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End of the Line for WMC

GE done with subprime unit

September 20, 2007


General Electric Company is finished with its subprime subsidiary WMC Mortgage Corp. Originations were halted, most of the loan portfolio has been sold off and the unit will be reported as a discontinued operation this quarter.

"We're on track to close or sell the business by the end of the year," Vice Chairman and CFO Keith Sherin told investors at the GE Security Analyst Meeting, Sept. 18, which was sponsored by Thomson Financial.

As a result of its decision to close or sell WMC, GE will be taking an additional charge of $300 million to $400 million during the third quarter "as we sell those assets down," Sherin said.

"WMC has just been a real drag for us," he admitted. "We've made a decision to get out. We're taking the hit, and we're exiting this and removing it from investors' minds as we go forward."

WMC's loan portfolio, which was $4.8 billion at the end of 2006, was reduced to $4.5 billion during the first quarter of 2007 and to $1.1 billion by the end of the second quarter, he said. And it is expected to be down to $200 million to $400 million by the end of the third quarter.

But finding buyers for those loans is becoming more difficult, he confessed

"The buyers who bought our $3 billion of sales remaining in the second quarter did not want to participate in the auction to buy the next $1 billion," he pointed out, noting that WMC has not been doing any new originations.

"This will be reported in discontinued operations in the third quarter," he said.

The sale or closing of WMC, according to Sherin, creates "an opportunity to take a lot of risk off the table," with the approximately $1.5 billion of after-tax gains from the $11.6 billion sale of its plastics division being used to fund this "business exit."

Despite these negatives on the subprime residential side of the mortgage business, Sherin said that on GE Capital's commercial finance side, "We haven't really seen any change in delinquencies or issues in the portfolio. The credit quality of our assets in the commercial side is in terrific shape."

However, he expressed some concern about "a lot of the bridge loans we've put in place," because "an awful lot of deals that have been announced are going to have challenges in how they get funded." He noted that a lot of deals have been delayed or canceled.

But on the consumer side, Sherin said he expects to see delinquencies continue to rise, prompting a "higher posting of reserves as we go forward."

Yet he said he sees "good news" in that we're seeing more conservative structures and a repricing of risk.

"You're seeing senior secured loans traded at 95 cents on the dollar, and that creates investment opportunities for us," he commented.

Last April, GE announced that it was laying off more than half of WMC's staff of nearly 1,500 and two months later it announced that it intended to sell the unit.

Jerry DeMuth is an award winning journalist who has been reporting for four decades.

e-mail Jerry at [email protected]
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