Low expectations for CIT, GE subprime sales
NEW YORK, July 23 (Reuters) - A new round of subprime assets are up for sale, and even blue-chip conglomerate General Electric Co. likely will lose money as the market for risky mortgages deteriorates at a rapid clip.
Analysts say GE (GE.N) and CIT Group Inc. probably will get far less for their respective subprime franchises than those sold less than a year ago. The value of subprime assets have tanked amid a rising wave of delinquencies and defaults on loans to people with weak credit.
In contrast, Cleveland, Ohio's National City Corp. NCC.N looks pretty smart for locking up a deal for its First Franklin Financial subprime franchise. Merrill Lynch & Co. Inc. MER.N agreed in September to pay $1.3 billion for First Franklin.
Meanwhile, General Electric (GE.N) and CIT Group Inc. (CIT.N) get poor marks for waiting too long.
GE, however, is scoring points among some analysts and investors for getting out of subprime rather than trying to revitalize its WMC Mortgage Corp. Any fallout from WMC is just a blip on the industrial behemoth's balance sheet.
"We appreciate GE saying 'enough is enough' on WMC," A.G. Edwards analyst Chris Kotowicz said in a research note.
Since the First Franklin deal was announced, soured subprime mortgages helped to buckle two hedge funds at Bear Stearns Cos. while roiling the U.S. housing market and other corners of the American economy.
And there's more to come as rating agencies and investors come to grips with how much the standards were lowered on loans to people with weak credit.
"In our view, the decision to cut and eventually run in home lending represents a severe blow to CIT's long-stated consumer expansion strategy," analysts at independent research firm CreditSights Inc. said. "We imagine it is some consolation that GE Capital has also decided to throw in the towel on mortgages, but we would note that (GE) already dramatically scaled down its franchise."
GE, in the past, has proved to be a savvy buyer of distressed assets. But the conglomerate determined it's not prime time for its subprime lender WMC. GE bought WMC in 2004 for an undisclosed price.
CreditSights estimated when the First Franklin deal was first announced that Merrill Lynch paid about 3.6 times earnings, based on midyear results. Earlier in 2006, Wachovia, Morgan Stanley and Deutsche Bank paid much higher multiples amid a wave of subprime buying by big banks and Wall Street.
Merrill Lynch's multiple on First Franklin likely rose amid further deterioration in the subprime market between the time the deal was announced and when it closed on Dec. 30. Merrill Lynch declined to discuss how it valued First Franklin.
In April, National City received a dispute notice from Merrill Lynch, which claimed that the net asset values and purchase price on First Franklin were overstated by $67 million. National City disagreed, according to a U.S. regulatory filing.
Last week, Merrill Lynch said it has seen some positive signals such as improvements in early defaults on subprime mortgage payments. But the company also said the market for subprime has not fully stabilized.
