Earth To Fed: MetLife Is Not A Bank

| About: MetLife, Inc. (MET)

The saga continues: the Fed, after refusing to let MetLife (NYSE:MET) raise its dividend or buy back shares in October last year, now finds that the company fails the stress test. While MET passed all the risk-based ratio tests, the stress case Tier 1 Leverage Ratio came in at 3.6%, which is below the requirement of 4%.

Worth noting, Goldman Sachs (NYSE:GS) at 3.8%, Citigroup (NYSE:C) at 3.2%, Morgan Stanley (NYSE:MS) at 3.4% were there to provide company under 4%. The thing is, their passing ratio was set at 3%. Here are the rules, from a footnote in the press release:

The minimum levels for BHCs to be considered adequately capitalized are 4 percent for the tier 1 ratio, 8 percent for the total capital ratio, and 3 or 4 percent for the tier 1 leverage ratio. Based on the U.S. capital adequacy guidelines, the tier 1 leverage minimum is 3 percent for BHCs with a composite BOPEC rating of "1" and for BHCs that have implemented the Board's risk percent for all other BHCs. The tier 1 leverage ratio minimum is 4 percent for Ally Financial Inc., American Express Company, Capital One Financial Corporation, and MetLife, Inc., and 3 percent for the rest of the 19 BHCs participating in CCAR 2012. The capital plans rule further stipulates that the BHCs must demonstrate their ability to maintain tier 1 common ratios above 5 percent.

Different strokes for different folks. The rule is, for big banks in the good graces of the Fed, 3% is a passing ratio; for all others, it is 4%. MetLife issued a press release in response, expressing disappointment. Also, the company is doing what it has to do to stop being labeled as a bank holding company:

"MetLife is financially strong and well positioned for both the current environment and a potential further economic downturn. We are deeply disappointed with the Federal Reserve's announcement. We do not believe that the bank-centric methodologies used under the CCAR are appropriate for insurance companies, which operate under a different business model than banks," said Steven A. Kandarian, chairman, president and chief executive officer of MetLife, Inc. "The established ratios used to measure insurance company capital adequacy, such as the NAIC's risk-based capital ratio, show that MetLife is financially strong. At year-end 2011, MetLife had a consolidated risk-based capital ratio of 450%, well in excess of regulatory minimums.

"At year-end 2011, MetLife had excess capital of $3.5 billion. We project our excess capital will grow to $6 billion to $7 billion at year-end 2012, before any capital distribution actions. It continues to be our strong belief that excess capital should be returned to shareholders and we remain fully committed to doing so," continued Kandarian. "In the capital plan we submitted, we requested approval for $2 billion in stock repurchases and an increase of MetLife's annual common stock dividend from $0.74 per share to $1.10 per share."

MetLife continues on track with its plan to cease being a bank holding company by the end of the second quarter of 2012. In addition to winding down the forward mortgage business of MetLife Bank, the company previously reached agreements to sell its depository and warehouse finance businesses.

The problem here is pretty simple: MetLife is not a bank holding company. It is an insurance holding company. Banks have one key weakness: they are subject to runs. Once the word gets out that they're weak, depositors start taking out their money. Or, in the case of Lehman, they stop trading with the weak one. Insurance companies aren't banks, and accordingly, do not experience bank runs.

While AIG failed during the GFC, it should be noted that it failed because it was able to evade insurance regulation and bring its CDS operations under the aegis of the now defunct OTS. Insurance regulators would not have permitted AIG to write insurance without adequate capital. Bank regulators didn't have a problem with the capital lite approach to insurance. At the time. They have since learned better.

Think about the assets for a minute: MetLife holds mostly bonds rated A or better. The big banks hold mortgages of questionable quality, together with a rat's nest of derivatives relating to credit defaults, interest rates, or foreign exchange. I prefer the bonds.

Investment Implications

I trimmed my MetLife position by about a third at the end of February, not because I had reservations about the company, but because I was increasing my cash holdings and sold portions of all my larger positions.

There is nothing wrong with this company. If the Fed would treat it the same as the big banks it would have passed the Tier 1 Leverage Ratio test, along with Goldman Sachs, Morgan Stanley, and Citigroup.

Insurance companies are appropriately regulated at the state level, coordinated by the NAIC. MetLife in due course will escape from the Fed's harassment and deploy its excess capital to benefit shareholders. If there is a sell-off, I will increase my position to its former size.

Disclosure: I am long MET.

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