GE Capital Fund Breaks the Buck!

-(Barron's)-thanks 'Calculated Risk'

A SHORT-TERM INSTITUTIONAL BOND Fund RUN MANAGED by General Electric Asset Management apparently has suffered losses in mortgage and asset-backed securities and is offering investors the option to redeem their holdings at 96 cents on the dollar.

The GE fund, totaling $5 billion, is an "enhanced" cash fund, meaning it seeks to provide a slightly higher yield than a money-market fund while preserving principal and maintaining an asset value of $1 per share.

The fund has been willing to take more risk than a money-market fund by purchasing floating-rate mortgage and asset securities with high credit ratings. The bulk of the money in the fund comes from GE's pension trust and other GE employee benefit plans.

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 will soon begin to sell certain securities held in the Fund which will result in realized losses and likely bring the Fund's yield to zero."

In the e-mail, GE Asset Management said the fund has "sufficient liquidity to redeem all non-GE subscribers at the current net asset value (.96) but there can be no assurance that this will continue to be the case at any point in the future as the difficulties in this market persist." Outside institutional investors therefore face a 4% loss on their holdings. GE said it plans to soon redeem $250 million from the fund and may liquidate additional holdings in the future.

Based on information on GE Asset Management's Website, the enhanced cash fund has about 27% of its assets in home-equity asset-backed securities, 23% in residential mortgage securities and the rest in a mix of securities, including credit-card securities and corporate bonds. This information is as of June 30.

The 4% loss suffered by outside investors is sizable relative to the added returns that the fund generated relative to short-term investments. The one-year return on the fund through June 30 was 5.49%, versus one-month Libor of 5.39%.

In response to the Barron's inquiry, GE Asset Management said in an e-mail statement that it has "ceased taking new investments" in the fund "based on our belief that recent extreme conditions in the credit markets, including liquidity concerns and value dislocations, will continue in the foreseeable future."

-Why wouldn't GE support the fund and give everyone a full dollar?
-It's only about $200 million.
-Is it a 'moral hazard' to support such a loss? Bank of America and Legg Mason shored up their funds. BAC is rumored to have to put up $500 million and Legg Mason put up $100 million and arranged another $200 million to prop up their money funds.
-It's only a 'moral hazard' if there are more problem funds that will need to be bailed out.
-However, the bulk of the money in the fund comes from GE's pension trust and other GE employee benefit plans.
-Fuck the employees, right. Those pesky pension liabilities. Did FAS 158 go into effect yet?
-I wonder how this will go over in the media.