A General Electric unit specializing in issuing subprime mortgages recently announced it has filed for bankruptcy.
WMC Mortgage, a subprime lender that GE Capital had acquired after shutting down operations in 2007, filed a Chapter 11 bankruptcy days after the payment of a $1.5 billion fine over faulty subprime mortgages WMC issued before the 2008 financial crisis.
The settlement concluded U.S. Department of Justice allegations that GE concealed the WMC’s faulty loans and WMC’s slack fraud controls. GE did not admit any wrongdoing.
The U.S. Justice Department alleged WMC of misrepresentation of the quality of its subprime mortgages which contributed to the mortgage collapse that fuelled the global financial meltdown. Investors and traders lost billions of dollars when the subprime loans bubble burst.
General Electric’s GE Capital unit bought WMC in 2004 and originated over $65 billion of mortgage loans from 2005 to 2007. WMC halted originations in 2007 because of the collapse of the U.S. housing and financial markets. The subprime lender sold most of its assets in the latter part of the year to DLJ Capital.
The filing of bankruptcy is part of GE’s effort to tackle the liabilities the prior management incurred when carrying out its expansion initiatives. This move also intends to improve the company’s financial health.
A GE spokesperson said in a statement regarding the WMC’s bankruptcy that this move is another crucial step for de-risking GE Capital. She stressed that GE and GE Capital are not part of the filing; hence the case has no impact on the corporation’s operations.
For analysts, WMC’s bankruptcy features the consequences of GE’s decision in 2004 under the helm of Jeff Immelt, its former CEO, to enter the subprime lending business during its prime.
GE’s management then saw an opportunity to get quick and easy money. But the consequences ended up as a disaster, an analyst at Gordon Haskett, John Inch, said.
