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MetLife Resorts To Regulatory Arbitrage - And Rightly So

|Includes:MetLife, Inc. (MET)

MetLife (NYSE:MET) filed an 8-K on the 21st, announcing that the pending deal to sell its depositary business to General Electric (NYSE:GE) has been revised to make the transaction subject to approval by the OCC, rather than the FDIC. From the filing:

On September 21, 2012, MetLife, Inc. and MetLife Bank, N.A. amended the Purchase and Assumption Agreement dated as of December 23, 2011 with GE Capital Bank (formerly known as GE Capital Financial Inc.) and General Electric Capital Corporation regarding the sale of the depository business of MetLife Bank. Under the new structure, MetLife Bank's deposit business would be assumed by GE Capital Retail Bank, rather than by GE Capital Bank.

The key terms of the agreement, whereby a GE Capital affiliate will acquire approximately $7 billion in MetLife Bank deposits, including certificates of deposit and money market accounts, remain unchanged. The transaction, as amended, will now be subject to approval by the Office of the Comptroller of the Currency, the primary regulator of GE Capital Retail Bank, and other customary closing conditions. The approval of the Federal Deposit Insurance Corporation (FDIC) will no longer be required for the transaction.

Upon completion of the sale, MetLife Bank would take the remaining administrative steps with the FDIC to terminate its deposit insurance and MetLife, Inc. would deregister as a bank holding company.

The Fed has held MET back from repurchasing shares and increasing the dividend. The company didn't pass the stress test, because the test is bank-centric and doesn't take the characteristics of life insurance into account. In order to escape regulation as a bank, MET is in the process of exiting the bank business by selling it to GE, a transaction that previously required FDIC approval.

The FDIC has held a number of meetings since the two parties applied for approval, but no action was taken.

As a practical matter, life insurers, when sticking to their core business, are not a source of systemic risk and are very capably regulated in the US by the States. MET sailed through the financial crisis without the kind of government assistance that the big banks required. Under the circumstances, the company's frustration with the Fed's incompetent regulation is understandable.

Confronted with incomprehensible dilatory behavior on the part of the FDIC, a change of regulator seems in order.

Regulatory Arbitrage

Regulatory arbitrage played a big role in the financial crisis. Bank regulators vied with each other to attract clients by providing extremely lenient oversight. The hapless OTS won AIG's business, and distinguished itself by watching passively as Fannie Mae, Freddie Mac and WaMu sent themselves down the tubes.

I'm on record as opposing regulatory arbitrage. Lax regulation was one of the primary causes of the financial crisis. More and better regulation is needed.

But in this case, the FDIC had no reason to deny approval, or to defer action. The whole situation is an example of arbitrary and capricious abuse of discretion. MET is doing the right thing.

Investment Implications

The inability to reward shareholders with dividend increases and buybacks has kept a lid on MET's share price. The company, by its reckoning, has substantial excess capital and has announced its determination to do something for shareholders. The stock will increase in price as soon as the company escapes from regulation as a bank.

It is widely expected that both MET and Prudential Financial (NYSE:PRU) will be classified as SIFI's (Systematically Important Financial Institutions) and will fall under Fed regulation for that reason. Given the record so far, it's very possible that MET will be exposed to more regulatory harassment.

However, in the long run, MET's profits will build up as retained earnings, and in due course persistence and perseverance will lead to relief, most likely by an Act of Congress. Patience will be required, and will be rewarded.

Disclosure: I am long MET, PRU.

Stocks: MET