(Unaudited)

	Three months ended March 31
(In millions)	2009			2008
Revenues
Revenues from services (Note 3)	$	13,336		$	16,756
Sales of goods		273			367
Total revenues		13,609			17,123
Costs and expenses
Interest		5,090			6,079
Operating and administrative		3,858			4,532
Cost of goods sold		224			317
Investment contracts, insurance losses and insurance annuity benefits		73			143
Provision for losses on financing receivables		2,322			1,333
Depreciation and amortization		2,173			2,121
Total costs and expenses		13,740			14,525
Earnings (loss) from continuing operations before income taxes		(131	)		2,598
Benefit (provision) for income taxes		1,155			(81	)
Earnings from continuing operations		1,024			2,517
Loss from discontinued operations, net of
taxes (Note 2)		(3	)		(46	)
Net earnings		1,021			2,471
Less net earnings attributable to noncontrolling interests		50			36
Net earnings attributable to GECC		971			2,435
Dividends		−			(1,130	)
Retained earnings at beginning of period		45,472			40,513
Retained earnings at end of period	$	46,443		$	41,818
Amounts attributable to GECC
Earnings from continuing operations	$	974		$	2,481
Loss from discontinued operations, net of taxes		(3	)		(46	)
Net earnings attributable to GECC	$	971		$	2,435

See accompanying notes.

 

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General Electric Capital Corporation and consolidated affiliates

Condensed Statement of Financial Position

	March 31,			December 31,
(In millions)	2009			2008
		(Unaudited)
Assets
Cash and equivalents	$	43,984		$	36,430
Investment securities (Note 5)		20,584			19,318
Inventories		65			77
Financing receivables – net (Notes 6 and 7)		352,697			370,592
Other receivables		21,145			22,175
Property, plant and equipment, less accumulated amortization of $25,564
and $29,026		58,153			64,043
Goodwill (Note 8)		24,278			25,204
Other intangible assets – net (Note 8)		2,982			3,174
Other assets		87,154			84,201
Assets of businesses held for sale		−			10,556
Assets of discontinued operations (Note 2)		1,464			1,640
Total assets	$	612,506		$	637,410
Liabilities and equity
Short-term borrowings (Note 9)	$	170,884		$	188,601
Accounts payable		12,371			14,863
Long-term borrowings (Note 9)		318,293			321,755
Investment contracts, insurance liabilities and insurance annuity benefits		10,851			11,403
Other liabilities		22,811			30,629
Deferred income taxes		8,845			8,112
Liabilities of businesses held for sale		−			636
Liabilities of discontinued operations (Note 2)		737			799
Total liabilities		544,792			576,798
Capital stock		56			56
Accumulated other comprehensive income – net(a)
Investment securities		(2,053	)		(2,013	)
Currency translation adjustments		(4,361	)		(1,337	)
Cash flow hedges		(2,530	)		(3,253	)
Benefit plans		(359	)		(367	)
Additional paid-in capital		28,421			19,671
Retained earnings		46,443			45,472
Total GECC shareowner’s equity		65,617			58,229
Noncontrolling interests(b)		2,097			2,383
Total equity		67,714			60,612
Total liabilities and equity	$	612,506		$	637,410

(a)	The sum of accumulated other comprehensive income − net was $(9,303) million and $(6,970) million at March 31, 2009 and December 31, 2008, respectively.
(b)	Included accumulated other comprehensive income attributable to noncontrolling interests of $170 million and $204 million at March 31, 2009 and December 31, 2008, respectively.

See accompanying notes.

 

 

 

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General Electric Capital Corporation and consolidated affiliates

Condensed Statement of Cash Flows

(Unaudited)

	Three months ended March 31
(In millions)	2009			2008
Cash flows – operating activities
Net earnings attributable to GECC	$	971		$	2,435
Loss from discontinued operations		3			46
Adjustments to reconcile net earnings attributable to GECC
to cash provided from operating activities
Depreciation and amortization of property, plant and equipment		2,173			2,121
Increase (decrease) in accounts payable		(2,241	)		780
Provision for losses on financing receivables		2,322			1,333
All other operating activities		(7,909	)		(2,892	)
Cash from (used for) operating activities – continuing operations		(4,681	)		3,823
Cash from (used for) operating activities – discontinued operations		(28	)		348
Cash from (used for) operating activities		(4,709	)		4,171
Cash flows – investing activities
Additions to property, plant and equipment		(1,889	)		(2,914	)
Dispositions of property, plant and equipment		1,091			3,177
Increase in loans to customers		(50,012	)		(88,376	)
Principal collections from customers – loans		64,553			77,000
Investment in equipment for financing leases		(2,505	)		(6,291	)
Principal collections from customers – financing leases		4,332			4,581
Net change in credit card receivables		2,491			2,128
Payments for principal businesses purchased		(6,822	)		(12,652	)
Proceeds from principal business dispositions		8,846			4,305
All other investing activities		(1,457	)		(1,747	)
Cash from (used for) investing activities – continuing operations		18,628			(20,789	)
Cash from (used for) investing activities – discontinued operations		30			(339	)
Cash from (used for) investing activities		18,658			(21,128	)
Cash flows – financing activities
Net increase (decrease) in borrowings (maturities of 90 days or less)		(20,000	)		3,527
Newly issued debt
Short-term (91 to 365 days)		1,031			331
Long-term (longer than one year)		29,943			35,548
Non-recourse, leveraged lease		−			57
Repayments and other debt reductions
Short-term (91 to 365 days)		(23,491	)		(18,380	)
Long-term (longer than one year)		(1,771	)		(2,336	)
Non-recourse, leveraged lease		(395	)		(348	)
Dividends paid to shareowner		−			(1,130	)
Capital contribution and share issuance		8,750			−
All other financing activities		(460	)		633
Cash from (used for) financing activities – continuing operations		(6,393	)		17,902
Cash from (used for) financing activities – discontinued operations		−			−
Cash from (used for) financing activities		(6,393	)		17,902
Increase in cash and equivalents		7,556			945
Cash and equivalents at beginning of year		36,610			8,907
Cash and equivalents at March 31		44,166			9,852
Less cash and equivalents of discontinued operations at March 31		182			309
Cash and equivalents of continuing operations at March 31	$	43,984		$	9,543

See accompanying notes.

 

 

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1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Our financial statements are prepared in conformity with the U.S. generally accepted accounting principles (GAAP). These statements include all adjustments (consisting of normal recurring accruals) that we considered necessary to present a fair statement of our results of operations, financial position and cash flows. The results reported in these condensed, consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. It is suggested that these condensed, consolidated financial statements be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K). See Note 1 to the consolidated financial statements in our 2008 Form 10-K which discusses our consolidation and financial statement presentation. We have reclassified certain prior-period amounts to conform to the current-period’s presentation.

 

All of the outstanding common stock of General Electric Capital Corporation (GE Capital or GECC) is owned by General Electric Capital Services, Inc. (GECS), all of whose common stock is owned by General Electric Company (GE Company or GE). Our financial statements consolidate all of our affiliates – companies that we control and in which we hold a majority voting interest. We also consolidate the economic interests we hold in certain businesses within companies in which we hold a voting equity interest and are majority owned by our ultimate parent, but which we have agreed to actively manage and control. GECC includes Commercial Lending and Leasing (CLL), Consumer (formerly GE Money), Real Estate, Energy Financial Services and GE Commercial Aviation Services (GECAS). During the first quarter of 2009, we transferred Banque Artesia Nederland N.V. (Artesia) from CLL to Consumer. Details of total revenues and segment profit by operating segment can be found on page 33 of this report.

 

Unless otherwise indicated, information in these notes to condensed, consolidated financial statements relates to continuing operations.

 

We label our quarterly information using a calendar convention, that is, first quarter is labeled as ending on March 31, second quarter as ending on June 30, and third quarter as ending on September 30. It is our longstanding practice to establish interim quarterly closing dates using a fiscal calendar, which requires our businesses to close their books on either a Saturday or Sunday, depending on the business. The effects of this practice are modest and only exist within a reporting year. The fiscal closing calendar from 1993 through 2013 is available on our website, www.ge.com/secreports.

 

Accounting changes

 

Effective January 1, 2008, we adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 157, Fair Value Measurements, for all financial instruments and non-financial instruments accounted for at fair value on a recurring basis. Effective January 1, 2009, we adopted SFAS 157 for all non-financial instruments accounted for at fair value on a non-recurring basis. SFAS 157 establishes a new framework for measuring fair value and expands related disclosures. See Note 10.

 

On January 1, 2009, we adopted SFAS 141(R), Business Combinations. This standard significantly changes the accounting for business acquisitions both during the period of the acquisition and in subsequent periods. Among the more significant changes in the accounting for acquisitions are the following:

 

·	Acquired in-process research and development (IPR&D) is accounted for as an asset, with the cost recognized as the research and development is realized or abandoned. IPR&D was previously expensed at the time of the acquisition.

 

·	Contingent consideration is recorded at fair value as an element of purchase price with subsequent adjustments recognized in operations. Contingent consideration was previously accounted for as a subsequent adjustment of purchase price.

 

·	Subsequent decreases in valuation allowances on acquired deferred tax assets are recognized in operations after the measurement period. Such changes were previously considered to be subsequent changes in consideration and were recorded as decreases in goodwill.

 

 

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·	Transaction costs are expensed. These costs were previously treated as costs of the acquisition.

 

In April 2009, the FASB issued FASB Staff Position (FSP) FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, which amends the accounting in SFAS 141(R) for assets and liabilities arising from contingencies in a business combination. The FSP is effective January 1, 2009, and requires pre-acquisition contingencies to be recognized at fair value, if fair value can be reasonably determined during the measurement period. If fair value cannot be reasonably determined, the FSP requires measurement based on the recognition and measurement criteria of SFAS 5, Accounting for Contingencies.

 

On January 1, 2009, we adopted SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, which requires us to make certain changes to the presentation of our financial statements. This standard requires us to classify noncontrolling interests (previously referred to as “minority interest”) as part of consolidated net earnings ($50 million and $36 million for the three months ended March 31, 2009 and 2008, respectively) and to include the accumulated amount of noncontrolling interests as part of shareowner’s equity ($2,097 million and $2,383 million at March 31, 2009 and December 31, 2008, respectively). The net earnings amounts we have previously reported are now presented as "Net earnings attributable to GECC". Similarly, in our presentation of shareowner’s equity, we distinguish between equity amounts attributable to GECC shareowner and amounts attributable to the noncontrolling interests – previously classified as minority interest outside of shareowner’s equity. In addition to these financial reporting changes, SFAS 160 provides for significant changes in accounting related to noncontrolling interests; specifically, increases and decreases in our controlling financial interests in consolidated subsidiaries will be reported in equity similar to treasury stock transactions. If a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interests are remeasured with the gain or loss reported in net earnings.

 

2. DISCONTINUED OPERATIONS

 

Discontinued operations comprised GE Money Japan (our Japanese personal loan business, Lake, and our Japanese mortgage and card businesses, excluding our minority ownership in GE Nissen Credit Co., Ltd.), our U.S. mortgage business (WMC), GE Life and Genworth Financial, Inc. (Genworth). Associated results of operations, financial position and cash flows are separately reported as discontinued operations for all periods presented.

 

GE Money Japan

 

During the third quarter of 2007, we committed to a plan to sell Lake upon determining that, despite restructuring, Japanese regulatory limits for interest charges on unsecured personal loans did not permit us to earn an acceptable return. During the third quarter of 2008, we completed the sale of GE Money Japan, which included Lake, along with our Japanese mortgage and card businesses, excluding our minority ownership in GE Nissen Credit Co., Ltd. As a result, we recognized an after-tax loss of $908 million in 2007 and an incremental loss in 2008 of $361 million. In connection with the transaction, GE Money Japan reduced the proceeds on the sale for estimated interest refund claims in excess of the statutory interest rate. Proceeds from the sale may be increased or decreased based on the actual claims experienced in accordance with terms specified in the agreement, and will not be adjusted unless claims exceed approximately $2,800 million. Estimated claims are not expected to exceed those levels and are based on our historical claims experience and the estimated future requests, taking into consideration the ability and likelihood of customers to make claims and other industry risk factors. However, uncertainties around the status of laws and regulations and lack of certain information related to the individual customers make it difficult to develop a meaningful estimate of the aggregate claims exposure. We review our estimated exposure quarterly, and make adjustments when required. To date, there have been no adjustments to sale proceeds for this matter. GE Money Japan revenues from discontinued operations were $1 million and $290 million in the first quarters of 2009 and 2008, respectively. In total, GE Money Japan earnings (loss) from discontinued operations, net of taxes, were $4 million and $(37) million in the first quarters of 2009 and 2008, respectively.

 

 

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WMC

 

During the fourth quarter of 2007, we completed the sale of our U.S. mortgage business. In connection with the transaction, WMC retained certain obligations related to loans sold prior to the disposal of the business, including WMC’s contractual obligations to repurchase previously sold loans as to which there was an early payment default or with respect to which certain contractual representations and warranties were not met. Reserves related to these obligations were $246 million at March 31, 2009, and $244 million at December 31, 2008. The amount of these reserves is based upon pending and estimated future loan repurchase requests, the estimated percentage of loans validly tendered for repurchase, and our estimated losses on loans repurchased. Based on our historical experience, we estimate that a small percentage of the total loans we originated and sold will be tendered for repurchase, and of those tendered, only a limited amount will qualify as “validly tendered,” meaning the loans sold did not satisfy specified contractual obligations. The amount of our current reserve represents our best estimate of losses with respect to our repurchase obligations. However, actual losses could exceed our reserve amount if actual claim rates, valid tenders or losses we incur on repurchased loans are higher than historically observed. WMC revenues from discontinued operations were $(7) million and $5 million in the first quarters of 2009 and 2008, respectively. In total, WMC’s losses from discontinued operations, net of taxes, were $6 million and $7 million in the first quarters of 2009 and 2008, respectively.

 

Summarized financial information for discontinued operations is shown below.

 

	Three months ended March 31
(In millions)	2009			2008
Operations
Total revenues	$	(6	)	$	295
Loss from discontinued operations before income taxes	$	(11	)	$	(78	)
Income tax benefit		4			32
Loss from discontinued operations, net of taxes	$	(7	)	$	(46	)

 

Disposal
Gain on disposal before income taxes	$	7		$	−
Income tax expense		(3	)		−
Gain on disposal, net of taxes	$	4		$	−
Loss from discontinued operations, net of taxes	$	(3	)	$	(46	)

 

	At
(In millions)	March 31, 2009			December 31, 2008
Assets
Cash and equivalents	$	182		$	180
Other assets		14			19
Other		1,268			1,441
Assets of discontinued operations	$	1,464		$	1,640

 

	At
(In millions)	March 31, 2009			December 31, 2008
Liabilities
Liabilities of discontinued operations	$	737		$	799

 

Assets at March 31, 2009 and December 31, 2008, were primarily comprised of a deferred tax asset for a loss carryforward, which expires in 2015, related to the sale of our GE Money Japan business.

 

 

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3.  REVENUES FROM SERVICES

 

Revenues from services are summarized in the following table.

 

(In millions)	Three months ended March 31
	2009			2008
Interest on loans	$	5,045		$	6,430
Equipment leased to others		3,473			3,795
Fees		1,159			1,332
Financing leases		901			1,149
Real estate investments		346			1,157
Associated companies		165			469
Investment income(a)		325			549
Net securitization gains		280			349
Other items(b)		1,642			1,526
Total	$	13,336		$	16,756

(a)	Included other-than-temporary impairments on investment securities of $141 million and $35 million in the first quarters of 2009 and 2008, respectively.
(b)	Included a gain on the sale of a limited partnership interest in Penske Truck Leasing Co., L.P. (PTL) and a related gain on the remeasurement of the retained investment to fair value totaling $296 million in the first quarter of 2009. See Note 13.

 

4.  INCOME TAXES

 

During the first quarter of 2009, following the change in our external credit ratings, funding actions taken and review of our operations, liquidity and funding, we determined that undistributed prior-year earnings of non-U.S. subsidiaries of GECC, on which we had previously provided deferred U.S. taxes, would be indefinitely reinvested outside the U.S. This change increased the amount of prior-year earnings indefinitely reinvested outside the U.S. by approximately $2 billion (to $52 billion), resulting in an income tax benefit of $700 million. Under applicable accounting rules, this tax benefit is recorded entirely in the first quarter tax provision and will not affect the tax provision for future quarters of 2009.

 

The balance of “unrecognized tax benefits,” the amount of related interest and penalties we have provided and what we believe to be the range of reasonably possible changes in the next 12 months, were:

 

	At
(In millions)	March 31, 2009					December 31, 2008
Unrecognized tax benefits		$	3,538				$	3,454
Portion that, if recognized, would reduce tax expense and
effective tax rate(a)			1,795					1,734
Accrued interest on unrecognized tax benefits			730					693
Accrued penalties on unrecognized tax benefits			65					65
Reasonably possible reduction to the balance of unrecognized
tax benefits in succeeding 12 months			0−450					0−350
Portion that, if recognized, would reduce tax expense
and effective tax rate(a)			0−150					0−50

(a)

Some portion of such reduction might be reported as discontinued operations.

 

 

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The IRS is currently auditing the GE consolidated income tax returns for 2003-2007, a substantial portion of which include our activities. In addition, certain other U.S. tax deficiency issues and refund claims for previous years remain unresolved. It is reasonably possible that the 2003-2005 U.S. audit cycle will be completed during the next 12 months, which could result in a decrease in our balance of unrecognized tax benefits. We believe that there are no other jurisdictions in which the outcome of unresolved issues or claims is likely to be material to our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties.

 

GE and GECC file a consolidated U.S. federal income tax return. The GECC provision for current tax expense includes its effect on the consolidated return. The effect of GECC on the consolidated liability is settled in cash as GE tax payments are due.

 

5. INVESTMENT SECURITIES

 

The vast majority of our investment securities are classified as available-for-sale and comprise mainly investment-grade debt securities supporting obligations to holders of guaranteed investment contracts.

 

(In millions)	Amortized cost			Gross unrealized gains			Gross unrealized losses			Estimated fair value
March 31, 2009
Debt
U.S. corporate	$	5,779		$	20		$	(693	)	$	5,106
State and municipal		904			4			(269	)		639
Residential mortgage-backed(a)		3,789			16			(1,044	)		2,761
Commercial mortgage-backed		1,655			−			(604	)		1,051
Asset-backed		2,561			1			(513	)		2,049
Corporate – non-U.S.		705			7			(59	)		653
Government – non-U.S.		1,195			4			(18	)		1,181
U.S. government and federal agency		83			2			−			85
Retained interests(b)(c)		5,442			78			(100	)		5,420
Equity
Available-for-sale		1,262			32			(79	)		1,215
Trading		424			−			−			424
Total	$	23,799		$	164		$	(3,379	)	$	20,584
December 31, 2008
Debt
U.S. corporate	$	4,456		$	54		$	(637	)	$	3,873
State and municipal		915			5			(70	)		850
Residential mortgage-backed(a)		4,228			9			(976	)		3,261
Commercial mortgage-backed		1,664			−			(509	)		1,155
Asset-backed		2,630			−			(668	)		1,962
Corporate – non-U.S.		608			6			(23	)		591
Government – non-U.S.		936			2			(15	)		923
U.S. government and federal agency		26			3			−			29
Retained interests(b)		5,144			73			(136	)		5,081
Equity
Available-for-sale		1,315			24			(134	)		1,205
Trading		388			−			−			388
Total	$	22,310		$	176		$	(3,168	)	$	19,318

(a)	Substantially collateralized by U.S. mortgages.
(b)	Included $1,904 million and $1,752 million of retained interests at March 31, 2009 and December 31, 2008, respectively, accounted for in accordance with SFAS 155, Accounting for Certain Hybrid Financial Instruments. See Note 13.
(c)	Amortized cost and estimated fair value included $3 million of trading securities at March 31, 2009.

 

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The following tables present the estimated fair values and gross unrealized losses of our available-for-sale investment securities.

 

	In loss position for
	Less than 12 months						12 months or more
(In millions)	Estimated fair value			Gross unrealized losses			Estimated fair value			Gross unrealized losses
March 31, 2009
Debt
U.S. corporate	$	641		$	(111	)	$	1,399		$	(582	)
State and municipal		309			(182	)		207			(87	)
Residential mortgage-backed		260			(64	)		1,728			(980	)
Commercial mortgage-backed		94			(40	)		955			(564	)
Asset-backed		1,049			(147	)		968			(366	)
Corporate – non-U.S.		184			(32	)		237			(27	)
Government – non-U.S.		140			(1	)		259			(17	)
U.S. government and federal agency		−			−			−			−
Retained interests		1,496			(33	)		325			(67	)
Equity		125			(76	)		4			(3	)
Total	$	4,298		$	(686	)	$	6,082		$	(2,693	)
December 31, 2008
Debt
U.S. corporate	$	1,152		$	(397	)	$	1,253		$	(240	)
State and municipal		302			(21	)		278			(49	)
Residential mortgage-backed		1,216			(64	)		1,534			(912	)
Commercial mortgage-backed		285			(85	)		870			(424	)
Asset-backed		903			(406	)		1,031			(262	)
Corporate – non-U.S.		60			(7	)		265			(16	)
Government – non-U.S.		−			−			275			(15	)
U.S. government and federal agency		−			−			−			−
Retained interests		1,246			(61	)		238			(75	)
Equity		200			(132	)		6			(2	)
Total	$	5,364		$	(1,173	)	$	5,750		$	(1,995	)

 

Of our residential mortgage-backed securities (RMBS) at March 31, 2009 and December 31, 2008, we had approximately $1,195 million and $1,284 million, respectively, of exposure to residential subprime credit, primarily supporting our guaranteed investment contracts, a majority of which have received investment-grade credit ratings from the major rating agencies. Of the total residential subprime credit exposure at March 31, 2009 and December 31, 2008, $1,027 million and $1,089 million, respectively, was insured by monoline insurers. Our subprime investment securities were collateralized primarily by pools of individual, direct mortgage loans, not other structured products such as collateralized debt obligations. Additionally, a majority of exposure to residential subprime credit related to investment securities with underlying loans originated in 2006 and 2005. At March 31, 2009 and December 31, 2008, we had approximately $784 million and $783 million, respectively, of exposure to commercial, regional and foreign banks, primarily relating to corporate debt securities, with associated unrealized losses of $142 million and $105 million, respectively.

 

We presently intend to hold our investment securities that are in an unrealized loss position at March 31, 2009, at least until we can recover their respective amortized cost. In reaching the conclusion that these investments are not other-than-temporarily impaired, consideration was given to research by our internal and third-party asset managers. With respect to corporate bonds, we placed greater emphasis on the credit quality of the issuers. With respect to RMBS and commercial mortgage-backed securities (CMBS), we placed greater emphasis on our expectations with respect to cash flows from the underlying collateral and, with respect to RMBS, we considered the availability of credit enhancements, principally monoline insurance.

 

 

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Supplemental information about gross realized gains and losses on available-for-sale investment securities follows.

 

	Three months ended March 31
(In millions)	2009			2008
Gains	$	8		$	52
Losses, including impairments		(146	)		(38	)
Net	$	(138	)	$	14

 

In the ordinary course of managing our investment securities portfolio, we may sell securities prior to their maturities for a variety of reasons, including diversification, credit quality, yield and liquidity requirements and the funding of claims and obligations to policyholders.

 

Proceeds from investment securities sales and early redemptions by the issuer totaled $1,965 million and $310 million in the first quarters of 2009 and 2008, respectively, principally from the sales of short-term securities in our bank subsidiaries.

 

We recognized pre-tax gains on trading securities of $40 million and $220 million in the first quarters of 2009 and 2008, respectively. Investments in retained interests increased by $87 million and decreased by $75 million during the first quarters of 2009 and 2008, respectively, reflecting changes in fair value accounted for in accordance with SFAS 155.

 

6.  FINANCING RECEIVABLES

 

Financing receivables – net, consisted of the following.

 

	At
(In millions)	March 31, 2009			December 31, 2008
Loans, net of deferred income	$	297,142		$	308,821
Investment in financing leases, net of deferred income		61,247			67,077
		358,389			375,898
Less allowance for losses (Note 7)		(5,692	)		(5,306	)
Financing receivables – net(a)	$	352,697		$	370,592

(a)

Included $5,538 million and $6,461 million related to consolidated, liquidating securitization entities at March 31, 2009, and December 31, 2008, respectively. In addition, financing receivables at March 31, 2009 and December 31, 2008, included $2,877 million and $2,736 million, respectively, relating to loans that had been acquired and accounted for in accordance with SOP 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer.

 

 

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We adopted SFAS 141(R) on January 1, 2009. As a result of this adoption, loans acquired in a business acquisition are recorded at fair value, which incorporates our estimate at the acquisition date of the credit losses over the remaining life of the portfolio. As a result, the allowance for loan losses is not carried over at acquisition. This may result in lower reserve coverage ratios prospectively. Details of financing receivables – net follow.

 

	At
(In millions)	March 31, 2009					December 31, 2008
CLL(a)
Americas		$	99,444				$	104,462
Europe			40,527					36,972
Asia			14,528					16,683
Other			764					786
			155,263					158,903
Consumer(a)
Non-U.S. residential mortgages(b)			56,974					60,753
Non-U.S. installment and revolving credit			22,256					24,441
U.S. installment and revolving credit			25,286					27,645
Non-U.S. auto			15,343					18,168
Other			10,309					11,541
			130,168					142,548
Real Estate			45,373					46,735
Energy Financial Services			8,324					8,355
GECAS(c)			15,398					15,326
Other(d)			3,863					4,031
			358,389					375,898
Less allowance for losses			(5,692	)				(5,306	)
Total		$	352,697				$	370,592

(a)	During the first quarter of 2009, we transferred Artesia from CLL to Consumer. Prior-period amounts were reclassified to conform to the current period’s presentation.
(b)	At March 31, 2009, net of credit insurance, approximately 27% of this portfolio comprised loans with introductory, below market rates that are scheduled to adjust at future dates; with high loan-to-value ratios at inception; whose terms permitted interest-only payments; or whose terms resulted in negative amortization. At the origination date, loans with an adjustable rate were underwritten to the reset value.
(c)	Included loans and financing leases of $13,189 million and $13,078 million at March 31, 2009, and December 31, 2008, respectively, related to commercial aircraft at Aviation Financial Services.
(d)	Consisted of loans and financing leases related to certain consolidated, liquidating securitization entities.

 

 

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Individually impaired loans are defined by GAAP as larger balance or restructured loans for which it is probable that the lender will be unable to collect all amounts due according to original contractual terms of the loan agreement. An analysis of impaired loans follows.

 

	At
(In millions)	March 31, 2009					December 31, 2008
Loans requiring allowance for losses		$	4,138				$	2,712
Loans expected to be fully recoverable			1,682					871
Total impaired loans		$	5,820				$	3,583
Allowance for losses		$	908				$	635
Average investment during the period			4,665					2,064
Interest income earned while impaired(a)			17					27

(a)	Recognized principally on cash basis.

 

7.  ALLOWANCE FOR LOSSES ON FINANCING RECEIVABLES

 

(In millions)	Balance January 1, 2009					Provision charged to operations					Currency exchange			Other(a)			Gross write-offs					Recoveries					Balance March 31, 2009
CLL(b)
Americas		$	824				$	257			$	(2	)	$	(8	)		$	(189	)			$	16				$	898
Europe			288					106				(10	)		(1	)			(59	)				3					327
Asia			163					50				(18	)		7				(28	)				4					178
Other			2					−				−			2				−					−					4
Consumer(b)
Non-U.S. residential
mortgages			383					237				(41	)		4				(81	)				24					526
Non-U.S. installment
and revolving credit			1,051					433				(62	)		12				(493	)				97					1,038
U.S. installment and
revolving credit			1,700					905				−			(229	)			(695	)				37					1,718
Non-U.S. auto			222					128				(12	)		19				(160	)				52					249
Other			226					73				(11	)		(23	)			(77	)				11					199
Real Estate			301					110				(6	)		−				(9	)				−					396
Energy Financial
Services			58					10				−			(2	)			−					−					66
GECAS			60					−				−			1				−					−					61
Other			28					13				−			1				(10	)				−					32
Total		$	5,306				$	2,322			$	(162	)	$	(217	)		$	(1,801	)			$	244				$	5,692

(a)	Other primarily included the effects of securitization activity.
(b)	During the first quarter of 2009, we transferred Artesia from CLL to Consumer. Prior-period amounts were reclassified to conform to the current period’s presentation.

 

 

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(In millions)	Balance January 1, 2008					Provision charged to operations					Currency exchange			Other(a)			Gross write-offs					Recoveries					Balance March 31, 2008
CLL(b)
Americas		$	451				$	88			$	1		$	72			$	(53	)			$	13				$	572
Europe			230					38				13			(37	)			(35	)				6					215
Asia			226					19				15			42				(187	)				2					117
Other			3					−				1			(1	)			−					−					3
Consumer(b)
Non-U.S. residential
mortgages			246					31				10			1				(27	)				20					281
Non-U.S. installment
and revolving credit			1,371					429				78			(1	)			(617	)				200					1,460
U.S. installment and
revolving credit			985					585				−			(161	)			(505	)				61					965
Non-U.S. auto			324					73				7			(39	)			(150	)				77					292
Other			167					54				14			−				(69	)				17					183
Real Estate			168					(1	)			2			15				(4	)				−					180
Energy Financial
Services			19					1				−			2				−					−					22
GECAS			8					16				−			−				(1	)				−					23
Other			18					−				−			1				(5	)				−					14
Total		$	4,216				$	1,333			$	141		$	(106	)		$	(1,653	)			$	396				$	4,327

(a)	Other primarily included the effects of securitization activity, dispositions and acquisitions.
(b)	During the first quarter of 2009, we transferred Artesia from CLL to Consumer. Prior-period amounts were reclassified to conform to the current period’s presentation.

 

8.  GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill and other intangible assets – net, consisted of the following.

 

	At
(In millions)	March 31, 2009					December 31, 2008
Goodwill		$	24,278				$	25,204
Intangible assets subject to amortization			2,982					3,174
Total		$	27,260				$	28,378

 

 

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Changes in goodwill balances follow.

 

	2009
(In millions)	CLL			Consumer			Real Estate			Energy Financial Services			GECAS			Total
Balance January 1	$	12,321	(a)	$	9,407	(a)	$	1,159		$	2,162		$	155		$	25,204
Acquisitions/acquisition accounting
adjustments		217			4			(7	)		(4	)		−			210
Dispositions, currency exchange
and other		(649	)		(416	)		(31	)		(39	)		(1	)		(1,136	)
Balance March 31	$	11,889		$	8,995		$	1,121		$	2,119		$	154		$	24,278

(a)	Reflected the transfer of Artesia during the first quarter of 2009, resulting in a related movement of beginning goodwill balance of $326 million.

 

The amount of goodwill related to new acquisitions recorded during the first quarter of 2009 was $125 million, all related to the acquisition of Interbanca S.p.A. (Interbanca) at CLL. During the first quarter of 2009, the goodwill balance increased by $85 million related to acquisition accounting adjustments to prior-year acquisitions. The most significant of these adjustments was an increase of $70 million associated with the 2008 acquisition of CitiCapital at CLL. Also during the first quarter of 2009, goodwill balances decreased $1,136 million, primarily as a result of the deconsolidation of PTL at CLL ($634 million) and the stronger U.S. dollar ($504 million).

 

We test goodwill for impairment annually and more frequently if circumstances warrant. Given the significant decline in GE’s stock price in the first quarter of 2009 and current market conditions in the financial services industry, we conducted an additional impairment analysis of the reporting units during the first quarter of 2009 using data as of December 31, 2008.

 

We determined fair values for each of the reporting units using an income approach. When available and as appropriate, we used comparative market multiples to corroborate discounted cash flow results. For purposes of the income approach, fair value was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for each business. Actual results may differ from those assumed in our forecasts. We derive our discount rates by applying the capital asset pricing model (i.e., to estimate the cost of equity financing) and analyzing published rates for industries relevant to our reporting units. We used discount rates that are commensurate with the risks and uncertainty inherent in the financial markets generally and in our internally developed forecasts. Discount rates used in these reporting unit valuations ranged from 11.5% to 13.0%. Valuations using the market approach reflect prices and other relevant observable information generated by market transactions involving financial services businesses.

 

Compared to the market approach, the income approach more closely aligns the reporting unit valuation to a company’s or business’ specific business model, geographic markets and product offerings, as it is based on specific projections of the business. Required rates of return, along with uncertainty inherent in the forecasts of future cash flows are reflected in the selection of the discount rate. Equally important, under this approach, reasonably likely scenarios and associated sensitivities can be developed for alternative future states that may not be reflected in an observable market price. A market approach allows for comparison to actual market transactions and multiples. It can be somewhat more limited in its application because the population of potential comparables (or pure plays) is often limited to publicly-traded companies where the characteristics of the comparative business and ours can be significantly different, market data is usually not available for divisions within larger conglomerates or non-public subsidiaries that could otherwise qualify as comparable, and the specific circumstances surrounding a market transaction (e.g., synergies between the parties, terms and conditions of the transaction, etc.) may be different or irrelevant with respect to our business. It can also be difficult under the current market conditions to identify orderly transactions between market participants in similar financial services businesses. We assess the valuation methodology based upon the relevance and availability of data at the time of performing the valuation and weight the methodologies appropriately.

 

 

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In performing the valuations, we updated cash flows to reflect management’s forecasts and adjusted discount rates to reflect the risks associated with the current market. Based on the results of our testing, the fair values of these reporting units exceeded their book values; therefore, the second step of the impairment test (in which fair value of each of the reporting units assets and liabilities are measured) was not required to be performed and no goodwill impairment was recognized. Estimating the fair value of reporting units involves the use of estimates and significant judgments that are based on a number of factors including actual operating results, future business plans, economic projections and market data. Actual results may differ from forecasted results. While no impairment was noted in our step one impairment tests, goodwill in our Real Estate reporting unit may be particularly sensitive to further deterioration in economic conditions. If current conditions persist longer or deteriorate further than expected, it is reasonably possible that the judgments and estimates described above could change in future periods.

 

Intangible assets subject to amortization

 

	At
	March 31, 2009											December 31, 2008
(In millions)	Gross carrying amount			Accumulated amortization					Net			Gross carrying amount			Accumulated amortization					Net
Customer-related	$	2,005			$	(894	)		$	1,111		$	1,790			$	(616	)		$	1,174
Patents, licenses and trademarks		563				(465	)			98			564				(460	)			104
Capitalized software		2,188				(1,523	)			665			2,148				(1,463	)			685
Lease valuations		1,716				(650	)			1,066			1,761				(594	)			1,167
All other		238				(196	)			42			233				(189	)			44
Total	$	6,710			$	(3,728	)		$	2,982		$	6,496			$	(3,322	)		$	3,174

 

Amortization expense related to intangible assets subject to amortization was $174 million and $195 million for the quarters ended March 31, 2009 and 2008, respectively.

 

 

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9.  BORROWINGS

 

Borrowings are summarized in the following table.

 

	At
(In millions)	March 31, 2009					December 31, 2008
Short-term borrowings
Commercial paper
U.S.
Unsecured(a)		$	44,632				$	57,665
Asset-backed(b)			3,518					3,652
Non-U.S.			7,772					9,033
Current portion of long-term debt(a)(c)			79,017					69,680
Bank deposits(d)(e)			25,770					29,634
Bank borrowings(f)			2,462					10,028
GE Interest Plus notes(g)			5,049					5,633
Other			2,664					3,276
Total			170,884					188,601
Long-term borrowings
Senior notes
Unsecured(a)(h)			296,475					300,172
Asset-backed(i)			4,518					5,002
Subordinated notes(j)			2,440					2,567
Subordinated debentures(k)			7,056					7,315
Bank deposits(l)			7,804					6,699
Total			318,293					321,755
Total borrowings		$	489,177				$	510,356

(a)	GE Capital had issued and outstanding, $73,990 million ($36,965 million commercial paper and $37,025 million long-term borrowings) and $35,243 million ($21,823 million commercial paper and $13,420 million long-term borrowings) of senior, unsecured debt that was guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary Liquidity Guarantee Program at March 31, 2009 and December 31, 2008, respectively. GE Capital and GE are parties to an Eligible Entity Designation Agreement and GE Capital is subject to the terms of a Master Agreement, each entered into with the FDIC. The terms of these agreements include, among other things, a requirement that GE and GE Capital reimburse the FDIC for any amounts that the FDIC pays to holders of debt that is guaranteed by the FDIC.
(b)	Consists entirely of obligations of consolidated, liquidating securitization entities. See Note 6.
(c)	Included $283 million and $326 million of asset-backed senior notes, issued by consolidated, liquidating securitization entities at March 31, 2009, and December 31, 2008, respectively.
(d)	Included $12,352 million and $11,793 million of deposits in non-U.S. banks at March 31, 2009, and December 31, 2008, respectively.
(e)	Included certificates of deposits distributed by brokers of $13,418 million and $17,841 million at March 31, 2009, and December 31, 2008, respectively.
(f)	Term borrowings from banks with a remaining term to maturity of less than 12 months.
(g)	Entirely variable denomination floating rate demand notes.
(h)	Included borrowings from GECS affiliates of $1,008 million and $1,006 million at March 31, 2009, and December 31, 2008, respectively.
(i)	Included $1,422 million and $2,104 million of asset-backed senior notes, issued by consolidated, liquidating securitization entities at March 31, 2009, and December 31, 2008, respectively. See Note 6.
(j)	Included $450 million of subordinated notes guaranteed by GE at March 31, 2009, and December 31, 2008.
(k)	Subordinated debentures receive rating agency equity credit and were hedged at issuance to the U.S. dollar equivalent of $7,725 million.
(l)	Entirely certificates of deposits distributed by brokers with maturities greater than one year.

 

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10.  FAIR VALUE MEASUREMENTS

 

Effective January 1, 2008, we adopted SFAS 157, Fair Value Measurements, for all financial instruments and non-financial instruments accounted for at fair value on a recurring basis. Effective January 1, 2009, we adopted SFAS 157 for all non-financial instruments accounted for at fair value on a non-recurring basis. SFAS 157 establishes a new framework for measuring fair value and expands related disclosures. Broadly, the SFAS 157 framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. SFAS 157 establishes a three-level valuation hierarchy based upon observable and non-observable inputs.

 

The following describes the valuation methodologies we use to measure non-financial instruments accounted for at fair value on a non-recurring basis. For valuation methodologies relating to financial instruments and non-financial instruments accounted for at fair value on a recurring basis and financial instruments accounted for on a non-recurring basis, see Note 19 to the consolidated financial statements in our 2008 Form 10-K.

 

Investments in subsidiaries and formerly consolidated subsidiaries

 

Upon a change in control that results in consolidation or deconsolidation of a subsidiary, a fair value measurement may be required if we held a noncontrolling investment in the entity and obtain control or sell a controlling interest and retain a noncontrolling stake in the entity. Such investments are valued using a discounted cash flow model, comparative market multiples or a combination of both approaches as appropriate. In applying these methodologies, we rely on a number of factors, including actual operating results, future business plans, economic projections and market data.

 

Long-lived assets

 

Long-lived assets, including aircraft and real estate, may be measured at fair value if such assets are held for sale or when there is a determination that the asset is impaired. The determination of fair value is based on the best information available, including internal cash flow estimates discounted at an appropriate interest rate, quoted market prices when available, market prices for similar assets and independent appraisals, as appropriate. For real estate, cash flow estimates are based on current market estimates that reflect current and projected lease profiles and available industry information about expected trends in rental, occupancy and capitalization rates.

 

The following tables present our assets and liabilities measured at fair value on a recurring basis. Included in the tables are investment securities of $7,790 million and $8,190 million at March 31, 2009 and December 31, 2008, respectively, supporting obligations to holders of guaranteed investment contracts. Such securities are mainly investment grade. Also included are retained interests in securitizations totaling $5,420 million and $5,081 million at March 31, 2009 and December 31, 2008, respectively.

 

 

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(In millions)	Level 1			Level 2			Level 3			FIN 39 netting(a)			Net balance
March 31, 2009
Assets
Investment securities	$	2,976		$	8,482		$	9,126		$	−		$	20,584
Derivatives(b)		–			15,601			580			(6,357	)		9,824
Other(c)		–			889			512			–			1,401
Total	$	2,976		$	24,972		$	10,218		$	(6,357	)	$	31,809
Liabilities
Derivatives	$	−		$	9,518		$	230		$	(6,524	)	$	3,224
Other		–			924			–			–			924
Total	$	−		$	10,442		$	230		$	(6,524	)	$	4,148

December 31, 2008
Assets
Investment securities	$	1,602		$	8,086		$	9,630		$	–		$	19,318
Derivatives(b)		–			17,721			544			(7,054	)		11,211
Other(c)		−			288			551			–			839
Total	$	1,602		$	26,095		$	10,725		$	(7,054	)	$	31,368
Liabilities
Derivatives	$	2		$	10,810		$	162		$	(7,218	)	$	3,756
Other		–			323			–			–			323
Total	$	2		$	11,133		$	162		$	(7,218	)	$	4,079

(a)	FASB Interpretation (FIN) 39, Offsetting of Amounts Related to Certain Contracts, permits the netting of derivative receivables and payables when a legally enforceable master netting agreement exists. Included fair value adjustments related to our own and counterparty credit risk.
(b)	The fair value of derivatives included an adjustment for non-performance risk. At March 31, 2009 and December 31, 2008, the cumulative adjustment was a gain of $167 million and $164 million, respectively.
(c)	Included private equity investments and loans designated under the fair value option.

 

 

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The following tables present the changes in Level 3 instruments measured on a recurring basis for the three months ended March 31, 2009 and 2008. The majority of our Level 3 balances consist of investment securities classified as available-for-sale with changes in fair value recorded in equity.

 

Changes in Level 3 instruments for the three months ended March 31, 2009

 

(In millions)	January 1, 2009			Net realized/ unrealized gains (losses) included in earnings(a)					Net realized/ unrealized gains (losses) included in accumulated other comprehensive income					Purchases, issuances and settlements					Transfers in and/or out of Level 3(b)			March 31, 2009				Net change in unrealized gains (losses) relating to instruments still held at March 31, 2009(c)
Investment securities	$	9,630			$	283				$	(210	)			$	7			$	(584	)	$	9,126				$	110
Derivatives(d)(e)		401				25					(44	)				(7	)			23			398					(15	)
Other		551				(10	)				(18	)				(11	)			−			512					(19	)
Total	$	10,582			$	298				$	(272	)			$	(11	)		$	(561	)	$	10,036				$	76

(a)	Earnings effects are primarily included in the “Revenues from services” and “Interest” captions in the Condensed Statement of Current and Retained Earnings.
(b)	Transfers in and out of Level 3 are considered to occur at the beginning of the period. Transfers out of Level 3 were a result of increased use of quotes from independent pricing vendors based on recent trading activity.
(c)	Represented the amount of unrealized gains or losses for the period included in earnings.
(d)	Earnings from Derivatives were more than offset by $30 million in losses from related derivatives included in Level 2 and $10 million in losses from qualifying fair value hedges.
(e)	Represented derivative assets net of derivative liabilities and included cash accruals of $48 million not reflected in the fair value hierarchy table.

 

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Changes in Level 3 instruments for the three months ended March 31, 2008

 

(In millions)	January 1, 2008			Net realized/ unrealized gains (losses) included in earnings(a)					Net realized/ unrealized gains (losses) included in accumulated other comprehensive income					Purchases, issuances and settlements					Transfers in and/or out of Level 3(b)			March 31, 2008				Net change in unrealized gains (losses) relating to instruments still held at March 31, 2008(c)
Investment securities	$	8,329			$	154				$	(102	)			$	513			$	−		$	8,894				$	(37	)
Derivatives(d)(e)		200				275					57					(43	)			−			489					260
Other		689				(18	)				33					10				−			714					(18	)
Total	$	9,218			$	411				$	(12	)			$	480			$	−		$	10,097				$	205

(a)	Earnings effects are primarily included in the “Revenues from services” and “Interest” captions in the Condensed Statement of Current and Retained Earnings.
(b)	Transfers in and out of Level 3 are considered to occur at the beginning of the period. No transfers occurred during the first quarter of 2008.
(c)	Represented the amount of unrealized gains or losses for the period included in earnings.
(d)	Earnings from Derivatives were more than offset by $141 million in losses from related derivatives included in Level 2 and $148 million in losses from qualifying fair value hedges.
(e)	Represented derivative assets net of derivative liabilities and includes cash accruals of $11 million not reflected in the fair value hierarchy table.

 

Non-Recurring Fair Value Measurements

 

Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. Included in this category are certain loans that are written down to fair value when they are held for sale or when they are written down to the fair value of their underlying collateral when deemed impaired, cost and equity method investments that are written down to fair value when their declines are determined to be other-than-temporary, long-lived assets that are written down to fair value when they are held for sale or determined to be impaired, the remeasurement of retained investments in former consolidated subsidiaries, and the remeasurement of previous equity interests upon acquisition of a controlling interest. At March 31, 2009 and December 31, 2008, these assets totaled $240 million and $48 million, identified as Level 2, and $10,460 million and $3,100 million, identified as Level 3, respectively.

 

The following table represents the fair value adjustments to assets still held at March 31, 2009 and March 31, 2008.

 

	Three months ended March 31
(In millions)	2009			2008
Financing receivables and loans held for sale	$	(324	)	$	(155	)
Cost and equity method investments		(224	)		(66	)
Long-lived assets(a)		(128	)		(26	)
Retained investments in formerly consolidated subsidiaries(a)		226			–
Total	$	(450	)	$	(247	)

(a)	SFAS 157 was adopted for non-financial assets valued on a non-recurring basis as of January 1, 2009.

 

 

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11. DERIVATIVES AND HEDGING

 

On January 1, 2009, we adopted SFAS 161, Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133. The standard supplements the required disclosures provided under SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended, with additional qualitative and quantitative information. Accordingly, the disclosures that follow should be read in the context of our existing disclosure in Note 20 to the consolidated financial statements in our 2008 Form 10-K.

 

We use derivatives for risk management purposes. As a matter of policy, we do not use derivatives for speculative purposes. A key risk management objective for our financial services businesses is to mitigate interest rate and currency risk by ensuring that the characteristics of the debt match the assets they are funding. If the form (fixed versus floating) and currency denomination of the debt we issue do not match the related assets, we execute derivatives to adjust the nature and tenor of debt funding to meet this objective. The determination of whether a derivative is necessary to achieve this objective depends on customer needs for specific types of financing and market factors affecting the type of debt we can issue.

 

Of the outstanding notional amount of $340,000 million, approximately 99%, or $338,000 million, is associated with reducing or eliminating the interest rate, currency or market risk between financial assets and liabilities in our financial services businesses. The remaining derivatives activity primarily relates to hedging against adverse changes in currency exchange rates and commodity prices related to anticipated sales and purchases. These activities are designated as hedges in accordance with SFAS 133, when practicable. When it is not possible to apply hedge accounting, or when the derivative and the hedged item are both recorded in earnings currently, the derivatives are accounted for as economic hedges where hedge accounting is not applied. This most frequently occurs when we hedge a recognized foreign currency transaction (e.g., a receivable or payable) with a derivative. Since the effects of changes in exchange rates are reflected currently in earnings for both the derivative and the underlying, the economic hedge does not require hedge accounting.

 

The following table provides information about the fair value of our derivatives, by contract type, separating those accounted for as hedges under SFAS 133 and those that are not.

 

	At March 31, 2009
	Fair value
(In millions)	Assets			Liabilities
Derivatives accounted for as hedges under SFAS 133
Interest rate contracts	$	7,789		$	4,622
Currency exchange contracts		5,295			3,103
Other contracts		71			−
		13,155			7,725
Derivatives not accounted for as hedges under SFAS 133
Interest rate contracts		1,129			1,168
Currency exchange contracts		1,660			739
Other contracts		237			116
		3,026			2,023
FIN 39 netting adjustment(a)		(6,357	)		(6,524	)
Total	$	9,824		$	3,224

Derivatives are classified in the captions “Other assets” and “Other liabilities” in our financial statements.

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FIN 39 permits the netting of derivative receivables and payables when a legally enforceable master netting agreement exists. Amounts included fair value adjustments related to our own and counterparty credit risk. At March 31, 2009 and December 31, 2008, the cumulative adjustment for non-performance risk was a gain of $167 million and $164 million, respectively.

 

 

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Earnings effects of derivatives on the Statement of Current and Retained Earnings

 

For relationships designated as fair value hedges, which relate entirely to hedges of debt, changes in fair value of the derivatives are recorded in earnings along with offsetting adjustments to the carrying amount of the hedged debt. Through March 31, 2009, such adjustments increased the carrying amount of debt outstanding by $7,181 million. The following table provides information about the earnings effects of our fair value hedging relationships for the three months ended March 31, 2009.

 

			Three months ended March 31, 2009
(In millions)	Financial statement caption		Gain (loss) on hedging derivatives			Gain (loss) on hedged items
Interest rate contracts	Interest		$	(937	)	$	986
Currency exchange contracts	Interest			(967	)		949

Fair value hedges resulted in $31 million of ineffectiveness of which $(27) million reflects amounts excluded from the assessment of effectiveness.

 

For derivatives that are designated in a cash flow hedging relationship, the effective portion of the change in fair value of the derivative is reported in the cash flow hedges subaccount of accumulated other comprehensive income (AOCI) and reclassified into earnings contemporaneously with the earnings effects of the hedged transaction. Earnings effects of the derivative and the hedged item are reported in the same caption in the Statement of Current and Retained Earnings. Hedge ineffectiveness and components of changes in fair value of the derivative that are excluded from the assessment of effectiveness are recognized in earnings each reporting period.

 

For derivatives that are designated as hedges of net investment in a foreign operation, we assess effectiveness based on changes in spot currency exchange rates. Changes in spot rates on the derivative are recorded in the currency translation adjustments subaccount of AOCI until such time as the foreign entity is substantially liquidated or sold. The change in fair value of the forward points, which reflects the interest rate differential between the two countries on the derivative, are excluded from the effectiveness assessment and are recorded currently in earnings.

 

 

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The following tables provide additional information about the financial statement effects related to our cash flow hedges and net investment hedges for the three months ended March 31, 2009.

 

(In millions)	Gain (loss) recognized in OCI			Financial statement caption		Gain (loss) reclassified from AOCI into earnings
Cash flow hedges
Interest rate contracts	$	141		Interest		$	(487	)
Currency exchange contracts		569		Interest			(1	)
				Revenues from services			(269	)
Commodity contracts		1
Total	$	711				$	(757	)

	Gain (loss) recognized in CTA					Gain (loss) reclassified from CTA
Net investment hedges
Currency exchange contracts	$	2,326		Revenues from services		$	(39	)

Of the total pre-tax amount recorded in AOCI, $4,247 million related to cash flow hedges of forecasted transactions of which we expect to transfer $1,922 million to earnings as an expense in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions. In the first quarter of 2009, we recognized insignificant gains and losses related to hedged forecasted transactions and firm commitments that did not occur by the end of the originally specified period. At March 31, 2009, the maximum term of derivative instruments that hedge forecasted transactions was 27 years and related to hedges of anticipated interest payments associated with external debt.

 

For cash flow hedges, the amount of ineffectiveness in the hedging relationship and amount of the changes in fair value of the derivative that are not included in the measurement of ineffectiveness are both reflected in earnings each reporting period. These amounts totaled $(7) million for the three months ended March 31, 2009, and primarily appear in Revenues from services. Ineffectiveness from net investment hedges was $(390) million, which primarily relates to changes in value of the forward points that under our hedge accounting designations are excluded from the assessment of effectiveness and recorded directly into earnings. These amounts appear in the “Interest” caption in the Statement of Current and Retained Earnings.

 

Changes in the fair value of derivatives that are not designated as hedges are recorded in earnings each period. As discussed above, these derivatives are entered into as economic hedges of changes in interest rates, currency exchange rates, commodity prices and other market risks. Gains or losses related to the derivative are recorded in predefined captions in the Statement of Current and Retained Earnings, typically “Revenues from services”, based on our accounting policy. In general, the earnings effects of the item that represents the economic risk exposure is recorded in the same caption as the derivative. Losses for the first quarter of 2009 on derivatives not designated as hedges, without considering the offsetting earnings effects from the item representing the economic risk exposure, were $(13) million, related to interest rate contracts of $148 million, currency exchange contracts of $(206) million and equity, credit and commodity derivatives of $45 million.

 

 

 

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Counterparty credit risk

 

To lower our exposure to credit risk, our standard master agreements typically contain mutual downgrade provisions that provide the ability of each party to require assignment or termination if the long-term credit rating of the counterparty were to fall below A-/A3. In certain of these master agreements, each party also has the ability to require assignment or termination if the short-term rating of the counterparty were to fall below A-1/P-1. The net derivative liability subject to these provisions was approximately $1,810 million at March 31, 2009. In addition to these provisions, we also have collateral arrangements that provide us with the right to hold collateral (cash or U.S. Treasury or other highly-rated securities) when the current market value of derivative contracts exceeds a specified limit. We also have a limited number of such collateral agreements under which we must post collateral. Under these agreements and in the normal course of business, the fair value of collateral posted by counterparties at March 31, 2009 was approximately $8,250 million, of which $131 million was held in cash and $8,119 million represented pledged securities. The fair value of collateral posted by us was approximately $1,021 million, of which $34 million was cash and $987 million represented securities repledged.

 

More information regarding our counterparty credit risk and master agreements can be found in Note 20 to the consolidated financial statements in our 2008 Form 10-K.

 

Guarantees of derivatives

 

We do not sell credit default swaps; however, as part of our risk management services, we provide certain performance guarantees to third-party financial institutions related to plain vanilla interest rate swaps on behalf of some customers related to variable rate loans we have extended to them. The fair value of such guarantees was $30 million at March 31, 2009. The aggregate fair value of customer derivative contracts in a liability position at March 31, 2009, was $363 million before consideration of any offsetting effect of collateral. At March 31, 2009, collateral value was sufficient to cover the loan amount and the fair value of the customer’s derivative, in the event we had been called upon to perform under the derivative. Given our strict underwriting criteria, we believe the likelihood that we will be required to perform under these guarantees is remote.

 

12.  SHAREOWNER’S EQUITY

 

A summary of increases (decreases) in GECC shareowner’s equity that did not result directly from transactions with the shareowner, net of income taxes, follows.

 

	Three months ended March 31
(In millions)		2009			2008
Net earnings attributable to GECC	$	971		$	2,435
Investment securities – net		(40	)		(501	)
Currency translation adjustments – net		(3,024	)		1,109
Cash flow hedges – net		723			(1,678	)
Benefit plans – net		8			13
Total	$	(1,362	)	$	1,378

 

Changes to noncontrolling interests during the first quarter of 2009 resulted from net earnings ($50 million), dividends ($(27) million), the effects of deconsolidating PTL ($(331) million), accumulated other comprehensive income ($(34) million) and other ($56 million). Changes to the individual components of accumulated other comprehensive income attributable to noncontrolling interests were insignificant.

 

During the first quarter of 2009, GE made a $9,500 million capital contribution to GECS, of which GECS subsequently contributed $8,250 million to us. In addition, we issued one share of common stock (par value $14) to GECS for $500 million.

 

 

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13.  OFF-BALANCE SHEET ARRANGEMENTS

 

We securitize financial assets and arrange other forms of asset-backed financing in the ordinary course of business to improve shareowner returns. The securitization transactions we engage in are similar to those used by many financial institutions. Beyond improving returns, these securitization transactions serve as funding sources for a variety of diversified lending and securities transactions. Historically, we have used both GE-supported and third-party Variable Interest Entities (VIEs) to execute off-balance sheet securitization transactions funded in the commercial paper and term markets. The largest single category of VIEs that we are involved with are Qualifying Special Purpose Entities (QSPEs), which meet specific characteristics defined in U.S. GAAP that exclude them from the scope of consolidation standards.

 

Investors in these entities only have recourse to the assets owned by the entity and not to our general credit, unless noted below. We did not provide non-contractual support to any consolidated VIE, unconsolidated VIE or QSPE in the three months ended March 31, 2009. We do not have implicit support arrangements with any VIE or QSPE.

 

Variable Interest Entities

 

When evaluating whether we are the primary beneficiary of a VIE and must therefore consolidate the entity, we perform a qualitative analysis that considers the design of the VIE, the nature of our involvement and the variable interests held by other parties. If that evaluation is inconclusive as to which party absorbs a majority of the entity’s expected losses or residual returns, a quantitative analysis is performed to determine who is the primary beneficiary.

 

Consolidated Variable Interest Entities

 

For additional information about our consolidated VIEs, see Note 21 to the consolidated financial statements in our 2008 Form 10-K. Consolidated VIEs at March 31, 2009 and December 31, 2008 follow:

 

	At
	March 31, 2009						December 31, 2008
(In millions)	Assets			Liabilities			Assets			Liabilities
Consolidated, liquidating securitization entities(a)	$	3,813		$	3,665		$	4,000		$	3,868
Trinity(b)		8,348			10,747			9,192			11,623
Penske Truck Leasing Co., L.P. (PTL)(c)		–			–			7,444			1,339
Other(d)		3,523			2,394			4,503			3,329
	$	15,684		$	16,806		$	25,139		$	20,159

(a)	If the short-term credit rating of GE Capital or these entities were reduced below A–1/P–1, we could be required to provide substitute liquidity for those entities or provide funds to retire the outstanding commercial paper. The maximum net amount that we could be required to provide in the event of such a downgrade is determined by contract, and totaled $3,420 million at March 31, 2009. The borrowings of these entities are reflected in our Statement of Financial Position.
(b)	If the long-term credit rating of GE Capital were to fall below AA-/Aa3 or its short-term credit rating were to fall below A-1+/P-1, GE Capital could be required to provide approximately $3,224 million to such entities as of March 31, 2009, pursuant to letters of credit issued by GE Capital. To the extent that the entities’ liabilities exceed the ultimate value of the proceeds from the sale of their assets and the amount drawn under the letters of credit, GE Capital could be required to provide such excess amount. The borrowings of these entities are reflected in our Statement of Financial Position.
(c)	In the first quarter of 2009, we sold a 1% limited partnership interest in PTL, a previously consolidated VIE, to Penske Truck Leasing Corporation, the general partner of PTL, whose majority shareowner is a member of GE’s Board of Directors.The disposition of the shares, coupled with our resulting minority position on the PTL advisory committee and related changes in our contractual rights, resulted in the deconsolidation of PTL. We recognized a pre-tax gain on the sale of $296 million, including a gain on the remeasurement of our retained investment of $189 million. The measurement of the fair value of our retained investment in PTL was based on a methodology that incorporated both discounted cash flow information and market data. In applying this methodology, we utilized different sources of information, including actual operating results, future business plans, economic projections and market observable pricing multiples of similar businesses. The resulting fair value reflected our position as a noncontrolling shareowner at the conclusion of the transaction.
(d)	The remaining assets and liabilities of VIEs that are included in our consolidated financial statements were acquired in transactions subsequent to adoption of FIN 46(R) on January 1, 2004. Assets of these entities consist of amortizing securitizations of financial assets originated by acquirees in Australia and Japan, and real estate partnerships. There are no recourse arrangements between GE and these entities.

 

 

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Unconsolidated Variable Interest Entities

 

Our involvement with unconsolidated VIEs consists of the following activities: assisting in the formation and financing of an entity, providing recourse and/or liquidity support, servicing the assets and receiving variable fees for services provided. The classification in our financial statements of our variable interests in these entities depends on the nature of the entity. As described below, our retained interests in securitization-related VIEs and QSPEs is reported in financing receivables or investment securities depending on its legal form. Variable interests in partnerships and corporate entities would be classified as either equity method or cost method investments.

 

In the ordinary course of business, we make investments in entities in which we are not the primary beneficiary, but may hold a variable interest such as limited partner equity interests or mezzanine debt investment. These investments are classified in two captions in our financial statements: “Other assets” for investments accounted for under the equity method, and “Financing receivables” for debt financing provided to these entities.

 

Investments in unconsolidated VIEs at March 31, 2009 and December 31, 2008 follow:

 

	At
(In millions)	March 31, 2009			December 31, 2008
Other assets(a)	$	8,257		$	1,897
Financing receivables		642			974
Total investment		8,899			2,871
Contractual obligations to fund new investments		1,460			1,159
Maximum exposure to loss	$	10,359		$	4,030

(a)	At March 31, 2009, our remaining investment in PTL of $6,108 million comprised a 49.9% partnership interest of $935 million and loans and advances of $5,173 million.

 

Other than those entities described above, we also hold passive investments in RMBS, CMBS and asset-backed securities issued by entities that may be either VIEs or QSPEs. Such investments were, by design, investment grade at issuance and held by a diverse group of investors. As we have no formal involvement in such entities beyond our investment, we believe that the likelihood is remote that we would be required to consolidate them. Further information about such investments is provided in Note 5.

 

Securitization Activities

 

We transfer assets to QSPEs in the ordinary course of business as part of our ongoing securitization activities. In our securitization transactions, we transfer assets to a QSPE and receive a combination of cash and retained interests in the assets transferred. The QSPE sells beneficial interests in the assets transferred to third-party investors, to fund the purchase of the assets.

 

The financing receivables in our QSPEs have similar risks and characteristics to our on-book financing receivables and were underwritten to the same standard. Accordingly, the performance of these assets has been similar to our on-book financing receivables; however, the blended performance of the pools of receivables in our QSPEs reflects the eligibility screening requirements that we apply to determine which receivables are selected for sale. Therefore, the blended performance can differ from the on-book performance.

 

When we securitize financing receivables we retain interests in the transferred receivables in two forms: a seller’s interest in the assets of the QSPE, which we classify as financing receivables, and subordinated interests in the assets of the QSPE, which we classify as investment securities.

 

 

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Financing receivables transferred to securitization entities that remained outstanding and our retained interests in those financing receivables at March 31, 2009 and December 31, 2008 follow.

 

(In millions)	Equipment			(a)	Commercial real estate				Credit card receivables				Other assets			Total assets
March 31, 2009
Asset amount outstanding		$	13,365			$	7,758			$	23,049		$	2,234		$	46,406
Included within the amount above are
retained interests of:
Financing receivables(b)			−				−				2,364			−			2,364
Investment securities			139				14				5,179			46			5,378
December 31, 2008
Asset amount outstanding		$	13,298			$	7,970			$	26,046		$	2,782		$	50,096
Included within the amount above are
retained interests of:
Financing receivables(b)			−				–				3,802			–			3,802
Investment securities			148				16				4,806			61			5,031

(a)	Included inventory floorplan receivables.
(b)	Uncertificated seller’s interests.

 

Retained Interests in Securitization Transactions

 

When we transfer financing receivables, we determine the fair value of retained interests received as part of the securitization transaction in accordance with SFAS 157. Further information about how fair value is determined is presented in Note 10. Retained interests in securitized receivables that are classified as investment securities are reported at fair value in each reporting period. These assets decrease as cash is received on the underlying financing receivables. Retained interests classified as financing receivables are accounted for in a similar manner to our on-book financing receivables.

 

 

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Key assumptions used in measuring the fair value of retained interests classified as investment securities and the sensitivity of the current fair value to changes in those assumptions related to all outstanding retained interests at March 31, 2009 and December 31, 2008 follow.

 

(In millions)	Equipment			Commercial real estate			Credit card receivables			Other assets
March 31, 2009
Discount rate(a)		14.0	%		58.9	%		13.9	%		8.7	%
Effect of
10% adverse change	$	(4	)	$	(1	)	$	(56	)	$	−
20% adverse change		(7	)		(2	)		(110	)		−
Prepayment rate(a)(b)		9.5	%		1.6	%		9.2	%		40.7	%
Effect of
10% adverse change	$	−		$	−		$	(82	)	$	−
20% adverse change		(1	)		−			(157	)		−
Estimate of credit losses(a)		0.5	%		5.4	%		13.9	%		0.2	%
Effect of
10% adverse change	$	−		$	−		$	(189	)	$	−
20% adverse change		(1	)		−			(371	)		−
Remaining weighted average
asset lives (in months)		19			81			10			2
Net credit losses for the quarter	$	5		$	−		$	446		$	−
Delinquencies		54			−			1,326			−
December 31, 2008
Discount rate(a)		16.7	%		54.2	%		15.1	%		13.4	%
Effect of
10% adverse change	$	(6	)	$	(1	)	$	(53	)	$	−
20% adverse change		(12	)		(2	)		(105	)		(1	)
Prepayment rate(a)(b)		10.0	%		1.5	%		9.6	%		43.8	%
Effect of
10% adverse change	$	(1	)	$	−		$	(60	)	$	–
20% adverse change		(1	)		−			(118	)		(1	)
Estimate of credit losses(a)		0.4	%		4.9	%		16.2	%		0.1	%
Effect of
10% adverse change	$	(1	)	$	−		$	(223	)	$	–
20% adverse change		(3	)		−			(440	)		–
Remaining weighted average
asset lives (in months)		20			70			10			3
Net credit losses for the year	$	4		$	−		$	1,512		$	−
Delinquencies		27			−			1,833			8

(a)	Based on weighted averages.
(b)	Represented a payment rate on credit card receivables, inventory financing receivables (included within equipment) and trade receivables (included within other assets).

 

 

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Activity related to retained interests classified as investment securities in our consolidated financial statements for the three months ended March 31, 2009 and 2008 follows.

 

	Three months ended March 31
(In millions)	2009			2008
Cash flows on transfers
Proceeds from new transfers	$	−		$	1,323
Proceeds from collections reinvested in revolving period transfers		11,227			14,700
Cash flows on retained interests recorded as investment securities		879			849
Effect on Revenues from services
Net gain on sale	$	280		$	349
Change in fair value on SFAS 155 retained interests		87			(75	)
Other-than-temporary impairments		(8	)		(1	)

 

Derivative activities

 

Our QSPEs use derivatives to eliminate interest rate risk between the assets and liabilities. At inception of the transaction, the QSPE will enter into derivative contracts to receive a floating rate of interest and pay a fixed rate with terms that effectively match those of the financial assets held. In some cases, we are the counterparty to such derivative contracts, in which case a second derivative is executed with a third party to substantially eliminate the exposure created by the first derivative. At March 31, 2009, the fair value of such derivative contracts was $189 million, ($205 million at December 31, 2008). We have no other derivatives arrangements with QSPEs or other VIEs.

 

Servicing activities

 

The amount of our servicing assets and liabilities was insignificant at March 31, 2009 and December 31, 2008. We received servicing fees from QSPEs of $155 million and $164 million, respectively, for the three months ended March 31, 2009 and 2008.

 

At March 31, 2009 and December 31, 2008, accounts payables included $4,069 million and $4,446 million, respectively, representing obligations to QSPEs for collections received in our capacity as servicer from obligors of QSPEs.

 

Included in other receivables at March 31, 2009 and December 31, 2008, were $2,564 million and $2,346 million, respectively, relating to amounts owed by QSPEs to GE, principally for the purchase of financial assets.

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

General Electric Capital Corporation (Registrant)
May 1, 2009		/s/Michael A. Neal
Date		Michael A. Neal Chief Executive Officer

 

 

 

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