Wave of Corporate Bankruptcies Coming: GE Warns About its Subprime Mortgage Unit

Earlier today I commented to a friend about corporate bankruptcies. A few hours later, another friend Emailed about GE.

Earlier today a friend pinged me with this story: U.S.Personal Spending Outpaces Income Growth For 26th Straight Month.

He commented: "Hey, a lot of good bankruptcies are coming."

I replied: "Yes - the killer will actually be corporate! Many Zombie firms are on life support - low interest rates."

Roughly three hours later, a second friend pinged me with this headline: GE warns its subprime mortgage unit could file for bankruptcy.

GE shut down WMC, its mortgage business, in 2007 after the market for lending to risky borrowers collapsed. But the business still faces legal trouble, including lawsuits from investors and an investigation by the Justice Department.

GE warned in a filing on Tuesday evening that WMC could file for bankruptcy if it loses one of those lawsuits.

Investors lost billions of dollars when subprime loans went bust across the country during the foreclosure crisis. Federal bank regulators ranked WMC as one of the worst subprime mortgage lenders in major metro areas, with more than 10,000 foreclosures between 2005 and 2007.

The investors who are suing claim that WMC misrepresented the quality of the mortgages it sold. The investors are demanding that WMC buy the mortgages back.

Story Irony

The irony in this story is that I was not at all referring to legacy businesses, but rather more recent corporate actions. This Tweet explains.

A "zombie" corporation is one that needs constant refinancing at low interest rates or repetitive debt offerings to survive. Zombies are unable to pay down debt.

With rising interest rates, it gets increasingly harder for zombies to survive.

Here is another interesting Tweet:

GE is a fitting place for a wave of corporate bankruptcies to begin.

Deflationary News

By the way, this is extremely deflationary news: For discussion, please see Speculative Bond Short Hits New High: Others Claim "Rates Headed to Zero".

Mike "Mish" Shedlock

Comments (16)
No. 1-16
buzz60016
buzz60016

Since 2010 Mish has been bearish on stocks, long on gold, and I agree with Mish. Mish's forcast of deflation was spot on. Is this time, the PIPER is paid for endless QE ? Time will tell. Bear Markets are normal, and difficult to predict with accuracy as the FED and PPT distort reality of Capitalism. Or maybe I am too conservative or just paranoid ? Again, time will tell.

caradoc-again
caradoc-again

What butterfly wings beating will cause reality to set in?

caradoc-again
caradoc-again

Turkey, Tesla, something in the area of Tianamen? It's just waiting for some silly last thing that under normal circumstances would have no consequence. Something few if any have their eye on so not allowed for. A possibly weak but important linkage. The last Jenga piece pulled out.

sachvik
sachvik

Mish - I've been a long-time reader of your blog and like your thoughtful analysis - agree with you that automation (and outsourcing) impact employment heavily. However, I still don't understand why you think share prices will decline so much.
The stock market does not reflect the entire economy - the consumer facing stocks do, but surely not all listed stocks. In any case, companies selling services to the Top 1%? 5%? 10%? (take your pick) should do fine even if there is a recession...
Finally, I don't see why the Fed wouldn't act (with even larger sums of money) to bail out the stock market (and asset prices) if there is a correction. I'm not sure there is any government body that will hold the Fed accountable or stop it from the bailout...

MorrisWR
MorrisWR

Remember 2008? When the psychology changes, the Fed will act too late as usual. In a large bear market, most stocks lose a large percentage but that does not mean they will not gain it back. I see a lot of comments about how the Fed will not allow the markets to drop. When credit tightens, the Fed is never able to stop it. The frenzy and panic in 2008 was palpable. Perhaps next time they will be able to stop it quickly but my money will not be on that happening.