Subprime woes take toll on GE results

Subprime woes take toll on GE results
By Francesco Guerrera in New York
Copyright The Financial Times Limited 2007
Published: April 13 2007 13:26 | Last updated: April 13 2007 18:21


The US subprime mortgage crisis hit General Electric on Friday, wiping $373m from the industrial conglomerate’s first quarter profits and prompting its executives to warn of an incipient “bubble” in global credit markets.

GE said it had replaced the senior management team at its mortgage unit, and would reduce its workforce by around 1,000 people, or 40 per cent.

GE will also cut by half the loans it makes to less than $15bn this year - a sign of its belief that the subprime market has yet to hit the bottom.

Asked whether GE would invest more in the subprime market, Keith Sherin, GE’s chief financial officer, told the Financial Times the company had to first restructure its mortgage unit and evaluate market conditons.

“We have got to get our house in order,” he said.

Mr Sherin said the problems in the subprime sector, which targets borrowers with weak credit histories, were being replicated in the market for “Alt-A” loans for borrowers with slightly better credit scores.

Mr Sherin sounded a broader warning on the health of the global credit markets.

He said he was concerned at the rise in the level of high-yield debt, which has fuelled the boom in leveraged buyouts by private equity groups, and the growing use of “no covenant” deals, which strip lenders of the right to force borrowers to repay the debt.

“The levels of debt assumed in LBO activities and the lack of covenants . . . to me those are sign of a bubble,” he said.

GE is in talks with a number of buyout groups over the $8bn-$10bn sale of its troubled plastics business, which it expects to clinch by June.

GE, whose WMC mortgage division is the fifth-largest US subprime lender, is the latest blue-chip company to be wrong-footed by the abrupt downturn in the industry, which has been hit by a sharp rise in defaults and delinquencies.

GE saw a reduction of $373m in the profits of its GE Money division in the first quarter of 2007 and took a $500m markdown to reflect the lower value of its assets.

Mark Begor, chief executive of GE Money, Americas, told Wall Street analysts the subprime woes would have smaller impact, about $50m, on second quarter results.

Despite problems in the subprime unit and the plastics business, GE reported net earnings from continuing operations of $4.5bn in the three months to March.

The 8 per cent increase over a year ago was in line with analysts’ forecasts.

Profits were driven by a strong performance in the infrastructure unit, which has been powered by strong orders in the Middle East and Asia. Revenues were up 6 per cent to $40.2bn.

Net earnings, including discontinued operations, were up 2 per cent at $4.5bn.