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