GE's Shadow Bank Moving Towards the Light

NEW YORK ( TheStreet) -- General Electric ( GE) learned its liquidity lesson during 1998 financial crisis, and concluded, "if you can't beat 'em, join 'em" by moving from banking shadows into the light over the past four years.

While it may seem ironic to some investors, GE Capital is continuing to lower its liquidity risk by growing its bank deposits.

This may even lower the likelihood of another government backstop for the GE's finance arm, in the event of another major liquidity crisis, like the one we saw in late 2008.

In November 2008, GE announced that the Federal Deposit Insurance Corp. had agreed to allow GE to participate in the regulator's Temporary Liquidity Guarantee Program, covering up to $139 billion in GE Capital debt, including long-term debt and commercial paper.

GE hinted at the time that it was desperate to hold down borrowing costs as liquidity tightened, saying its participation would "allow us to source our debt competitively with the other financial institutions that are eligible for the new FDIC program." The company also participated in the Federal Reserve's Commercial Paper Funding Facility, selling about $16 billion in commercial paper to the central bank.

The company -- which was not eligible to participate in the Troubled Assets Relief Program, or TARP, which featured direct equity investments by the government -- was careful to point out that its participation in the temporary was not a bailout, but that the program put the company "on a level playing field with other financial services companies who are eligible."

Four years on, these events may seem like ancient history, and GE Capital has returned to being a major profit center and source of capital strength for General Electric, paying a $3 billion dividend to the parent company during the second quarter.

without splitting hairs about what really constitutes a "bailout," it is plain that the company is bent on lowering its financial subsidiary's liquidity risk profile, in order to sail through the next economic crisis.

GE Capital had $558.8 billion in total assets as of June 30, shrinking 20% from $695.8 billion as of June 30, 2008. Over that five-year period, the finance company's short-term borrowings declined by 41% to $119.8 billion, while total bank deposits grew by 72%, to $41.9 billion, and $18.2 billion in deposits has maturities of one year or more.

Short-term borrowings funded 21% of GE Capital's balance sheet as of June 30, coming down from 29% in June 2008.

GE Capital will add roughly $6.8 billion in additional deposits, after the company's GE Capital Retail Bank subsidiary completes its purchase of the remaining deposits of MetLife ( MET) subsidiary MetLife Bank, NA.

Eager to escape the "bank holding company" label and the associated supervision by the Federal Reserve, MetLife in December of last year agreed to sell MetLife Bank's deposits to GE Capital, for undisclosed terms. After endless "due diligence" by the FDIC for a relatively small deposit deal, MetLife announced last Friday that it had revised its agreement with GE Capital, so that GE Capital Retail Bank would assume MetLife Bank's deposits, rather than GE Capital Bank.

GE Capital Retail Bank's primary regulator is the Office of the Comptroller of the Currency, which is expected to take a less unreasonably long time to approve the transaction, than the FDIC was taking.

Bank of America Merrill Lynch analyst Andrew Obin rates General Electric a "Buy," with a $25 price target, and said on Monday that the restructuring of the MetLife deposit deal "should accelerate the closure of the acquisition to late '12-early '13 under the new regulator," and that the FDIC had "continued to delay its approval of the transaction as it continued its lengthy due diligence, likely due to GE's relatively recent entry into the consumer deposit space and its lack of physical branches."

Obin called the MetLife deal "another milestone in strengthening GECC's funding base," and said that "the company aims to more than double its bank deposit through 2014, mostly through organic growth, but also through some select acquisitions, such a MetLife."

The analyst called GE Capital's stabilizing funding model "one of factors that should enable the parent company to extract more cash to fund growth initiatives on the industrial side, support higher dividends and incremental share buybacks over time."

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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