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EX-31.A - GECC EX31A 09-30-09 - GENERAL ELECTRIC CAPITAL CORPgeccex31a0903.htm
EX-31.B - GECC EX31B 09-30-09 - GENERAL ELECTRIC CAPITAL CORPgeccex31b0903.htm
EX-99 - GECC EX99 09-30-09 - GENERAL ELECTRIC CAPITAL CORPgeccex99093009.htm
EX-10 - GECC EX10 09-30-09 - GENERAL ELECTRIC CAPITAL CORPgeccex10093009.htm
EX-12 - GECC EX12 09-30-09 - GENERAL ELECTRIC CAPITAL CORPgeccex12093009.htm
EX-32 - GECC EX32 09-30-09 - GENERAL ELECTRIC CAPITAL CORPgeccex32093009.htm

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, D.C. 20549
 
     
 
FORM 10-Q
 

(Mark One)
       
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2009
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________to ___________
_____________________________
 
Commission file number 001-06461
_____________________________
 
GENERAL ELECTRIC CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)

Delaware
 
13-1500700
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
3135 Easton Turnpike, Fairfield, Connecticut
 
06828-0001
(Address of principal executive offices)
 
(Zip Code)

(Registrant’s telephone number, including area code) (203) 373-2211

                                                                                              
(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ¨ 
Accelerated filer ¨
Non-accelerated filer þ
Smaller reporting company ¨

 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
 
At October 30, 2009, 3,985,404 shares of voting common stock, which constitute all of the outstanding common equity, with a par value of $14 per share were outstanding.
 
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT.
 

 
(1)

 


 
General Electric Capital Corporation
 
Part I – Financial Information
 
Page
       
Item 1.
Financial Statements
   
 
Condensed Statement of Current and Retained Earnings
 
3
 
Condensed Statement of Financial Position
 
4
 
Condensed Statement of Cash Flows
 
5
 
Notes to Condensed, Consolidated Financial Statements (Unaudited)
 
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
40
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
61
Item 4.
Controls and Procedures
 
61
       
Part II – Other Information
   
       
Item 1.
Legal Proceedings
 
61
Item 5.
Other Information
 
62
Item 6.
Exhibits
 
63
Signatures
 
64

 
Forward-Looking Statements
 
This document contains “forward-looking statements”- that is, statements related to future, not past, events. In this context, forward-looking statements often address our expected future business and financial performance and financial condition, and often contain words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “see,” or “will.” Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include: the severity and duration of current economic and financial conditions, including volatility in interest and exchange rates, commodity and equity prices and the value of financial assets; the impact of U.S. and foreign government programs to restore liquidity and stimulate national and global economies; the impact of conditions in the financial and credit markets on the availability and cost of our funding and on our ability to reduce our asset levels as planned; the impact of conditions in the housing market and unemployment rates on the level of commercial and consumer credit defaults; our ability to maintain our current credit rating and the impact on our funding costs and competitive position if we do not do so; the soundness of other financial institutions with which we do business; the level of demand and financial performance of the major industries we serve, including, without limitation, real estate and healthcare; the impact of regulation and regulatory, investigative and legal proceedings and legal compliance risks, including the impact of proposed financial services regulation; strategic actions, including acquisitions and dispositions and our success in integrating acquired businesses; and numerous other matters of national, regional and global scale, including those of a political, economic, business and competitive nature. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements.
 

 
(2)

 

Part I. Financial Information
 
 
Item 1. Financial Statements.
 
General Electric Capital Corporation and consolidated affiliates
 
Condensed Statement of Current and Retained Earnings
 
(Unaudited)
 
   
 
Three months ended
   
Nine months ended
 
September 30
   
September 30
(In millions)
 
2009
   
2008
     
2009
   
2008
                         
Revenues
                       
Revenues from services (Note 9)
$
 11,652 
 
$
 17,045 
   
$
 37,398 
 
$
 51,422 
Sales of goods
 
 213 
   
 579 
     
 691 
   
 1,474 
   Total revenues
 
 11,865 
   
 17,624 
     
 38,089 
   
 52,896 
                         
Costs and expenses
                       
Interest
 
 4,122 
   
 6,675 
     
 13,648 
   
 19,021 
Operating and administrative
 
 3,633 
   
 4,580 
     
 10,945 
   
 13,946 
Cost of goods sold
 
 181 
   
 486 
     
 569 
   
 1,264 
Investment contracts, insurance losses and insurance annuity benefits
 
 47 
   
 108 
     
 165 
   
 373 
Provision for losses on financing receivables
 
 2,860 
   
 1,634 
     
 7,997 
   
 4,437 
Depreciation and amortization
 
 2,064 
   
 2,355 
     
 6,176 
   
 6,612 
   Total costs and expenses
 
 12,907 
   
 15,838 
     
 39,500 
   
 45,653 
                         
Earnings (loss) from continuing operations before income taxes
 
 (1,042)
   
 1,786 
     
 (1,411)
   
 7,243 
Benefit for income taxes
 
 1,145 
   
 413 
     
 2,978 
   
 286 
                         
Earnings from continuing operations
 
 103 
   
 2,199 
     
 1,567 
   
 7,529 
Earnings (Loss) from discontinued operations, net of taxes (Note 2)
 
 84 
   
 (169)
     
 (113)
   
 (551)
Net earnings
 
 187 
   
 2,030 
     
 1,454 
   
 6,978 
Less net earnings attributable to noncontrolling interests
 
 16 
   
 111 
     
 95 
   
 210 
Net earnings attributable to GECC
 
 171 
   
 1,919 
     
 1,359 
   
 6,768 
Dividends
 
 – 
   
 (273)
     
 – 
   
 (2,292)
Retained earnings at beginning of period(a)
 
 46,662 
   
 43,343 
     
 45,474 
   
 40,513 
Retained earnings at end of period
$
 46,833 
 
$
 44,989 
   
$
 46,833 
 
$
 44,989 
                         
Amounts attributable to GECC
                       
Earnings from continuing operations
$
 87 
 
$
 2,088 
   
$
 1,472 
 
$
 7,319 
Earnings (loss) from discontinued operations, net of taxes
 
 84 
   
 (169)
     
 (113)
   
 (551)
Net earnings attributable to GECC
$
 171 
 
$
 1,919 
   
$
 1,359 
 
$
 6,768 
                         

 
(a)    
Primarily included a cumulative effect adjustment to increase retained earnings in 2009.
 

 
See Note 3 for other-than-temporary impairment amounts.
 
See accompanying notes.
 

 
(3)

 

General Electric Capital Corporation and consolidated affiliates
 
 
   
September 30,
 
December 31,
(In millions)
 
2009
 
2008
   
(Unaudited)
   
Assets
           
Cash and equivalents
 
$
 56,250 
 
$
 36,430 
Investment securities (Note 3)
   
 26,325 
   
 19,318 
Inventories
   
 79 
   
 77 
Financing receivables – net (Note 4)
   
 347,356 
   
 370,592 
Other receivables
   
 20,748 
   
 22,175 
Property, plant and equipment, less accumulated amortization of $26,458
           
   and $29,026
   
 58,685 
   
 64,043 
Goodwill (Note 5)
   
 28,043 
   
 25,204 
Other intangible assets – net (Note 5)
   
 3,371 
   
 3,174 
Other assets
   
 87,133 
   
 84,201 
Assets of businesses held for sale
   
 1,263 
   
 10,556 
Assets of discontinued operations (Note 2)
   
 1,533 
   
 1,640 
Total assets
 
$
 630,786 
 
$
 637,410 
             
Liabilities and equity
           
Short-term borrowings (Note 6)
 
$
 155,722 
 
$
 188,601 
Accounts payable
   
 12,560 
   
 14,863 
Long-term borrowings (Note 6)
   
 348,354 
   
 321,755 
Investment contracts, insurance liabilities and insurance annuity benefits
   
 9,640 
   
 11,403 
Other liabilities
   
 20,099 
   
 30,629 
Deferred income taxes
   
 8,128 
   
 8,112 
Liabilities of businesses held for sale
   
 143 
   
 636 
Liabilities of discontinued operations (Note 2)
   
 843 
   
 799 
Total liabilities
   
 555,489 
   
 576,798 
             
Capital stock
   
 56 
   
 56 
Accumulated other comprehensive income – net(a)
           
   Investment securities
   
 (1,077)
   
 (2,013)
   Currency translation adjustments
   
 1,266 
   
 (1,337)
   Cash flow hedges
   
 (1,954)
   
 (3,253)
   Benefit plans
   
 (374)
   
 (367)
Additional paid-in capital
   
 28,418 
   
 19,671 
Retained earnings
   
 46,833 
   
 45,472 
Total GECC shareowner's equity
   
 73,168 
   
 58,229 
Noncontrolling interests(b)
   
 2,129 
   
 2,383 
Total equity
   
 75,297 
   
 60,612 
Total liabilities and equity
 
$
 630,786 
 
$
 637,410 
             

 
(a)   
The sum of accumulated other comprehensive income − net was $(2,139) million and $(6,970) million at September 30, 2009 and December 31, 2008, respectively.
 
(b)    
Included accumulated other comprehensive income attributable to noncontrolling interests of $(97) million and $(181) million at September 30, 2009 and December 31, 2008, respectively.
 

 
See accompanying notes.
 
(4)

 
General Electric Capital Corporation and consolidated affiliates
 
Condensed Statement of Cash Flows
 
(Unaudited)
 
   
Nine months ended September 30
(In millions)
   
2009
   
2008
             
Cash flows – operating activities
           
Net earnings attributable to GECC
 
$
 1,359 
 
$
 6,768 
Loss from discontinued operations
   
 113 
   
 551 
Adjustments to reconcile net earnings attributable to GECC
           
   to cash provided from operating activities
           
      Depreciation and amortization of property, plant and equipment
   
 6,176 
   
 6,612 
      Increase (decrease) in accounts payable
   
 (2,422)
   
 (62)
      Provision for losses on financing receivables
   
 7,997 
   
 4,437 
      All other operating activities
   
 (12,762)
   
 (462)
Cash from (used for) operating activities – continuing operations
   
 461 
   
 17,844 
Cash from (used for) operating activities – discontinued operations
   
 (41)
   
 512 
Cash from (used for) operating activities
   
 420 
   
 18,356 
             
Cash flows – investing activities
           
Additions to property, plant and equipment
   
 (4,184)
   
 (9,348)
Dispositions of property, plant and equipment
   
 3,921 
   
 7,055 
Increase in loans to customers
   
 (175,395)
   
 (290,958)
Principal collections from customers – loans
   
 200,097 
   
 263,839 
Investment in equipment for financing leases
   
 (6,155)
   
 (18,477)
Principal collections from customers – financing leases
   
 13,554 
   
 17,850 
Net change in credit card receivables
   
 3,859 
   
 (2,852)
Proceeds from sale of discontinued operations
   
 – 
   
 5,220 
Proceeds from principal business dispositions
   
 8,818 
   
 4,422 
Payments for principal businesses purchased
   
 (5,637)
   
 (24,989)
All other investing activities
   
 35 
   
 (969)
Cash from (used for) investing activities – continuing operations
   
 38,913 
   
 (49,207)
Cash from (used for) investing activities – discontinued operations
   
 45 
   
 (631)
Cash from (used for) investing activities
   
 38,958 
   
 (49,838)
             
Cash flows – financing activities
           
Net increase (decrease) in borrowings (maturities of 90 days or less)
   
 (33,884)
   
 (16,888)
Newly issued debt
           
   Short-term (91 to 365 days)
   
 4,008 
   
 26,982 
   Long-term (longer than one year)
   
 68,495 
   
 72,175 
   Non-recourse, leveraged lease
   
 – 
   
 113 
Repayments and other debt reductions
           
   Short-term (91 to 365 days)
   
 (60,158)
   
 (41,778)
   Long-term (longer than one year)
   
 (4,664)
   
 (2,471)
   Non-recourse, leveraged lease
   
 (587)
   
 (524)
Dividends paid to shareowner
   
 – 
   
 (2,291)
Capital contribution and share issuance
   
 8,750 
   
 – 
All other financing activities
   
 (1,514)
   
 (362)
Cash from (used for) financing activities – continuing operations
   
 (19,554)
   
 34,956 
Cash used for financing activities – discontinued operations
   
 – 
   
 (4)
Cash from (used for) financing activities
   
 (19,554)
   
 34,952 
             
Increase in cash and equivalents
   
 19,824 
   
 3,470 
Cash and equivalents at beginning of year
   
 36,610 
   
 8,907 
Cash and equivalents at September 30
   
 56,434 
   
 12,377 
Less cash and equivalents of discontinued operations at September 30
   
 184 
   
 177 
Cash and equivalents of continuing operations at September 30
 
$
 56,250 
 
$
 12,200 
             

 
See accompanying notes.
 
(5)

 
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
All of the outstanding common stock of General Electric Capital Corporation (GE Capital or GECC) is owned by General Electric Capital Services, Inc. (GECS), all of whose common stock is owned by General Electric Company (GE Company or GE). Our financial statements consolidate all of our affiliates – companies that we control and in which we hold a majority voting interest. We also consolidate the economic interests we hold in certain businesses within companies in which we hold a voting equity interest and are majority owned by our ultimate parent, but which we have agreed to actively manage and control. See Note 1 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K), which discusses our consolidation and financial statement presentation. GECC includes Commercial Lending and Leasing (CLL), Consumer (formerly GE Money), Real Estate, Energy Financial Services and GE Capital Aviation Services (GECAS). During the first quarter of 2009, we transferred Banque Artesia Nederland N.V. (Artesia) from CLL to Consumer. Details of total revenues and segment profit by operating segment can be found on page 43 of this report. We have reclassified certain prior-period amounts to conform to the current-period’s presentation. Unless otherwise indicated, information in these notes to condensed, consolidated financial statements relates to continuing operations.
 
Accounting Changes
 
The Financial Accounting Standards Board (FASB) issued FASB Accounting Standards Codification (ASC) effective for financial statements issued for interim and annual periods ending after September 15, 2009. The ASC is an aggregation of previously issued authoritative U.S. generally accepted accounting principles (GAAP) in one comprehensive set of guidance organized by subject area. In accordance with the ASC, references to previously issued accounting standards have been replaced by ASC references. Subsequent revisions to GAAP will be incorporated into the ASC through Accounting Standards Updates (ASU).
 
We adopted FASB ASC 820, Fair Value Measurements and Disclosures, in two steps; effective January 1, 2008, we adopted it for all financial instruments and non-financial instruments accounted for at fair value on a recurring basis and effective January 1, 2009, for all non-financial instruments accounted for at fair value on a non-recurring basis. This guidance establishes a new framework for measuring fair value and expands related disclosures. See Note 10.
 
On January 1, 2009, we adopted an amendment to FASB ASC 805, Business Combinations. This amendment significantly changed the accounting for business acquisitions both during the period of the acquisition and in subsequent periods. Among the more significant changes in the accounting for acquisitions are the following:
 
·  
Acquired in-process research and development (IPR&D) is accounted for as an asset, with the cost recognized as the research and development is realized or abandoned. IPR&D was previously expensed at the time of the acquisition.
 
·  
Contingent consideration is recorded at fair value as an element of purchase price with subsequent adjustments recognized in operations. Contingent consideration was previously accounted for as a subsequent adjustment of purchase price.
 
·  
Subsequent decreases in valuation allowances on acquired deferred tax assets are recognized in operations after the measurement period. Such changes were previously considered to be subsequent changes in consideration and were recorded as decreases in goodwill.
 
·  
Transaction costs are expensed. These costs were previously treated as costs of the acquisition.
 
In April 2009, the FASB amended FASB ASC 805 and changed the previous accounting for assets and liabilities arising from contingencies in a business combination. We adopted this amendment retrospectively effective January 1, 2009. The amendment requires pre-acquisition contingencies to be recognized at fair value, if fair value can be determined or reasonably estimated during the measurement period. If fair value cannot be determined or reasonably estimated, the standard requires measurement based on the recognition and measurement criteria of FASB ASC 450, Contingencies.
 

 
(6)

 

On January 1, 2009, we adopted an amendment to FASB ASC 810, Consolidation, which requires us to make certain changes to the presentation of our financial statements. This amendment requires us to classify noncontrolling interests (previously referred to as “minority interest”) as part of consolidated net earnings ($16 million and $111 million for the three months ended September 30, 2009 and 2008, respectively, and $95 million and $210 million for the nine months ended September 30, 2009 and 2008, respectively) and to include the accumulated amount of noncontrolling interests as part of shareowner’s equity ($2,129 million and $2,383 million at September 30, 2009 and December 31, 2008, respectively). The net earnings amounts we have previously reported are now presented as "Net earnings attributable to GECC". Similarly, in our presentation of shareowner’s equity, we distinguish between equity amounts attributable to the GECC shareowner and amounts attributable to the noncontrolling interests – previously classified as minority interest outside of shareowner’s equity. Beginning January 1, 2009, dividends to noncontrolling interests are classified as financing cash flows. In addition to these financial reporting changes, this guidance provides for significant changes in accounting related to noncontrolling interests; specifically, increases and decreases in our controlling financial interests in consolidated subsidiaries will be reported in equity similar to treasury stock transactions. If a change in ownership of a consolidated subsidiary results in loss of control and deconsolidation, any retained ownership interests are remeasured with the gain or loss reported in net earnings.
 
Effective April 1, 2009, the FASB amended ASC 820 in relation to determining fair value when the volume and level of activity for an asset or liability have significantly decreased and identifying transactions that are not orderly. Adoption of this amendment had an insignificant effect on our financial statements.
 
Effective April 1, 2009, the FASB amended ASC 320, Investments – Debt and Equity Securities. See Note 3. This amendment modified the existing model for recognition and measurement of impairment for debt securities. The two principal changes to the impairment model for securities are as follows:
 
·  
Recognition of an other-than-temporary impairment charge for debt securities is required if any of these conditions are met: (1) we do not expect to recover the entire amortized cost basis of the security, (2) we intend to sell the security or (3) it is more likely than not that we will be required to sell the security before we recover its amortized cost basis.
 
·  
If the first condition above is met, but we do not intend to sell and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis, we would be required to record the difference between the security’s amortized cost basis and its recoverable amount in earnings and the difference between the security’s recoverable amount and fair value in other comprehensive income. If either the second or third criteria are met, then we would be required to recognize the entire difference between the security’s amortized cost basis and its fair value in earnings.
 
Interim Period Presentation
 
The condensed, consolidated financial statements and notes thereto are unaudited. These statements include all adjustments (consisting of normal recurring accruals) that we considered necessary to present a fair statement of our results of operations, financial position and cash flows. We have evaluated subsequent events that have occurred through November 2, 2009, the date of financial statement issuance. The results reported in these condensed, consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. It is suggested that these condensed, consolidated financial statements be read in conjunction with the financial statements and notes thereto included in our 2008 Form 10-K. We label our quarterly information using a calendar convention, that is, first quarter is labeled as ending on March 31, second quarter as ending on June 30, and third quarter as ending on September 30. It is our longstanding practice to establish interim quarterly closing dates using a fiscal calendar, which requires our businesses to close their books on either a Saturday or Sunday, depending on the business. The effects of this practice are modest and only exist within a reporting year. The fiscal closing calendar from 1993 through 2013 is available on our website, www.ge.com/secreports.
 

 
(7)

 

2. DISCONTINUED OPERATIONS
 
Discontinued operations comprised GE Money Japan (our Japanese personal loan business, Lake, and our Japanese mortgage and card businesses, excluding our investment in GE Nissen Credit Co., Ltd.), our U.S. mortgage business (WMC), GE Life and Genworth Financial, Inc. (Genworth). Associated results of operations, financial position and cash flows are separately reported as discontinued operations for all periods presented.
 
GE Money Japan
 
During the third quarter of 2007, we committed to a plan to sell Lake upon determining that, despite restructuring, Japanese regulatory limits for interest charges on unsecured personal loans did not permit us to earn an acceptable return. During the third quarter of 2008, we completed the sale of GE Money Japan, which included Lake, along with our Japanese mortgage and card businesses, excluding our investment in GE Nissen Credit Co., Ltd. As a result, we recognized an after-tax loss of $908 million in 2007 and an incremental loss in 2008 of $361 million. In connection with the transaction, GE Money Japan reduced the proceeds on the sale for estimated interest refund claims in excess of the statutory interest rate. Proceeds from the sale may be increased or decreased based on the actual claims experienced in accordance with terms specified in the agreement, and will not be adjusted unless claims exceed approximately $3,000 million. During the second quarter of 2009, we accrued $132 million, which represents the amount by which we expect claims to exceed those levels and is based on our historical and recent claims experience and the estimated future requests, taking into consideration the ability and likelihood of customers to make claims and other industry risk factors. Uncertainties around the status of laws and regulations and lack of certain information related to the individual customers make it difficult to develop a meaningful estimate of the aggregate claims exposure. We will continue to review our estimated exposure quarterly, and make adjustments when required. GE Money Japan revenues from discontinued operations were an insignificant amount and $209 million in the third quarters of 2009 and 2008, respectively, and an insignificant amount and $760 million in the first nine months of 2009 and 2008, respectively. In total, GE Money Japan losses from discontinued operations, net of taxes, were $10 million and $160 million in the third quarters of 2009 and 2008, respectively, and $142 million and $508 million in the first nine months of 2009 and 2008, respectively.
 
WMC
 
During the fourth quarter of 2007, we completed the sale of our U.S. mortgage business. In connection with the transaction, WMC retained certain obligations related to loans sold prior to the disposal of the business, including WMC’s contractual obligations to repurchase previously sold loans as to which there was an early payment default or with respect to which certain contractual representations and warranties were not met. Reserves related to these obligations were $212 million at September 30, 2009, and $244 million at December 31, 2008. The amount of these reserves is based upon pending and estimated future loan repurchase requests, the estimated percentage of loans validly tendered for repurchase, and our estimated losses on loans repurchased. Based on our historical experience, we estimate that a small percentage of the total loans we originated and sold will be tendered for repurchase, and of those tendered, only a limited amount will qualify as “validly tendered,” meaning the loans sold did not satisfy specified contractual obligations. The amount of our current reserve represents our best estimate of losses with respect to our repurchase obligations. However, actual losses could exceed our reserve amount if actual claim rates, valid tenders or losses we incur on repurchased loans are higher than historically observed. WMC revenues from discontinued operations were $4 million and $(7) million in the third quarters of 2009 and 2008, respectively, and $(5) million and $(64) million in the first nine months of 2009 and 2008, respectively. In total, WMC’s earnings (loss) from discontinued operations, net of taxes, were $3 million and $(8) million in the third quarters of 2009 and 2008, respectively, and $(8) million and $(35) million in the first nine months of 2009 and 2008, respectively.
 

 
(8)

 

Summarized financial information for discontinued operations is shown below.
 
 
Three months ended September 30
 
Nine months ended September 30
(In millions)
2009
 
2008
 
2009
 
2008
                       
Operations
                     
Total revenues
$
 
$
202 
 
$
(4)
 
$
696 
                       
Earnings (loss) from discontinued operations before income taxes
$
12 
 
$
(206)
 
$
(100)
 
$
(488)
Income tax benefit (expense)
 
(16)
   
51 
   
26 
   
184 
Loss from discontinued operations, net of taxes
$
(4)
 
$
(155)
 
$
(74)
 
$
(304)
                       
Disposal
                     
Earnings (loss) on disposal before income taxes
$
88 
 
$
(1,278)
 
$
(35)
 
$
(1,502)
Income tax benefit (expense)
 
– 
   
1,264 
   
(4)
   
1,255 
Earnings (loss) on disposal, net of taxes
$
88 
 
$
(14)
 
$
(39)
 
$
(247)
                       
Earnings (loss) from discontinued operations, net of taxes
$
84 
 
$
(169)
 
$
(113)
 
$
(551)
                       
     
At
         
September 30,
 
December 31,
(In millions)
       
2009
 
2008
                       
Assets
                     
Cash and equivalents
           
$
184 
 
$
180 
Other assets
             
13 
   
19 
Other
             
1,336 
   
1,441 
Assets of discontinued operations
           
$
1,533 
 
$
1,640 
                       
     
At
         
September 30,
 
December 31,
(In millions)
       
2009
 
2008
                       
Liabilities
                     
Liabilities of discontinued operations
           
$
843 
 
$
799 

 
Assets at September 30, 2009 and December 31, 2008, primarily comprised a deferred tax asset for a loss carryforward, which expires in 2015, related to the sale of our GE Money Japan business.
 

 
(9)

 

3. INVESTMENT SECURITIES
 
The vast majority of our investment securities are classified as available-for-sale and comprise mainly investment-grade debt securities supporting obligations to holders of guaranteed investment contracts and retained interests in securitization entities.
 
 
At
 
September 30, 2009
 
December 31, 2008
     
Gross
 
Gross
         
Gross
 
Gross
   
 
Amortized
 
unrealized
 
unrealized
 
Estimated
 
Amortized
 
unrealized
 
unrealized
 
Estimated
(In millions)
cost
 
gains
 
losses
 
fair value
 
cost
 
gains
 
losses
 
fair value
                                               
Debt
                                             
   U.S. corporate
$
4,053 
 
$
85 
 
$
 (410)
 
$
 3,728 
 
$
4,456 
 
$
54 
 
$
 (637)
 
$
 3,873 
   State and municipal
 
1,231 
   
10 
   
 (202)
   
 1,039 
   
915 
   
   
 (70)
   
 850 
   Residential mortgage-backed(a)
 
3,200 
   
21 
   
 (828)
   
 2,393 
   
4,228 
   
   
 (976)
   
 3,261 
   Commercial mortgage-backed
 
1,628 
   
   
 (390)
   
 1,241 
   
1,664 
   
 - 
   
 (509)
   
 1,155 
   Asset-backed
 
2,844 
   
35 
   
 (330)
   
 2,549 
   
2,922 
   
 2 
   
 (668)
   
 2,256 
   Corporate – non-U.S.
 
832 
   
24 
   
 (23)
   
 833 
   
608 
   
 6 
   
 (23)
   
 591 
   Government – non-U.S.
 
2,896 
   
11 
   
 (9)
   
 2,898 
   
936 
   
 2 
   
 (15)
   
 923 
   U.S. government and
                                             
       federal agency
 
2,728 
   
   
 - 
   
 2,730 
   
26 
   
 3 
   
 - 
   
 29 
Retained interests(b)(c)
 
6,907 
   
223 
   
 (44)
   
 7,086 
   
5,144 
   
 73 
   
 (136)
   
 5,081 
Equity
                                             
   Available-for-sale
 
982 
   
195 
   
 (8)
   
 1,169 
   
1,023 
   
 22 
   
 (134)
   
 911 
   Trading
 
659 
   
 - 
   
 - 
   
 659 
   
388 
   
 - 
   
 - 
   
 388 
Total
$
27,960 
 
$
609 
 
$
 (2,244)
 
$
 26,325 
 
$
22,310 
 
$
176 
 
$
 (3,168)
 
$
 19,318 
                                               

 
(a)   
Substantially collateralized by U.S. mortgages.
 
(b)    
Included $1,846 million and $1,752 million of retained interests at September 30, 2009 and December 31, 2008, respectively, accounted for in accordance with FASB ASC 815, Derivatives and Hedging. See Note 12.
 
(c)    
Amortized cost and estimated fair value included $2 million of trading securities at September 30, 2009.
 

 
(10)

 

The following tables present the estimated fair values and gross unrealized losses of our available-for-sale investment securities.
 
 
In loss position for
 
Less than 12 months
 
12 months or more
     
Gross
     
Gross
 
Estimated
unrealized
Estimated
unrealized
(In millions)
fair value
losses
fair value
losses
                       
September 30, 2009
                     
Debt
                     
   U.S. corporate
$
1,273 
 
$
 (27)
 
$
 1,485 
 
$
 (383)
   State and municipal
 
387 
   
 (120)
   
 393 
   
 (82)
   Residential mortgage-backed
 
159 
   
 (11)
   
 1,633 
   
 (817)
   Commercial mortgage-backed
 
 - 
   
 - 
   
 1,016 
   
 (390)
   Asset-backed
 
81 
   
 (2)
   
 1,378 
   
 (328)
   Corporate – non-U.S.
 
203 
   
 (10)
   
 305 
   
 (13)
   Government – non-U.S.
 
1,067 
   
 (7)
   
 224 
   
 (2)
   U.S. government and federal agency
 
   
 - 
   
 - 
   
 - 
Retained interests
 
272 
   
 (9)
   
 90 
   
 (35)
Equity
 
63 
   
 (4)
   
 21 
   
 (4)
Total
$
3,512 
 
$
 (190)
 
$
 6,545 
 
$
 (2,054)
                       
December 31, 2008
                     
Debt
                     
   U.S. corporate
$
1,152 
 
$
 (397)
 
$
 1,253 
 
$
 (240)
   State and municipal
 
302 
   
 (21)
   
 278 
   
 (49)
   Residential mortgage-backed
 
1,216 
   
 (64)
   
 1,534 
   
 (912)
   Commercial mortgage-backed
 
285 
   
 (85)
   
 870 
   
 (424)
   Asset-backed
 
903 
   
 (406)
   
 1,031 
   
 (262)
   Corporate – non-U.S.
 
60 
   
 (7)
   
 265 
   
 (16)
   Government – non-U.S.
 
 - 
   
 - 
   
 275 
   
 (15)
   U.S. government and federal agency
 
 - 
   
 - 
   
 - 
   
 - 
Retained interests
 
1,246 
   
 (61)
   
 238 
   
 (75)
Equity
 
200 
   
 (132)
   
 6 
   
 (2)
Total
$
5,364 
 
$
 (1,173)
 
$
 5,750 
 
$
 (1,995)
                       

 
We adopted amendments to FASB ASC 320 and recorded a cumulative effect adjustment to increase retained earnings as of April 1, 2009 of $25 million.
 
We regularly review investment securities for impairment using both qualitative and quantitative criteria. We presently do not intend to sell our debt securities and believe that it is not more likely than not that we will be required to sell these securities that are in an unrealized loss position before recovery of our amortized cost. We believe that the unrealized loss associated with our equity securities will be recovered within the foreseeable future.
 
The vast majority of our U.S. corporate debt securities are rated investment grade by the major rating agencies. We evaluate U.S. corporate debt securities based on a variety of factors such as the financial health of and specific prospects for the issuer, including whether the issuer is in compliance with the terms and covenants of the security. In the event a U.S. corporate debt security is deemed to be other-than-temporarily impaired, we isolate the credit portion of the impairment by comparing the present value of our expectation of cash flows to the amortized cost of the security. We discount the cash flows using the original effective interest rate of the security.
 
The vast majority of our residential mortgage-backed securities (RMBS) have investment-grade credit ratings from the major rating agencies and are in a senior position in the capital structure of the deal. Of our total RMBS at September 30, 2009 and December 31, 2008, approximately $968 million and $1,284 million, respectively, relate to residential subprime credit, primarily supporting our guaranteed investment contracts. These are collateralized primarily by pools of individual, direct mortgage loans (a majority of which were originated in 2006 and 2005), not other structured products such as collateralized debt obligations. In addition, of the total residential subprime credit exposure at September 30, 2009 and December 31, 2008, approximately $836 million and $1,089 million, respectively, was insured by monoline insurers.
 

 
(11)

 

Substantially all of our commercial mortgage-backed securities (CMBS) also have investment-grade credit ratings from the major rating agencies and are in a senior position in the capital structure of the deal. Our CMBS investments are collateralized by both diversified pools of mortgages that were originated for securitization (conduit CMBS) and pools of large loans backed by high quality properties (large loan CMBS), a majority of which were originated in 2006 and 2007.
 
For asset-backed securities, including RMBS, we estimate the portion of loss attributable to credit using a discounted cash flow model that considers estimates of cash flows generated from the underlying collateral. Estimates of cash flows consider internal credit risk, interest rate and prepayment assumptions that incorporate management’s best estimate of key assumptions, including default rates, loss severity and prepayment rates. For CMBS, we estimate the portion of loss attributable to credit by evaluating potential losses on each of the underlying loans in the security. Collateral cash flows are considered in the context of our position in the capital structure of the deal. Assumptions can vary widely depending upon the collateral type, geographic concentrations and vintage.
 
If there has been an adverse change in cash flows for RMBS, management considers credit enhancements such as monoline insurance (which are features of a specific security). In evaluating the overall credit worthiness of the Monoline, we use an analysis that is similar to the approach we use for corporate bonds, including an evaluation of the sufficiency of the Monoline’s cash reserves and capital, ratings activity, whether the Monoline is in default or default appears imminent, and the potential for intervention by an insurance or other regulator.
 
During the three months ended September 30, 2009, we recorded pre-tax, other-than-temporary impairments of $239 million, of which $79 million was recorded through earnings ($18 million relates to equity securities), and $160 million was recorded in Accumulated Other Comprehensive Income (AOCI).
 
Previously recognized other-than-temporary impairments related to credit on securities still held at July 1, 2009 were $159 million. During the third quarter, first time and incremental credit impairments were $27 million and $31 million, respectively. Previous credit impairments relating to securities sold were $82 million.
 
During the period April 1, 2009 through September 30, 2009, we recorded pre-tax, other-than-temporary impairments of $391 million, of which $130 million was recorded through earnings ($26 million relates to equity securities), and $261 million was recorded in AOCI.
 
Previously recognized other-than-temporary impairments related to credit on securities still held at April 1, 2009 were $117 million. During the period April 1, 2009 through September 30, 2009, first time and incremental credit impairments were $48 million and $52 million, respectively. Previous credit impairments relating to securities sold were $82 million.
 

 
(12)

 

Supplemental information about gross realized gains and losses on available-for-sale investment securities follows.
 
 
Three months ended September 30
 
Nine months ended September 30
(In millions)
2009 
 
2008 
 
2009 
 
2008 
                       
Gains
$
36 
 
$
26 
 
$
63 
 
$
133 
Losses, including impairments
 
(101)
   
(110)
   
(299)
   
(210)
   Net
$
(65)
 
$
(84)
 
$
(236)
 
$
(77)

 
Although we generally do not have the intent to sell any specific securities at the end of the period, in the ordinary course of managing our investment securities portfolio, we may sell securities prior to their maturities for a variety of reasons, including diversification, credit quality, yield and liquidity requirements and the funding of claims and obligations to policyholders.
 
Proceeds from investment securities sales and early redemptions by the issuer totaled $3,393 million and $887 million in the third quarters of 2009 and 2008, respectively, and $6,671 million and $2,177 million in the first nine months of 2009 and 2008, respectively, principally from the sales and maturities of short-term securities in our bank subsidiaries.
 
We recognized pre-tax gains on trading securities of $29 million and pre-tax losses of $(164) million in the third quarters of 2009 and 2008, respectively, and pre-tax gains of $273 million and $223 million in the first nine months of 2009 and 2008, respectively. Investments in retained interests increased by $210 million and $10 million during the first nine months of 2009 and 2008, respectively, reflecting changes in fair value.
 

4. FINANCING RECEIVABLES AND ALLOWANCE FOR LOSSES ON FINANCING RECEIVABLES
 
Financing receivables - net, consisted of the following.
 
 
At
 
September 30,
 
December 31,
(In millions)
2009
 
2008
           
Loans, net of deferred income
$
297,568 
 
$
308,821 
Investment in financing leases, net of deferred income
 
57,136 
   
67,077 
   
354,704 
   
375,898 
Less allowance for losses
 
(7,348)
   
(5,306)
Financing receivables – net(a)
$
347,356 
 
$
370,592 
           

 
(a)   
Included $4,406 million and $6,461 million related to consolidated, liquidating securitization entities at September 30, 2009 and December 31, 2008, respectively. In addition, financing receivables at September 30, 2009 and December 31, 2008 included $2,880 million and $2,736 million, respectively, relating to loans that had been acquired in a transfer but have been subject to credit deterioration since origination per FASB ASC 310, Receivables.
 

 
(13)

 

Effective January 1, 2009, loans acquired in a business acquisition are recorded at fair value, which incorporates our estimate at the acquisition date of the credit losses over the remaining life of the portfolio. As a result, the allowance for loan losses is not carried over at acquisition. This may result in lower reserve coverage ratios prospectively. Details of financing receivables – net follow.
 
 
At
 
September 30,
 
December 31,
(In millions)
2009
 
2008
           
Commercial Lending and Leasing (CLL)(a)
         
Americas
$
91,807 
 
$
104,462 
Europe
 
39,804 
   
36,972 
Asia
 
14,096 
   
16,683 
Other
 
776 
   
786 
   
146,483 
   
158,903 
Consumer(a)
         
Non-U.S. residential mortgages
 
61,308 
   
60,753 
Non-U.S. installment and revolving credit
 
25,197 
   
24,441 
U.S. installment and revolving credit
 
22,324 
   
27,645 
Non-U.S. auto
 
14,366 
   
18,168 
Other
 
13,191 
   
11,541 
   
136,386 
   
142,548 
           
Real Estate
 
45,471 
   
46,735 
           
Energy Financial Services
 
8,326 
   
8,355 
           
GE Capital Aviation Services (GECAS)(b)
 
14,943 
   
15,326 
           
Other(c)
 
3,095 
   
4,031 
   
354,704 
   
375,898 
Less allowance for losses
 
(7,348)
   
(5,306)
Total
$
347,356 
 
$
370,592 
           

 
(a)   
During the first quarter of 2009, we transferred Artesia from CLL to Consumer. Prior-period amounts were reclassified to conform to the current-period’s presentation.
 
(b)    
Included loans and financing leases of $12,927 million and $13,078 million at September 30, 2009 and December 31, 2008, respectively, related to commercial aircraft at Aviation Financial Services.
 
(c)    
Consisted of loans and financing leases related to certain consolidated, liquidating securitization entities.
 

 

 
(14)

 

Individually impaired loans are defined by GAAP as larger balance or restructured loans for which it is probable that the lender will be unable to collect all amounts due according to original contractual terms of the loan agreement. An analysis of impaired loans and specific reserves follows. The vast majority of our consumer and a portion of our CLL nonearning receivables are excluded from this definition, as they represent smaller balance homogeneous loans that we evaluate collectively by portfolio for impairment.
 
 
At
 
September 30,
 
December 31,
(In millions)
2009
 
2008
           
Loans requiring allowance for losses
$
8,842 
 
$
2,712 
Loans expected to be fully recoverable
 
3,218 
   
871 
   Total impaired loans
$
12,060 
 
$
3,583 
           
Allowance for losses (specific reserves)
$
1,874 
 
$
635 
Average investment during the period
 
7,463 
   
2,064 
Interest income earned while impaired(a)
 
133 
   
48 
           

 
(a)   
Recognized principally on cash basis.
 

 
(15)

 

Impaired loans increased by $8.5 billion from December 31, 2008 to September 30, 2009 primarily relating to increases at Real Estate ($5.4 billion) and CLL ($2.2 billion). Impaired loans increased by $4.0 billion from June 30, 2009 to September 30, 2009, primarily relating to increases at Real Estate ($2.9 billion) and CLL ($0.7 billion). The increase in impaired loans and related specific reserves in Real Estate reflects our current estimate of collateral values of the underlying properties, and our estimate of loans which are not past due, but for which it is probable that we will be unable to collect the full principal balance at maturity due to a decline in the underlying value of the collateral. Of our $6.2 billion impaired loans at Real Estate at September 30, 2009, approximately $4 billion are currently paying in accordance with the contractual terms of the loan. Impaired loans at CLL primarily represent senior secured lending positions.
 
Allowance for Losses on Financing Receivables
 
 
Balance
 
Provision
             
Balance
 
January 1,
 
charged to
     
Gross
     
September 30,
(In millions)
2009 
 
operations
 
Other(a)
 
write-offs
 
Recoveries
 
2009 
                                   
CLL(b)
                                 
Americas
$
824 
 
$
945 
 
$
(31)
 
$
(715)
 
$
63 
 
$
 1,086 
Europe
 
288 
   
412 
   
   
(225)
   
17 
   
500 
Asia
 
163 
   
188 
   
   
(136)
   
19 
   
242 
Other
 
   
   
   
(1)
   
– 
   
                                   
Consumer(b)
                                 
Non-U.S. residential
                                 
   mortgages
 
383 
   
805 
   
81 
   
(424)
   
130 
   
975 
Non-U.S. installment
                                 
   and revolving credit
 
1,051 
   
1,347 
   
41 
   
(1,702)
   
376 
   
1,113 
U.S. installment and
                                 
   revolving credit
 
1,700 
   
2,631 
   
(761)
   
(2,134)
   
132 
   
1,568 
Non-U.S. auto
 
222 
   
351 
   
31 
   
(441)
   
138 
   
301 
Other
 
226 
   
284 
   
25 
   
(329)
   
73 
   
279 
                                   
Real Estate
 
301 
   
903 
   
13 
   
(190)
   
   
1,028 
                                   
Energy Financial
                                 
   Services
 
58 
   
42 
   
   
– 
   
– 
   
101 
                                   
GECAS
 
60 
   
69 
   
– 
   
(3)
   
– 
   
126 
                                   
Other
 
28 
   
16 
   
– 
   
(22)
   
   
23 
Total
$
5,306 
 
$
7,997 
 
$
(583)
 
$
(6,322)
 
$
950 
 
$
7,348 
                                   
 
(a)   
Other primarily included the effects of securitization activity and currency exchange.
 
(b)   
During the first quarter of 2009, we transferred Artesia from CLL to Consumer. Prior-period amounts were reclassified to conform to the current-period’s presentation.
 

 
(16)

 


 
Balance
 
Provision
             
Balance
 
January 1,
 
charged to
     
Gross
     
September 30,
(In millions)
2008 
 
operations
 
Other(a)
 
write-offs
 
Recoveries
 
2008 
                                   
CLL(b)
                                 
Americas
$
451 
 
$
377 
 
$
157 
 
$
(352)
 
$
50 
 
$
683 
Europe
 
230 
   
146 
   
(58)
   
(141)
   
23 
   
200 
Asia
 
226 
   
78 
   
(7)
   
(188)
   
   
114 
Other
 
   
   
– 
   
– 
   
– 
   
                                   
Consumer(b)
                                 
Non-U.S. residential
                                 
   mortgages
 
246 
   
147 
   
(15)
   
(135)
   
52 
   
295 
Non-U.S. installment
                                 
   and revolving credit
 
1,371 
   
1,259 
   
(57)
   
(1,968)
   
722 
   
1,327 
U.S. installment and
                                 
   revolving credit
 
985 
   
1,908 
   
(416)
   
(1,477)
   
215 
   
1,215 
Non-U.S. auto
 
324 
   
260 
   
(59)
   
(479)
   
225 
   
271 
Other
 
167 
   
136 
   
25 
   
(182)
   
54 
   
200 
                                   
Real Estate
 
168 
   
47 
   
   
(10)
   
   
210 
                                   
Energy Financial
                                 
   Services
 
19 
   
12 
   
   
– 
   
– 
   
33 
                                   
GECAS
 
   
47 
   
– 
   
(1)
   
– 
   
54 
                                   
Other
 
18 
   
18 
   
(1)
   
(15)
   
– 
   
20 
Total
$
4,216 
 
$
4,437 
 
$
(425)
 
$
(4,948)
 
$
1,347 
 
$
4,627 
                                   

 
(a)   
Other primarily included the effects of securitization activity, currency exchange, dispositions and acquisitions.
 
(b)    
During the first quarter of 2009, we transferred Artesia from CLL to Consumer. Prior-period amounts were reclassified to conform to the current-period’s presentation.
 

 
(17)

 

5. GOODWILL AND OTHER INTANGIBLE ASSETS
 
Goodwill and other intangible assets – net, consisted of the following.
 
 
At
 
September 30,
 
December 31,
(In millions)
2009
 
2008
           
Goodwill
$
28,043 
 
$
25,204 
           
Other intangible assets
         
    Intangible assets subject to amortization
$
3,371 
 
$
3,174 
           

 
Changes in goodwill balances follow.
 
     
Acquisitions/
 
Dispositions,
     
 
Balance
 
acquisition
 
currency
 
Balance
 
 
January 1,
 
accounting
 
exchange
 
September 30,
 
(In millions)
2009
 
adjustments
 
and other
 
2009
 
                         
CLL
$
12,321 
(a)
$
1,262 
 
$
 (109)
 
$
 13,474 
 
Consumer
 
9,407 
(a)
 
1,352 
   
 325 
   
 11,084 
 
Real Estate
 
1,159 
   
 (7)
   
 57 
   
 1,209 
 
Energy Financial Services
 
2,162 
   
 (4)
   
 (39)
   
 2,119 
 
GECAS
 
 155 
   
 - 
   
 2 
   
 157 
 
Total
$
25,204 
 
$
2,603 
 
$
 236 
 
$
28,043 
 
                         

 
(a)    
Reflected the transfer of Artesia during the first quarter of 2009, resulting in a related movement of beginning goodwill balance of $326 million.
 

 
Goodwill related to new acquisitions in the first nine months of 2009 was $2,384 million and included acquisitions of BAC Credomatic (BAC) ($1,309 million) at Consumer and Interbanca S.p.A. (Interbanca) ($1,075 million) at CLL. During the first nine months of 2009, the goodwill balance increased by $219 million related to acquisition accounting adjustments for prior-year acquisitions. The most significant of these adjustments was an increase of $180 million associated with the 2008 acquisition of CitiCapital at CLL. Also during the first nine months of 2009, goodwill balances increased $236 million, primarily as a result of the weaker U.S. dollar ($1,034 million), partially offset by the deconsolidation of Penske Truck Leasing Co., L.P. (PTL) ($634 million) at CLL.
 
On June 25, 2009, we increased our ownership in BAC from 49.99% to 75% for a purchase price of $623 million, in accordance with terms of a previous agreement. We remeasured our previously held equity investment to fair value, resulting in a pre-tax gain of $343 million, which is reported in Revenues from services.
 
We test goodwill for impairment annually and more frequently if circumstances warrant. We determine fair values for each of the reporting units using an income approach. When available and as appropriate, we use comparative market multiples to corroborate discounted cash flow results. For purposes of the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for each business. Actual results may differ from those assumed in our forecasts. We derive our discount rates by applying the capital asset pricing model (i.e., to estimate the cost of equity financing) and analyzing published rates for industries relevant to our reporting units. We use discount rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in our internally developed forecasts. Valuations using the market approach reflect prices and other relevant observable information generated by market transactions involving comparable businesses.
 

 
(18)

 

Compared to the market approach, the income approach more closely aligns the reporting unit valuation to a company’s or business’ specific business model, geographic markets and product offerings, as it is based on specific projections of the business. Required rates of return, along with uncertainty inherent in the forecasts of future cash flows are reflected in the selection of the discount rate. Equally important, under this approach, reasonably likely scenarios and associated sensitivities can be developed for alternative future states that may not be reflected in an observable market price. A market approach allows for comparison to actual market transactions and multiples. It can be somewhat more limited in its application because the population of potential comparables (or pure plays) is often limited to publicly-traded companies where the characteristics of the comparative business and ours can be significantly different, market data is usually not available for divisions within larger conglomerates or non-public subsidiaries that could otherwise qualify as comparable, and the specific circumstances surrounding a market transaction (e.g., synergies between the parties, terms and conditions of the transaction, etc.) may be different or irrelevant with respect to our business. It can also be difficult under the current market conditions to identify orderly transactions between market participants in similar financial services businesses. We assess the valuation methodology based upon the relevance and availability of data at the time of performing the valuation and weight the methodologies appropriately.
 
Given the significant decline in GE’s stock price in the first quarter of 2009 and market conditions in the financial services industry at that time, we conducted an additional impairment analysis of the reporting units during the first quarter of 2009 using data as of January 1, 2009. As a result of these tests, no goodwill impairment was recognized.
 
We performed our annual impairment test for goodwill at all of our reporting units in the third quarter using data as of July 1, 2009. In performing the valuations, we used cash flows which reflected management’s forecasts and discount rates which reflect the risks associated with the current market. Based on the results of our testing, the fair values of CLL, Consumer, Energy Financial Services and GECAS reporting units exceeded their book values; therefore, the second step of the impairment test (in which fair value of each of the reporting unit’s assets and liabilities are measured) was not required to be performed and no goodwill impairment was recognized. Due to the volatility and uncertainties in the current commercial real estate environment, we used a range of valuations to determine the fair value for our Real Estate reporting unit. While the Real Estate reporting unit’s book value was within the range of its fair value, we further substantiated our Real Estate goodwill balance by performing the second step analysis described above. As a result of our tests for Real Estate, no goodwill impairment was recognized. Our Real Estate reporting unit had a goodwill balance of $1,209 million at September 30, 2009.
 
Estimating the fair value of reporting units involves the use of estimates and significant judgments that are based on a number of factors including actual operating results. If current conditions persist longer or deteriorate further than expected, it is reasonably possible that the judgments and estimates described above could change in future periods.
 
Intangible Assets Subject to Amortization
 
 
At
 
September 30, 2009
 
December 31, 2008
 
Gross
         
Gross
       
 
carrying
 
Accumulated
     
carrying
 
Accumulated
   
(In millions)
amount
 
amortization
 
Net
 
amount
 
amortization
 
Net
                                   
                                   
Customer-related
$
1,801 
 
$
 (767)
 
$
1,034 
 
$
1,790 
 
$
 (616)
 
$
1,174 
Patents, licenses and trademarks
 
568 
   
 (409)
   
159 
   
564 
   
 (460)
   
104 
Capitalized software
 
2,161 
   
 (1,517)
   
644 
   
2,148 
   
 (1,463)
   
685 
Lease valuations
 
1,734 
   
 (730)
   
1,004 
   
1,761 
   
 (594)
   
1,167 
All other
 
895 
   
 (365)
   
530 
   
233 
   
 (189)
   
44 
Total
$
7,159 
 
$
 (3,788)
 
$
3,371 
 
$
6,496 
 
$
 (3,322)
 
$
3,174 

 
Amortization related to intangible assets subject to amortization was $298 million and $273 million for the quarters ended September 30, 2009 and 2008, respectively. Amortization related to intangible assets subject to amortization for the nine months ended September 30, 2009 and 2008, was $708 million and $675 million, respectively.
 

 
(19)

 

6. BORROWINGS
 
Borrowings are summarized in the following table.
 
 
At
(In millions)
September 30,
 
December 31,
 
2009
 
2008
Short-term borrowings
         
           
Commercial paper
         
   U.S.
         
     Unsecured(a)
$
34,669 
 
$
57,665 
     Asset-backed(b)
 
2,884 
   
3,652 
   Non-U.S.
 
9,871 
   
9,033 
Current portion of long-term debt(a)(c)(d)
 
69,322 
   
69,680 
Bank deposits(e)
 
25,738 
   
29,634 
Bank borrowings(f)
 
5,041 
   
10,569 
GE Interest Plus notes(g)
 
6,520 
   
5,633 
Other
 
1,677 
   
2,735 
Total
 
155,722 
   
188,601 
           
Long-term borrowings
         
           
Senior notes
         
    Unsecured(a)(d)(h)
 
323,518 
   
299,651 
    Asset-backed(i)
 
4,069 
   
5,002 
Subordinated notes(j)
 
2,412 
   
2,567 
Subordinated debentures(k)
 
7,706 
   
7,315 
Bank deposits(l)
 
10,649 
   
7,220 
Total
 
348,354 
   
321,755 
Total borrowings
$
504,076 
 
$
510,356 
           

 
(a)   
GE Capital had issued and outstanding $59,110 million ($3,660 million commercial paper and $55,450 million long-term borrowings) and $35,243 million ($21,823 million commercial paper and $13,420 million long-term borrowings) of senior, unsecured debt that was guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary Liquidity Guarantee Program at September 30, 2009 and December 31, 2008, respectively. GE Capital and GE are parties to an Eligible Entity Designation Agreement and GE Capital is subject to the terms of a Master Agreement, each entered into with the FDIC. The terms of these agreements include, among other things, a requirement that GE and GE Capital reimburse the FDIC for any amounts that the FDIC pays to holders of GE Capital debt that is guaranteed by the FDIC.
 
(b)    
Consists entirely of obligations of consolidated, liquidating securitization entities. See Note 12.
 
(c)    
Included $239 million and $326 million of asset-backed senior notes, issued by consolidated, liquidating securitization entities at September 30, 2009 and December 31, 2008, respectively.
 
(d)    
Included $1,665 million ($74 million short-term and $1,591 million long-term) of borrowings under European government-sponsored programs at September 30, 2009.
 
(e)    
Included $20,893 million and $11,793 million of deposits in non-U.S. banks at September 30, 2009 and December 31, 2008, respectively, and included certificates of deposits distributed by brokers of $4,845 million and $17,841 million at September 30, 2009 and December 31, 2008, respectively.
 
(f)    
Term borrowings from banks with an original term to maturity of less than 12 months.
 
(g)    
Entirely variable denomination floating rate demand notes.
 
(h)    
Included borrowings from GECS affiliates of $1,011 million and $1,006 million at September 30, 2009 and December 31, 2008, respectively.
 
(i)    
Included $895 million and $2,104 million of asset-backed senior notes, issued by consolidated, liquidating securitization entities at September 30, 2009 and December 31, 2008, respectively. See Note 12.
 
(j)    
Included $117 million and $450 million of subordinated notes guaranteed by GE at September 30, 2009 and December 31, 2008, respectively.
 
(k)    
Subordinated debentures receive rating agency equity credit and were hedged at issuance to the U.S. dollar equivalent of $7,725 million.
 
(l)    
Included certificates of deposits distributed by brokers with maturities greater than one year of $9,898 million and $6,699 million at September 30, 2009 and December 31, 2008, respectively.
 

 
(20)

 

7. INCOME TAXES
 
During the first quarter of 2009, following the change in our external credit ratings, funding actions taken and review of our operations, liquidity and funding, we determined that undistributed prior-year earnings of non-U.S. subsidiaries of GECC, on which we had previously provided deferred U.S. taxes, would be indefinitely reinvested outside the U.S. This change increased the amount of prior-year earnings indefinitely reinvested outside the U.S. by approximately $2 billion to $52 billion, resulting in an income tax benefit of $700 million in the first quarter of 2009.
 
The balance of “unrecognized tax benefits,” the amount of related interest and penalties we have provided and what we believe to be the range of reasonably possible changes in the next 12 months, were:
 
 
At
 
September 30,
 
December 31,
(In millions)
2009
 
2008
           
Unrecognized tax benefits
$
3,711 
 
$
3,454 
   Portion that, if recognized, would reduce tax expense and effective tax rate(a)
 
1,822 
   
1,734 
Accrued interest on unrecognized tax benefits
 
701 
   
693 
Accrued penalties on unrecognized tax benefits
 
72 
   
65 
Reasonably possible reduction to the balance of unrecognized
         
   tax benefits in succeeding 12 months
 
0-300
   
0-350
   Portion that, if recognized, would reduce tax expense and effective tax rate(a)
 
0-150
   
0-50
           

 
(a)   
Some portion of such reduction might be reported as discontinued operations.
 

 
The IRS is currently auditing the GE consolidated income tax returns for 2003-2007, a substantial portion of which include our activities. In addition, certain other U.S. tax deficiency issues and refund claims for previous years remain unresolved. It is reasonably possible that the 2003-2005 U.S. audit cycle will be completed during the next 12 months, which could result in a decrease in our balance of unrecognized tax benefits. We believe that there are no other jurisdictions in which the outcome of unresolved issues or claims is likely to be material to our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties.
 
GE and GECC file a consolidated U.S. federal income tax return. The GECC provision for current tax expense includes its effect on the consolidated return. The effect of GECC on the consolidated liability is settled in cash as GE tax payments are due.
 
8. SHAREOWNER’S EQUITY
 
A summary of increases (decreases) in GECC shareowner’s equity that did not result directly from transactions with the shareowner, net of income taxes, follows.
 
 
Three months ended September 30
 
Nine months ended September 30
(In millions)
2009 
 
2008 
 
2009 
 
2008 
                       
Net earnings attributable to GECC
$
171 
 
$
1,919 
 
$
1,359 
 
$
6,768 
Investment securities – net
 
420 
   
(367)
   
936 
   
(1,108)
Currency translation adjustments – net
 
896 
   
(3,389)
   
2,603 
   
(2,600)
Cash flow hedges – net
 
(17)
   
(1,513)
   
1,299 
   
(1,399)
Benefit plans – net
 
   
   
(7)
   
21 
Total
$
1,472 
 
$
(3,347)
 
$
6,190 
 
$
1,682 

 

 
(21)

 

Changes to noncontrolling interests during the third quarter of 2009 resulted from net earnings ($16 million), dividends ($(6) million), AOCI ($(9) million) and other ($10 million). Changes to the individual components of AOCI attributable to noncontrolling interests were insignificant.
 
Changes to noncontrolling interests during the first nine months of 2009 resulted from net earnings ($95 million), dividends ($(12) million), the effects of deconsolidating PTL ($(331) million, including $101 million of AOCI), other AOCI ($(17) million) and other ($11 million). Changes to the individual components of AOCI attributable to noncontrolling interests were insignificant.
 
During the first quarter of 2009, GE made a $9,500 million capital contribution to GECS, of which GECS subsequently contributed $8,250 million to us. In addition, we issued one share of common stock (par value $14) to GECS for $500 million.
 
9. REVENUES FROM SERVICES
 
Revenues from services are summarized in the following table.
 
 
Three months ended September 30
 
Nine months ended September 30
(In millions)
2009
 
2008
 
2009
 
2008
                       
Interest on loans
$
4,906 
 
$
7,153 
 
$
15,012 
 
$
20,258 
Equipment leased to others
 
2,894 
   
3,953 
   
9,283 
   
11,644 
Fees
 
1,158 
   
1,985 
   
3,417 
   
4,716 
Financing leases
 
791 
   
1,099 
   
2,517 
   
3,438 
Real estate investments
 
410 
   
798 
   
1,125 
   
3,088 
Associated companies
 
277 
   
560 
   
751 
   
1,676 
Investment income(a)
 
379 
   
300 
   
1,303 
   
1,446 
Net securitization gains
 
403 
   
275 
   
1,043 
   
897 
Other items(b)(c)
 
434 
   
922 
   
2,947 
   
4,259 
Total
$
 11,652 
 
$
 17,045 
 
$
 37,398 
 
$
 51,422 
                       

 
(a)    
Included net other-than-temporary impairments on investment securities of $79 million and $109 million in the third quarters of 2009 and 2008, respectively, and $272 million and $206 million in the first nine months of 2009 and 2008, respectively. See Note 3.
 
(b)    
Included a gain on the sale of a limited partnership interest in PTL and a related gain on the remeasurement of the retained investment to fair value totaling $296 million in the first quarter of 2009. See Note 12.
 
(c)    
Included a gain of $343 million on the remeasurement to fair value of our equity method investment in BAC, following our acquisition of a controlling interest in the second quarter of 2009. See Note 5.
 

 
(22)

 

10. FAIR VALUE MEASUREMENTS
 
We adopted FASB ASC 820 in two steps; effective January 1, 2008, we adopted it for all financial instruments and non-financial instruments accounted for at fair value on a recurring basis and effective January 1, 2009, for all non-financial instruments accounted for at fair value on a non-recurring basis. This guidance establishes a new framework for measuring fair value and expands related disclosures. Broadly, the framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. It also establishes a three-level valuation hierarchy based upon observable and non-observable inputs.
 
For financial assets and liabilities, fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.
 
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
 
Level 1  –                      Quoted prices for identical instruments in active markets.
 
Level 2  –                       Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
 
Level 3  –                       Significant inputs to the valuation model are unobservable.
 
We maintain policies and procedures to value instruments using the best and most relevant data available. In addition, we have risk management teams that review valuation, including independent price validation for certain instruments. Further, in other instances, we retain independent pricing vendors to assist in valuing certain instruments.
 
The following section describes the valuation methodologies we use to measure different financial instruments at fair value on a recurring basis. There has been no change to the valuation methodologies during 2009.
 
Investments in Debt and Equity Securities
 
When available, we use quoted market prices to determine the fair value of investment securities, and they are included in Level 1. Level 1 securities primarily include publicly-traded equity securities.
 
When quoted market prices are unobservable, we obtain pricing information from an independent pricing vendor. The pricing vendor uses various pricing models for each asset class that are consistent with what other market participants would use. The inputs and assumptions to the model of the pricing vendor are derived from market observable sources including: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and other market-related data. Since many fixed income securities do not trade on a daily basis, the methodology of the pricing vendor uses available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. The pricing vendor considers all available market observable inputs in determining the evaluation for a security. Thus, certain securities may not be priced using quoted prices, but rather determined from market observable information. These investments are included in Level 2 and primarily comprise our portfolio of corporate fixed income, and government, mortgage and asset-backed securities. In infrequent circumstances, our pricing vendors may provide us with valuations that are based on significant unobservable inputs, and in those circumstances we classify the investment securities in Level 3.
 

 
(23)

 

Annually, we conduct reviews of our primary pricing vendor, with the assistance of an accounting firm, to validate that the inputs used in that vendor’s pricing process are deemed to be market observable as defined in the standard. While we were not provided access to proprietary models of the vendor, our reviews have included on-site walk-throughs of the pricing process, methodologies and control procedures for each asset class and level for which prices are provided. Our review also included an examination of the underlying inputs and assumptions for a sample of individual securities across asset classes, credit rating levels and various durations, a process we continue to perform for each reporting period. In addition, the pricing vendor has an established challenge process in place for all security valuations, which facilitates identification and resolution of potentially erroneous prices. We believe that the prices received from our pricing vendor are representative of prices that would be received to sell the assets at the measurement date (exit prices) and are classified appropriately in the hierarchy.
 
We use non-binding broker quotes as our primary basis for valuation when there is limited, or no, relevant market activity for a specific instrument or for other instruments that share similar characteristics. We have not adjusted the prices we have obtained. Investment securities priced using non-binding broker quotes are included in Level 3. As is the case with our primary pricing vendor, third-party brokers do not provide access to their proprietary valuation models, inputs and assumptions. Accordingly, our risk management personnel conduct internal reviews of pricing for all such investment securities quarterly to ensure reasonableness of valuations used in our financial statements. These reviews are designed to identify prices that appear stale, those that have changed significantly from prior valuations, and other anomalies that may indicate that a price may not be accurate. Based on the information available, we believe that the fair values provided by the brokers are representative of prices that would be received to sell the assets at the measurement date (exit prices). Level 3 investment securities valued using non-binding broker quotes totaled $620 million and $556 million at September 30, 2009 and December 31, 2008, respectively, and were classified as available-for-sale securities.
 
Retained interests in securitizations are valued using a discounted cash flow model that considers the underlying structure of the securitization and estimated net credit exposure, prepayment assumptions, discount rates and expected life.
 
Private equity investments held in investment company affiliates are initially valued at cost. Valuations are reviewed at the end of each quarter utilizing available market data to determine whether or not any fair value adjustments are necessary. Such market data include any comparable public company trading multiples. Unobservable inputs include company-specific fundamentals and other third-party transactions in that security. These investments are generally included in Level 3.
 
Derivatives
 
We use closing prices for derivatives included in Level 1, which are traded either on exchanges or liquid over-the-counter markets.
 
The majority of our derivatives portfolio is valued using internal models. The models maximize the use of market observable inputs including interest rate curves and both forward and spot prices for currencies and commodities. Derivative assets and liabilities included in Level 2 primarily represent interest rate swaps, cross-currency swaps and foreign currency and commodity forward and option contracts.
 
Derivative assets and liabilities included in Level 3 primarily represent interest rate products that contain embedded optionality or prepayment features.
 
The following tables present our assets and liabilities measured at fair value on a recurring basis. Included in the tables are investment securities of $7,204 million and $8,190 million at September 30, 2009 and December 31, 2008, respectively, supporting obligations to holders of guaranteed investment contracts. Such securities are mainly investment grade.
 

 
(24)

 


(In millions)
                 
Netting
     
 
Level 1
 
Level 2
 
Level 3
   
adjustment
(a)
Net balance
September 30, 2009
                           
                             
Assets
                           
Investment securities
                           
    Debt
                           
       U.S. corporate
$
180 
 
$
1,981 
 
$
1,567 
 
$
– 
 
$
3,728 
       State and municipal
 
185 
   
607 
   
247 
   
– 
   
1,039 
       Residential mortgage-backed
 
– 
   
2,348 
   
45 
   
– 
   
2,393 
       Commercial mortgage-backed
 
– 
   
1,188 
   
53 
   
– 
   
1,241 
       Asset-backed
 
– 
   
716 
   
1,833 
   
– 
   
2,549 
       Corporate - non-U.S.
 
238 
   
43 
   
552 
   
– 
   
833 
       Government - non-U.S.
 
1,156 
   
1,576 
   
166 
   
– 
   
2,898 
       U.S. government and federal agency
 
   
2,722 
   
– 
   
– 
   
2,730 
   Retained interests
 
– 
   
– 
   
7,086 
   
– 
   
7,086 
   Equity
                           
        Available-for-sale
 
508 
   
643 
   
18 
   
– 
   
1,169 
        Trading
 
659 
   
– 
   
– 
   
– 
   
659 
Derivatives(b)
 
– 
   
11,620 
   
434 
   
(4,541)
   
7,513 
Other(c)
 
– 
   
– 
   
604 
   
– 
   
604 
Total
$
2,934 
 
$
23,444 
 
$
12,605 
 
$
(4,541)
 
$
34,442 
                             
Liabilities
                           
Derivatives
$
– 
 
$
8,108 
 
$
275 
 
$
(4,567)
 
$
3,816 
Other
 
– 
   
32 
   
– 
   
– 
   
32 
Total
$
– 
 
$
8,140 
 
$
275 
 
$
(4,567)
 
$
3,848 
                             
December 31, 2008
                           
                             
Assets
                           
Investment securities
                           
    Debt
                           
       U.S. corporate
$
525 
 
$
1,708 
 
$
1,640 
 
$
– 
 
$
3,873 
       State and municipal
 
– 
   
603 
   
247 
   
– 
   
850 
       Residential mortgage-backed
 
30 
   
3,113 
   
118 
   
– 
   
3,261 
        Commercial mortgage-backed
 
– 
   
1,098 
   
57 
   
– 
   
1,155 
       Asset-backed
 
– 
   
676 
   
1,580 
   
– 
   
2,256 
       Corporate - non-U.S.
 
69 
   
50 
   
472 
   
– 
   
591 
       Government - non-U.S.
 
495 
   
11 
   
417 
   
– 
   
923 
       U.S. government and federal agency
 
   
24 
   
– 
   
– 
   
29 
    Retained interests
 
– 
   
– 
   
5,081 
   
– 
   
5,081 
    Equity
                           
       Available-for-sale
 
395 
   
498 
   
18 
   
– 
   
911 
       Trading
 
83 
   
305 
   
– 
   
– 
   
388 
Derivatives(b)
 
– 
   
17,721 
   
544 
   
(7,054)
   
11,211 
Other(c)
 
– 
   
288 
   
551 
   
– 
   
839 
Total
$
1,602 
 
$
26,095 
 
$
10,725 
 
$
(7,054)
 
$
31,368 
                             
Liabilities
$
 
$
10,810 
 
$
162 
 
$
(7,218)
 
$
3,756 
Derivatives
 
– 
   
323 
   
– 
   
– 
   
323 
Other
$
 
$
11,133 
 
$
162 
 
$
(7,218)
 
$
4,079 
Total
                           
                             

 
(a)    
The netting of derivative receivables and payables is permitted when a legally enforceable master netting agreement exists. Included fair value adjustments related to our own and counterparty credit risk.
 
(b)    
The fair value of derivatives included an adjustment for non-performance risk. At September 30, 2009 and December 31, 2008, the cumulative adjustment was a gain of $26 million and $164 million, respectively.
 
(c)    
Included private equity investments and loans designated under the fair value option.
 

 
(25)

 

The following tables present the changes in Level 3 instruments measured on a recurring basis for the three months ended September 30, 2009 and 2008, and the nine months ended September 30, 2009 and 2008. The majority of our Level 3 balances consist of investment securities classified as available-for-sale with changes in fair value recorded in shareowner’s equity.
 
Changes in Level 3 Instruments for the Three Months Ended September 30, 2009
 
(In millions)
       
Net realized/
               
Net change
 
         
unrealized
               
in unrealized
 
         
gains (losses)
               
gains (losses)
 
     
Net realized/
 
included in
               
relating to
 
     
unrealized
 
accumulated
 
Purchases,
 
Transfers
       
instruments
 
     
gains(losses)
 
other
 
issuances
 
in and/or
       
still held at
 
 
July 1,
 
included in
 
comprehensive