For the first time since the 2008 financial crisis, derivatives traders regard General Electric Capital Corp. (GE:US) as less risky than JPMorgan Chase & Co. (JPM:US) as GE shrinks the unit and the bank faces billions of dollars in fines.
Credit-default swaps protecting debt of GE Capital cost 2.5 basis points less than debt of JPMorgan, according to data provider CMA. Contracts on the biggest U.S. bank by assets traded 26.5 basis points lower at the start of 2013 and as much as 497 basis points lower in April 2009.
The price reversal marks a milestone in GE’s recovery from damage suffered when the finance unit imperiled the Fairfield, Connecticut-based company as its access to capital dwindled in 2008-09. While JPMorgan Chief Executive Officer Jamie Dimon negotiates a potential $11 billion settlement to end a U.S. regulatory probe, GE CEO Jeffrey Immelt is seeking to curb risk by plotting exits from some real estate and lending operations.
“GE Capital is performing relatively well versus JPMorgan, and the other banks as well, as they’ve shed their higher-risk assets,” Brian Monteleone, a Barclays Plc credit analyst in New York, said in a telephone interview. “JPMorgan has been underperforming for the last couple months and that’s been largely drive by the various negative regulatory and litigation-related headlines.”
The cost to protect GE Capital debt with credit-default swaps was 89 basis points compared with 91.5 for JPMorgan at 4:16 p.m. in New York, according to CMA, which is owned by McGraw-Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Default swaps typically rise as investor confidence deteriorates and fall as it improves. They pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.
Russell Wilkerson, a spokesman for GE Capital, and Justin Perras of New York-based JPMorgan, each said they couldn’t immediately comment on the performance of the swaps.
GE Capital lost favor with traders in the wake of Lehman Brothers Holdings Inc.’s bankruptcy in September 2008, and its credit-default swaps soared to a record 1,000 basis points on March 5, 2009, prices compiled by Bloomberg show. Contracts to protect JPMorgan debt traded at 180 basis points that day.
Immelt has divested real estate holdings from Canada to Australia, and he told investors at a conference in May that he’s plotting a “staged exit” from more financial operations. GE has hired JPMorgan and Goldman Sachs Group Inc. to manage an initial public offering of its private-label credit card business, the Wall Street Journal reported last month, citing unidentified sources.
“The markets were expressing caution for the credit markets for GE Capital, but as they improved the balance sheet, market confidence has risen,” said Allerton Smith, senior director of the capital markets research group at Moody’s Analytics.
JPMorgan is facing what Chief Financial Officer Marianne Lake has called a “crescendo” of litigation and enforcement action as regulators step up their focus on the largest U.S. bank following more than $6.2 billion in trading losses in 2012.
The bank agreed on Sept. 19 to pay about $1.3 billion to resolve investigations into the loss and to settle unrelated claims that it unfairly charged customers for credit-monitoring products. It is currently negotiating a potential $11 billion deal with state and federal authorities to settle several probes into its mortgage bond sales practices, according to people familiar with the discussions.
To contact the reporters on this story: Tim Catts in New York at firstname.lastname@example.org; Callie Bost in New York at email@example.com
To contact the editors responsible for this story: Ed Dufner at firstname.lastname@example.org; Alan Goldstein at email@example.com