General Electric Co. (GE), yesterday (Thursday) reduced its annual profit forecast for the second time this year and announced plans to reduce dependence on its financial services arm and focus more on the company’s industrial operations, particularly in China.

“GE today revised its earnings guidance for the third quarter, to a range of $0.43 to $0.48 per share from $0.50 to $0.54, reflecting unprecedented weakness and volatility in the financial services markets,” Chief Executive Officer Jeffery Immelt said in a statement.

GE cut its full-year earnings estimate to between $1.95 and $2.10 a share, down from the previous projection of $2.20 to $2.30 a share. The company also made a grim assessment of the U.S. economy in general, saying, “Difficult conditions in the financial-services markets are not likely to improve in the near future.”

The only silver lining GE was able to muster up was that its financial arm, which accounted for more than half the company’s profit last year, “continues to significantly outperform the majority of its peers among large financial institutions.”

GE expects its financial services businesses will earn approximately $2 billion in the third quarter. However, Immelt also announced plans to reduce exposure to financial markets that includes raising capital in GE Capital to reduce leverage ratios by cutting the segment’s dividend payment to its parent company to 10% of earnings from 40% and suspending the current share buyback. GE Capital’s commercial paper cut from 15% to 10% of its total debt going forward.

Immelt’s ultimate aim is to restructure GE in such a way that that its industrial business accounts for 60% of the company’s earnings by the end of 2009.  That would effectively reduce GE Capital’s contribution to GE’s bottom line by 13%, as financial services made up 53% of the company’s 2007 profit.

It is Immelt’s hope that these measures will reduce risk, strengthen GE’s balance sheet, and allow the company to maintain its dividend and AAA-credit rating.  They are, however, also a reflection of GE’s renewed focus on its industrial operations, which Immelt believes will lead the way to greater profitability, particularly through emerging markets such as China.

“Our industrial business fundamentals remain very strong, with continued global strength in our core industries,” Immelt said. “Long-cycle industrial and service orders are expected to be up double digits in the third quarter.”

The Industrial Shift to China

GE said earlier this month that it expects its business in China to double to $10 billion a year by 2010.

On Aug. 25, GE announced it was starting to move into its new China headquarters, a massive office campus situated in the East Coast city of Shanghai. Located in that city’s Zhangjiang Hi-Tech Park, GE’s China Technology Park complex of offices is an expansion of its former China research center. It covers more than 650,000 square feet and – when completed – will house more than 3,000 employees from GE’s China business groups.

Immelt said the new facility – one of four global research-and-development centers that GE operates – would help the company conduct actual R&D programs inside China. The three other R&D centers are located in the United States, Germany and India.

The Shanghai complex also will serve as GE’s China headquarters, helping the company with its efforts to “localize” its product lines for the China market. Overall, GE has 12,100 employees in China.

Late last month, GE also said that it would soon be delivering the first of 300 advanced locomotives to China, with the remainder arriving by mid-2010. The first two locomotives – from a contract signed in 2005 – will be shipped fully assembled from the United States. But the remaining 298 will be shipped as “kits,” with the local content gradually rising – until it reaches as much as 80%, said Lorenzo Simonelli, the global president of GE Transportation. The first locomotive will be assembled in China next month.

GE was also a major sponsor for the just-concluded Summer Olympic Games in Beijing, and said it generated $1.7 billion in revenue from that event – including $700 million in sales of power-equipment and other products for sports venues, and another $700 million from advertising on NBC, the U.S. broadcaster for the games.

News and Related Story Links:

• General Electric:
  GE Investor Update

• Money Morning:
  New Look General Electric Aims to Double its China Business by the Decade’s End

By Jennifer Yousfi
Managing Editor

General Electric Corp. (GE) is strengthening its commitment to clean energy with a $230 million (150 million euros) investment in Spain’s Fotowatio. The investment, made through GE’s Energy Financial Services unit, will amount to a 32% stake in the solar-energy firm.

“By facilitating the growth of one of the solar industry’s leading developers, this investment gives us immediate access to attractive solar markets in Europe and the United States and will form an important part of GE’s broader strategy to become a major player in solar power,” Alex Urquhart, President and CEO of GE Energy Financial Services, said in a statement. “GE has all the right ingredients to succeed in solar: capital, technology, research and ecomagination.”

Ecomagination is GE’s in-house term for its program to help customers meet their energy needs through cleaner technologies such as solar and wind power. The company recently announced that its alternative energy investments had crossed the $4 billion threshold.

Fotowatio owns and operates solar-power installations in Spain, Italy and the United States, which will amount to approximately 960 megawatts when all projects currently under development are completed.

Countries around the world are setting aggressive renewable energy targets in hopes of reducing both environmental damage and overdependence on fossil fuels. The European Union has set a 20% target for that portion of EU energy consumption to come from renewable sources by 2020.

The International Energy Agency (IEA) projects that $45 trillion will be spent on clean technology development over the next 20 years.

And solar power is one of the fastest growing sources of alternative energy, as technological advances make solar panels thinner and more energy-efficient. To get in on the global commitment to alternative energy, here are some investments to consider.

First Solar Inc.’s (FSLR) reliance on low cost thin-film cells has helped the Phoenix-based solar module manufacturer to produce solar cells for a lower cost than its rivals. According to MarketWatch data, the average rating for this stock is “overweight” with a price target of $350. First Solar shares have traded in a range from $74.77 – $317.00 over the past 12 months and closed at $XXX.XX on Friday.

LDK Solar Company Ltd. (LDK) is a manufacturer of multicrystalline solar wafers, used to produce solar cells. This China-based firm has been hard hit this year, with a share price down over 30% year-to-date. But LDK Solar has several lucrative projects in the pipeline that could turn things around as it puts the finishing touches on a brand-new silicon plant with a 1,000-ton production capacity. Another plant with a production capacity of 15,000 tons per year is set to come online some time next year. LDK Solar shares closed at $XX.XX on Friday.

If you prefer the built-in diversification that mutual-fund-type investments offer, consider an exchange-traded fund (ETFs) that focuses on such “clean” technologies as solar and wind power. One of the top ETF names in this category is PowerShares WilderHill Clean Energy Fund (PBW). This ETF has also been battered, but if you have a long-term investment horizon and believe global governments will honor their pledge to clean energy investments, now might be the time to buy.

News and Related Story Links:

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General Electric Co. (GE), which is reevaluating its operations after two consecutive quarters of sub-par earnings, will advance its presence in the Middle East by partnering with Abu Dhabi’s Mubadala Development Co. to create an $8 billion commercial finance fund.

“What it allows us to do is get good geographic and asset spread of risk, but more importantly it allows us to reallocate to higher-return opportunities in commercial finance,” Jeff Immelt, chief executive of GE, told reporters on a conference call.

The two companies will also work together in the clean energy, aviation, and oil and gas sectors, investing $40 billion in commercial and infrastructure projects over the next 18 months.

GE will build a research center for clean energy and water in Abu Dhabi’s new, carbon-neutral Masdar City, as well as invest $50 million in Masdar’s Clean Tech fund. GE also wants to expand its aircraft engine service and repair business in the Middle East, the company’s fastest growing market.

The move is also part of GE’s strategy to shift its financial operations away from volatile segments such as lending and consumer spending toward areas that provide higher growth. Shares of the second-largest U.S. company by market capitalization have lost 25% this year, and 30% in the past 12 months, as investors fret over the company’s heavy finance arms.

GE Capital, the company’s financial services wing, accounted for 52% of GE’s net income in the first half of the year. Immelt said the goal is to whittle GE Capital’s share of the profit to 40% by 2010.

One of the first steps the company took was to sell its Japanese mortgage-loan and credit card units to Shinsei Bank Ltd. (PINK: SKLKF) for $5.4 billion last month. That sale was followed by the announcement that GE would also spin-off its Consumer & Industrial Division, which includes they company’s trademark appliance and light bulb businesses.

GE’s media titan, NBC Universal Inc., may be next. Longtime GE analyst Nicolas P. Heymann of Sterne Agee recently told BusinessWeek that to fully restore investors’ confidence, Immelt needs to shed the consumer finance units in developed markets, and should announce plans to sell NBC Universal sometime after the Olympics, but before the company’s end-of-year shareholder conference.

GE’s recent $3.5 billion purchase of The Weather Channel Cos. was telling, Heymann says, as the cable property’s highly trafficked Web site could make NBC Universal even more attractive to potential buyers. “That’s the Duncan Hines icing on your cake called [digital] media,” he said.

While Immelt has denied the rumors, a sale of NBC Universal could bring anywhere from $30 billion to $35 billion and provide GE with the capital to bolster its stock by boosting dividends or buying back shares. It would also give the company cash to restructure, make acquisitions, and increase emerging market investment.

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• General Electric:
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• BusinessWeek:
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GE Chief Executive Officer Jeffrey R. Immelt – who last week told analysts the company was "seriously considering a spin-off" for the unit – said yesterday (Wednesday) that there were five possible buyers, including:

• LG Electronics Inc., a South Korean electronics and telecommunications giant that’s positioning itself as a global heavyweight.
• Haier Group Co., a China-based appliance-maker that’s one of that country’s real corporate success stories.
• Controladora Mabe S.A. de C.V., a successful Mexico-based appliance firm that is partly owned by GE, and that already makes appliances for other brand-name firms – including GE.
• Electrolux AB (OTC ADR: ELUXY), a Stockholm-based company that parlayed its success in high-end vacuum cleaners into a broader success in home appliances.
• Arcelik Anonim Sirketi, an Istanbul, Turkey-based appliance-maker that does business throughout the world – including in the United States.

It’s only been a week since reports surfaced that GE was looking to sell or spin-off its home-appliance business unit, the latest in an ongoing series of divestitures aimed at unshackling the Corporate America heavyweight from the ebb-and-flow of consumer-focused markets. In that time, however, the unconfirmed rumors have solidified to the point that Immelt yesterday identified specific possible suitors.

"The players become very obvious,” Immelt said during a breakfast meeting with businessmen in Seoul yesterday. "It’s Haier in China, LG in Korea, and so on. Of course, LG is one of the leading candidates."

Immelt said the sale of the unit will be "a  long process."

GE’s appliances division is the No. 1 provider of refrigerators, ovens and dishwashers for newly-constructed houses in the U.S. market. The unit may draw bids of $3 billion to $8 billion, according to analysts at Citigroup Inc. (C) and Goldman Sachs Group Inc. (GS).

For Haier, the acquisition of the GE unit would give the China-based company a household brand name it could use to accelerate its  U.S. expansion. Once named Qingdao Refrigerator Plant, the company is now "China’s ambassador to appliance stores worldwide," according to Hoover’s, the well-known business-information provider.

From the brink of bankruptcy, Haier rebounded and remade itself into China’s largest appliance company and a world-renowned brand that sells refrigerators, freezers, mobile phones, computers, air conditioners and more in more than 160 countries worldwide. Since "pulling itself up by its bootstraps," Haier has used joint ventures and other shrewd maneuvers to branch out both geographically and commercially, Hoover’s reports.

For the Seoul-based LG Electronics, the purchase of GE’s appliance business would allow the Korean firm to challenge U.S. heavyweight Whirlpool Corp.’s (WHR) global lead in the production of appliances, Bloomberg News reported.

According to published reports by Bloomberg and others, LG hasn’t decided whether to bid for the GE unit, the company said yesterday in response to a query by Korea’s stock exchange.
LG is "carefully monitoring" the sale of GE’s appliances division, Chief Executive Officer Nam Yong said. Zhao Rui, a spokeswoman at Haier, declined to comment, Bloomberg said.
James Kim, an analyst at Lehman Brothers Holdings Inc. (LEH), wrote in an investment note that speculation that LG will bid for GE "has been overdone, without any concrete developments … according to our channel checks, GE and LG Electronics have not talked about this potential acquisition."

However, Castor Pang, an analyst at Sun Hung Kai Securities in Hong Kong, told Bloomberg that "both LG and Haier need [the] GE [business unit in order] to break into the U.S. market because [GE] has a very strong brand. Buying GE would be a big advertisement for them. After all, the U.S. market is still a very big market."
GE’s appliances business had a U.S. market share of 27% in 2006, the most recent figures available, JPMorgan Chase & Co. (JPM) analysts estimate. The unit had revenue of $7.2 billion in 2007, according to Credit Suisse Group (ADR: CS) estimates.

News and Related Story Links:

• Bloomberg News:
  LG, Haier May Bid for GE Appliances Unit, Immelt Says.

• WebWire.com:
  LG Electronics Aims to Be Truly Multinational, Marketing-Driven Company.

• Money Morning News:
  With its Profits Lagging, GE May Have a Deal in the Oven, Analysts Say.

• Bloomberg News:
  GE Appliance Sale May Foreshadow More Divestitures.

• The Financial Times:
  GE could sell appliances unit.

• The Financial Times:
  GE steps up plans to trim amid slowdown.

While industry insiders say that General Electric Co. (GE) may be looking to sell or spin-off its home-appliance business unit, the move may actually be the first in a series of divestitures designed to unshackle the Corporate America heavyweight from consumer-driven markets.

Story continues below…

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The rumored decision to shed the century-old business that makes refrigerators, ovens and dishwashers may signal even bigger divestiture deals before the year ends, as GE Chief Executive Officer Jeffrey R. Immelt continues pursuing his strategy of shifting the huge conglomerate out of economically sensitive sectors. Since Immelt announced that plan in December 2002, GE has cut loose more than $75 billion worth of its business units, including insurance and plastics, The Financial Times reported.

At the same time, the Immelt initiative has led GE to make more than $50 billion in acquisitions in faster-growing areas, such as aviation products and services, and wind power. [In fact, former corporate raider T. Boone Pickens Jr., has unveiled plans for the world's largest wind farm, an ultimate $10 billion project that will utilize GE turbines. To read that story, also featured in today's issue of Money Morning, please click here].

GE officials have declined to comment on the media reports speculating about the potential divestiture.

With the U.S. economy slumping, and the scorched American housing market not expected to rebound for years, GE has put a premium on the divestiture of consumer-focused businesses. That effort gained an additional urgency recently when GE stunned investors by revealing that its profit actually declined in the last quarter.

That decline came even though Immelt has a stated goal of having GE’s profits grow at an average annual rate of 10%, something it did under his legendary predecessor: the now-retired Chairman and CEO John "Jack" Welch.

The company’s shares closed at $32.37 yesterday, down 14 cents. They are down 13% so far this year.

GE’s appliance unit accounted for more than half of last year’s $13.3 billion in revenue generated by the company’s Consumer & Industrial business unit, which also sells switches and lighting hardware. In fact, GE’s decision to sell, spin off or find a partner for the appliance unit may be merely the first step toward divesting the entire consumer/industrial segment of its business, according to an analyst at Credit Suisse Group AG (ADR: CS).

"GE could be exploring multiple strategic alternatives, including the sale or spin-off of all of Consumer & Industrial, as well as the potential sale of individual pieces," Credit Suisse analyst Nicole M. Parent wrote in a note to clients yesterday (Thursday).

Selling or otherwise divesting the entire Consumer & Industrial segment could cut GE’s earnings per share by as much as 10 cents, since it provided just over $1 billion in operating profits last year, Credit Suisse’s Parent wrote.

Overall, GE’s profit from continuing operations was $22.47 billion on sales of nearly $173 billion in 2007. The Commercial & Industrial group is one of six mainstay divisions. It generates substantial amounts of free cash, which could be used for additional purchases, and also has a strong brand name, which has an intrinsic value. But the overall division also houses most of GE’s slowest-growing properties, making it an excellent deal candidate, analysts say.

The GE appliance unit pioneered the electric toaster back in the early 1900s, had sales of $7.2 billion last year, and is the largest supplier of appliances to newly built homes in the United States, The FT reported. Rival Whirlpool Corp. (WHR) is the world’s largest overall appliance maker. Whirlpool CEO Jeff. M. Fettig told analysts last month that demand for home appliances has dropped for seven consecutive quarters.

A sale of the GE appliance unit alone could bring $3 billion to $8 billion, according to published reports, although GE’s take is likely to be at the higher end of that range – most likely in the $6 billion to $8 billion range. The company has reportedly had talks with several investment banks, including Goldman Sachs Group Inc. (GS).

Analysts and industry insiders say that possible suitors could include companies from China, South Korea or India that are in the market for strong brand names, and that want to take over established distribution chains in the United States and other developed markets. And since the unit has strong cash flow, buyout firms and private-equity players also could be in the mix if the appliance unit goes up on the auction block.

News and Related Story Links:

• Bloomberg News:
  GE Appliance Sale May Foreshadow More Divestitures.

• The Financial Times:
  GE could sell appliances unit.

• Wikipedia:
  T. Boone Pickens Jr.

• The Financial Times:
  GE steps up plans to trim amid slowdown.

General Electric Co. (GE) shocked the market when it announced a 6% drop in net income for the first quarter of 2008.

Continuing earnings per share for the quarter were down 8% to 44 cents per share, missing the mean of analyst expectations at 51 cents per share. Continuing earnings were down 12% from the same period a year prior to $4.4 billion.

"Demand for our global Infrastructure business remained strong, but our financial services businesses were challenged by a slowing U.S. economy and difficult capital markets," GE Chairman and CEO Jeff Immelt said in a statement. "While we are disappointed with our results, the fundamentals of our businesses are strong."

As the second-largest domestic company based on market capitalization and the only original Dow Jones Industrial Average Index component that is still included in the index, GE has long been considered a bellwether indicator for the U.S. economy. The unexpectedly weak report shook the markets and lead to a 256.56-point decline in the Dow to close at 12,325.42 on Friday.

GE’s financial services division, which makes both consumer and commercial loans, was the biggest drag on earnings with a 20% decline in profit.

"Our primary shortfall was a decline in financial services earnings," Immelt said. "We knew the first quarter was going to be challenging, but the extraordinary disruption in the capital markets in March affected our ability to complete asset sales and resulted in higher mark-to-market losses and impairments."

"Our inability to complete these asset sales and higher mark-to-market losses and impairments impacted earnings by $.05 per share versus plan," he added.

GE also lowered its full-year earnings per share estimate to $2.20 to $2.30, down from the $2.42 annual estimate that Immelt had confirmed as recently as March 13 as part of a Webcast.

When asked about his affirmation of GE’s EPS target on a conference call with analysts, Immelt made reference to the U.S. Federal Reserve led bailout of investment bank The Bear Stearns Cos. Inc. (BSC).

"Two days after the Webcast, the Bear Stearns situation took place," Immelt said on the call. "The last two weeks in March were a different world in financial services."

Several analysts downgraded the stock on Friday.

"The miss and cut to guidance raises credibility concerns for GE over the near-term, given that CEO Jeff Immelt had expressed confidence," New York-based Goldman Sachs Group Inc. (GS) analyst Deane Dray wrote in a report, Bloomberg News reported. Goldman downgraded GE shares to "neutral."

Credit Suisse Group (CS) also downgraded shares to "neutral," while Deutsche Bank AG (DB) downgraded the shares to "hold."

Many seemed to take GE’s unexpected earnings report as confirmation that the U.S. economy is in recession.
"The quarter was disappointing,"’ James Hardesty, president of Hardesty Capital Management in Baltimore, told Bloomberg Television. "It does reflect a rather sharp economic slowdown that seems to be occurring in the U.S."

But not everyone agrees with that assessment.

"Based on its historical performance, we are not so sure that the term bell-weather necessarily applies to [GE] stock," Bespoke Investment Group said in a note to clients on Friday. "Since the turn of the century the S&P 500 is down 8.5%. GE, on the other hand, is down over four times that with a decline of 36.6%."

Furthermore, Bespoke analyzed GE and the S&P 500’s performance after "the ten largest one day declines in the stock since 1980."

"While both are positive, GE has typically underperformed the S&P 500 in the following week, month, quarter, and half year."

GE stock dropped $4.70, a 12.79% decline the day of the announcement to close at $32.05.

News and Related Story Links:

• GE Press Release:
  GE Reports First Quarter 2008 Net EPS of $.43, down 2%, and Continuing EPS of $.44, down 8%; Revenues of $42.2 billion, up 8%; Orders of $24 billion, up 8%

• Bloomberg News:
  GE Says Profit Fell, Citing Finance; Forecast Reduced

• MarketWatch:
  General Electric’s quarterly net off 6%; outlook cut

• Reuters:
  GE shocks market with profit drop, shares tumble

For the first time, overseas growth and revenue compromised more than half of General Electric Co. (GE) fourth-quarter earnings.

The company reported earnings of $6.8 billion, up 15% from earnings the previous year, and earnings per share (EPS) growth of 68 cents, up 17%. For fiscal 2007, earnings were $22.5 billion, up 16%, and EPS was $2.20, up 18%.

The surge of international growth was fueled by infrastructure growth, which accounted for 26% of profit growth. Total orders were up 18% to $27 billion.

The company forecasts full-year 2008 continuing EPS of at least $2.42.

GE Chairman and Chief Jeff Immelt said in a statement that the company is built to outperform in an otherwise stagnate U.S. market.

"Our record performance in such a tough environment validates the strength of our strategy and the talent of our team," Immelt said.

Breaking Ground

While many companies [and their investors] flocked to China and India to tap their growing middle classes, GE was in other countries… creating them.

Perhaps the best examples of GE’s performance this year are a pair of billion-dollar deals in countries where few other U.S. businesses venture – Turkmenistan and Algeria.

In the former – a normally very politically and socially isolated country – GE inked a deal to build two power plants and help the desert nation [and Central Asia's leading source of natural gas] develop solar-energy production. Financial terms weren’t disclosed.

In Algeria, GE won a $2.15 billion contract to build a 1,200-megawatt combined-cycle plant with Spanish power company Iberdrola S.A. over the next 46 months. In June, Alstom and GE signed deals totaling $767 million to build power plants in Algeria.

"Every place we went there’s a need for power, there’s a need for planes, there’s lots of capital being invested, and there’s just no signs this global infrastructure boom is slowing at all," Immelt told investors on a conference call.

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• General Electric:
  GE Reports Record Fourth-Quarter and Full-Year Results for 2007; 4Q EPS up 17%; 18% for the Year

• Bloomberg: 
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• Money Morning:
  Algeria Awards $4.1 Billion Worth of Power Plant Contracts; General Electric Part of $2.15 Billion Deal

• Money Morning:
  GE to Build Two Power Plants in Turkmenistan

General Electric plans to build two power plants in Turkmenistan in an effort to help the desert nation develop solar-power facilities, Reuters reported.

The agreement was reached after talks with GE officials and Turkmen president Kurbanguly Berdymukhamedov last week in the nation’s capital, Ashgabat. 

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Despite his country’s status as Central Asia’s largest natural gas exporter, president Berdymukhamedov said Turkmenistan needs to develop alternative energy sources.

"It is incredible, but in Europe, where there are so few sunny days, they are actively working on producing solar power," Berdymukhamedov told Reuters. Meanwhile, Turkmenistan gets about 360 sunny days a year, he added.

The deal marks a huge policy leap for Turkmenistan, which has long been politically and economically isolated from Western countries and companies. Such reclusive politics were the signature of Berdymukhamedov’s predecessor, Saparmurat Niyazov, whose dictatorship ended last December after a 21-year reign.

And since Berdymukhamedov’s February election, foreign investors have been paying attention to the resource-rich country north of Iran and Afghanistan.

News and Related Story Links:

• Reuters:
  GE to build two power plants in Turkmenistan

• Wikipedia:
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General Electric Co.’s (GE) GE Energy Financial Services unit bought a 26% stake in Sayi Power Energy, a majority shareholder of KSK Power for an undisclosed amount.

But the intentions are clear as day. India’s rapidly expanding housing market is a major growth opportunity, especially compared to GE’s home turf in United States. And KSK is positioned to profit from it.

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KSK develops and owns downstream energy assets throughout India. KSK’s portfolio of existing and future power-generation assets is diversified across fuel types throughout India. The company has eight projects eithier in operation or under construction, representing 875 megawatts of capacity. KSK’s pipeline of future projects totals 3,200 megawatts and is expected to come on line by 2012.

“KSK’s pioneering leadership in mid-sized captive power generation and access to dedicated low-cost fuel reserves creates opportunities for sizeable additional investment in new power projects. We will play a strategic role in helping KSK to carry out its growth plans,” said Raghuveer Kurada, managing director of GE Energy Financial Services’ India operations.

Earlier this year, GE Energy Financial Services lent $17 million to Binani Cement for the construction of a 22.3 megawatt thermal power plant and associated utilities in Sirohi, Rajasthan, the company said.

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A short-term institutional bond managed by General Electric Asset Management suffered such extreme losses from mortgage and asset-backed securities that it has offered investors the option of redeeming their holdings at 96 cents on the dollar. Barron’s first reported the losses in the General Electric (GE) fund on Wednesday.

The GEAM Trust Enhanced Cash Trust is an enhanced-cash fund, which means it aspires to provide a higher yield than a conventional money-market fund while preserving principal and maintaining an asset value of $1 per share. When a fund’s shares drop below $1, it’s known as "breaking the buck," which is exactly what the $5 billion GEAM Trust Enhanced Cash Trust did.

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It is only the second time in history an enhanced-cash fund has done so. The only money-market fund to ever fail was Community Bankers Mutual Fund in Denver, which liquidated in 1994 because of losses on interest-rate derivatives.

According to Barron’s, a Nov. 8 e-mail from the company said the fund had "sufficient liquidity to redeem all non-GE subscribers at the current net asset value (.96) but there can be no assurance that this will continue to be the case at any point in the future as the difficulties in this market persist." As a result, outside institutional investors took a 4% hit to their holdings, a significant loss considering the one-year return on the fund through June 30 was 5.49%.

All outside investors in the fund, who, according to spokesman Chris Linehan, accounted "several hundreds of millions of dollars," pulled their money, Bloomberg News reported. Most of the fund’s money before the redemptions came from GE’s corporate pension plan, and remains invested. That means the company’s benefit and pension plans could suffer additional losses from the fund, as more securities are liquidated.

The setback at the GEAM Trust Enhanced Cash Trust is just the latest in a series of crises-level events being faced by funds in the money markets and short-term bond markets. Many such funds have more leeway to boost yields by buying lower-rated – but higher-yielding – securities, which has left many of those higher-yielding funds staring directly at the problems in the global credit markets.

"When you get involved in this contest for when you can make three basis points more here or two basis points more there, that’s insane," Bruce Bent, creator of the first money-market fund in 1970, told Bloomberg, "It’s not what I designed my money fund to do."

Bank of America Corp. (BAC), and others, are reportedly propping up their money-market funds in a frantic effort to cushion against possible losses on debt issued by structured investment funds.

Bank of America, the nation’s second largest bank, said Tuesday that it would provide up to $600 million to funds that bought asset-backed securities. Legg Mason Inc. (LM), Cheyne Debt, and SunTrust Banks Inc. (STI) have taken similar steps to ensure the security of their riskier assets.

Structured Investment Vehicles (SIVs) were set up by banks and investment firms to profit by borrowing money at low rates and owning securities that pay higher yields. They sell short-term debt, including mortgage-backed securities. Investors have retreated from these types of holdings since securities backed by subprime mortgages began defaulting in record numbers back in August.

News and Related Story Links:

• Barron’s:
  Mortgage Woes Damage a GE Bond Fund

• Bloomberg:
  GE Bond Fund Investors Cash Out After Losses From Subprime

• Bloomberg:
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• Money Morning:
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