The $6.3 Million Hit That Makes General Electric the Big Winner

Last week, the Federal Housing Finance Authority, or FHFA, announced that its tally of settlements in 2013 topped $8 billion -- yet there was one big winner after the dust settled.

The FHFA is the conservator for Fannie Mae (NASDAQOTCBB: FNMA  ) and Freddie Mac (NASDAQOTCBB: FMCC  ) , the two entities responsible for providing funding to the housing market through mortgages purchases and guarantees. It has controlled the companies since September 2008.

Throughout 2013, various banks settled lawsuits for mortgage bonds that were sold to Fannie and Freddie during the years before the financial crisis. The FHFA alleged that the banks misrepresented the underlying quality of the mortgages that were used to create the bonds, which helped lead to the colossal losses and subsequent bailout of Fannie and Freddie during the financial crisis. The lawsuits spanned across 17 institutions and were for mortgages worth upwards of $200 billion. 

JPMorgan Chase (NYSE: JPM  ) headlined the list of banks with its $4 billion settlement in October. Behind JPMorgan was Deutsche Bank, with its $1.9 billion settlement, and UBS, which settled for $885 million. Also, Citigroup (NYSE: C  ) , which announced it had settled, but did not disclose an amount, was cited for $250 million in settlements. But at the very bottom of the list was General Electric (NYSE: GE  ) , which paid out only $6.25 million.

Source: Flickr/Jeffrey Turner.

The big winner
While many people think of GE as an industrial company that does just about anything, it's also the eighth largest financial institution in the country, with more than $525 billion in assets.Yet following the financial crisis, GE's financial arm started experiencing losses, and it ultimately received a $3 billion investment from Warren Buffett to help buoy the stock as questions arose about its staying power.

However, data from The Wall Street Journal suggests that when it came to mortgages, GE may have in fact been one of the safest banks not just in America, but also in the entire world.

Reason to celebrate
Before the latest release from the FHFA, the banks generally paid anywhere between 7% and 14% of the value of the securities that were at the heart of the lawsuits. For example, JPMorgan had $33 billion of bonds in question, and its $4 billion settlement represented a 12% payout. Citigroup fared better, as it had $3.5 billion in securities and it paid out only 7.1% of their value.

Yet the real winner was General Electric, which came in with not only the smallest settlement, but also the smallest amount relative to the securities in question, as GE paid out a settlement equal to only 1.1% of its private-label securities:

Data source: The Wall Street Journal.

Why it matters to investors
Although diving into the litigation of banks and financial institutions isn't the most exciting thing to do, data points like these are nonetheless vital to monitor when crafting an investment decision. They demonstrate that although from first glance banks can appear to be incredibly similar and there is little differentiation between them, there can be vast differences when it comes to the risks each one undertakes.

In the case of General Electric, some investors may be worried that although it is an industrial company, almost 35% of its profits came from its GE Capital segment through the first nine months of 2013. However, this data should ease some concern about the risks the unit undertook. Just because something may be massive in size, that doesn't mean it's a massive risk.

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  • Report this Comment On January 07, 2014, at 12:56 PM, JBMore3 wrote:

    General Electric is a highly diversified company and seems to be set for a good earning report this month. The spin off of consumer credit may help earning along with new purchase and backlog of sales. I like the buy!

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Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

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