GE 2011 Annual Report Download - page 130

128 GE 2011 ANNUAL REPORT
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Note 24.
Variable Interest Entities
We securitize fi nancial assets and arrange other forms of asset-
backed fi nancing in the ordinary course of business. The
securitization transactions we engage in are similar to those used
by many fi nancial institutions. These securitization transactions
serve as alternative funding sources for a variety of diversifi ed
lending and securities transactions. Historically, we have used
both GE-supported and third-party VIEs to execute off-balance
sheet securitization transactions funded in the commercial paper
and term markets. The largest group of VIEs that we are involved
with are former QSPEs, which under guidance in effect through
December 31, 2009 were excluded from the scope of consolida-
tion standards based on their characteristics. Except as noted
below, investors in these entities only have recourse to the assets
owned by the entity and not to our general credit. We do not have
implicit support arrangements with any VIE. We did not provide
non-contractual support for previously transferred fi nancing
receivables to any VIE in 2011 or 2010.
In evaluating whether we have the power to direct the
activities of a VIE that most signifi cantly impact its economic
performance, we consider the purpose for which the VIE was
created, the importance of each of the activities in which it is
engaged and our decision-making role, if any, in those activities
that signifi cantly determine the entity’s economic performance
as compared to other economic interest holders. This evaluation
requires consideration of all facts and circumstances relevant to
decision-making that affects the entity’s future performance and
the exercise of professional judgment in deciding which decision-
making rights are most important.
In determining whether we have the right to receive benefi ts
or the obligation to absorb losses that could potentially be signifi -
cant to the VIE, we evaluate all of our economic interests in the
entity, regardless of form (debt, equity, management and servic-
ing fees, and other contractual arrangements). This evaluation
considers all relevant factors of the entity’s design, including: the
entity’s capital structure, contractual rights to earnings (losses),
subordination of our interests relative to those of other investors,
contingent payments, as well as other contractual arrangements
that have potential to be economically signifi cant. The evalua-
tion of each of these factors in reaching a conclusion about the
potential signifi cance of our economic interests is a matter that
requires the exercise of professional judgment.
Consolidated Variable Interest Entities
We consolidate VIEs because we have the power to direct the
activities that signifi cantly affect the VIEs economic performance,
typically because of our role as either servicer or manager for the
VIE. Our consolidated VIEs fall into three main groups, which are
further described below:
• Trinity comprises two consolidated entities that hold invest-
ment securities, the majority of which are investment grade,
and are funded by the issuance of GICs. These entities were
consolidated in 2003. Since 2004, GECC has fully guaranteed
repayment of these entities’ GIC obligations. If the long-term
credit rating of GECC were to fall below AA-/Aa3 or its short-
term credit rating were to fall below A-1+/P-1, certain GIC
holders could require immediate repayment of their invest-
ment. To the extent that amounts due exceed the ultimate
value of proceeds realized from Trinity assets, GECC would be
required to provide such excess amount. The entities ceased
issuing new investment contracts beginning in the fi rst quarter
of 2010. In 2011, we determined that the letters of credit were
no longer required and were terminated on December 6, 2011.
• Consolidated Securitization Entities (CSEs) comprise primar-
ily our former off-book QSPEs that were consolidated on
January 1, 2010 in connection with our adoption of ASU 2009-
16 & 17. These entities were created to facilitate securitization
of fi nancial assets and other forms of asset-backed fi nancing
which serve as an alternative funding source by providing
access to the commercial paper and term markets. The secu-
ritization transactions executed with these entities are similar
to those used by many fi nancial institutions and substantially
all are non-recourse. We provide servicing for substantially all
of the assets in these entities.
• The fi nancing receivables in these entities have similar risks
and characteristics to our other fi nancing receivables and
were underwritten to the same standard. Accordingly, the
performance of these assets has been similar to our other
fi nancing receivables; however, the blended performance of
the pools of receivables in these entities refl ects the eligibil-
ity criteria that we apply to determine which receivables are
selected for transfer. Contractually the cash fl ows from these
fi nancing receivables must fi rst be used to pay third-party
debt holders as well as other expenses of the entity. Excess
cash fl ows are available to GE. The creditors of these entities
have no claim on other assets of GE.
• Other remaining assets and liabilities of consolidated VIEs
relate primarily to four categories of entities: (1) enterprises we
acquired that had previously created asset-backed fi nancing
entities to fund commercial, middle-market and equipment
loans; we are the collateral manager for these entities; (2) joint
ventures that lease light industrial equipment; (3) insurance
entities that, among other lines of business, provide property
and casualty and workers’ compensation coverage for GE; and
(4) other entities that are involved in power generating and
leasing activities.