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GE agrees to settle DoJ subprime mortgage case for $1.5bn

General Electric‘s new boss took a first step towards ending years of upheaval that has drove the conglomerate from the top tier of American companies, announcing strong revenue growth and a $1.5bn settlement in a longstanding probe into its role in the 2008 financial crisis.

Larry Culp, who took over as chief executive in October, reached the agreement in principle with the US justice department to close an investigation into GE’s sale of subprime mortgages, calming investors’ fears the civil penalty would be higher.

The settlement, which was announced on Thursday alongside fourth-quarter revenues of $33.3bn that were up 5 per cent from a year earlier, sent GE shares soaring, up 14 per cent in midday New York trading.

Despite investors’ enthusiasm, the results continued to show the company was struggling in its division that makes equipment for the power industry, which has proven GE’s undoing almost from the day it acquired Alstom’s power and grid business three years ago.

The unit, which has been hit by a downturn in the market for gas-fired power plants as well as what GE described as “continued execution and operational issues”, suffered a 23 per cent drop in orders last year.

Mr Culp, reporting the first set of results under his leadership, said GE had “made a lot of progress” in addressing its problems, while acknowledging that it still had a great deal of work to do, identifying the power unit as one of his top priorities. He warned there would be “meaningful” job losses in the division beyond the 10,000 cut last year.

Scott Davis of Melius Research wrote in a note that despite the “sobering” numbers from the power division, the earnings statement “feels much better than any GE release in quite some time”, with debt falling and cash flow stabilising.

The justice department settlement, in a probe of operations in GE’s now-defunct subprime mortgage business WMC in 2006-07, was seen by analysts as an encouraging sign the company was reducing the risk that it would be hit with large additional liabilities. The sum was in line with the $1.5bn provision that GE made last year.

Other than the power division, GE’s industrial operations generally performed well, and Mr Culp said the results from aviation, healthcare and renewable energy showed that “we have three businesses that are just knocking the cover off the ball”.

He pointed to the division making aero-engines and other aircraft parts as being “at a wonderful place” as demand for planes remains strong; its revenues were up 21 per cent and profits were up 24 per cent for the quarter at $1.72bn.

He also said there were “no plans to sell” GE Capital Aviation Services, its aircraft leasing business, which has attracted interest from several potential buyers.

“It’s a very good business. It’s one that we like, and it’s tied to the aviation business which is really a core for us,” he said.

At the healthcare division, which GE plans to spin off, profits were up 2 per cent at $1.18bn. Mr Culp told analysts that “we don’t have a date” for the initial public offering for the business, but “we’re on the path toward an IPO here in 2019.”

He did not give any guidance for projected earnings in 2019, which had been expected by some analysts, but said he would be back “soon” with more details on the outlook. The average forecast for adjusted earnings in 2019 was 81 cents, compared to the 65 cents reported for 2018.

John Inch, an analyst at Gordon Haskett Research Advisors, said the more important issue for investors would be the outcome of GE’s divestments. “The guidance for 2019 is not as important as what the company is going to look like in 2020,” he said.


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