A top Capital One Financial Corp. executive said Tuesday that regulators and the public should be pleased that it wants to merge with ING Group's online U.S. banking unit, saying its purchase is substantially safer than other potential alternatives.
While consumer groups have urged the Federal Reserve Board to reject the proposed deal, arguing it would create another "too big to fail" institution, Capital One said the merger is the best of all options for ING. Testifying at a second Fed hearing on the deal, John Finneran, the bank's general counsel, said that given ING's size and business model, the potential pool of interested acquirers was "greatly limited."
"The most likely alternative to an acquisition by Capital One would have been a sale of ING Direct to a larger and more complex institution or a more interconnected foreign bank, which raises a greater probability of heightened risk to the financial system than an acquisition by Capital One," Finneran said.
The European Commission is requiring that the U.S. division be divested from the company as part of a series of restructuring measures.
But Finneran said relatively few firms would want to purchase ING, considering many banks are already flush with deposits.
"Many banks face significant challenges in generating sufficient asset growth," said Finneran. "Capital One is uniquely positioned to redeploy ING Direct's balance sheet from less reliance on mortgage-backed and other securities to originating direct loans to consumers and small businesses."
That was the latest argument made on the part of the McLean, Va.-based credit card company, which has sought to rebut charges the merger would heighten risk to the system. Instead, Cap One has emphasized that the deal would create thousands of jobs, including 500 in Wilmington, Del., by the end of 2013.
But that was not enough to squash criticism by community groups who claim that Capital One has done little in the form of investments in the past, and will simply put the U.S. financial system at greater harm if the deal is approved.
Panelists at Tuesday's hearing in Chicago echoed similar criticisms made at a D.C. hearing last week, saying the deal would make the combined company the fifth largest institution in the U.S. They also cited its lack of diversity and claimed its monoline business would put it in danger of failure.
James Carr, chief business officer for the National Community Reinvestment Coalition, described Capital One as suffering from a mindset borrowed from Lewis Caroll's Alice in Wonderland, which has put it out of touch with reality. He said the company's argument that its merger would in fact decrease, rather increase systemic risk, is false.
"Like the Mad Hatter, Capital One lives in a world of its own," Carr said. "Such an implausible and inexplicable proposition from Capital One indicates that the bank either is out of touch with the risks and complexities of its own business model; truly does not understand the concept of systemic risk; or is simply not taking the Federal Reserve's hearings or the American public's concern seriously."
The hearing also featured testimony from non-profit organizations who testified on Capital One's behalf, citing its work to help students get higher quality education, for example.
In its own defense, Capital One cited the $2.2 billion it has already spent in community investment as a result of the last three mergers it completed, including Hibernia National Bank, North Fork, and Chevy Chase. It promised to spend $180 billion more over the next 10 years.
Still, a Fed official couldn't help but notice the contrast of the two opposing views, citing Charles Dicken's famed novel A Tale of Two Cities, when it came to Capital One.
Carr cautioned the Fed to look at the facts, not just the opinion of some non-profit community organizations, which have received grants as a way to compensate for the systemic risk posed by the deal.
Dory Rand, president of Woodstock Institute, and others echoed that sentiment.
"Do they have a past record of meeting community needs? When you look at the facts, and you look at the numbers, the answer is 'No,'" said Rand, referencing Capital One's pledge.
Instead, Rand pressed regulators to consider how the pledge would be used as a condition of approval by the Board, but not as a means to influence the Fed's opinion of Capital One's past record.
Adding to that, Bob Palmer, policy director for Housing Action Illinois reminded the Fed of its statutory requirement is to consider an institution's past actions, not just its pledge on future commitments.
Panelists also pressed for Capital One to diversify its business, repeatedly citing how 75% of its income comes from its credit card business.
Capital One's Finneran refuted such claims in his testimony, saying the company's U.S. credit card business constitutes just over a quarter of its total assets. Even with the acquisition of ING and HSBC's card business, credit cards will remain just above a quarter of its total assets, he said.
The final hearing on the deal will be held on Oct. 4 in San Francisco.