GE 2009 Annual Report Download - page 107

GE 2009 ANNUAL REPORT 105
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Support of customer derivatives
We do not sell protection under credit default swaps; however,
as part of our risk management services, we provide certain
support agreements to third-party financial institutions providing
plain vanilla interest rate derivatives to our customers in connec-
tion with variable rate loans we have extended to them. The
underwriting risk to our customers inherent in these arrange-
ments, together with the related loans, is essentially similar to
that of a fixed rate loan. Under these arrangements, the cus-
tomer’s obligation to us is secured, usually by the asset being
purchased or financed, or by other assets of the customer. In
addition, these arrangements are underwritten to provide for
collateral value that exceeds the combination of the loan amount
and the initial expected future exposure of the derivative. These
support arrangements mature on the same date as the related
financing arrangements or transactions and are across a broad
spectrum of diversified industries and companies. The fair value
of such support agreements was $24 million at December 31,
2009. Because we are supporting the performance of the cus-
tomer under these arrangements, our exposure to loss at any
point in time is limited to the fair value of the customer’s deriva-
tive contracts that are in a liability position. The aggregate fair
value of customer derivative contracts in a liability position at
December 31, 2009, was $260 million before consideration of
any offsetting effect of collateral. At December 31, 2009, collat-
eral 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. If we assumed that,
on January 1, 2010, interest rates moved unfavorably by 100
basis points across the yield curve (a “parallel shift” in that
curve), the effect on the fair value of such contracts, without
considering any potential offset of the underlying collateral,
would have been an increase of $120 million. Given our under-
writing criteria, we believe that the likelihood that we will be
required to perform under these arrangements is remote.
Note 23.
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
alternative 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 have specific characteristics
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 do not have implicit support arrangements with any VIE or
QSPE. We did not provide non-contractual support for previously
transferred financing receivables to any VIE or QSPE in 2009
or 2008.
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.
In 2009, the FASB issued ASU 2009-16 and ASU 2009-17
amendments to ASC 860, Transfers and Servicing, and ASC 810,
Consolidation, respectively, which are effective for us on January 1,
2010. ASU 2009-16 will eliminate the QSPE concept, and ASU
2009-17 will require that all such entities be evaluated for con-
solidation as VIEs, which will result in our consolidating substantially
all of our former QSPEs. Upon adoption we will record assets and
liabilities of these entities at carrying amounts consistent with
what they would have been if they had always been consolidated,
which will require the reversal of a portion of previously recog-
nized securitization gains as a cumulative effect adjustment to
retained earnings.
Consolidated Variable Interest Entities
On July 1, 2003, and January 1, 2004, we were required, as a
result of amendments to U.S. GAAP, to consolidate certain
VIEs with aggregate assets and liabilities of $54.0 billion and
$52.6 billion respectively, which are further described below.
At December 31, 2009, assets and liabilities of those VIEs, and
additional VIEs consolidated as a result of subsequent acquisi-
tions of financial companies, totaled $16,994 million and
$15,231 million, respectively (at December 31, 2008, assets and
liabilities were $26,865 million and $21,428 million, respectively).