General Electric has agreed to pay $1.5 billion to settle a Justice Department investigation of high-risk mortgages handled by its lending business before the 2008 financial crisis.
The Boston-based company, which appointed a new CEO in 2018 for the second time in two years as it grapples with lackluster cash flow and a global slowdown in its power business, set aside money for the payment last April. The company learned that investigators were looking into GE Capital and its WMC subsidiary about three years ago, in December 2015, and Justice subsequently served subpoenas.
GE expects the matter will “conclude expeditiously,” Chief Financial Officer Jamie Miller told investors on an earnings call Thursday. The company said in 2018 that it expected prosecutors to claim WMC violated a 1989 finance law through the origination and sale of so-called subprime loans that were packaged into mortgage-backed securities and sold to investors from 2005 through 2007.
Such securities, which enabled lenders to book profits from home loans immediately while insulating themselves from the risk of borrower defaults, were at the heart of the 2008 financial crisis. The U.S. mortgage market surged to about $15 trillion as lending standards loosened due to the securities. But when housing prices began to tumble in 2006, borrowers found themselves unable to repay the loans or refinance at lower rates, and the notes proved impossible to value.
That led to the failure of investment bank Lehman Brothers in September 2008, froze global credit markets, and forced the U.S. to pour billions of dollars into bailouts to shore up the financial system.
GE completed the sale of WMC in December 2007, a transaction it said at the time was prompted by “pressures in the U.S. subprime mortgage industry.”
