GE's subprime mortgage unit files for bankruptcy

WMC Mortgage, a defunct subprime lender that GE Capital acquired during the housing boom, filed for bankruptcy on Tuesday.

The Chapter 11 filing, a rare step by a major company, comes just weeks after GE agreed to pay a $1.5 billion fine over WMC, a leading subprime lender that was shut down in 2007. News of the bankruptcy was reported earlier by Reuters.

The Justice Department alleged that WMC misrepresented the quality of subprime mortgages — contributing to the mortgage meltdown and ensuing financial meltdown. Investors lost billions of dollars when those subprime loans went bust.

GE said in a statement that WMC filed for bankruptcy to resolve its remaining liabilities "in an efficient and equitable manner."

WMC's bankruptcy highlights the repercussions of GE's decision in 2004 under former CEO Jeff Immelt to get into the subprime lending game at the top of the market.

"They saw quick and easy money. The consequences turned out to be a disaster," said John Inch, an analyst at Gordon Haskett who covers GE.

Federal bank regulators ranked WMC as one of the "worst" subprime mortgage lenders in major metro areas, with more than 10,000 foreclosures between 2005 and 2007.

GE, reeling from years of bad acquisitions and questionable decisions, is now seeking to clean up its debt-riddled balance sheet. Under CEO Larry Culp, GE has slashed its dividend to a penny, sold off long-held businesses and vowed to cut costs.

The WMC bankruptcy and recent Justice Department settlement could remove major questions that had been looming over the company and GE Capital, the financial arm that nearly destroyed GE during the financial crisis.

"This filing is another important step in the de-risking of GE Capital," a GE spokesperson said.

Buying high, selling low

GE emphasized that neither the parent company nor GE Capital are part of the filing and the case has "no adverse impact on our business operations."

GE has previously said in filings that putting WMC into bankruptcy could allow the company to no longer consolidate WMC's financials into the parent company. That could help make GE's balance sheet look healthier.

However, GE also said that a WMC bankruptcy would increase legal and administration expenses. GE first signaled a WMC bankruptcy was possible a year ago.

It's not the first time a GE unit has succumbed to bankruptcy.

In December 2000, Montgomery Ward, a retailer owned by GE Capital, filed for bankruptcy and liquidated. The retailer had been acquired by GE Capital in 1999 after emerging from a prior bankruptcy, according to filings.

GE, which was already making microwaves, jet engines and locomotives, decided in 2004 to add subprime lending to its empire. At the time, WMC was the sixth-biggest subprime lender.

"This fits the pattern that's long been established of GE buying high, selling low and doing whatever they could to drive earnings as high as they could — regardless of the consequences," said Inch.

WMC legal headaches continue

The bankruptcy filing does not end GE's misadventure into subprime mortgages.

WMC is still involved in litigation with investors who allege the lender misrepresented the quality of mortgages it sold. Those investors want WMC to buy the mortgages back.

The WMC bankruptcy filing lists liabilities of between $100 million and $500 million. The largest unsecured creditors include Barclays, Morgan Stanley, Merrill Lynch and a unit of Deutsche Bank.

"The failure to disclose material deficiencies in those loans contributed to the financial crisis," Jody Hunt, the assistant US attorney general, said in a statement earlier this month announcing the $1.5 billion GE settlement.

GE has said that the Justice Department settlement contains "no admission of any allegations" and it's "pleased to put this matter behind us."