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

Following the latest announcement of the financial institutions that returned $8 billion to taxpayers in 2013, it turns out that General Electric may have been the safest bank of them all in the years leading up to the financial crisis.

Jan 7, 2014 at 9:00AM

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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Fool contributor Patrick Morris owns shares of General Electric. The Motley Fool owns shares of Citigroup, General Electric, and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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