Condensed Statement of Current and Retained Earnings

 

(Unaudited)

 

	Three months ended							Nine months ended
	September 30							September 30
(In millions)		2009			2008				2009			2008
Revenues
Revenues from services (Note 9)	$	11,652		$	17,045			$	37,398		$	51,422
Sales of goods		213			579				691			1,474
Total revenues		11,865			17,624				38,089			52,896
Costs and expenses
Interest		4,122			6,675				13,648			19,021
Operating and administrative		3,633			4,580				10,945			13,946
Cost of goods sold		181			486				569			1,264
Investment contracts, insurance losses and insurance annuity benefits		47			108				165			373
Provision for losses on financing receivables		2,860			1,634				7,997			4,437
Depreciation and amortization		2,064			2,355				6,176			6,612
Total costs and expenses		12,907			15,838				39,500			45,653
Earnings (loss) from continuing operations before income taxes		(1,042)			1,786				(1,411)			7,243
Benefit for income taxes		1,145			413				2,978			286
Earnings from continuing operations		103			2,199				1,567			7,529
Earnings (Loss) from discontinued operations, net of taxes (Note 2)		84			(169)				(113)			(551)
Net earnings		187			2,030				1,454			6,978
Less net earnings attributable to noncontrolling interests		16			111				95			210
Net earnings attributable to GECC		171			1,919				1,359			6,768
Dividends		–			(273)				–			(2,292)
Retained earnings at beginning of period(a)		46,662			43,343				45,474			40,513
Retained earnings at end of period	$	46,833		$	44,989			$	46,833		$	44,989
Amounts attributable to GECC
Earnings from continuing operations	$	87		$	2,088			$	1,472		$	7,319
Earnings (loss) from discontinued operations, net of taxes		84			(169)				(113)			(551)
Net earnings attributable to GECC	$	171		$	1,919			$	1,359		$	6,768

 

(a)	Primarily included a cumulative effect adjustment to increase retained earnings in 2009.

 

 

See Note 3 for other-than-temporary impairment amounts.

 

See accompanying notes.

 

 

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General Electric Capital Corporation and consolidated affiliates

 

 

Condensed Statement of Cash Flows

 

(Unaudited)

 

		Nine months ended September 30
(In millions)			2009			2008
Cash flows – operating activities
Net earnings attributable to GECC		$	1,359		$	6,768
Loss from discontinued operations			113			551
Adjustments to reconcile net earnings attributable to GECC
to cash provided from operating activities
Depreciation and amortization of property, plant and equipment			6,176			6,612
Increase (decrease) in accounts payable			(2,422)			(62)
Provision for losses on financing receivables			7,997			4,437
All other operating activities			(12,762)			(462)
Cash from (used for) operating activities – continuing operations			461			17,844
Cash from (used for) operating activities – discontinued operations			(41)			512
Cash from (used for) operating activities			420			18,356
Cash flows – investing activities
Additions to property, plant and equipment			(4,184)			(9,348)
Dispositions of property, plant and equipment			3,921			7,055
Increase in loans to customers			(175,395)			(290,958)
Principal collections from customers – loans			200,097			263,839
Investment in equipment for financing leases			(6,155)			(18,477)
Principal collections from customers – financing leases			13,554			17,850
Net change in credit card receivables			3,859			(2,852)
Proceeds from sale of discontinued operations			–			5,220
Proceeds from principal business dispositions			8,818			4,422
Payments for principal businesses purchased			(5,637)			(24,989)
All other investing activities			35			(969)
Cash from (used for) investing activities – continuing operations			38,913			(49,207)
Cash from (used for) investing activities – discontinued operations			45			(631)
Cash from (used for) investing activities			38,958			(49,838)
Cash flows – financing activities
Net increase (decrease) in borrowings (maturities of 90 days or less)			(33,884)			(16,888)
Newly issued debt
Short-term (91 to 365 days)			4,008			26,982
Long-term (longer than one year)			68,495			72,175
Non-recourse, leveraged lease			–			113
Repayments and other debt reductions
Short-term (91 to 365 days)			(60,158)			(41,778)
Long-term (longer than one year)			(4,664)			(2,471)
Non-recourse, leveraged lease			(587)			(524)
Dividends paid to shareowner			–			(2,291)
Capital contribution and share issuance			8,750			–
All other financing activities			(1,514)			(362)
Cash from (used for) financing activities – continuing operations			(19,554)			34,956
Cash used for financing activities – discontinued operations			–			(4)
Cash from (used for) financing activities			(19,554)			34,952
Increase in cash and equivalents			19,824			3,470
Cash and equivalents at beginning of year			36,610			8,907
Cash and equivalents at September 30			56,434			12,377
Less cash and equivalents of discontinued operations at September 30			184			177
Cash and equivalents of continuing operations at September 30		$	56,250		$	12,200

 

See accompanying notes.

 

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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. See Note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K), which discusses our consolidation and financial statement presentation. GECC includes Commercial Lending and Leasing (CLL), Consumer (formerly GE Money), Real Estate, Energy Financial Services and GE Capital 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 43 of this report. We have reclassified certain prior-period amounts to conform to the current-period’s presentation. Unless otherwise indicated, information in these notes to condensed, consolidated financial statements relates to continuing operations.

 

Accounting Changes

 

The Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Codification (ASC) effective for financial statements issued for interim and annual periods ending after September 15, 2009. The ASC is an aggregation of previously issued authoritative U.S. generally accepted accounting principles (GAAP) in one comprehensive set of guidance organized by subject area. In accordance with the ASC, references to previously issued accounting standards have been replaced by ASC references. Subsequent revisions to GAAP will be incorporated into the ASC through Accounting Standards Updates (ASU).

 

We adopted FASB ASC 820, Fair Value Measurements and Disclosures, in two steps; effective January 1, 2008, we adopted it for all financial instruments and non-financial instruments accounted for at fair value on a recurring basis and effective January 1, 2009, for all non-financial instruments accounted for at fair value on a non-recurring basis. This guidance establishes a new framework for measuring fair value and expands related disclosures. See Note 10.

 

On January 1, 2009, we adopted an amendment to FASB ASC 805, Business Combinations. This amendment significantly changed 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.

 

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

 

In April 2009, the FASB amended FASB ASC 805 and changed the previous accounting for assets and liabilities arising from contingencies in a business combination. We adopted this amendment retrospectively effective January 1, 2009. The amendment requires pre-acquisition contingencies to be recognized at fair value, if fair value can be determined or reasonably estimated during the measurement period. If fair value cannot be determined or reasonably estimated, the standard requires measurement based on the recognition and measurement criteria of FASB ASC 450, Contingencies.

 

 

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On January 1, 2009, we adopted an amendment to FASB ASC 810, Consolidation, which requires us to make certain changes to the presentation of our financial statements. This amendment requires us to classify noncontrolling interests (previously referred to as “minority interest”) as part of consolidated net earnings ($16 million and $111 million for the three months ended September 30, 2009 and 2008, respectively, and $95 million and $210 million for the nine months ended September 30, 2009 and 2008, respectively) and to include the accumulated amount of noncontrolling interests as part of shareowner’s equity ($2,129 million and $2,383 million at September 30, 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 the GECC shareowner and amounts attributable to the noncontrolling interests – previously classified as minority interest outside of shareowner’s equity. Beginning January 1, 2009, dividends to noncontrolling interests are classified as financing cash flows. In addition to these financial reporting changes, this guidance 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.

 

Effective April 1, 2009, the FASB amended ASC 820 in relation to determining fair value when the volume and level of activity for an asset or liability have significantly decreased and identifying transactions that are not orderly. Adoption of this amendment had an insignificant effect on our financial statements.

 

Effective April 1, 2009, the FASB amended ASC 320, Investments – Debt and Equity Securities. See Note 3. This amendment modified the existing model for recognition and measurement of impairment for debt securities. The two principal changes to the impairment model for securities are as follows:

 

·

Recognition of an other-than-temporary impairment charge for debt securities is required if any of these conditions are met: (1) we do not expect to recover the entire amortized cost basis of the security, (2) we intend to sell the security or (3) it is more likely than not that we will be required to sell the security before we recover its amortized cost basis.

 

·

If the first condition above is met, but we do not intend to sell and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis, we would be required to record the difference between the security’s amortized cost basis and its recoverable amount in earnings and the difference between the security’s recoverable amount and fair value in other comprehensive income. If either the second or third criteria are met, then we would be required to recognize the entire difference between the security’s amortized cost basis and its fair value in earnings.

 

Interim Period Presentation

 

The condensed, consolidated financial statements and notes thereto are unaudited. 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. We have evaluated subsequent events that have occurred through November 2, 2009, the date of financial statement issuance. 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 2008 Form 10-K. 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.

 

 

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2. DISCONTINUED OPERATIONS

 

Discontinued operations comprised GE Money Japan (our Japanese personal loan business, Lake, and our Japanese mortgage and card businesses, excluding our investment 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 investment 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 $3,000 million. During the second quarter of 2009, we accrued $132 million, which represents the amount by which we expect claims to exceed those levels and is based on our historical and recent claims experience and the estimated future requests, taking into consideration the ability and likelihood of customers to make claims and other industry risk factors. 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 will continue to review our estimated exposure quarterly, and make adjustments when required. GE Money Japan revenues from discontinued operations were an insignificant amount and $209 million in the third quarters of 2009 and 2008, respectively, and an insignificant amount and $760 million in the first nine months of 2009 and 2008, respectively. In total, GE Money Japan losses from discontinued operations, net of taxes, were $10 million and $160 million in the third quarters of 2009 and 2008, respectively, and $142 million and $508 million in the first nine months of 2009 and 2008, respectively.

 

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 $212 million at September 30, 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 $4 million and $(7) million in the third quarters of 2009 and 2008, respectively, and $(5) million and $(64) million in the first nine months of 2009 and 2008, respectively. In total, WMC’s earnings (loss) from discontinued operations, net of taxes, were $3 million and $(8) million in the third quarters of 2009 and 2008, respectively, and $(8) million and $(35) million in the first nine months of 2009 and 2008, respectively.

 

 

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Summarized financial information for discontinued operations is shown below.

 

	Three months ended September 30						Nine months ended September 30
(In millions)	2009			2008			2009			2008
Operations
Total revenues	$	4		$	202		$	(4)		$	696
Earnings (loss) from discontinued operations before income taxes	$	12		$	(206)		$	(100)		$	(488)
Income tax benefit (expense)		(16)			51			26			184
Loss from discontinued operations, net of taxes	$	(4)		$	(155)		$	(74)		$	(304)
Disposal
Earnings (loss) on disposal before income taxes	$	88		$	(1,278)		$	(35)		$	(1,502)
Income tax benefit (expense)		–			1,264			(4)			1,255
Earnings (loss) on disposal, net of taxes	$	88		$	(14)		$	(39)		$	(247)
Earnings (loss) from discontinued operations, net of taxes	$	84		$	(169)		$	(113)		$	(551)
							At
							September 30,			December 31,
(In millions)							2009			2008
Assets
Cash and equivalents							$	184		$	180
Other assets								13			19
Other								1,336			1,441
Assets of discontinued operations							$	1,533		$	1,640
							At
							September 30,			December 31,
(In millions)							2009			2008
Liabilities
Liabilities of discontinued operations							$	843		$	799

 

Assets at September 30, 2009 and December 31, 2008, primarily comprised 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. 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 and retained interests in securitization entities.

 

	At
	September 30, 2009												December 31, 2008
				Gross			Gross									Gross			Gross
	Amortized			unrealized			unrealized			Estimated			Amortized			unrealized			unrealized			Estimated
(In millions)	cost			gains			losses			fair value			cost			gains			losses			fair value
Debt
U.S. corporate	$	4,053		$	85		$	(410)		$	3,728		$	4,456		$	54		$	(637)		$	3,873
State and municipal		1,231			10			(202)			1,039			915			5			(70)			850
Residential mortgage-backed(a)		3,200			21			(828)			2,393			4,228			9			(976)			3,261
Commercial mortgage-backed		1,628			3			(390)			1,241			1,664			-			(509)			1,155
Asset-backed		2,844			35			(330)			2,549			2,922			2			(668)			2,256
Corporate – non-U.S.		832			24			(23)			833			608			6			(23)			591
Government – non-U.S.		2,896			11			(9)			2,898			936			2			(15)			923
U.S. government and
federal agency		2,728			2			-			2,730			26			3			-			29
Retained interests(b)(c)		6,907			223			(44)			7,086			5,144			73			(136)			5,081
Equity
Available-for-sale		982			195			(8)			1,169			1,023			22			(134)			911
Trading		659			-			-			659			388			-			-			388
Total	$	27,960		$	609		$	(2,244)		$	26,325		$	22,310		$	176		$	(3,168)		$	19,318

 

(a)	Substantially collateralized by U.S. mortgages.

 

(b)	Included $1,846 million and $1,752 million of retained interests at September 30, 2009 and December 31, 2008, respectively, accounted for in accordance with FASB ASC 815, Derivatives and Hedging. See Note 12.

 

(c)	Amortized cost and estimated fair value included $2 million of trading securities at September 30, 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
				Gross						Gross
	Estimated			unrealized			Estimated			unrealized
(In millions)	fair value			losses			fair value			losses
September 30, 2009
Debt
U.S. corporate	$	1,273		$	(27)		$	1,485		$	(383)
State and municipal		387			(120)			393			(82)
Residential mortgage-backed		159			(11)			1,633			(817)
Commercial mortgage-backed		-			-			1,016			(390)
Asset-backed		81			(2)			1,378			(328)
Corporate – non-U.S.		203			(10)			305			(13)
Government – non-U.S.		1,067			(7)			224			(2)
U.S. government and federal agency		7			-			-			-
Retained interests		272			(9)			90			(35)
Equity		63			(4)			21			(4)
Total	$	3,512		$	(190)		$	6,545		$	(2,054)
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)

 

We adopted amendments to FASB ASC 320 and recorded a cumulative effect adjustment to increase retained earnings as of April 1, 2009 of $25 million.

 

We regularly review investment securities for impairment using both qualitative and quantitative criteria. We presently do not intend to sell our debt securities and believe that it is not more likely than not that we will be required to sell these securities that are in an unrealized loss position before recovery of our amortized cost. We believe that the unrealized loss associated with our equity securities will be recovered within the foreseeable future.

 

The vast majority of our U.S. corporate debt securities are rated investment grade by the major rating agencies. We evaluate U.S. corporate debt securities based on a variety of factors such as the financial health of and specific prospects for the issuer, including whether the issuer is in compliance with the terms and covenants of the security. In the event a U.S. corporate debt security is deemed to be other-than-temporarily impaired, we isolate the credit portion of the impairment by comparing the present value of our expectation of cash flows to the amortized cost of the security. We discount the cash flows using the original effective interest rate of the security.

 

The vast majority of our residential mortgage-backed securities (RMBS) have investment-grade credit ratings from the major rating agencies and are in a senior position in the capital structure of the deal. Of our total RMBS at September 30, 2009 and December 31, 2008, approximately $968 million and $1,284 million, respectively, relate to residential subprime credit, primarily supporting our guaranteed investment contracts. These are collateralized primarily by pools of individual, direct mortgage loans (a majority of which were originated in 2006 and 2005), not other structured products such as collateralized debt obligations. In addition, of the total residential subprime credit exposure at September 30, 2009 and December 31, 2008, approximately $836 million and $1,089 million, respectively, was insured by monoline insurers.

 

 

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Substantially all of our commercial mortgage-backed securities (CMBS) also have investment-grade credit ratings from the major rating agencies and are in a senior position in the capital structure of the deal. Our CMBS investments are collateralized by both diversified pools of mortgages that were originated for securitization (conduit CMBS) and pools of large loans backed by high quality properties (large loan CMBS), a majority of which were originated in 2006 and 2007.

 

For asset-backed securities, including RMBS, we estimate the portion of loss attributable to credit using a discounted cash flow model that considers estimates of cash flows generated from the underlying collateral. Estimates of cash flows consider internal credit risk, interest rate and prepayment assumptions that incorporate management’s best estimate of key assumptions, including default rates, loss severity and prepayment rates. For CMBS, we estimate the portion of loss attributable to credit by evaluating potential losses on each of the underlying loans in the security. Collateral cash flows are considered in the context of our position in the capital structure of the deal. Assumptions can vary widely depending upon the collateral type, geographic concentrations and vintage.

 

If there has been an adverse change in cash flows for RMBS, management considers credit enhancements such as monoline insurance (which are features of a specific security). In evaluating the overall credit worthiness of the Monoline, we use an analysis that is similar to the approach we use for corporate bonds, including an evaluation of the sufficiency of the Monoline’s cash reserves and capital, ratings activity, whether the Monoline is in default or default appears imminent, and the potential for intervention by an insurance or other regulator.

 

During the three months ended September 30, 2009, we recorded pre-tax, other-than-temporary impairments of $239 million, of which $79 million was recorded through earnings ($18 million relates to equity securities), and $160 million was recorded in Accumulated Other Comprehensive Income (AOCI).

 

Previously recognized other-than-temporary impairments related to credit on securities still held at July 1, 2009 were $159 million. During the third quarter, first time and incremental credit impairments were $27 million and $31 million, respectively. Previous credit impairments relating to securities sold were $82 million.

 

During the period April 1, 2009 through September 30, 2009, we recorded pre-tax, other-than-temporary impairments of $391 million, of which $130 million was recorded through earnings ($26 million relates to equity securities), and $261 million was recorded in AOCI.

 

Previously recognized other-than-temporary impairments related to credit on securities still held at April 1, 2009 were $117 million. During the period April 1, 2009 through September 30, 2009, first time and incremental credit impairments were $48 million and $52 million, respectively. Previous credit impairments relating to securities sold were $82 million.

 

 

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

 

	Three months ended September 30						Nine months ended September 30
(In millions)	2009			2008			2009			2008
Gains	$	36		$	26		$	63		$	133
Losses, including impairments		(101)			(110)			(299)			(210)
Net	$	(65)		$	(84)		$	(236)		$	(77)

 

Although we generally do not have the intent to sell any specific securities at the end of the period, 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 $3,393 million and $887 million in the third quarters of 2009 and 2008, respectively, and $6,671 million and $2,177 million in the first nine months of 2009 and 2008, respectively, principally from the sales and maturities of short-term securities in our bank subsidiaries.

 

We recognized pre-tax gains on trading securities of $29 million and pre-tax losses of $(164) million in the third quarters of 2009 and 2008, respectively, and pre-tax gains of $273 million and $223 million in the first nine months of 2009 and 2008, respectively. Investments in retained interests increased by $210 million and $10 million during the first nine months of 2009 and 2008, respectively, reflecting changes in fair value.

 

4. FINANCING RECEIVABLES AND ALLOWANCE FOR LOSSES ON FINANCING RECEIVABLES

 

Financing receivables - net, consisted of the following.

 

	At
	September 30,			December 31,
(In millions)	2009			2008
Loans, net of deferred income	$	297,568		$	308,821
Investment in financing leases, net of deferred income		57,136			67,077
		354,704			375,898
Less allowance for losses		(7,348)			(5,306)
Financing receivables – net(a)	$	347,356		$	370,592

 

(a)

Included $4,406 million and $6,461 million related to consolidated, liquidating securitization entities at September 30, 2009 and December 31, 2008, respectively. In addition, financing receivables at September 30, 2009 and December 31, 2008 included $2,880 million and $2,736 million, respectively, relating to loans that had been acquired in a transfer but have been subject to credit deterioration since origination per FASB ASC 310, Receivables.

 

 

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Effective January 1, 2009, 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
	September 30,			December 31,
(In millions)	2009			2008
Commercial Lending and Leasing (CLL)(a)
Americas	$	91,807		$	104,462
Europe		39,804			36,972
Asia		14,096			16,683
Other		776			786
		146,483			158,903
Consumer(a)
Non-U.S. residential mortgages		61,308			60,753
Non-U.S. installment and revolving credit		25,197			24,441
U.S. installment and revolving credit		22,324			27,645
Non-U.S. auto		14,366			18,168
Other		13,191			11,541
		136,386			142,548
Real Estate		45,471			46,735
Energy Financial Services		8,326			8,355
GE Capital Aviation Services (GECAS)(b)		14,943			15,326
Other(c)		3,095			4,031
		354,704			375,898
Less allowance for losses		(7,348)			(5,306)
Total	$	347,356		$	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)	Included loans and financing leases of $12,927 million and $13,078 million at September 30, 2009 and December 31, 2008, respectively, related to commercial aircraft at Aviation Financial Services.

 

(c)	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 and specific reserves follows. The vast majority of our consumer and a portion of our CLL nonearning receivables are excluded from this definition, as they represent smaller balance homogeneous loans that we evaluate collectively by portfolio for impairment.

 

	At
	September 30,			December 31,
(In millions)	2009			2008
Loans requiring allowance for losses	$	8,842		$	2,712
Loans expected to be fully recoverable		3,218			871
Total impaired loans	$	12,060		$	3,583
Allowance for losses (specific reserves)	$	1,874		$	635
Average investment during the period		7,463			2,064
Interest income earned while impaired(a)		133			48

 

(a)	Recognized principally on cash basis.

 

 

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Impaired loans increased by $8.5 billion from December 31, 2008 to September 30, 2009 primarily relating to increases at Real Estate ($5.4 billion) and CLL ($2.2 billion). Impaired loans increased by $4.0 billion from June 30, 2009 to September 30, 2009, primarily relating to increases at Real Estate ($2.9 billion) and CLL ($0.7 billion). The increase in impaired loans and related specific reserves in Real Estate reflects our current estimate of collateral values of the underlying properties, and our estimate of loans which are not past due, but for which it is probable that we will be unable to collect the full principal balance at maturity due to a decline in the underlying value of the collateral. Of our $6.2 billion impaired loans at Real Estate at September 30, 2009, approximately $4 billion are currently paying in accordance with the contractual terms of the loan. Impaired loans at CLL primarily represent senior secured lending positions.

 

Allowance for Losses on Financing Receivables

 

	Balance			Provision												Balance
	January 1,			charged to						Gross						September 30,
(In millions)	2009			operations			Other(a)			write-offs			Recoveries			2009
CLL(b)
Americas	$	824		$	945		$	(31)		$	(715)		$	63		$	1,086
Europe		288			412			8			(225)			17			500
Asia		163			188			8			(136)			19			242
Other		2			4			1			(1)			–			6
Consumer(b)
Non-U.S. residential
mortgages		383			805			81			(424)			130			975
Non-U.S. installment
and revolving credit		1,051			1,347			41			(1,702)			376			1,113
U.S. installment and
revolving credit		1,700			2,631			(761)			(2,134)			132			1,568
Non-U.S. auto		222			351			31			(441)			138			301
Other		226			284			25			(329)			73			279
Real Estate		301			903			13			(190)			1			1,028
Energy Financial
Services		58			42			1			–			–			101
GECAS		60			69			–			(3)			–			126
Other		28			16			–			(22)			1			23
Total	$	5,306		$	7,997		$	(583)		$	(6,322)		$	950		$	7,348

 

(a)	Other primarily included the effects of securitization activity and currency exchange.

 

(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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	Balance			Provision												Balance
	January 1,			charged to						Gross						September 30,
(In millions)	2008			operations			Other(a)			write-offs			Recoveries			2008
CLL(b)
Americas	$	451		$	377		$	157		$	(352)		$	50		$	683
Europe		230			146			(58)			(141)			23			200
Asia		226			78			(7)			(188)			5			114
Other		3			2			–			–			–			5
Consumer(b)
Non-U.S. residential
mortgages		246			147			(15)			(135)			52			295
Non-U.S. installment
and revolving credit		1,371			1,259			(57)			(1,968)			722			1,327
U.S. installment and
revolving credit		985			1,908			(416)			(1,477)			215			1,215
Non-U.S. auto		324			260			(59)			(479)			225			271
Other		167			136			25			(182)			54			200
Real Estate		168			47			4			(10)			1			210
Energy Financial
Services		19			12			2			–			–			33
GECAS		8			47			–			(1)			–			54
Other		18			18			(1)			(15)			–			20
Total	$	4,216		$	4,437		$	(425)		$	(4,948)		$	1,347		$	4,627

 

(a)	Other primarily included the effects of securitization activity, currency exchange, 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.

 

 

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5. GOODWILL AND OTHER INTANGIBLE ASSETS

 

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

 

	At
	September 30,			December 31,
(In millions)	2009			2008
Goodwill	$	28,043		$	25,204
Other intangible assets
Intangible assets subject to amortization	$	3,371		$	3,174

 

Changes in goodwill balances follow.

 

				Acquisitions/			Dispositions,
	Balance			acquisition			currency			Balance
	January 1,			accounting			exchange			September 30,
(In millions)	2009			adjustments			and other			2009
CLL	$	12,321	(a)	$	1,262		$	(109)		$	13,474
Consumer		9,407	(a)		1,352			325			11,084
Real Estate		1,159			(7)			57			1,209
Energy Financial Services		2,162			(4)			(39)			2,119
GECAS		155			-			2			157
Total	$	25,204		$	2,603		$	236		$	28,043

 

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

 

 

Goodwill related to new acquisitions in the first nine months of 2009 was $2,384 million and included acquisitions of BAC Credomatic (BAC) ($1,309 million) at Consumer and Interbanca S.p.A. (Interbanca) ($1,075 million) at CLL. During the first nine months of 2009, the goodwill balance increased by $219 million related to acquisition accounting adjustments for prior-year acquisitions. The most significant of these adjustments was an increase of $180 million associated with the 2008 acquisition of CitiCapital at CLL. Also during the first nine months of 2009, goodwill balances increased $236 million, primarily as a result of the weaker U.S. dollar ($1,034 million), partially offset by the deconsolidation of Penske Truck Leasing Co., L.P. (PTL) ($634 million) at CLL.

 

On June 25, 2009, we increased our ownership in BAC from 49.99% to 75% for a purchase price of $623 million, in accordance with terms of a previous agreement. We remeasured our previously held equity investment to fair value, resulting in a pre-tax gain of $343 million, which is reported in Revenues from services.

 

We test goodwill for impairment annually and more frequently if circumstances warrant. We determine fair values for each of the reporting units using an income approach. When available and as appropriate, we use comparative market multiples to corroborate discounted cash flow results. For purposes of the income approach, fair value is 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 use discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. Valuations using the market approach reflect prices and other relevant observable information generated by market transactions involving comparable businesses.

 

 

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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.

 

Given the significant decline in GE’s stock price in the first quarter of 2009 and market conditions in the financial services industry at that time, we conducted an additional impairment analysis of the reporting units during the first quarter of 2009 using data as of January 1, 2009. As a result of these tests, no goodwill impairment was recognized.

 

We performed our annual impairment test for goodwill at all of our reporting units in the third quarter using data as of July 1, 2009. In performing the valuations, we used cash flows which reflected management’s forecasts and discount rates which reflect the risks associated with the current market. Based on the results of our testing, the fair values of CLL, Consumer, Energy Financial Services and GECAS reporting units exceeded their book values; therefore, the second step of the impairment test (in which fair value of each of the reporting unit’s assets and liabilities are measured) was not required to be performed and no goodwill impairment was recognized. Due to the volatility and uncertainties in the current commercial real estate environment, we used a range of valuations to determine the fair value for our Real Estate reporting unit. While the Real Estate reporting unit’s book value was within the range of its fair value, we further substantiated our Real Estate goodwill balance by performing the second step analysis described above. As a result of our tests for Real Estate, no goodwill impairment was recognized. Our Real Estate reporting unit had a goodwill balance of $1,209 million at September 30, 2009.

 

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. 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
	September 30, 2009									December 31, 2008
	Gross									Gross
	carrying			Accumulated						carrying			Accumulated
(In millions)	amount			amortization			Net			amount			amortization			Net
Customer-related	$	1,801		$	(767)		$	1,034		$	1,790		$	(616)		$	1,174
Patents, licenses and trademarks		568			(409)			159			564			(460)			104
Capitalized software		2,161			(1,517)			644			2,148			(1,463)			685
Lease valuations		1,734			(730)			1,004			1,761			(594)			1,167
All other		895			(365)			530			233			(189)			44
Total	$	7,159		$	(3,788)		$	3,371		$	6,496		$	(3,322)		$	3,174

 

Amortization related to intangible assets subject to amortization was $298 million and $273 million for the quarters ended September 30, 2009 and 2008, respectively. Amortization related to intangible assets subject to amortization for the nine months ended September 30, 2009 and 2008, was $708 million and $675 million, respectively.

 

 

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6. BORROWINGS

 

Borrowings are summarized in the following table.

 

	At
(In millions)	September 30,			December 31,
	2009			2008
Short-term borrowings
Commercial paper
U.S.
Unsecured(a)	$	34,669		$	57,665
Asset-backed(b)		2,884			3,652
Non-U.S.		9,871			9,033
Current portion of long-term debt(a)(c)(d)		69,322			69,680
Bank deposits(e)		25,738			29,634
Bank borrowings(f)		5,041			10,569
GE Interest Plus notes(g)		6,520			5,633
Other		1,677			2,735
Total		155,722			188,601
Long-term borrowings
Senior notes
Unsecured(a)(d)(h)		323,518			299,651
Asset-backed(i)		4,069			5,002
Subordinated notes(j)		2,412			2,567
Subordinated debentures(k)		7,706			7,315
Bank deposits(l)		10,649			7,220
Total		348,354			321,755
Total borrowings	$	504,076		$	510,356

 

(a)

GE Capital had issued and outstanding $59,110 million ($3,660 million commercial paper and $55,450 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 September 30, 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 GE Capital debt that is guaranteed by the FDIC.

 

(b)	Consists entirely of obligations of consolidated, liquidating securitization entities. See Note 12.

 

(c)	Included $239 million and $326 million of asset-backed senior notes, issued by consolidated, liquidating securitization entities at September 30, 2009 and December 31, 2008, respectively.

 

(d)	Included $1,665 million ($74 million short-term and $1,591 million long-term) of borrowings under European government-sponsored programs at September 30, 2009.

 

(e)	Included $20,893 million and $11,793 million of deposits in non-U.S. banks at September 30, 2009 and December 31, 2008, respectively, and included certificates of deposits distributed by brokers of $4,845 million and $17,841 million at September 30, 2009 and December 31, 2008, respectively.

 

(f)	Term borrowings from banks with an original term to maturity of less than 12 months.

 

(g)	Entirely variable denomination floating rate demand notes.

 

(h)	Included borrowings from GECS affiliates of $1,011 million and $1,006 million at September 30, 2009 and December 31, 2008, respectively.

 

(i)	Included $895 million and $2,104 million of asset-backed senior notes, issued by consolidated, liquidating securitization entities at September 30, 2009 and December 31, 2008, respectively. See Note 12.

 

(j)	Included $117 million and $450 million of subordinated notes guaranteed by GE at September 30, 2009 and December 31, 2008, respectively.

 

(k)	Subordinated debentures receive rating agency equity credit and were hedged at issuance to the U.S. dollar equivalent of $7,725 million.

 

(l)	Included certificates of deposits distributed by brokers with maturities greater than one year of $9,898 million and $6,699 million at September 30, 2009 and December 31, 2008, respectively.

 

 

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7. 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 in the first quarter 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
	September 30,			December 31,
(In millions)	2009			2008
Unrecognized tax benefits	$	3,711		$	3,454
Portion that, if recognized, would reduce tax expense and effective tax rate(a)		1,822			1,734
Accrued interest on unrecognized tax benefits		701			693
Accrued penalties on unrecognized tax benefits		72			65
Reasonably possible reduction to the balance of unrecognized
tax benefits in succeeding 12 months		0-300			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.

 

 

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.

 

8. 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 September 30						Nine months ended September 30
(In millions)	2009			2008			2009			2008
Net earnings attributable to GECC	$	171		$	1,919		$	1,359		$	6,768
Investment securities – net		420			(367)			936			(1,108)
Currency translation adjustments – net		896			(3,389)			2,603			(2,600)
Cash flow hedges – net		(17)			(1,513)			1,299			(1,399)
Benefit plans – net		2			3			(7)			21
Total	$	1,472		$	(3,347)		$	6,190		$	1,682

 

 

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Changes to noncontrolling interests during the third quarter of 2009 resulted from net earnings ($16 million), dividends ($(6) million), AOCI ($(9) million) and other ($10 million). Changes to the individual components of AOCI attributable to noncontrolling interests were insignificant.

 

Changes to noncontrolling interests during the first nine months of 2009 resulted from net earnings ($95 million), dividends ($(12) million), the effects of deconsolidating PTL ($(331) million, including $101 million of AOCI), other AOCI ($(17) million) and other ($11 million). Changes to the individual components of AOCI 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.

 

9. REVENUES FROM SERVICES

 

Revenues from services are summarized in the following table.

 

	Three months ended September 30						Nine months ended September 30
(In millions)	2009			2008			2009			2008
Interest on loans	$	4,906		$	7,153		$	15,012		$	20,258
Equipment leased to others		2,894			3,953			9,283			11,644
Fees		1,158			1,985			3,417			4,716
Financing leases		791			1,099			2,517			3,438
Real estate investments		410			798			1,125			3,088
Associated companies		277			560			751			1,676
Investment income(a)		379			300			1,303			1,446
Net securitization gains		403			275			1,043			897
Other items(b)(c)		434			922			2,947			4,259
Total	$	11,652		$	17,045		$	37,398		$	51,422

 

(a)	Included net other-than-temporary impairments on investment securities of $79 million and $109 million in the third quarters of 2009 and 2008, respectively, and $272 million and $206 million in the first nine months of 2009 and 2008, respectively. See Note 3.

 

(b)	Included a gain on the sale of a limited partnership interest in 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 12.

 

(c)	Included a gain of $343 million on the remeasurement to fair value of our equity method investment in BAC, following our acquisition of a controlling interest in the second quarter of 2009. See Note 5.

 

 

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10. FAIR VALUE MEASUREMENTS

 

We adopted FASB ASC 820 in two steps; effective January 1, 2008, we adopted it for all financial instruments and non-financial instruments accounted for at fair value on a recurring basis and effective January 1, 2009, for all non-financial instruments accounted for at fair value on a non-recurring basis. This guidance establishes a new framework for measuring fair value and expands related disclosures. Broadly, the 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. It also establishes a three-level valuation hierarchy based upon observable and non-observable inputs.

 

For financial assets and liabilities, fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.

 

Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:

 

Level 1  –                      Quoted prices for identical instruments in active markets.

 

Level 2  –                       Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 

Level 3  –                       Significant inputs to the valuation model are unobservable.

 

We maintain policies and procedures to value instruments using the best and most relevant data available. In addition, we have risk management teams that review valuation, including independent price validation for certain instruments. Further, in other instances, we retain independent pricing vendors to assist in valuing certain instruments.

 

The following section describes the valuation methodologies we use to measure different financial instruments at fair value on a recurring basis. There has been no change to the valuation methodologies during 2009.

 

Investments in Debt and Equity Securities

 

When available, we use quoted market prices to determine the fair value of investment securities, and they are included in Level 1. Level 1 securities primarily include publicly-traded equity securities.

 

When quoted market prices are unobservable, we obtain pricing information from an independent pricing vendor. The pricing vendor uses various pricing models for each asset class that are consistent with what other market participants would use. The inputs and assumptions to the model of the pricing vendor are derived from market observable sources including: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and other market-related data. Since many fixed income securities do not trade on a daily basis, the methodology of the pricing vendor uses available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. The pricing vendor considers all available market observable inputs in determining the evaluation for a security. Thus, certain securities may not be priced using quoted prices, but rather determined from market observable information. These investments are included in Level 2 and primarily comprise our portfolio of corporate fixed income, and government, mortgage and asset-backed securities. In infrequent circumstances, our pricing vendors may provide us with valuations that are based on significant unobservable inputs, and in those circumstances we classify the investment securities in Level 3.

 

 

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Annually, we conduct reviews of our primary pricing vendor, with the assistance of an accounting firm, to validate that the inputs used in that vendor’s pricing process are deemed to be market observable as defined in the standard. While we were not provided access to proprietary models of the vendor, our reviews have included on-site walk-throughs of the pricing process, methodologies and control procedures for each asset class and level for which prices are provided. Our review also included an examination of the underlying inputs and assumptions for a sample of individual securities across asset classes, credit rating levels and various durations, a process we continue to perform for each reporting period. In addition, the pricing vendor has an established challenge process in place for all security valuations, which facilitates identification and resolution of potentially erroneous prices. We believe that the prices received from our pricing vendor are representative of prices that would be received to sell the assets at the measurement date (exit prices) and are classified appropriately in the hierarchy.

 

We use non-binding broker quotes as our primary basis for valuation when there is limited, or no, relevant market activity for a specific instrument or for other instruments that share similar characteristics. We have not adjusted the prices we have obtained. Investment securities priced using non-binding broker quotes are included in Level 3. As is the case with our primary pricing vendor, third-party brokers do not provide access to their proprietary valuation models, inputs and assumptions. Accordingly, our risk management personnel conduct internal reviews of pricing for all such investment securities quarterly to ensure reasonableness of valuations used in our financial statements. These reviews are designed to identify prices that appear stale, those that have changed significantly from prior valuations, and other anomalies that may indicate that a price may not be accurate. Based on the information available, we believe that the fair values provided by the brokers are representative of prices that would be received to sell the assets at the measurement date (exit prices). Level 3 investment securities valued using non-binding broker quotes totaled $620 million and $556 million at September 30, 2009 and December 31, 2008, respectively, and were classified as available-for-sale securities.

 

Retained interests in securitizations are valued using a discounted cash flow model that considers the underlying structure of the securitization and estimated net credit exposure, prepayment assumptions, discount rates and expected life.

 

Private equity investments held in investment company affiliates are initially valued at cost. Valuations are reviewed at the end of each quarter utilizing available market data to determine whether or not any fair value adjustments are necessary. Such market data include any comparable public company trading multiples. Unobservable inputs include company-specific fundamentals and other third-party transactions in that security. These investments are generally included in Level 3.

 

Derivatives

 

We use closing prices for derivatives included in Level 1, which are traded either on exchanges or liquid over-the-counter markets.

 

The majority of our derivatives portfolio is valued using internal models. The models maximize the use of market observable inputs including interest rate curves and both forward and spot prices for currencies and commodities. Derivative assets and liabilities included in Level 2 primarily represent interest rate swaps, cross-currency swaps and foreign currency and commodity forward and option contracts.

 

Derivative assets and liabilities included in Level 3 primarily represent interest rate products that contain embedded optionality or prepayment features.

 

The following tables present our assets and liabilities measured at fair value on a recurring basis. Included in the tables are investment securities of $7,204 million and $8,190 million at September 30, 2009 and December 31, 2008, respectively, supporting obligations to holders of guaranteed investment contracts. Such securities are mainly investment grade.

 

 

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(In millions)										Netting
	Level 1			Level 2			Level 3				adjustment	(a)	Net balance
September 30, 2009
Assets
Investment securities
Debt
U.S. corporate	$	180		$	1,981		$	1,567		$	–		$	3,728
State and municipal		185			607			247			–			1,039
Residential mortgage-backed		–			2,348			45			–			2,393
Commercial mortgage-backed		–			1,188			53			–			1,241
Asset-backed		–			716			1,833			–			2,549
Corporate - non-U.S.		238			43			552			–			833
Government - non-U.S.		1,156			1,576			166			–			2,898
U.S. government and federal agency		8			2,722			–			–			2,730
Retained interests		–			–			7,086			–			7,086
Equity
Available-for-sale		508			643			18			–			1,169
Trading		659			–			–			–			659
Derivatives(b)		–			11,620			434			(4,541)			7,513
Other(c)		–			–			604			–			604
Total	$	2,934		$	23,444		$	12,605		$	(4,541)		$	34,442
Liabilities
Derivatives	$	–		$	8,108		$	275		$	(4,567)		$	3,816
Other		–			32			–			–			32
Total	$	–		$	8,140		$	275		$	(4,567)		$	3,848
December 31, 2008
Assets
Investment securities
Debt
U.S. corporate	$	525		$	1,708		$	1,640		$	–		$	3,873
State and municipal		–			603			247			–			850
Residential mortgage-backed		30			3,113			118			–			3,261
Commercial mortgage-backed		–			1,098			57			–			1,155
Asset-backed		–			676			1,580			–			2,256
Corporate - non-U.S.		69			50			472			–			591
Government - non-U.S.		495			11			417			–			923
U.S. government and federal agency		5			24			–			–			29
Retained interests		–			–			5,081			–			5,081
Equity
Available-for-sale		395			498			18			–			911
Trading		83			305			–			–			388
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	$	2		$	10,810		$	162		$	(7,218)		$	3,756
Derivatives		–			323			–			–			323
Other	$	2		$	11,133		$	162		$	(7,218)		$	4,079
Total

 

(a)	The netting of derivative receivables and payables is permitted 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 September 30, 2009 and December 31, 2008, the cumulative adjustment was a gain of $26 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 September 30, 2009 and 2008, and the nine months ended September 30, 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 shareowner’s equity.

 

Changes in Level 3 Instruments for the Three Months Ended September 30, 2009

 

(In millions)							Net realized/													Net change
							unrealized													in unrealized
							gains (losses)													gains (losses)
				Net realized/			included in													relating to
				unrealized			accumulated			Purchases,			Transfers							instruments
				gains(losses)			other			issuances			in and/or							still held at
	July 1,			included in			comprehensive			and			out of			September 30,				September 30,
	2009			earnings		(a)	income			settlements			Level 3		(b)	2009				2009		(c)
Investment securities
Debt
U.S. corporate	$	1,546		$	(38)		$	69		$	(8)		$	(2)		$	1,567			$	–
State and municipal		157			–			6			73			11			247				–
Residential
mortgage-backed		51			–			3			–			(9)			45				–
Commercial
mortgage-backed		50			–			3			–			–			53				–
Asset-backed		1,748			(9)			14			(28)			108			1,833				–
Corporate - non-U.S.		452			12			58			(4)			34			552				–
Government
- non-U.S.		142			–			10			14			–			166				–
U.S. government and
federal agency		–			–			–			–			–			–				–
Retained interests		6,259			250			46			531			–			7,086				75
Equity
Available-for-sale		16			–			2			–			–			18				–
Trading		–			–			–			–			–			–				–
Derivatives(d)		380			(17)			26			(15)			(184)			190				(10)
Other		571			12			21			–			–			604				12
Total	$	11,372		$	210		$	258		$	563		$	(42)		$	12,361			$	77

 

(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)	Represented derivative assets net of derivative liabilities and included cash accruals of $31 million not reflected in the fair value hierarchy table.

 

 

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Changes in Level 3 Instruments for the Three Months Ended September 30, 2008

 

(In millions)							Net realized/													Net change
							unrealized													in unrealized
							gains (losses)													gains (losses)
				Net realized/			included in													relating to
				unrealized			accumulated			Purchases,			Transfers							instruments
				gains(losses)			other			issuances			in and/or							still held at
	July 1,			included in			comprehensive			and			out of			September 30,				September 30,
	2008			earnings		(a)	income			settlements			Level 3		(b)	2008				2008		(c)
Investment securities	$	9,797		$	284		$	(215)		$	(477)		$	(75)		$	9,314			$	128
Derivatives(d)(e)		414			301			17			(30)			7			709				268
Other		715			(34)			(37)			1			–			645				(31)
Total	$	10,926		$	551		$	(235)		$	(506)		$	(68)		$	10,668			$	365

 

(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.

 

(c)	Represented the amount of unrealized gains or losses for the period included in earnings.

 

(d)	Earnings from derivatives were more than offset by $85 million in losses from related derivatives included in Level 2 and $253 million in losses from qualifying fair value hedges.

 

(e)	Represented derivative assets net of derivative liabilities and included cash accruals of $19 million not reflected in the fair value hierarchy table.

 

 

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Changes in Level 3 Instruments for the Nine Months Ended September 30, 2009

 

(In millions)							Net realized/													Net change
							unrealized													in unrealized
							gains (losses)													gains (losses)
				Net realized/			included in													relating to
				unrealized			accumulated			Purchases,			Transfers							instruments
				gains(losses)			other			issuances			in and/or							still held at
	January 1,			included in			comprehensive			and			out of			September 30,				September 30,
	2009			earnings		(a)	income			settlements			Level 3		(b)	2009				2009		(c)
Investment securities
Debt
U.S. corporate	$	1,640		$	(26)		$	69		$	(11)		$	(105)		$	1,567			$	–
State and municipal		247			–			(101)			65			36			247				–
Residential
mortgage-backed		118			–			(6)			(20)			(47)			45				–
Commercial
mortgage-backed		57			–			(4)			–			–			53				–
Asset-backed		1,580			(1)			232			55			(33)			1,833				–
Corporate - non-U.S.		472			(3)			46			43			(6)			552				–
Government
- non-U.S.		418			–			6			17			(275)			166				–
U.S. government and
federal agency		–			–			–			–			–			–				–
Retained interests		5,081			856			244			905			–			7,086				167
Equity
Available-for-sale		17			–			2			(1)			–			18				–
Trading		–			–			–			–			–			–				–
Derivatives(d)(e)		401			60			(40)			(82)			(149)			190				(114)
Other		551			(7)			31			29			–			604				(10)
Total	$	10,582		$	879		$	479		$	1,000		$	(579)		$	12,361			$	43

 

(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 partially offset by $56 million in losses from related derivatives included in Level 2.

 

(e)	Represented derivative assets net of derivative liabilities and included cash accruals of $31 million not reflected in the fair value hierarchy table.

 

 

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Changes in Level 3 Instruments for the Nine Months Ended September 30, 2008

 

(In millions)							Net realized/													Net change
							unrealized													in unrealized
							gains (losses)													gains (losses)
				Net realized/			included in													relating to
				unrealized			accumulated			Purchases,			Transfers							instruments
				gains(losses)			other			issuances			in and/or							still held at
	January 1,			included in			comprehensive			and			out of			September 30,				September 30,
	2008			earnings		(a)	income			settlements			Level 3		(b)	2008				2008		(c)
Investment securities	$	8,329		$	665		$	(314)		$	221		$	413		$	9,314			$	102
Derivatives(d)(e)		200			591			43			(132)			7			709				464
Other		689			(42)			(9)			(44)			51			645				9
Total	$	9,218		$	1,214		$	(280)		$	45		$	471		$	10,668			$	575

 

(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.

 

(c)	Represented the amount of unrealized gains or losses for the period included in earnings.

 

(d)	Earnings from derivatives were partially offset by $132 million in losses from related derivatives included in Level 2 and $309 million in losses from qualifying fair value hedges.

 

(e)	Represented derivative assets net of derivative liabilities and included cash accruals of $19 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. These include 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 and the remeasurement of retained investments in formerly consolidated subsidiaries.

 

Non-recurring fair value amounts (as measured at the time of the adjustment) for assets still held at September 30, 2009 and December 31, 2008, totaled $741 million and $48 million, identified as Level 2, and $16,149 million and $3,100 million, identified as Level 3, respectively. Level 3 amounts at September 30, 2009 primarily included our retained investment in PTL ($5,991 million), financing receivables and loans held for sale ($5,404 million), long-lived assets ($3,145 million), primarily real estate held for investment and equipment leased to others, and cost and equity method investments ($1,299 million).

 

The following table represents the fair value adjustments to assets measured at fair value on a non-recurring basis and still held at September 30, 2009 and September 30, 2008.

 

	Three months ended September 30						Nine months ended September 30
(In millions)	2009			2008			2009			2008
Financing receivables and loans held for sale	$	(656)		$	(121)		$	(1,338)		$	(379)
Cost and equity method investments		(219)			(199)			(674)			(275)
Long-lived assets(a)		(351)			(135)			(615)			(180)
Retained investments in formerly consolidated subsidiaries(a)		–			–			237			–
Total	$	(1,226)		$	(455)		$	(2,390)		$	(834)

 

(a)	FASB ASC 820 was adopted for non-financial assets valued on a non-recurring basis as of January 1, 2009.

 

 

 

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The following describes the valuation methodologies we use to measure non-financial instruments accounted for at fair value on a non-recurring basis. There has been no change to the valuation methodologies during 2009.

 

Loans

 

When available, we use observable market data, including pricing on recent closed market transactions, to value loans which are included in Level 2. When this data is unobservable, we use valuation methodologies using current market interest rate data adjusted for inherent credit risk, and such loans are included in Level 3. When appropriate, loans are valued using collateral values as a practical expedient.

 

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.

 

Investments in Subsidiaries and Formerly Consolidated Subsidiaries

 

Upon a change in control that results in deconsolidation of a subsidiary, a fair value measurement may be required if we 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.

 

 

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11. FINANCIAL INSTRUMENTS

 

The following table provides information about the assets and liabilities not carried at fair value in our Statement of Financial Position. Consistent with FASB ASC 825, the table excludes financing leases and non-financial assets and liabilities. Apart from certain of our borrowings and certain marketable securities, few of the instruments identified below are actively traded and their fair values must often be determined using financial models. Realization of the fair value of these instruments depends upon market forces beyond our control, including marketplace liquidity. For a description on how we estimate fair value, see Note 20 to the consolidated financial statements in our 2008 Form 10-K.

 

		At
		September 30, 2009									December 31, 2008
					Assets (liabilities)									Assets (liabilities)
		Notional			Carrying			Estimated			Notional			Carrying			Estimated
(In millions)		amount			amount(net)			fair value			amount			amount(net)			fair value
Assets
Loans	$	(a)		$	290,921		$	272,186		$	(a)		$	304,010		$	291,465
Other commercial mortgages		(a)			132			132			(a)			374			374
Loans held for sale		(a)			1,864			1,898			(a)			3,640			3,670
Other financial instruments(b)		(a)			2,210			2,333			(a)			2,609			2,781
Liabilities
Borrowings(c)(d)		(a)			(504,076)			(505,122)			(a)			(510,356)			(491,240)
Guaranteed investment contracts		(a)			(9,241)			(9,156)			(a)			(10,828)			(10,677)
Insurance - credit life(e)		1,447			(72)			(47)			1,052			(46)			(33)

 

(a)	These financial instruments do not have notional amounts.

 

(b)	Principally cost method investments.

 

(c)	See Note 6.

 

(d)	Fair values exclude interest rate and currency derivatives designated as hedges of borrowings. Had they been included, the fair value of borrowings at September 30, 2009 and December 31, 2008 would have been reduced by $3,367 million and $3,776 million, respectively.

 

(e)	Net of reinsurance of $2,300 million and $3,100 million at September 30, 2009 and December 31, 2008, respectively.

 

 

Loan Commitments

 

		Notional amount at
		September 30,			December 31,
(In millions)		2009			2008
Ordinary course of business lending commitments(a)(b)	$	7,370		$	8,507
Unused revolving credit lines(c)
Commercial		30,259			26,300
Consumer - principally credit cards		245,764			252,867

 

(a)	Excluded investment commitments of $2,493 million and $3,501 million as of September 30, 2009 and December 31, 2008, respectively.

 

(b)	Included a $1,004 million and $1,067 million commitment as of September 30, 2009 and December 31, 2008, respectively, associated with a secured financing arrangement that can increase to a maximum of $4,943 million based on the asset volume under the arrangement.

 

(c)	Excluded inventory financing arrangements, which may be withdrawn at our option, of $13,234 million and $14,503 million as of September 30, 2009 and December 31, 2008, respectively.

 

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Derivatives and Hedging

 

On January 1, 2009, in accordance with FASB ASC 815, we began disclosing additional qualitative and quantitative information about our derivative and hedging activities. The following disclosures should be read in the context of our existing disclosure in Note 20 to the consolidated financial statements in our 2008 Form 10-K.

 

As a matter of policy, we use derivatives for risk management purposes. 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 seeking to ensure 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 typically execute derivatives to adjust the nature and tenor of debt funding to meet this objective. The determination of whether a derivative is used to achieve this objective depends on a number of factors, including customer needs for specific types of financing, and market factors affecting the type of debt we can issue.

 

Of the outstanding notional amount of $312,000 million, approximately 93%, or $289,000 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 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 and 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 and those that are not.

 

	At September 30, 2009
	Fair value
(In millions)	Assets			Liabilities
Derivatives accounted for as hedges
Interest rate contracts	$	5,455		$	3,690
Currency exchange contracts		3,996			3,301
Other contracts		28			2
		9,479			6,993
Derivatives not accounted for as hedges
Interest rate contracts		878			789
Currency exchange contracts		1,423			532
Other contracts		274			69
		2,575			1,390
Netting adjustment(a)		(4,541)			(4,567)
Total	$	7,513		$	3,816

 

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

 

 

(a)

The netting of derivative receivables and payables is permitted when a legally enforceable master netting agreement exists. Amounts included fair value adjustments related to our own and counterparty credit risk. At September 30, 2009 and December 31, 2008, the cumulative adjustment for non-performance risk was a gain of $26 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 September 30, 2009, such adjustments increased the carrying amount of debt outstanding by $4,355 million. The following table provides information about the earnings effects of our fair value hedging relationships for the three and nine months ended September 30, 2009.

 

Three months ended

Nine months ended

September 30, 2009

September 30, 2009

(In millions)

Financial statement caption

Gain (loss)

Gain (loss)

Gain (loss)

Gain (loss)

on hedging

on hedged

on hedging

on hedged

derivatives

items

derivatives

items

Interest rate contracts

Interest

$

1,559

$

(1,768)

$

(3,621)

$

3,478

Currency exchange contracts

Interest

(36)

53

(1,094)

1,085

 

Fair value hedges resulted in $(192) million and $(152) million of ineffectiveness of which $(153) million and $(228) million reflects amounts excluded from the assessment of effectiveness for the three and nine months ended September 30, 2009, respectively.

 

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 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 and nine months ended September 30, 2009.

 

Three months ended September 30, 2009					Financial statement caption		Gain (loss)
							reclassified
		Gain (loss)					from
		recognized					AOCI into
		in OCI					earnings
(In millions)
Cash flow hedges
Interest rate contracts		$	17		Interest		$	(446)
Currency exchange contracts			257		Interest			219
					Revenues from services			(102)
Commodity contracts			(33)
Total		$	241				$	(329)
		Gain (loss)					Gain (loss)
		recognized					reclassified
		in CTA					from CTA
Net investment hedges
Currency exchange contracts		$	(1,916)		Revenues from services		$	(2)

Nine months ended September 30, 2009					Financial statement caption		Gain (loss)
							reclassified
		Gain (loss)					from
		recognized					AOCI into
		in OCI					earnings
(In millions)
Cash flow hedges
Interest rate contracts		$	790		Interest		$	(1,536)
Currency exchange contracts			2,379		Interest			1,215
					Revenues from services			(98)
Commodity contracts			(18)
Total		$	3,151				$	(419)
		Gain (loss)					Gain (loss)
		recognized					reclassified
		in CTA					from CTA
Net investment hedges
Currency exchange contracts		$	(5,075)		Revenues from services		$	(32)

 

Of the total pre-tax amount recorded in AOCI, $3,281 million related to cash flow hedges of forecasted transactions of which we expect to transfer $1,471 million to earnings as an expense in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions. In the first nine months 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 September 30, 2009, the maximum term of derivative instruments that hedge forecasted transactions was 26 years and related to hedges of anticipated interest payments associated with external debt.

 

 

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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 $9 million and $11 million for the three and nine months ended September 30, 2009, respectively, and primarily appear in Revenues from services. Ineffectiveness from net investment hedges was $(99) million and $(656) million for the three and nine months ended September 30, 2009, respectively, which primarily related 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. Gains for the first nine months of 2009 on derivatives not designated as hedges, without considering the offsetting earnings effects from the item representing the economic risk exposure, were $403 million, related to interest rate contracts of $151 million, currency exchange contracts of $198 million and equity, credit and commodity derivatives of $54 million.

 

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 $2,029 million at September 30, 2009. In addition to these provisions, in certain of these master agreements, we also have collateral arrangements that provide us with the right to hold collateral (cash or U.S. Treasuries 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 September 30, 2009, was approximately $7,868 million, of which $2,500 million was held in cash and $5,368 million represented pledged securities. The fair value of collateral posted by us was approximately $1,836 million, of which $1,771 million was cash and $65 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 $28 million at September 30, 2009. The aggregate fair value of customer derivative contracts in a liability position at September 30, 2009, was $314 million before consideration of any offsetting effect of collateral. At September 30, 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.

 

 

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12. 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 nine months ended September 30, 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 September 30, 2009 and December 31, 2008 follow:

 

 

	At
	September 30, 2009						December 31, 2008
(In millions)	Assets			Liabilities			Assets			Liabilities
Consolidated, liquidating securitization entities(a)	$	2,790		$	2,969		$	4,000		$	3,868
Trinity(b)		7,657			9,447			9,192			11,623
Penske Truck Leasing Co., L.P. (PTL)(c)		–			–			7,444			1,339
Other(d)		3,602			1,664			4,574			3,335
	$	14,049		$	14,080		$	25,210		$	20,165

 

(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 $2,900 million at September 30, 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 $2,917 million to such entities as of September 30, 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)

A majority of the remaining assets and liabilities of VIEs that are included in our consolidated financial statements were acquired in transactions subsequent to 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. We have no recourse arrangements with 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 September 30, 2009 and December 31, 2008 follow:

 

	At
(In millions)	September 30,			December 31,
	2009			2008
Other assets(a)	$	8,989		$	2,919
Financing receivables		712			1,045
Total investment		9,701			3,964
Contractual obligations to fund new investments		1,477			1,159
Maximum exposure to loss	$	11,178		$	5,123

 

(a)	At September 30, 2009, our remaining investment in PTL of $5,991 million comprised a 49.9% partnership interest of $950 million and loans and advances of $5,041 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 3.

 

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. In certain credit card receivables trusts, we are required to maintain minimum free equity (subordinated interest) of 4% or 7% depending on the credit rating of GE Capital.

 

 

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Financing receivables transferred to securitization entities that remained outstanding and our retained interests in those financing receivables at September 30, 2009 and December 31, 2008 follow.

 

					Commercial			Credit card			Other			Total
(In millions)		Equipment	(a)(b)		real estate			receivables	(b)		assets			assets
September 30, 2009
Asset amount outstanding	$	10,533		$	7,533		$	24,570		$	1,773		$	44,409
Included within the amount above are
retained interests of:
Financing receivables(c)		–			–			1,770			–			1,770
Investment securities		266			12			6,712			56			7,046
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(c)		–			–			3,802			–			3,802
Investment securities		148			16			4,806			61			5,031

 

(a)	Included inventory floorplan receivables.

 

(b)

As permitted by the terms of the applicable trust documents, in the second and third quarters of 2009, we transferred $268 million of floorplan financing receivables to the GE Dealer Floorplan Master Note Trust and $328 million of credit card receivables to the GE Capital Credit Card Master Note Trust in exchange for additional subordinated interests. These actions had the effect of maintaining the AAA ratings of certain securities issued by these entities.

 

(c)	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. 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 September 30, 2009 and December 31, 2008 follow.

 

(In millions)	Equipment			Commercial			Credit card			Other
				real estate			receivables			assets
September 30, 2009
Discount rate(a)		8.9	%		68.1	%		11.2	%		4.8	%
Effect of
10% adverse change	$	(3)		$	(1)		$	(69)		$	−
20% adverse change		(7)			(2)			(136)			−
Prepayment rate(a)(b)		5.0	%		1.1	%		9.4	%		50.3	%
Effect of
10% adverse change	$	−		$	−		$	(56)		$	−
20% adverse change		−			−			(103)			−
Estimate of credit losses(a)		0.6	%		7.8	%		16.0	%		0.1	%
Effect of
10% adverse change	$	−		$	−		$	(231)		$	−
20% adverse change		(1)			(1)			(459)			−
Remaining weighted average
asset lives (in months)		8			76			10			2
Net credit losses for the quarter	$	–		$	14		$	1,333		$	−
Delinquencies		–			6			1,561			1
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		$	7		$	1,512		$	−
Delinquencies		27			58			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 and nine months ended September 30, 2009 and 2008 follows.

 

	Three months ended September 30						Nine months ended September 30
(In millions)	2009			2008			2009			2008
Cash flows on transfers
Proceeds from new transfers	$	3,724		$	657		$	6924		$	4,313
Proceeds from collections reinvested
in revolving period transfers		10,285			12,856			31,598			42,388
Cash flows on retained interests recorded
as investment securities		1,236			901			3,253			2,752
Effect on Revenues from services
Net gain on sale	$	403		$	275		$	1043		$	897
Change in fair value of retained interests
recorded in earnings		38			103			210			10
Other-than-temporary impairments		(18)			(4)			(34)			(5)

 

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. The fair value of such derivative contracts was a net asset of $123 million and $205 million at September 30, 2009 and December 31, 2008, respectively. We have no other derivatives arrangements with QSPEs or other VIEs.

 

 

Servicing Activities

 

The amount of our servicing assets and liabilities was insignificant at September 30, 2009 and December 31, 2008. We received servicing fees from QSPEs of $144 million and $162 million, respectively, for the three months ended September 30, 2009 and 2008, and $447 million and $486 million, respectively, for the first nine months ended September 30, 2009 and 2008.

 

At September 30, 2009 and December 31, 2008, accounts payable included $3,309 million and $3,456 million, respectively, representing obligations to QSPEs for collections received in our capacity as servicer from obligors of the QSPEs.

 

Included in other receivables at September 30, 2009 and December 31, 2008, were $2,756 million and $2,346 million, respectively, relating to amounts owed by QSPEs to GECC, principally for the purchase of financial assets.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

A. Results of Operations

 

In the accompanying analysis of financial information, we sometimes use information derived from consolidated financial information but not presented in our financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP). Certain of these data are considered “non-GAAP financial measures” under the U.S. Securities and Exchange Commission (SEC) rules. For such measures, we have provided supplemental explanations and reconciliations in Exhibit 99 to this Form 10-Q Report.

 

Unless otherwise indicated, we refer to captions such as revenues and earnings from continuing operations attributable to GECC simply as “revenues” and “earnings” throughout this Management’s Discussion and Analysis. Similarly, discussion of other matters in our condensed, consolidated financial statements relates to continuing operations unless otherwise indicated.

 

 

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Overview

 

Revenues for the third quarter of 2009 were $11.9 billion, a $5.8 billion (33%) decrease from the third quarter of 2008. Revenues for the third quarter of 2009 and 2008 included $0.7 billion and $0.2 billion of revenue from acquisitions, respectively, and in 2009 were reduced by $1.5 billion as a result of dispositions, including the effect of the deconsolidation of Penske Truck Leasing Co., L.P. (PTL). Revenues for the quarter also decreased $4.8 billion compared with the third quarter of 2008 as a result of organic revenue declines and the stronger U.S. dollar. Organic revenue growth excludes the effects of acquisitions, business dispositions (other than dispositions of businesses acquired for investment) and currency exchange rates. Earnings were $0.1 billion, down 96% from $2.1 billion in the third quarter of 2008.

 

Revenues for the first nine months of 2009 were $38.1 billion, a $14.8 billion (28%) decrease from the first nine months of 2008. Revenues for the first nine months of 2009 and 2008 included $2.6 billion and $0.4 billion of revenue from acquisitions, respectively, and in 2009 were reduced by $3.7 billion as a result of dispositions, including the effect of the deconsolidation of PTL. Revenues for the first nine months of 2009 also decreased $13.3 billion compared with the first nine months of 2008 as a result of organic revenue declines and the stronger U.S. dollar. Organic revenue growth excludes the effects of acquisitions, business dispositions (other than dispositions of businesses acquired for investment) and currency exchange rates. Earnings were $1.5 billion, down 80% from $7.3 billion in the first nine months of 2008.

 

Overall, acquisitions contributed $0.7 billion and $1.4 billion to total revenues in the third quarters of 2009 and 2008, respectively. Our earnings in both the third quarters of 2009 and 2008 included approximately $0.1 billion from acquired businesses. We integrate acquisitions as quickly as possible. Only revenues and earnings from the date we complete the acquisition through the end of the fourth following quarter are attributed to such businesses. Dispositions also affected our operations through lower revenues of $1.5 billion and $0.1 billion in the third quarters of 2009 and 2008, respectively. The effect of dispositions on earnings was an insignificant amount in both the third quarters of 2009 and 2008.

 

Acquisitions contributed $2.6 billion and $3.6 billion to total revenues in the first nine months of 2009 and 2008, respectively. Our earnings in the first nine months of 2009 and 2008 included approximately $0.6 billion and $0.4 billion, respectively, from acquired businesses. We integrate acquisitions as quickly as possible. Only revenues and earnings from the date we complete the acquisition through the end of the fourth following quarter are attributed to such businesses. Dispositions also affected our operations through lower revenues of $3.2 billion in the first nine months of 2009 and higher revenues of $0.3 billion in the first nine months of 2008. The effect of dispositions on earnings was an increase of $0.3 billion in both the first nine months of 2009 and 2008.

 

The most significant acquisitions affecting results in the first nine months of 2009 were CitiCapital and Interbanca S.p.A. at Commercial Lending and Leasing (CLL); and BAC Credomatic (BAC) and Bank BPH at Consumer (formerly GE Money).

 

The provision for income taxes was a benefit of $1.1 billion for the third quarter of 2009 (effective tax rate of 109.9%), compared with $0.4 billion benefit for the third quarter of 2008 (effective tax rate of a negative 23.1%). The third quarter 2009 tax benefit when compared to the pre-tax loss results in a positive rate for the quarter. The tax rate increased primarily because of a reduction of income in higher-taxed jurisdictions. This had the effect of increasing the relative impact on the rate of tax benefits from lower-taxed global operations that more than offset the decline in those benefits.

 

The provision for income taxes was a benefit of $3.0 billion for the first nine months of 2009 (effective tax rate of 211.1%), compared with $0.3 billion benefit for the first nine months of 2008 (effective tax rate of negative 3.9%). The tax benefit when compared to the pre-tax loss results in a positive rate for the first nine months of 2009. The tax rate increased primarily because of a reduction of income in higher-taxed jurisdictions. This had the effect of increasing the relative impact on the rate of tax benefits from lower-taxed global operations that more than offset the decline in those benefits. Mitigating the reduction in tax benefits from lower-taxed global operations, were increased benefits from management’s decision (discussed below) in the first quarter to indefinitely reinvest outside the U.S. prior year earnings.

 

 

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During the first quarter of 2009, following the change in our external credit ratings, funding actions taken and our continued review of our operations, liquidity and funding, we determined that undistributed prior-year earnings of non- U.S. subsidiaries of General Electric Capital Corporation (GE Capital or GECC), on which we had previously provided deferred U.S. taxes, would now 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 $0.7 billion in the first quarter of 2009.

 

During the first nine months of 2009, GE Capital provided $51 billion of new financings in the U.S. to various companies, infrastructure projects and municipalities. Additionally, we extended $54 billion of credit to approximately 49 million U.S. consumers. GE Capital provided credit to approximately 19,700 new commercial customers and 26,000 new small businesses during the first nine months of 2009 in the U.S. and ended the period with outstanding credit to more than 350,000 commercial customers and 147,000 small businesses through retail programs in the U.S.

 

Segment Operations

 

Operating segments comprise our five businesses focused on the broad markets they serve: CLL, Consumer, Real Estate, Energy Financial Services and GE Capital Aviation Services (GECAS). The Chairman allocates resources to, and assesses the performance of, these five businesses. We also provide a one-line reconciliation to GECC-only results, the most significant component of these reconciliations is the exclusion of the results of businesses which are not subsidiaries of GECC but instead are direct subsidiaries of General Electric Capital Services (GECS). In addition to providing information on GECS segments in their entirety, we have also provided supplemental information for the geographic regions within the CLL segment for greater clarity.

 

GECC corporate items and eliminations include the effects of eliminating transactions between operating segments; results of our run-off insurance operations remaining in continuing operations attributable to GECC; underabsorbed corporate overhead; certain non-allocated amounts determined by the Chairman; and a variety of sundry items. GECC corporate items and eliminations is not an operating segment. Rather, it is added to operating segment totals to reconcile to consolidated totals on the financial statements.

 

Segment profit is determined based on internal performance measures used by the Chairman to assess the performance of each business in a given period. In connection with that assessment, the Chairman may exclude matters such as charges for restructuring; rationalization and other similar expenses; in-process research and development and certain other acquisition-related charges and balances; technology and product development costs; certain gains and losses from acquisitions or dispositions; and litigation settlements or other charges, responsibility for which preceded the current management team.

 

Segment profit always excludes the effects of principal pension plans, results reported as discontinued operations, earnings attributable to noncontrolling interests of consolidated subsidiaries and accounting changes. Segment profit, which we sometimes refer to as “net earnings”, includes interest and income taxes.

 

We have reclassified certain prior-period amounts to conform to the current period’s presentation.

 

 

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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)
November 2, 2009		/s/Michael A. Neal
Date		Michael A. Neal Chief Executive Officer

 

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