losses at June 30, 2009, totaled $6.6 billion compared with $5.3
billion at December 31, 2008, representing our best estimate of probable losses
inherent in the portfolio and reflecting the then current credit and economic
environment. Allowance for losses increased $1.3 billion from December 31, 2008,
primarily due to increasing delinquencies and nonearning receivables, reflecting
the continued weakened economic and credit environment.
“Impaired”
loans in the table below are defined as larger balance or restructured loans for
which it is probable that the lender will be unable to collect all amounts due
according to original contractual terms of the loan agreement. The vast majority
of our consumer and a portion of our CLL nonearning receivables are excluded
from this definition, as they represent smaller balance homogenous loans that we
evaluate collectively by portfolio for impairment.
Impaired
loans include nonearning receivables on larger balance or restructured loans,
loans which are currently paying interest under the cash basis (but are excluded
from the nonearning category), and loans paying currently but which have been
previously restructured.
Specific
reserves are recorded for individually impaired loans to the extent we judge
principal to be uncollectible. Certain loans classified as impaired may not
require a reserve. In these circumstances, we believe that we will ultimately
collect the unpaid balance (through collection or collateral
repossession).
Further
information pertaining to loans classified as impaired and specific reserves is
included in the table below.
|
At
|
(In
millions)
|
June
30,
2009
|
|
December
31,
2008
|
|
|
|
|
|
|
|
Loans
requiring allowance for losses
|
$
|
5,657
|
|
$
|
2,712
|
|
Loans
expected to be fully recoverable
|
|
2,425
|
|
|
871
|
|
Total
impaired loans
|
$
|
8,082
|
|
$
|
3,583
|
|
|
|
|
|
|
|
|
Allowance
for losses (specific reserves)
|
$
|
1,321
|
|
$
|
635
|
|
Average
investment during the period
|
|
5,836
|
|
|
2,064
|
|
Interest
income earned while impaired(a)
|
|
55
|
|
|
48
|
|
|
|
|
|
|
|
|
(a)
|
Recognized
principally on cash basis.
|
Impaired
loans increased by $4.5 billion from December 31, 2008 to June 30, 2009
primarily relating to increases at Real Estate ($2.5 billion) and CLL ($1.5
billion). Of the impaired loans at Real Estate, approximately $2.0 billion
are currently paying in accordance with the contractual terms of the loan.
Impaired loans at CLL primarily represent senior secured lending
positions.
CLL − Americas. Nonearning
receivables of $3.0 billion represented 23.1% of total nonearning receivables at
June 30, 2009. The ratio of allowance for losses as a percent of nonearning
receivables declined from 42.4% at December 31, 2008, to 36.9% at June 30, 2009,
primarily from an increase in secured exposures requiring relatively lower
specific reserve levels, based upon the strength of the underlying collateral
values. The ratio of nonearning receivables as a percent of financing
receivables increased from 1.9% at December 31, 2008, to 3.1% at June 30, 2009,
primarily from an increase in nonearning receivables in our senior secured
lending portfolio concentrated in the following industries: media,
communications, corporate aircraft, auto, transportation, retail/publishing,
inventory finance, and franchise finance.
CLL – Europe. Nonearning
receivables of $1.1 billion represented 8.1% of total nonearning receivables at
June 30, 2009. The ratio of allowance for losses as a percent of nonearning
receivables declined from 83.5% at December 31, 2008, to 42.1% at June 30, 2009,
primarily from the increase in nonearning receivables related to the acquisition
of Interbanca S.p.A. The ratio of nonearning receivables as a percent of
financing receivables increased from 0.9% at December 31, 2008, to 2.6% at June
30, 2009, primarily from the increase in nonearning receivables related to the
acquisition of Interbanca S.p.A. and an increase in nonearning receivables in
secured lending in the automotive industry, partially offset by the effect of
the increase in financing receivables from the acquisition of Interbanca
S.p.A. in the first quarter of 2009. Excluding the effects of the Interbanca
S.p.A. acquisition, the ratio of allowance for losses as a percent of financing
receivables would have been 1.3%.
CLL – Asia. Nonearning
receivables of $0.5 billion represented 4.1% of total nonearning receivables at
June 30, 2009. The ratio of allowance for losses as a percent of nonearning
receivables declined from 53.3% at December 31, 2008, to 37.3% at June 30, 2009,
primarily due to an increase in nonearning receivables in secured exposures
which did not require significant specific reserves based upon the strength of
the underlying collateral values. The ratio of nonearning receivables as a
percent of financing receivables increased from 1.8% at December 31, 2008, to
3.8% at June 30, 2009, primarily from an increase in nonearning
receivables at our corporate asset-based, distribution finance and
corporate air secured financing businesses in Japan, Australia, New Zealand and
India and a lower financing receivables balance.
Consumer − non-U.S. residential
mortgages. Nonearning receivables of $4.9 billion represented 37.3% of
total nonearning receivables at June 30, 2009. The ratio of allowance for losses
as a percent of nonearning receivables increased from 11.5% at December 31,
2008, to 17.0% at June 30, 2009. In the first six months of 2009, our nonearning
receivables increased primarily as a result of continued decline in the U.K.
housing market, partially offset by increased foreclosures. Our non-U.S.
mortgage portfolio has a loan-to-value of approximately 75% at origination and
the vast majority are first lien positions. In addition, we carry mortgage
insurance on most of our first mortgage loans originated at a loan-to-value
above 80%. At June 30, 2009, we had in repossession stock approximately 2,100
houses in the U.K. which had a value of $0.3 billion.
Consumer − non-U.S. installment and
revolving credit. Nonearning receivables of $0.5 billion represented 4.0%
of total nonearning receivables at June 30, 2009. The ratio of allowance for
losses as a percent of nonearning receivables declined from 254.5% at December
31, 2008, to 218.9% at June 30, 2009, reflecting the effects of loan repayments
and reduced originations. Allowance for losses as a percent of financing
receivables increased from 4.3% at December 31, 2008, to 4.5% at June
30, 2009, as increases in allowance for losses, driven by the effects of
increased delinquencies in Western Europe and Australia, were partially offset
by the effects of the BAC acquisition. Excluding the effects of the BAC
acquisition, the ratio of allowance for losses as a percent of financing
receivables would have been 4.8%.
Consumer − U.S. installment and revolving
credit. Nonearning receivables of $0.8 billion represented 6.3% of total
nonearning receivables at June 30, 2009. The ratio of allowance for losses as a
percent of nonearning receivables declined from 224.3% at December 31, 2008, to
192.5% at June 30, 2009, as increases in the allowance due to the effects of the
continued deterioration in our U.S. portfolio in connection with rising
unemployment were more than offset by the effects of better entry rates and
improved late stage collection effectiveness.
Real Estate. Nonearning
receivables of $1.3 billion represented 10.1% of total nonearning receivables at
June 30, 2009. The $1.1 billion increase in nonearning receivables
since December 31, 2008 was driven primarily by delinquency deterioration in the
U.S. apartment loan portfolio, which has been adversely affected by rent and
occupancy declines. The ratio of allowance for losses as a percent of total
financing receivables increased from 0.6% at December 31, 2008, to 1.2% at June
30, 2009, driven primarily by continued economic deterioration in the U.S. and
the U.K. markets which resulted in an increase in specific provisions. The ratio
of allowance for losses as a percent of nonearning receivables declined from
155.2% at December 31, 2008, to 43.0% at June 30, 2009, reflecting a higher
proportion of the allowance being attributable to specific reserves and our
estimate of underlying collateral values. At June 30, 2009, real estate held for
investment included $0.5 billion representing 44 foreclosed commercial real
estate properties.
Delinquency
rates on managed equipment financing loans and leases and managed consumer
financing receivables follow.
|
Delinquency
rates at
|
|
June
30,
2009(a)
|
|
December
31,
2008
|
|
June
30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
Financing
|
|
2.78
|
%
|
|
2.17
|
%
|
|
1.48
|
%
|
Consumer
|
|
8.73
|
|
|
7.43
|
|
|
5.91
|
|
U.S.
|
|
6.99
|
|
|
7.14
|
|
|
5.55
|
|
Non-U.S.
|
|
9.45
|
|
|
7.57
|
|
|
6.05
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency
rates on equipment financing loans and leases increased from December 31, 2008
and June 30, 2008, to June 30, 2009, as a result of the continuing weakness in
the global economic and credit environment. In addition, delinquency rates on
equipment financing loans and leases increased 10 basis points from June 30,
2008 to June 30, 2009, as a result of the inclusion of the CitiCapital and Sanyo
acquisitions. The challenging credit environment may continue to lead to a
higher level of commercial delinquencies and provisions for financing
receivables and could adversely affect results of operations at
CLL.
Delinquency
rates on consumer financing receivables increased from December 31, 2008 and
June 30, 2008, to June 30, 2009, primarily because of rising unemployment, a
challenging economic environment and lower volume. In response, we continued to
tighten underwriting standards globally, increased focus on collection
effectiveness and will continue the process of regularly reviewing and adjusting
reserve levels. We expect the global environment, along with U.S. unemployment
levels, to continue to deteriorate in 2009, which may result in higher
provisions for loan losses and could adversely affect results of operations at
Consumer. At June 30, 2009, roughly 44% of our U.S.-managed portfolio, which
consisted of credit cards, installment and revolving loans, was receivable from
subprime borrowers. We had no U.S. subprime residential mortgage loans at June
30, 2009. See Note 4 to the condensed, consolidated financial
statements.
Other assets comprise mainly
real estate equity investments, equity and cost method investments, derivative
instruments and assets held for sale. Other assets totaled $84.8 billion at June
30, 2009, including a $6.1 billion equity method investment in PTL following our
partial sale during the first quarter of 2009, compared with $84.2 billion at
December 31, 2008. During the first six months of 2009, we recognized other-than-temporary
impairments of cost and equity method investments of $0.2 billion. Of the amount
at June 30, 2009, we had cost method investments totaling $2.4 billion. The fair
value of and unrealized loss on cost method investments in a continuous
unrealized loss position for less than 12 months at June 30, 2009, were $0.9
billion and $0.2 billion, respectively. The fair value of and unrealized loss on
cost method investments in a continuous unrealized loss position for 12 months
or more at June 30, 2009, were insignificant.
Included
in other assets are Real Estate equity investments of $32.8 billion at both June
30, 2009 and December 31, 2008. Our portfolio is diversified, both
geographically and by asset type. However, the global real estate
market is subject to periodic cycles that can cause significant fluctuations in
market value. Over the past several months, these markets have been
increasingly affected by rising unemployment, a slowdown in general business
activity and continued challenging conditions in the credit markets. We expect
these markets will continue to be affected while the economic environment
remains challenging.
We
annually review the estimated values of our real estate investments, and at
December 31, 2008, the carrying value of our Real Estate investments exceeded
the estimated value by about $4 billion. For additional information, see page 38
of Management’s Discussion and Analysis of Financial Conditions and Results of
Operations in our 2008 Form 10-K. During the second quarter, we
updated our review and determined that the carrying value of our Real Estate
investments exceeded estimated value by about $5 billion at June 30, 2009 due to
a decline in the Eurozone macroeconomic forecast. Declines in estimated value of
real estate below carrying value result in impairment losses when the aggregate
undiscounted cash flow estimates used in the estimated value measurement are
below carrying amount. As such, estimated losses in the portfolio will not
necessarily result in recognized impairment losses. When we recognize an
impairment, the impairment is measured based upon the fair value of the
underlying asset which is based upon current market data, including current
capitalization rates. During the first six months of 2009, Real Estate
recognized pre-tax impairments of $0.2 billion on its real estate investments,
compared with an insignificant amount for the comparable period in 2008.
Continued deterioration in economic and market conditions may result in further
impairments being recognized.
D.
Liquidity and Borrowings
We manage
our liquidity to help ensure access to sufficient funding at acceptable costs to
meet our business needs and financial obligations throughout business cycles.
Our obligations include principal payments on outstanding borrowings, interest
on borrowings, purchase obligations for equipment and general obligations such
as collateral deposits held, payroll and general expenses. We rely on cash
generated through our operating activities as well as unsecured and secured
funding sources, including commercial paper, term debt, bank deposits, bank
borrowings, securitization and other retail funding products.
Sources
for payment of our obligations are determined through our annual financial and
strategic planning processes. GECS 2009 funding plan anticipates repayment of
principal on outstanding short-term borrowings ($194 billion at December 31,
2008) through commercial paper issuances; deposit funding and alternative
sources of funding; long-term debt issuances; collections of financing
receivables exceeding originations; and cash on hand.
Interest
on borrowings is funded through interest earned on existing financing
receivables. During the first six months of 2009, GECS earned interest income on
financing receivables of $11.9 billion, which more than offset interest expense
of $9.6 billion. Purchase obligations and other general obligations are funded
through collection of principal on our existing portfolio of loans and leases,
cash on hand and operating cash flow.
Over the
last year, the global credit markets have recently experienced significant
volatility, which has affected both the availability and cost of our funding
sources. Throughout this period of volatility, we have been able to continue to
meet our funding needs at acceptable costs and we continue to access the
commercial paper markets without interruption.
Recent
Liquidity Actions
GE, our
ultimate parent, GECS and GECC maintain a strong focus on their liquidity.
Recent actions to strengthen and maintain liquidity included:
·
|
GECS
cash and cash equivalents were $50 billion at June 30, 2009, and committed
credit lines were $55.4 billion. GECS intends to maintain committed credit
lines and cash in excess of GECS commercial paper borrowings going
forward;
|
·
|
We
achieved our targeted 2009 reduction of commercial paper borrowings ahead
of plan by reducing GECS commercial paper borrowings to $50 billion at
June 30, 2009;
|
·
|
GECS
completed its funding related to its long-term debt funding target of $45
billion for 2009 and have issued $20 billion of its targeted long-term
debt funding for 2010;
|
·
|
During
the first six months of 2009, GECS issued an aggregate of $9.2 billion of
long-term debt that is not guaranteed under the Federal Deposit Insurance
Corporation’s (FDIC) Temporary Liquidity Guarantee Program (TLGP).
Subsequent to June 30, 2009, we issued an additional $3 billion of debt
that is not guaranteed under the
TLGP;
|
·
|
GECS
is managing collections versus originations to help support liquidity
needs. In the first half of 2009, collections have exceeded originations
by approximately $25 billion;
|
·
|
In
May 2009, we issued Series 2009-1, Class A Notes, in the amount of $1.0
billion utilizing our GE Capital Credit Card Master Note Trust
securitization platform. The Class A Notes were eligible collateral under
the Federal Reserve Bank of New York’s Term Asset-Backed Securities Loan
Facility (“TALF”). Depending on market conditions and terms, we may
securitize additional credit card assets, floorplan receivables, equipment
receivables and commercial mortgage loans, in transactions for which
investors can access TALF;
|
·
|
In
February 2009, GE announced the reduction of its quarterly stock dividend
by 68% from $0.31 per share to $0.10 per share, effective in the third
quarter of 2009, which will save the company approximately $4 billion
during the remainder of 2009 and approximately $9 billion annually
thereafter;
|
·
|
In
September 2008, GECS reduced its dividend to GE and GE suspended its stock
repurchase program. Effective January 2009, GECS fully suspended its
dividend to GE;
|
·
|
In
October 2008, GE raised $15 billion in cash through common and preferred
stock offerings and contributed $15 billion to GECS, including $9.5
billion in the first quarter of 2009 (of which $8.8 billion was further
contributed to GE Capital through capital contribution and share
issuance), in order to improve tangible capital and reduce leverage. We do
not anticipate additional contributions in 2009;
and
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·
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GECS
registered in October 2008 to use the Federal Reserve’s Commercial Paper
Funding Facility (CPFF) for up to $83 billion, which is available through
February 1, 2010.
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Cash
and Equivalents
GE’s cash
and equivalents were $52.3 billion at June 30, 2009. GE anticipates that it will
continue to generate cash from operating activities in the future, which is
available to help meet our liquidity needs. We also generate substantial cash
from the principal collections of loans and rentals from leased assets, which
historically has been invested in asset growth.
We have
committed, unused credit lines totaling $55.4 billion that had been extended to
us by 59 financial institutions at June 30, 2009. These lines include $36.6
billion of revolving credit agreements under which we can borrow funds for
periods exceeding one year. Additionally, $17.1 billion are 364-day lines that
contain a term-out feature that allows us to extend borrowings for one year from
the date of expiration of the lending agreement.
Funding
Plan
Our 2009
funding plan anticipates approximately $45 billion of senior, unsecured
long-term debt issuance, $13.4 billion of which was pre-funded in December 2008.
In the first six months of 2009, we completed issuances of $34.6 billion of
long-term debt under the TLGP and $9.2 billion in non-guaranteed senior,
unsecured debt with maturities up to 30 years. We have completed our anticipated
2009 long-term debt funding plan and have pre-funded $20 billion of our 2010
long-term debt funding target of $35 to $40 billion.
Under the
TLGP, the FDIC guarantees certain senior, unsecured debt issued before October
31, 2009 (with maturities of greater than 30 days that mature on or prior to
December 31, 2012). GE Capital pays annualized fees associated with this program
that range from 60 to 160 basis points of the principal amount of each issuance
and vary according to the issuance date and maturity.
At the
request of GE Capital, on July 21, 2009, the FDIC approved an application filed
by GE Capital which positions it to exit the TLGP. As a result, GE Capital will
no longer issue FDIC-guaranteed commercial paper with maturities of 31 to 270
days and will be able to issue non-guaranteed long-term debt with maturities of
18 months to three years. The FDIC and GE Capital have also agreed to reduce GE
Capital’s aggregate limit under the program, resulting in approximately $14
billion of remaining long-term debt capacity under the TLGP at July 21,
2009.
During
the fourth quarter of 2008, GECS issued commercial paper into the CPFF. The last
tranche of this commercial paper matured in February 2009. Although we do not
anticipate further utilization of the CPFF, it remains available until February
1, 2010.
GECS has
incurred $1.9 billion of fees for participation in the TLGP and CPFF programs
through June 30, 2009. These fees are amortized over the terms of the related
borrowings.
We
maintain securitization capability in most of the asset classes we have
traditionally securitized. However, in 2008 and 2009 these capabilities have
been, and continue to be, more limited than in 2007. We have continued to
execute new securitizations using bank commercial paper conduits. Securitization
proceeds were $13.3 billion and $24.5 billion during the three months and six
months ended June 30, 2009, respectively. Comparable amounts for 2008 were $17.2
billion and $33.1 billion, for the three months and six months, respectively. On
May 12, 2009, we issued Series 2009-1, Class A Notes, in the amount of $1.0
billion utilizing our GE Capital Credit Card Master Note Trust securitization
platform. The Class A Notes were eligible collateral under TALF. Depending on
market conditions and terms, we may securitize additional credit card assets,
floorplan and equipment receivables, and commercial mortgage loans, in
transactions for which investors can access TALF.
We have
deposit-taking capability at 18 banks outside of the U.S. and two banks in the
U.S. – GE Money Bank, Inc., a Federal Savings Bank (FSB), and GE Capital
Financial Inc., an industrial bank (IB). The FSB and IB currently issue
certificates of deposit (CDs) distributed by brokers in maturity terms from
three months to ten years. Bank deposits, which are a large component of our
alternative funding, were $36.5 billion at June 30, 2009, including CDs of $17.3
billion. Total alternative funding decreased from $54.9 billion to $48.1 billion
during the first six months of 2009, primarily resulting from a reduction in
bank borrowings and CD balances due to the timing of asset origination at the
banks. This decline was more than offset by collections on financing receivables
exceeding originations by approximately $25 billion in the first half of
2009.
The
effect on our liquidity when the TLGP expires will depend on a number of
factors, including our funding needs and market conditions at that time. If the
recent disruption in the credit markets were to return or if the challenging
market conditions continue, our ability to issue unsecured long-term debt may be
affected. In the event we cannot sufficiently access our normal sources of
funding as a result of the ongoing credit market turmoil, we have a number of
alternative means to enhance liquidity, including:
·
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Controlling
new originations in GE Capital to reduce capital and funding
requirements;
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Using
part of our available cash balance;
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Pursuing
alternative funding sources, including deposits and asset-backed
fundings;
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Using
our bank credit lines which, with our cash, we plan to maintain in excess
of our outstanding commercial paper;
and
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Obtaining
additional capital from GE, including from funds retained as a result of
the reduction in GE’s dividend announced in February 2009 or future
dividend reductions.
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We
believe that our existing funds combined with our alternative means to enhance
liquidity provide us with adequate liquidity to manage through the current
credit cycle.
Credit
Ratings
The major
debt rating agencies routinely evaluate GE’s and our debt. This evaluation is
based on a number of factors, which include financial strength as well as
transparency with rating agencies and timeliness of financial reporting. On
March 12, 2009, Standard & Poor’s (S&P) downgraded GE and GE Capital’s
long-term rating by one notch from “AAA” to “AA+” and, at the same time, revised
the outlook from negative to stable. Under S&P’s definitions, an obligation
rated “AAA” has the highest rating assigned by S&P. The obligor's capacity
to meet its financial commitment on the obligation is extremely strong. An
obligation rated “AA” differs from an obligation rated “AAA” only to a small
degree in that the obligor's capacity to meet its financial commitment on the
obligation is very strong. An S&P rating outlook assesses the potential
direction of a long-term credit rating over the intermediate term. In
determining a rating outlook, consideration is given to any changes in the
economic and/or fundamental business conditions. Stable means that a rating is
not likely to change in the next six months to two years.
On March
23, 2009, Moody’s Investors Service (Moody’s) downgraded GE and GE Capital’s
long-term rating by two notches from “Aaa” to “Aa2” with a stable outlook and
removed GE and GE Capital from review for possible downgrade. Under Moody’s
definitions, obligations rated “Aaa” are judged to be of the highest quality,
with minimal credit risk. Obligations rated “Aa” are judged to be of high
quality and are subject to very low credit risk.
The
short-term ratings of “A-1+/P-1” were affirmed by both rating agencies at the
same time with respect to GE, GE Capital Services and GE Capital.
We do not
believe that the downgrades by S&P and Moody’s have had, or will have, a
material impact on our cost of funding or liquidity as the downgrades had been
widely anticipated in the market and were already reflected in the spreads on
our debt.
Ratio
of Earnings to Fixed Charges
As set
forth in Exhibit 99(b) hereto, GE Capital’s ratio of earnings to fixed charges
declined to 0.94:1 in the first six months of 2009 due to lower pre-tax earnings
at GE Capital which were primarily driven by higher provisions for losses on
financing receivables in connection with the challenging economic
environment.
Income
Maintenance Agreement
On March
28, 1991, GE entered into an agreement with GE Capital to make payments to GE
Capital, constituting additions to pre-tax income under the agreement, to the
extent necessary to cause the ratio of earnings to fixed charges of GE Capital
and consolidated affiliates (determined on a consolidated basis) to be not less
than 1.10 for the period, as a single aggregation, of each GE Capital fiscal
year commencing with fiscal year 1991. The agreement, which is filed as Exhibit
99(a) to GE’s annual report on Form 10-K, can only be terminated by either party
upon written notice, in which case termination is not effective until the third
anniversary of the date of such notice. GE made a $9.5 billion capital
contribution to GECS in the first quarter of 2009 (of which $8.8 billion was
further contributed to GE Capital through capital contribution and share
issuance) to improve tangible capital and reduce leverage. This payment
constitutes an addition to pre-tax income under the agreement and therefore will
increase the ratio of earnings to fixed charges of GE Capital for the fiscal
year 2009 for purposes of the agreement. The payment will not affect the ratio
of earnings to fixed charges as determined in accordance with current SEC rules
and disclosed in the preceding paragraph because it does not constitute an
addition to pre-tax income under current U.S. GAAP. We do not anticipate
additional capital contributions in 2009.
Variable
Interest Entities and Off-Balance Sheet Arrangements
In the
first quarter of 2009, we further reduced our investment in PTL by selling a 1%
limited partnership interest in PTL, a previously consolidated variable interest
entity, to Penske Truck Leasing Corporation, the general partner of PTL, whose
majority shareowner is a member of GE’s Board of Directors.
The
disposition of the shares, coupled with our resulting minority position on the
PTL advisory committee and related changes in our contractual rights, resulted
in the deconsolidation of PTL. We recognized a pre-tax gain on the sale of $296
million, including a gain on the remeasurement of our retained investment of
$189 million. The measurement of the fair value of our retained investment in
PTL was based on a methodology that incorporated both discounted cash flow
information and market data. In applying this methodology, we utilized different
sources of information, including actual operating results, future business
plans, economic projections and market observable pricing multiples of similar
businesses. The resulting fair value reflected our position as a noncontrolling
shareowner at the conclusion of the transaction. As of June 30, 2009, our
remaining equity investment in PTL was 49.9% and is accounted for under the
equity method.
E.
New Accounting Standards
On June
12, 2009, the FASB issued amendments to existing standards on accounting for
securitizations and consolidation of variable interest entities (VIEs), which
will be effective for us on January 1, 2010. The amendment to securitization
accounting will eliminate the qualifying special purpose entity (QSPE) concept,
and a corresponding amendment to the consolidation standard will require that
all such entities be evaluated for consolidation as VIEs, which will likely
result in our consolidating substantially all of our former QSPEs. Upon
adoption, we will record assets and liabilities of these entities at carrying
amounts consistent with what they would have been if they had always been
consolidated, which will require the reversal of a portion of previously
recognized securitization gains as a cumulative effect adjustment to retained
earnings. Alternatively, we may elect to record all qualifying financial assets
and liabilities of a VIE at fair value both on the date of adoption, as an
adjustment to retained earnings, and subsequently, through net earnings. Under
the revised guidance and assuming consolidation at carrying amount at June 30,
2009, we would have recognized GECS financing receivables, net of allowance for
losses, of approximately $22 billion and a reduction in equity of approximately
$2 billion.
The
amended guidance on securitizations also modifies existing derecognition
criteria in a manner that will significantly narrow the types of transactions
that will qualify as sales. The revised criteria will apply prospectively to
transfers of financial assets occurring after December 31, 2009.
The
amended consolidation guidance for VIEs will also replace the existing
quantitative approach for identifying who should consolidate a VIE, which was
based on who is exposed to a majority of the risks and rewards, with a
qualitative approach, based on who has the power to direct the economically
significant activities of the entity. Under the revised guidance, more entities
may meet the definition of a VIE, and the determination about who should
consolidate a VIE is required to be evaluated continuously. Upon adoption,
assets and liabilities of consolidated VIEs will be recorded in the manner
described above for QSPEs. If it is not practicable to determine such carrying
amounts, assets and liabilities will be measured at their fair values on the
date of adoption. We are evaluating all entities that fall within the scope of
the amended guidance to determine whether we may be required to consolidate or
deconsolidate additional entities on January 1, 2010.
Item
3. Quantitative and Qualitative Disclosures About Market Risk.
There
have been no significant changes to our market risk since December 31, 2008. For
a discussion of our exposure to market risk, refer to Part II, Item 7A.
“Quantitative and Qualitative Disclosures about Market Risk,” contained in our
Annual Report on Form 10-K for the year ended December 31, 2008.
Item
4. Controls and Procedures.
Under the
direction of our Chief Executive Officer and Chief Financial Officer, we
evaluated our disclosure controls and procedures and internal control over
financial reporting and concluded that (i) our disclosure controls and
procedures were effective as of June 30, 2009, and (ii) no change in internal
control over financial reporting occurred during the quarter ended June 30,
2009, that has materially affected, or is reasonably likely to materially
affect, such internal control over financial reporting.
Part
II. Other Information
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Exhibit
12
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Computation
of Ratio of Earnings to Fixed Charges.*
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Exhibit
31(a)
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Certification
Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange
Act of 1934, as Amended.*
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Exhibit
31(b)
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Certification
Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange
Act of 1934, as Amended.*
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Exhibit
32
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Certification
Pursuant to 18 U.S.C. Section 1350.*
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Exhibit
99
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Financial
Measures That Supplement Generally Accepted Accounting
Principles.*
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*
Filed electronically herewith.
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Signatures
General
Electric Capital Corporation
(Registrant)
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August
3, 2009
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/s/Michael
A. Neal
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Date
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Michael
A. Neal
Chief
Executive Officer
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