General Electric Capital Corp. is poised to become a better risk than JPMorgan Chase & Co. (JPM) in the $24.8 trillion credit-default swap market for the first time in more than four years, according to Barclays Plc.
“The fact that GECC isn’t a derivatives player and doesn’t have the swings of trading businesses provides investors with some comfort,” said Brian Monteleone, a Barclays credit analyst in New York. “When you think about the direction of the two business models, investors are increasingly concerned about the derivatives and investment-banking businesses.”
Protecting debt issued by GE’s finance arm from losses with credit-default swaps cost 25 basis points more yesterday than debt from JPMorgan, the biggest U.S. bank by assets, according to data compiled by Bloomberg. The gap was 107 basis points at the start of 2012 and as wide as 820 basis points in March 2009.
GE Capital is gaining favor as parent company Chief Executive Officer Jeffrey Immelt, 56, shrinks the unit and exits businesses including European mortgage lending, Monteleone said in a telephone interview.
At the same time, investor concerns that Wall Street firms are vulnerable to trading slumps were compounded by JPMorgan’s disclosure of at least $5.8 billion in losses on a botched derivatives bet, he said.
The cost to protect the debt of GE Capital with credit- default swaps was 144 basis points yesterday, compared with 119 basis points to insure debt from New York-based JPMorgan, according to data compiled by Bloomberg. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Default swaps typically rise as investor confidence deteriorates and fall as it improves. They pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.
GE Capital may come to be seen as a less-risky investment than JPMorgan in as few as six months, Monteleone said. Credit- default swap prices on their debt came within less than 1 basis point of converging on June 12, a day before 56-year-old CEO Jamie Dimon testified about JPMorgan’s trading loss at a Senate Banking Committee hearing.
Falling below the JPMorgan swap cost would be a milestone in GE’s recovery from the 2008 financial crisis. Swaps protecting against a GE Capital default covered a net $10.3 billion of the unit’s obligations as of Aug. 3, the most of any corporate issuer, according to Depository Trust & Clearing Corp.
Traders punished GE Capital in the aftermath of Lehman Brothers Holdings Inc.’s bankruptcy in 2008, pushing its default swaps to an all-time high of 1,000 basis points on March 5, 2009, prices compiled by Bloomberg show. JPMorgan swaps traded at 180 basis points that day, the prices show.
GE Capital swaps last traded lower than those of JPMorgan in January 2008, prices compiled by Bloomberg show.
Credit losses at GE Capital reached about $32 billion during the financial crisis, the company has said, and both Moody’s Investors Service and Standard & Poor’s stripped it of its top credit ratings in 2009. Immelt halted payouts from the unit to its parent, raised $15 billion from investors including Warren Buffett and cut GE’s dividend for the first time since 1938 to shore up liquidity.
While GE shares gained 17 percent this year through yesterday to $21.04, they haven’t reached the $22.25 strike price on $3 billion of warrants Buffett received along with his capital infusion. The Standard & Poor’s 500 Index advanced 12 percent through yesterday.
GE’s commitment to support its finance business contrasts with the so-called living wills required of banks including JPMorgan by the Federal Deposit Insurance Corp. and Federal Reserve to assist in shutting them down without taxpayer aid, Monteleone said.
Big banks were required under the 2010 Dodd-Frank Act to plan for how they would be liquidated through bankruptcy without federal bailouts. The Fed and FDIC posted the public portion of wills for nine large banks last month.
“In a downside scenario you’ve got more protection with GECC, given explicit support from its industrial parent, and on an ongoing basis, people are viewing the business model as being lower risk,” he said.
To contact the editor responsible for this story: Ed Dufner at email@example.com