MetLife to sell retail deposits to GE Capital

Neither GE nor GE Capital accepted any money from TARP, or Troubled Asset Relief Program, which was used to shore up the finances of many large banks.

GE Capital did use the FDIC's Temporary Liquidity Guarantee Program. This program, though, is widely misunderstood. GE Capital did not borrow from the U.S. government. Instead, GE Capital sold debt to the public and paid a fee to have its debt backstopped by the government. GE has since exited the program and paid the U.S. government $2.3 billion in fees for the temporary backstop. GE's participation in the program did not cost the government anything. In fact, it generated income for the U.S.' coffers.

Retail deposits are not the issue...they are the greatest form a inexpensive and reliable capital...where else can you capitialize a business for close to 'free.' The issue with fims like GE Capital and the rest of the investment banks is that they leveraged and deployed that retail deposit-like capital 30x and more into highly risk assets like sub-prime mortgages. So it is not retail banking per se that is the issue in the financial system, it is the amount of leverage and risk that investments banks and other large lenders like GE Capital take as part of how they execute their business model.

Patrick - retail deposits are a liability for a bank because they can be withdrawn at any moment. You can capitalize your business best with common stock who's issuance is very low cost, but you must keep the share value up by running your business properly. That's where GE screwed up - not managing the business properly. Taking on more demand deposits is only a band-aid.

GE Capital has about $300 million direct exposure to PIIGS. This is not an amount that should be alarming.

GE Capital's total European exposure is $95 billion that includes credit-card debt, auto loans, and mortgages. Any significant decline in the value of the euro would cause massive losses in these investments. And the Euro is declining as I write which means the euro must soon either be significantly devalued or significantly restructured. GE is still likely to lose an enormous amount of money on these loans. The reason why is buried in a footnote on page 21 of its second-quarter credit-quality report. It says:

"...At origination, we underwrite loans with an adjustable rate to the reset value. 81% of these loans are in our U.K. and France portfolios, which comprise mainly loans with interest-only payments and introductory below market rates..."

What that means is that GE Capital invested heavily in interest-only, variable-rate mortgages in the U.K. and France. Most of these loans haven't "reset" yet. And when they do, they have enormously high default rates.