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Variable Interest Entities
 6 Months Ended
Jun. 30, 2012
Variable Interest Entities [Abstract]  
Variable Interest Entities

13. VARIABLE INTEREST ENTITIES

We securitize financial assets and arrange other forms of asset-backed financing in the ordinary course of business. The securitization transactions we engage in are similar to those used by many financial institutions. These securitization transactions serve as alternative funding sources for a variety of diversified lending and securities transactions. Historically, we have used both GECC-supported and third-party VIEs to execute off-balance sheet securitization transactions funded in the commercial paper and term markets. The largest group of VIEs that we are involved with are former Qualified Special Purpose Entities (QSPEs), which under guidance in effect through December 31, 2009 were excluded from the scope of consolidation standards based on their characteristics. Except as noted below, investors in these entities only have recourse to the assets owned by the entity and not to our general credit. We do not have implicit support arrangements with any VIE. We did not provide non-contractual support for previously transferred financing receivables to any VIE in 2012 or 2011.

 

In evaluating whether we have the power to direct the activities of a VIE that most significantly impact its economic performance, we consider the purpose for which the VIE was created, the importance of each of the activities in which it is engaged and our decision-making role, if any, in those activities that significantly determine the entity's economic performance as compared to other economic interest holders. This evaluation requires consideration of all facts and circumstances relevant to decision-making that affects the entity's future performance and the exercise of professional judgment in deciding which decision-making rights are most important.

 

In determining whether we have the right to receive benefits or the obligation to absorb losses that could potentially be significant to the VIE, we evaluate all of our economic interests in the entity, regardless of form (debt, equity, management and servicing fees, and other contractual arrangements). This evaluation considers all relevant factors of the entity's design, including: the entity's capital structure, contractual rights to earnings (losses), subordination of our interests relative to those of other investors, contingent payments, as well as other contractual arrangements that have potential to be economically significant. The evaluation of each of these factors in reaching a conclusion about the potential significance of our economic interests is a matter that requires the exercise of professional judgment.

 

Consolidated Variable Interest Entities

We consolidate VIEs because we have the power to direct the activities that significantly affect the VIEs economic performance, typically because of our role as either servicer or manager for the VIE. Our consolidated VIEs fall into three main groups, which are further described below:

 

  • Trinity comprises two consolidated entities that hold investment securities, the majority of which are investment grade, and were funded by the issuance of GICs. These entities were consolidated in 2003 and ceased issuing new investment contracts beginning in the first quarter of 2010. Since 2004, GECC has fully guaranteed repayment of these entities' GIC obligations. These obligations include conditions under which certain GIC holders could require immediate repayment of their investment should the long-term credit ratings of GECC fall below AA-/Aa3 or the short-term credit ratings fall below A-1+/P-1. To the extent that amounts due were to exceed the ultimate value of proceeds realized from Trinity assets, GECC would be required to provide such excess amount. Following the April 3, 2012 Moody's downgrade of GECC's long-term credit ratings to A1, substantially all of these GICs became redeemable by the holders. In the second quarter of 2012, holders of $1,981 million of GICs redeemed their holdings. The redemption was funded primarily through advances from GECC. The remaining outstanding GICs will continue to be subject to the existing terms and maturities of their respective contracts.

 

  • Consolidated Securitization Entities (CSEs) comprise primarily our previously unconsolidated QSPEs that were consolidated on January 1, 2010 in connection with our adoption of ASU 2009-16 & 17. These entities were created to facilitate securitization of financial assets and other forms of asset-backed financing which serve as an alternative funding source by providing access to the commercial paper and term markets. The securitization transactions executed with these entities are similar to those used by many financial institutions and substantially all are non-recourse. We provide servicing for substantially all of the assets in these entities.

     

           The financing receivables in these entities have similar risks and characteristics to our other financing receivables and were underwritten to the same standard. Accordingly, the performance of these assets has been similar to our other financing receivables; however, the blended performance of the pools of receivables in these entities reflects the eligibility criteria that we apply to determine which receivables are selected for transfer. Contractually the cash flows from these financing receivables must first be used to pay third-party debt holders as well as other expenses of the entity. Excess cash flows are available to GECC. The creditors of these entities have no claim on other assets of GECC.

     

  • Other remaining assets and liabilities of consolidated VIEs relate primarily to four categories of entities: (1) enterprises we acquired that had previously created asset-backed financing entities to fund commercial, middle-market and equipment loans; we are the collateral manager for these entities of $823 million of assets and $754 million of liabilities; (2) joint ventures that lease light industrial equipment of $1,620 million of assets and $880 million of liabilities; (3) other entities that are involved in power generating and leasing activities of $2,343 million of assets and $583 million of liabilities; and (4) insurance entities that, among other lines of business, provide property and casualty and workers' compensation coverage for GE of $1,198 million of assets and $604 million of liabilities.

 

The table below summarizes the assets and liabilities of consolidated VIEs described above.

   Consolidated Securitization Entities    
                     
    Credit        Trade      
(In millions)Trinity Cards(a)Equipment(a)Real Estate(b)Receivables Other(c)Total
                     
June 30, 2012                    
Assets(d)                    
Financing receivables, net$0 $19,847 $11,596 $3,055 $1,899 $4,724 $41,121
Investment securities 3,829  0  0  0  0  1,046  4,875
Other assets 349  1,136  332  223  0  1,589  3,629
Total$4,178 $20,983 $11,928 $3,278 $1,899 $7,359 $49,625
                     
Liabilities(d)                    
Borrowings$0 $0 $3 $25 $0 $1,280 $1,308
Non-recourse borrowings 0  14,974  9,312  3,163  1,602  745  29,796
Other liabilities 2,167  85  0  4  13  1,472  3,741
Total$2,167 $15,059 $9,315 $3,192 $1,615 $3,497 $34,845
                     
December 31, 2011                    
Assets(d)                    
Financing receivables, net$0 $19,229 $10,523 $3,521 $1,614 $2,973 $37,860
Investment securities 4,289  0  0  0  0  1,031  5,320
Other assets 389  17  283  210  0  2,250  3,149
Total$4,678 $19,246 $10,806 $3,731 $1,614 $6,254 $46,329
                     
Liabilities(d)                    
Borrowings$0 $0 $2 $25 $0 $821 $848
Non-recourse borrowings 0  14,184  8,166  3,659  1,769  980  28,758
Other liabilities 4,456  37  0  19  23  1,312  5,847
Total$4,456 $14,221 $8,168 $3,703 $1,792 $3,113 $35,453
                     
                     

  • We provide servicing to the CSEs and are contractually permitted to commingle cash collected from customers on financing receivables sold to investors with our own cash prior to payment to a CSE, provided our short-term credit rating does not fall below A-1/P-1. These CSEs also owe us amounts for purchased financial assets and scheduled quarterly distributions. At June 30, 2012, the amounts owed to the CSEs and receivable from the CSEs were $6,062 million and $5,112 million, respectively.
  • During the second quarter of 2012, we made the decision to sell our Business Property business, which includes servicing rights for most of these CSEs. Following the sale and upon the trust's acceptance of the buyer as the new servicer, we will deconsolidate substantially all of these securitization entities as we will no longer have the power to direct these entities.
  • Includes $1,415 million in other assets and $537 million of borrowings at June 30, 2012 due to the consolidation of an entity involved in power generating activities.This entity was previously subject to a leveraged lease and we consolidated this entity in March 2012 following the execution of an agreement that gave us the power to direct activities of this entity.
  • Asset amounts exclude intercompany receivables for cash collected on behalf of the entities by GE as servicer, which are eliminated in consolidation. Such receivables provide the cash to repay the entities' liabilities. If these intercompany receivables were included in the table above, assets would be higher. In addition, other assets, borrowings and other liabilities exclude intercompany balances that are eliminated in consolidation. 

Revenues from services from our consolidated VIEs were $1,660 million and $1,394 million in the three months ended June 30, 2012 and 2011, respectively, and $3,240 million and $2,885 million in the six months ended June 30, 2012 and 2011, respectively. Related expenses consisted primarily of provisions for losses of $170 million and $188 million in the three months ended June 30, 2012 and 2011, respectively, and $370 million and $550 million in the six months ended June 30, 2012 and 2011, respectively, and interest of $115 million and $151 million in the three months ended June 30, 2012 and 2011, respectively, and $247 million and $307 million in the six months ended June 30, 2012 and 2011, respectively. These amounts do not include intercompany revenues and costs, principally fees and interest between GECC and the VIEs, which are eliminated in consolidation.

Investments in Unconsolidated Variable Interest Entities

Our involvement with unconsolidated VIEs consists of the following activities: assisting in the formation and financing of the entity, providing recourse and/or liquidity support, servicing the assets and receiving variable fees for services provided. We are not required to consolidate these entities because the nature of our involvement with the activities of the VIEs does not give us power over decisions that significantly affect their economic performance.

 

The largest unconsolidated VIE with which we are involved is Penske Truck Leasing Co., L.P. (PTL), a joint venture and limited partnership formed in 1988 between Penske Truck Leasing Corporation (PTLC) and GE. PTLC is the sole general partner of PTL and an indirect wholly-owned subsidiary of Penske Corporation. PTL is engaged in truck leasing and support services, including full-service leasing, dedicated logistics support and contract maintenance programs, as well as rental operations serving commercial and consumer customers. Our direct and indirect interest in PTL is accounted for using the equity method. During the second quarter of 2012, PTL effected a recapitalization and subsequently acquired third-party financing which was used to repay $2,382 million of its outstanding debt owed to GECC. At June 30, 2012, our direct and indirect investment in PTL of $5,093 million primarily comprised partnership interests of $799 million and loans and advances of $4,259 million.

 

Other significant exposures to unconsolidated VIEs at June 30, 2012 include an investment in high quality senior secured debt of various middle-market companies ($4,268 million); investments in real estate entities ($3,075 million), which generally consist of passive limited partnership investments in tax-advantaged, multi-family real estate and investments in various European real estate entities; and exposures to joint ventures that purchase factored receivables ($1,807 million). The vast majority of our other unconsolidated entities consist of passive investments in various asset-backed financing entities.

 

The classification of our variable interests in these entities in our financial statements is based on the nature of the entity and the type of investment we hold. Variable interests in partnerships and corporate entities are classified as either equity method or cost method investments. In the ordinary course of business, we also make investments in entities in which we are not the primary beneficiary but may hold a variable interest such as limited partner interests or mezzanine debt investments. These investments are classified in two captions in our financial statements: “Other assets” for investments accounted for under the equity method, and “Financing receivables – net” for debt financing provided to these entities. Our investments in unconsolidated VIEs at June 30, 2012 and December 31, 2011 follow.

 

 June 30, 2012 December 31, 2011
(In millions)PTL All other Total PTL All other Total
                  
Other assets and investment                  
    securities$5,093 $7,825 $12,918 $7,038 $7,318 $14,356
Financing receivables – net 0  3,002  3,002  0  2,507  2,507
Total investments 5,093  10,827  15,920  7,038  9,825  16,863
Contractual obligations to fund                 
    investments or guarantees 189  2,206  2,395  600  2,244  2,844
Revolving lines of credit 10  47  57  1,356  92  1,448
Total$5,292 $13,080 $18,372 $8,994 $12,161 $21,155
                  

In addition to the entities included in the table above, we also hold passive investments in RMBS, commercial mortgage-backed securities (CMBS) and asset-backed securities (ABS) issued by VIEs. Such investments were, by design, investment grade at issuance and held by a diverse group of investors. Further information about such investments is provided in Note 3.