Dealmakers Exhale as CapOne-ING Deal Gets Nod

Market watchers would have been stunned if regulators blocked Capital One Financial Corp. from buying ING Direct USA. The Federal Reserve Board did give its green light late Tuesday afternoon, but its delays in reaching the decision underscored the political obstacles facing big merger deals in the postcrisis era.

Wall Street believed the $9 billion deal made sense. So did Washington, many say. But the Federal Reserve Board — which took an exceedingly long amount of time to deliberate on it — had to figure out how to give it the go-ahead in a way that would convince Main Street it was a good idea.

"Everything is political, or so it would seem. The Fed has become entirely politicized," said Gary B. Townsend, the chief executive of Hill-Townsend Capital LLC, before the final decision was announced. "There is some opposition here. I don't see any reasonable argument to disallow it."

A flat-out rejection of the plan by Capital One, of McLean, Va., to become the country's fifth-biggest deposit holder could have been dire, he said. The country has too many banks and not enough borrowers to go around. Mergers are preferable to failures. It is not in the interest of regulators or the long-term health of the banking industry to strongly discourage able buyers from helping clean up the system, he said.

The buyer and the seller were counting on the deal for different strategic reasons.

ING Group NV had to sell its U.S. online operation to comply with a European Commission edict. Only a few other U.S. banks were capable of absorbing ING Direct, which has 7 million customers and $80 billion of deposits.

Capital One seemed to be the only one that wanted to, given the nature of its business. It aims to close the purchase of HSBC Holdings PLC's U.S. credit cards operation next quarter. The idea is to use ING Direct's high-interest checking and savings accounts to fund growth in credit cards as the economy rebounds and it integrates the HSBC unit.

Capital One has plenty of access to wholesale funding; its returns and margins are among the best in banking. But deposit-funded loans have fatter spreads. It can justify acquiring lots of high-interest deposit accounts because about half its main business is credit cards, which generate higher interest than the home and business loans most commercial banks rely on.

Meantime, there wasn't much of a chance of getting any other buyers for ING Direct or anything else systemically important through the Fed if the said no to Capital One's bid, experts said.

"I don't know who else would be particularly inclined," Townsend said.

The Dodd-Frank Act mandates that the Federal Reserve must block the creation of conglomerates that pose a threat to the economy. Congress left it up to the Fed to decide what constitutes a threat. The first large deal to be subject to the new standard was PNC Financial Services Group Inc.'s $3.5 billion agreement to buy RBC Bank USA from Royal Bank of Canada, which the Fed approved in December.

The approval of that deal bolstered the view that Capital One's purchase of ING was on track to being cleared by the Fed, too. They shared similar risk profiles.

A post-merger Capital One will have slightly more deposits than PNC, but fewer assets. Both lack the complexity and dense interconnectivity of a global investment bank such as Goldman Sachs Group Inc. If either company fails after the merger, its customers would still be able to get access to the services they provide such as consumer loans or credit cards.

The Federal Reserve's handling of the Capital One transaction was being closely watched because it helped spell out how the central bank defines systemic risk as it relates to M&A. Does it mean simply riskier? Or does it mean a clear risk to ruin the economy?

With PNC, the Fed leaned toward the latter view. David Dietze, president and chief investment strategist of Point View Wealth Management Inc., correctly predicted earlier Tuesday that the Fed would follow a similar tack with Capital One. The Fed's 40-page order, released late in the day, said the firm would not pose a systemic risk to either the U.S. banking or financial systems. The Fed placed some conditions on the deal, including ensuring that it would take specific steps to ensure that the combined company is managed appropriately according to its "new size and complexity."

The industry needs "intelligent consolidation" because "I think a lot of economists and the Federal Reserve think we're overbanked here," Dietze said before the approval became official. "I think it will be permitted because, basically, FDIC-insured deposits are a more favored way to grow to as opposed" to alternatives overseers might frown upon such as buying trading operations.