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Financial Instruments
6 Months Ended
Jun. 30, 2011
Financial Instruments [Abstract]  
Financial Instruments

16. Financial Instruments

The following table provides information about the assets and liabilities not carried at fair value in our Condensed Statement of Financial Position. Consistent with ASC 825, Financial Instruments, the table excludes finance leases and non-financial assets and liabilities. Apart from certain of our borrowings and certain marketable securities, few of the instruments discussed below are actively traded and their fair values must often be determined using financial models. Realization of the fair value of these instruments depends upon market forces beyond our control, including marketplace liquidity. For a description on how we estimate fair value, see Note 22 in our 2010 consolidated financial statements.

 June 30, 2011 December 31, 2010
   Assets (liabilities)   Assets (liabilities)
   Carrying     Carrying  
 Notional amount Estimated Notional amount Estimated
(In millions)amount (net) fair value amount (net) fair value
                  
                  
GE                 
Assets                 
   Investments and notes                 
       receivable$(a) $276 $276 $(a) $414 $414
Liabilities                 
   Borrowings (a)  (10,927)  (11,704)  (a)  (10,112)  (10,953)
GECS                 
Assets                 
   Loans (a)  260,015  257,272  (a)  268,239  264,550
   Other commercial mortgages (a)  1,137  1,192  (a)  1,041  1,103
   Loans held for sale (a)  985  986  (a)  287  287
   Other financial instruments(c) (a)  2,038  2,571  (a)  2,103  2,511
Liabilities                 
   Borrowings and bank                  
      deposits(b)(d) (a)  (463,228)  (473,901)  (a)  (470,520)  (482,724)
   Investment contract benefits (a)  (3,621)  (4,316)  (a)  (3,726)  (4,264)
   Guaranteed investment                 
      contracts (a)  (4,793)  (4,796)  (a)  (5,502)  (5,524)
   Insurance – credit life(e) 2,006  (106)  (90)  1,825  (103)  (69)
                  
                  

(a)       These financial instruments do not have notional amounts.

(b)       See Note 8.

(c)       Principally cost method investments.

(d)       Fair values exclude interest rate and currency derivatives designated as hedges of borrowings. Had they been included, the fair value of borrowings at June 30, 2011 and December 31, 2010 would have been reduced by $4,634 million and $4,298 million, respectively.

(e)       Net of reinsurance of $2,800 million at both June 30, 2011 and December 31, 2010.

Loan Commitments     
 Notional amount
 June 30, December 31,
(In millions)2011 2010
     
Ordinary course of business lending commitments(a)$ 3,545 $ 3,584
Unused revolving credit lines(b)     
   Commercial(c)  18,417   21,338
   Consumer – principally credit cards  246,159   227,006
      
      

(a)       Excluded investment commitments of $1,494 million and $1,990 million as of June 30, 2011 and December 31, 2010, respectively.

(b)       Excluded inventory financing arrangements, which may be withdrawn at our option, of $12,400 million and $11,840 million as of June 30, 2011 and December 31, 2010, respectively.

(c)       Included commitments of $13,614 million and $16,243 million as of June 30, 2011 and December 31, 2010, respectively, associated with secured financing arrangements that could have increased to a maximum of $18,053 million and $20,268 million at June 30, 2011 and December 31, 2010, respectively, based on asset volume under the arrangement.

Derivatives and hedging

As a matter of policy, we use derivatives for risk management purposes, and we do not use derivatives for speculative purposes. A key risk management objective for our financial services businesses is to mitigate interest rate and currency risk by seeking to ensure that the characteristics of the debt match the assets they are funding. If the form (fixed versus floating) and currency denomination of the debt we issue do not match the related assets, we typically execute derivatives to adjust the nature and tenor of funding to meet this objective. The determination of whether we enter into a derivative transaction or issue debt directly to achieve this objective depends on a number of factors, including market related factors that affect the type of debt we can issue.

The notional amounts of derivative contracts represent the basis upon which interest and other payments are calculated and are reported gross, except for offsetting foreign currency forward contracts that are executed in order to manage our currency risk of net investment in foreign subsidiaries. Of the outstanding notional amount of $342,000 million, approximately 88% or $300,000 million, is associated with reducing or eliminating the interest rate, currency or market risk between financial assets and liabilities in our financial services businesses. The remaining derivative activities primarily relate to hedging against adverse changes in currency exchange rates and commodity prices related to anticipated sales and purchases and contracts containing certain clauses which meet the accounting definition of a derivative. The instruments used in these activities are designated as hedges when practicable. When we are not able to apply hedge accounting, or when the derivative and the hedged item are both recorded in earnings concurrently, the derivatives are deemed economic hedges and hedge accounting is not applied. This most frequently occurs when we hedge a recognized foreign currency transaction (e.g., a receivable or payable) with a derivative. Since the effects of changes in exchange rates are reflected currently in earnings for both the derivative and the transaction, the economic hedge does not require hedge accounting.

The following table provides information about the fair value of our derivatives, by contract type, separating those accounted for as hedges and those that are not.

 At June 30, 2011 At December 31, 2010
 Fair value Fair value
(In millions) Assets  Liabilities  Assets  Liabilities
            
Derivatives accounted for as hedges           
   Interest rate contracts$5,213 $2,364 $5,959 $2,675
   Currency exchange contracts 3,036  2,452  2,965  2,533
   Other contracts 2  0  5  0
  8,251  4,816  8,929  5,208
            
Derivatives not accounted for as hedges           
   Interest rate contracts 195  289  294  552
   Currency exchange contracts 1,905  795  1,602  846
   Other contracts 439  39  531  50
  2,539  1,123  2,427  1,448
            
Netting adjustments(a) (3,583)  (3,573)  (3,867)  (3,857)
            
Total$7,207 $2,366 $7,489 $2,799
            
            

Derivatives are classified in the captions “All other assets” and “All other liabilities” in our financial statements.

(a)       The netting of derivative receivables and payables is permitted when a legally enforceable master netting agreement exists. Amounts included fair value adjustments related to our own and counterparty non-performance risk. At both June 30, 2011 and December 31, 2010, the cumulative adjustment for non-performance risk was a loss of $10 million.

 

 

Fair value hedges

We use interest rate and currency exchange derivatives to hedge the fair value effects of interest rate and currency exchange rate changes on local and non-functional currency denominated fixed-rate debt. For relationships designated as fair value hedges, changes in fair value of the derivatives are recorded in earnings within interest and other financial charges, along with offsetting adjustments to the carrying amount of the hedged debt. The following tables provide information about the earnings effects of our fair value hedging relationships for the three and six months ended June 30, 2011 and 2010, respectively.

 Three months ended
 June 30, 2011 June 30, 2010
(In millions)Gain (loss) Gain (loss) Gain (loss) Gain (loss)
 on hedging on hedged on hedging on hedged
 derivatives items derivatives items
            
Interest rate contracts $1,341 $(1,466) $2,551 $(2,721)
Currency exchange contracts  15  (20)  11  (15)
            
            

Fair value hedges resulted in $(130) million and $(174) million of ineffectiveness in the three months ended June 30, 2011 and 2010, respectively. In both the three months ended June 30, 2011 and 2010, there were insignificant amounts excluded from the assessment of effectiveness.

 

 Six months ended
 June 30, 2011 June 30, 2010
(In millions)Gain (loss) Gain (loss) Gain (loss) Gain (loss)
 on hedging on hedged on hedging on hedged
 derivatives items derivatives items
            
Interest rate contracts $(390) $195 $3,811 $(4,130)
Currency exchange contracts  39  (47)  (9)  1
            
            

Fair value hedges resulted in $(203) million and $(327) million of ineffectiveness in the six months ended June 30, 2011 and 2010, respectively. In both the six months ended June 30, 2011 and 2010, there were insignificant amounts excluded from the assessment of effectiveness.

 

 

Cash flow hedges

We use interest rate, currency exchange and commodity derivatives to reduce the variability of expected future cash flows associated with variable rate borrowings and commercial purchase and sale transactions, including commodities. For derivatives that are designated in a cash flow hedging relationship, the effective portion of the change in fair value of the derivative is reported as a component of AOCI and reclassified into earnings contemporaneously and in the same caption with the earnings effects of the hedged transaction.

The following tables provide information about the amounts recorded in AOCI, as well as the gain (loss) recorded in earnings, primarily in interest and other financial charges, when reclassified out of AOCI, for the three and six months ended June 30, 2011 and 2010.

      
       Gain (loss) reclassified
 Gain (loss) recognized in AOCI from AOCI into earnings
(In millions)for the three months ended for the three months ended
 June 30, June 30, June 30, June 30,
 2011 2010 2011 2010
            
Cash flow hedges           
Interest rate contracts$(141) $(214) $(221) $(352)
Currency exchange contracts 500  (1,070)  459  (983)
Commodity contracts 2  6  12  2
Total$361 $(1,278) $250 $(1,333)

      
       Gain (loss) reclassified
 Gain (loss) recognized in AOCI from AOCI into earnings
(In millions)for the six months ended for the six months ended
 June 30, June 30, June 30, June 30,
 2011 2010 2011 2010
            
            
Cash flow hedges           
Interest rate contracts$(117) $(444) $(478) $(771)
Currency exchange contracts 764  (1,604)  952  (1,685)
Commodity contracts 2  9  8  0
Total$649 $(2,039) $482 $(2,456)
            
            

The total pre-tax amount in AOCI related to cash flow hedges of forecasted transactions was $(1,887) million at June 30, 2011. We expect to transfer $670 million to earnings as an expense in the next 12 months contemporaneously with the earnings effects of the related forecasted transactions. In both the three and six months ended June 30, 2011 and 2010, we recognized insignificant gains and losses, respectively, related to hedged forecasted transactions and firm commitments that did not occur by the end of the originally specified period. At June 30, 2011 and 2010, the maximum term of derivative instruments that hedge forecasted transactions was 21 years and 22 years, respectively.

 

 

For cash flow hedges, the amount of ineffectiveness in the hedging relationship and amount of the changes in fair value of the derivatives that are not included in the measurement of ineffectiveness are both reflected in earnings each reporting period. These amounts are primarily reported in GECS revenues from services and totaled $(16) million and $7 million in the three months ended June 30, 2011 and 2010, respectively, and $12 million and $(27) million in the six months ended June 30, 2011 and 2010, respectively.

 

Net investment hedges in foreign operations

We use currency exchange derivatives to protect our net investments in global operations conducted in non-U.S. dollar currencies. For derivatives that are designated as hedges of net investment in a foreign operation, we assess effectiveness based on changes in spot currency exchange rates. Changes in spot rates on the derivative are recorded as a component of AOCI until such time as the foreign entity is substantially liquidated or sold. The change in fair value of the forward points, which reflects the interest rate differential between the two countries on the derivative, is excluded from the effectiveness assessment.

 

The following tables provide information about the amounts recorded in AOCI for the three and six months ended June 30, 2011 and 2010, as well as the gain (loss) recorded in GECS revenues from services when reclassified out of AOCI.

 Gain (loss) recognized in CTA Gain (loss) reclassified from CTA
(In millions)for the three months ended for the three months ended
 June 30, June 30, June 30, June 30,
 2011 2010 2011 2010
Net investment hedges           
Currency exchange contracts$(2,605) $1,813 $(360) $(30)
            
            

 Gain (loss) recognized in CTA Gain (loss) reclassified from CTA
(In millions)for the six months ended for the six months ended
 June 30, June 30, June 30, June 30,
 2011 2010 2011 2010
Net investment hedges           
Currency exchange contracts$(3,406) $2,217 $(698) $(30)

The amounts related to the change in the fair value of the forward points that are excluded from the measure of effectiveness were $(377) million and $(213) million for the three months ended June 30, 2011 and 2010, respectively, and $(655) million and $(412) million for the six months ended June 30, 2011 and 2010, respectively, and are recorded in interest and other financial charges.

 

Free-standing derivatives

Changes in the fair value of derivatives that are not designated as hedges are recorded in earnings each period. As discussed above, these derivatives are typically entered into as economic hedges of changes in interest rates, currency exchange rates, commodity prices and other risks. Gains or losses related to the derivative are typically recorded in GECS revenues from services or other income, based on our accounting policy. In general, the earnings effects of the item that represent the economic risk exposure are recorded in the same caption as the derivative. Gains for the six months ended June 30, 2011 on derivatives not designated as hedges were $843 million comprised of amounts related to interest rate contracts of $(17) million, currency exchange contracts of $834 million, and other derivatives of $26 million. These gains more than offset the earnings effects from the underlying items that were economically hedged. Losses for the six months ended June 30, 2010 on derivatives not designated as hedges, without considering the offsetting earnings effects from the item representing the economic risk exposure, were $(1,286) million comprised of amounts related to interest rate contracts of $184 million, currency exchange contracts of $(1,459) million, and other derivatives of $(11) million.

 

Counterparty credit risk

Fair values of our derivatives can change significantly from period to period based on, among other factors, market movements and changes in our positions. Accordingly, we actively monitor these exposures and take appropriate actions in response. We manage counterparty credit risk (the risk that counterparties will default and not make payments to us according to the terms of our standard master agreements) on an individual counterparty basis. Where we have agreed to netting of derivative exposures with a counterparty, we offset our exposures with that counterparty and apply the value of collateral posted to us to determine the exposure. When net exposure to a counterparty, based on the current market values of agreements and collateral, exceeds credit exposure limits, we typically take action to reduce such exposures. These actions may include prohibiting additional transactions with the counterparty, requiring additional collateral from the counterparty (as described below) and terminating or restructuring transactions.

 

As discussed above, we have provisions in certain of our master agreements that require counterparties to post collateral (typically, cash or U.S. Treasuries) when our receivable due from the counterparty, measured at current market value, exceeds a specified limit. At June 30, 2011, our exposure to counterparties, including interest due, net of collateral we hold, was $979 million. The fair value of such collateral was $9,255 million, of which $2,033 million was cash and $7,223 million was in the form of securities held by a custodian for our benefit. Under certain of these same agreements, we post collateral to our counterparties for our derivative obligations, the fair value of which was $1,301 million at June 30, 2011.

 

Additionally, our standard master agreements typically contain mutual downgrade provisions that provide the ability of each party to require termination if the long-term credit rating of the counterparty were to fall below A-/A3. In certain of these master agreements, each party also has the ability to require termination if the short-term rating of the counterparty were to fall below A-1/P-1. The net amount relating to our derivative liability of $2,366 million subject to these provisions, after consideration of collateral posted by us, and outstanding interest payments, was $1,114 million at June 30, 2011.