Bloomberg, in “GE Plans to Seek Buyer for Subprime Mortgage Unit,” tells us that for GE, cutting its subprime lending business WMC’s staff by more than 50% wasn’t enough. The parent told staff via e-mail that the business is to be sold. It reportedly contributed $100 million of GE’s total $20 billion profits in 2006, but required a $330 million addition to reserves in the first quarter and is expected to report second-quarter losses of $150 million. However, the 2007 charges were offset by a $500 million gain on sale of asset to a joint venture with Hitachi.
It appears, lacking any other stuffees, the continued cash drain is unacceptable. But it begs the question of who, besides the employees, would be willing to buy it. GE acquired the business a mere three years ago from private equity firm Apollo.
GE is generally regarded as a canny operator and had built a formidable financial services business. But it is prone to end-of-cycle excesses. In the late 1980s, it was heavily exposed to failed LBO loans. But the lack of long-term career paths in Corproate America means there is a lack of institutional memory.
From Bloomberg:
General Electric Co. plans to sell its three-year-old U.S. subprime mortgage unit, the company said in an e-mail to employees.
“The mortgage industry has greatly changed since the purchase of WMC,” Laurent Bossard, chief executive officer of the division, said in the memo to employees today. “The current subprime market environment has made a significant negative impact on the business.”
GE’s decision to divest WMC comes as more than 60 mortgage companies have halted operations, gone bankrupt or sought buyers since the start of 2006, according to Bloomberg data. The contraction in the subprime industry caused the near-collapse last month of two hedge funds run by Bear Stearns Cos. and the downgrading of almost $12 billion of mortgage securities by ratings companies.
Burbank, California-based WMC this year slashed its workforce by more than half and added $330 million to reserves in the first quarter, GE said in April on a conference call with investors. General Electric may report a $150 million loss at WMC when it releases second-quarter results tomorrow, Jeffrey Sprague, an analyst at Citigroup Inc., said in a July 10 note to clients.
Shares of Fairfield, Connecticut-based GE, which trails only Exxon Mobil Corp. in market value, rose 80 cents, or 2.1 percent, to $39 at 4:05 p.m. in New York Stock Exchange composite trading.
Morgan Stanley
GE Money, the consumer-finance segment of which WMC is a part, sold $3 billion in mortgages in the second quarter and has about $1.5 billion remaining, GE said earlier this month.
GE’s financial adviser Morgan Stanley will explore a sale of the unit in the “next couple of months,” the memo said. The decision to divest came as part of regular company reviews in which GE looks at all its operations “to divest select businesses not within its long-term growth plans,” the memo said. The reviews are usually conducted in May.
The rising defaults are roiling financial markets. WMC and a unit of Washington Mutual Inc. were among four subprime lenders whose loans were behind many of the Moody’s Investors Service ratings downgrades on mortgage securities this week, the firm said today.
Washington Mutual’s Long Beach Mortgage, WMC Mortgage, New Century Financial Corp. and Fremont General Corp. made loans that backed about 60 percent of the $5 billion of bonds that were downgraded, Nicolas Weill, Moody’s chief credit officer for asset finance, said on a conference call.
Standard & Poor’s also downgraded $6.39 billion of mortgage bonds backed by subprime loans.
Immelt Will Announce
General Electric spokesman Russell Wilkerson declined to comment, adding the company will discuss its businesses including the subprime unit when it reports second-quarter results. Chief Executive Officer Jeffrey Immelt plans to announce the decision to sell WMC during his conference call with investors tomorrow, the memo said.
“GE’s been in and out of the mortgage business before,” said Angelo Mozilo, chief executive officer of Countrywide Financial Corp. His Calabasas, California-based company, the country’s largest home lender, has said it expects to benefit as weaker rivals or competitors less dedicated to mortgages disappear during a difficult period for the cyclical business.
The biggest independent U.S. subprime lender, New Century Financial of Irvine, California, sought bankruptcy protection in April and is being liquidated.
WMC’s Loss
All of the companies gave loans to people with poor credit histories or heavy debt loads who then failed to make payments. As the housing market cooled in 2006, lenders became more lax, attracting additional borrowers with weaker credit.
WMC’s loss, spurred by defaults, will be offset by an estimated $500 million pretax gain from the sale of assets to a GE joint venture with Japan’s Hitachi Ltd., Citigroup’s Sprague said in his note. WMC provided about $100 million of the parent company’s $20.8 billion in total profit last year.
GE bought WMC from private-equity firm Apollo Management LP in 2004 for an undisclosed amount. General Electric had exited the U.S. mortgage business in 2000 by selling its home-loan unit to San Francisco-based Wells Fargo & Co.
GE is required to record the loans on its balance sheet at market prices, said Mark Begor, who runs the GE Money unit in the Americas, on a conference call with analysts in April. Begor said in April GE had adequate reserves of about $700 million at WMC to cover the mortgages.
