General Electric Co. (NYSE: GE) has reached a settlement with the U.S. Department of Justice to pay a $1.5 billion civil fine to resolve claims that the company overstated the quality of loans packaged into residential mortgage-backed securities prior to the 2008 global financial crisis. The accusations arose from the activities of its former WMC Mortgage unit.
Subprime residential mortgage loan provider WMC was acquired by GE’s finance unit, General Electric Capital, in 2004. The unit originated more than $65 billion in loans over the next three years. The Justice Department said GE concealed the poor quality of the loans and WMC’s lax fraud controls when packaging the loans into residential mortgage-backed securities sold to investors. It says the fraudulent practices resulted in billions of dollars of investor losses.
The claims against GE were brought under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The law has a 10-year statute of limitations. GE did not admit any wrongdoing in the settlement.
GE is not the only large financial institution facing these types of accusations. Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley, and Royal Bank of Scotland have all settled claims made against them over mortgage securities originated and sold in the U.S. UBS Group AG is currently facing similar charges in federal court in New York.
GE is attempting to turn around its struggling business under CEO Larry Culp, who took over the top job at the beginning of October. In a bid to improve profitability and cash flow, he has sold off key divisions and planned an expensive revamp of its flailing power sectors. Last March, Culp warned that the changes would result in profit dropping more than expected in 2019, but he expected it turn positive over the next two years.