GE 2009 Annual Report Download - page 42

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40 GE 2009 ANNUAL REPORT
In November 2006, the United States Federal District Court
approved a consent decree, which had been agreed to by GE and
the United States Environmental Protection Agency (EPA), that
represents a comprehensive framework for implementation of
EPA’s 2002 Record of Decision to dredge polychlorinated biphenyl
(PCB)-containing sediments in the upper Hudson River. Under the
consent degree, the dredging is to be performed in two phases
and Phase I was completed in May through November of 2009.
Between Phase I and Phase II there will be an intervening peer
review by an independent panel of national experts. The panel
will evaluate the performance of Phase I dredging operations with
respect to Phase I Engineering Performance Standards, evaluate
experience gained from Phase I and may set forth proposed
changes to the standards. This evaluation is expected to conclude
in the summer of 2010 after which EPA, considering the peer
review panel’s recommendations, GE’s proposed changes, and its
own analysis, will issue its regulatory decision setting forth any
changes to the scope of, or performance standards for, Phase II.
Following EPA’s decision, GE has 90 days to either elect to perform
Phase II or to opt out of the project, at which point GE may be
responsible for further costs. Our statement of financial position
as of December 31, 2009, included liabilities for the probable and
estimable costs of the project under the consent decree.
Financial Resources and Liquidity
This discussion of financial resources and liquidity addresses
the Statement of Financial Position, Liquidity and Borrowings,
Debt Instruments, Guarantees and Covenants, the Statement of
Changes in Shareowners’ Equity, the Statement of Cash Flows,
Contractual Obligations, and Variable Interest Entities and Off-
Balance Sheet Arrangements.
Overview of Financial Position
Major changes to our shareowners’ equity are discussed in the
Consolidated Statement of Changes in Shareowners’ Equity section.
In addition, other significant changes to balances in our Statement
of Financial Position follow.
Statement of Financial Position
Because GE and GECS share certain significant elements of their
Statements of Financial Position — property, plant and equipment
and borrowings, for example — the following discussion addresses
significant captions in the “consolidated” statement. Within the
following discussions, however, we distinguish between GE and
GECS activities in order to permit meaningful analysis of each
individual consolidating statement.
INVESTMENT SECURITIES comprise mainly investment-grade debt
securities supporting obligations to annuitants and policyholders
in our run-off insurance operations and holders of guaranteed
investment contracts (GICs), and retained interests in securitiza-
tion entities. The fair value of investment securities increased
to $51.9 billion at December 31, 2009, from $41.4 billion at
December 31, 2008, primarily driven by decreases in unrealized
losses due to market improvements, investment of cash into
short-term investments such as money market funds and certifi-
cates of deposits, and an increase in our retained interests in
securitization entities. Of the amount at December 31, 2009, we
held debt securities with an estimated fair value of $41.7 billion,
which included corporate debt securities, residential mortgage-
backed securities (RMBS) and commercial mortgage-backed
securities (CMBS) with estimated fair values of $25.5 billion,
$3.3 billion and $2.7 billion, respectively. Unrealized losses on
debt securities were $2.6 billion and $5.4 billion at December 31,
2009 and 2008, respectively. This amount included unrealized
losses on corporate debt securities, RMBS and CMBS of $0.8 billion,
$0.8 billion and $0.4 billion, respectively, at December 31, 2009,
as compared with $2.6 billion, $1.1 billion and $0.8 billion,
respectively, at December 31, 2008.
Of the $3.3 billion of RMBS, our exposure to subprime credit
was approximately $0.9 billion. These securities are primarily
held to support obligations to holders of GICs. We purchased no
such securities in 2009 and 2008. These investment securities
are collateralized primarily by pools of individual direct mortgage
loans, and do not include structured products such as collateral-
ized debt obligations. Additionally, a majority of exposure to
residential subprime credit related to investment securities backed
by mortgage loans originated in 2006 and 2005.
The vast majority of our CMBS 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.
We regularly review investment securities for impairment. Our
review uses both qualitative and quantitative criteria. Effective
April 1, 2009, the FASB amended ASC 320, Investments — Debt
and Equity Securities, and modified the requirements for recog-
nizing and measuring other-than-temporary impairment for debt
securities. This did not have a material impact on our results of
operations. 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. If we do not
intend to sell the security and it is not more likely than not that
we will be required to sell the security before recovery of our
amortized cost, we evaluate other qualitative criteria to deter-
mine whether a credit loss exists, 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.
Quantitative criteria include determining whether there has been
an adverse change in expected future cash flows. With respect to
corporate bonds, we placed greater emphasis on the credit
quality of the issuer. With respect to RMBS and CMBS, we placed
greater emphasis on our expectations with respect to cash flows
from the underlying collateral and with respect to RMBS, we
considered other features of the security, principally monoline
insurance. For equity securities, our criteria include the length of
time and magnitude of the amount that each security is in an
unrealized loss position. Our other-than-temporary impairment
reviews involve our finance, risk and asset management functions
as well as the portfolio management and research capabilities of
our internal and third-party asset managers.