4/12/2008: GE's Q108 and mark-to-market accounting

Excerpts from transcript of GE’s Q108 earnings conference call:

Keith Sherin – GE’s CFO: “So here is a summary of the financial businesses in the first quarter. Our miss was in commercial finance. As Jeff said, we had $270 million of negative marks and impairments versus our plan and they basically were in three categories. They were in public equities, they are in retained interest valuations from things that we have securitized where we still own the equity tranche and they are in warehouse marks. … The index, loan index for the comparable products was about $0.95 on the dollar as we started the year and that went down as low as $0.85 on the dollar through the quarter and towards the end of the quarter was between $0.85 and $0.88 or so. So that was about $55 million. … The last two weeks of March were a different world, particularly in financial services. And like I said, I don't want to -- I don't want this to be a company that is about excuses, but I think the $500 million plus in commercial finance that we missed in the quarter fundamentally took place with really the inability to do transactions in the last two weeks that we normally could get done and marks that basically we do at the end of the quarter that basically all went negative. And that is the vast majority of what we saw and what we experienced.”
…
Keith Sherin – GE’s CFO: “And then retained interest, we have about $1.5 billion of retained interest in the commercial finance book related to the securitizations we have done. Again, that is a mark -- that is not a credit mark, that is a mark based on the fact that the yields investors expect for securities like this have risen and so the present value of the discounted cash flow really came down and that is about $55 million in the quarter. I mean the spreads widened from the end of the year from 400 basis points to 1000 basis points depending upon those securitizations and what we had to discount the cash flows by. I think the dramatic mark to market there is totally based on the market conditions and basically, as long as we hold those securities to maturity, we are going to earn that back.”

Sabaziotatos says:

In other words, a material portion of the losses GE reported were due to the fact that the “loan index” (not further specified) against which GE marks loans to market plunged at the end of March, requiring GE to take significant marks on its commercial loans. On the other hand, the losses were unrealized (“that is not a credit mark … as long as we hold those securities to maturity, we are going to earn that back”).

As George Feiger commented:

“[GE i]s a huge lender and they fund these loans through commercial paper,” says George Feiger, CEO of Contango Capital Advisors, the wealth management arm of Zions Bancorporation. “Why should it be better off than Merrill Lynch or Citigroup or anybody? Essentially, it’s a collateralized lender on a huge scale. Nobody should be surprised GE is having the same mark-to-market problems that every other CLO is having.”