GE Lets Investors Eat Money Fund Losses

Is the worst damage evident in the credit and mortgage markets? Are there signs that conditions in financial markets have bottomed?

Investors got their answer late in trading on Wednesday when Barron’s Online reported a $5 billion money market fund run by General Electric Co.'s (GE) Asset Management unit offered a handful of outside investors—who put money alongside GE's assets (primarily from GE's pension trust and other GE employee benefit plans)—an option to redeem their holdings at 96 cents on the dollar.

Ironically, prior to Wednesday, shareholders thought that ongoing turmoil in the mortgage markets would no longer have a material impact on GE’s Money Segment unit. As a result of pressures in the U.S. subprime mortgage industry, GE previously committed to a plan to sell its U.S. mortgage business.

In connection with this exit, the Company had recorded an after-tax loss of $43 million in the third quarter of 2007 (which represented the difference between the net book value of the business and the projected sale price). For the three months-ended September 30, 2007, segment profits from GE Money were $942 million, or 13.8 percent of total segment profits.

Barron’s exposed that in a Nov. 8 e-mail to institutional holders of the fund, GE Asset Management cited "extreme conditions in the credit markets" and told investors that "it would soon begin to sell certain securities held in the Fund which would result in realized losses and likely bring the Fund's yield to zero."

GE's fund is slightly different than a traditional money market fund because it is an “enhanced” cash fund, taking on more risk to provide a slightly higher yield. Unlike money market funds, too, the GE Asset Management's GEAM Trust Enhanced Cash Trust never promised to preserve what was invested—i.e. maintaining an asset value of $1 per share.

Still, letting any money fund lose principal is a rare event—given the importance of protecting the financial institution’s reputation and all. Recently Legg Mason (LM), Wachovia (WB), and Bank of America (BAC) ($600 million in reserves!) have all shored up ailing money market funds with their own funds to prevent them from sliding below the dollar-per-dollar-invested level.

That GE is not stepping in—and letting institutional investors eat the 4 percent decline on principal—suggests to us that these initial losses are just the “tip of the iceberg.” Like a floating Bergy Bit—where about 90% of mass lies below the surface of the water—how much GE will book in realized losses and asset impairments in coming quarters is still anyone's guess right now.

Author David J. Phillips does not hold a financial interest in General Electric Co. The 10Q Detective has a Full Disclosure Policy.