Photo: The Associated Press
With the flames of the financial crisis abated but still crackling, Capital One is accused of stoking the embers for the next big economic meltdown.Experts fear we’ve only treated the symptoms of our financial maladies by rescuing banks without addressing the possibility of systemic failure.
Consumer groups and competitors are worried Capital One’s most recent business endeavour will set the scene for another predictable collapse.
Capital One gets bigger
Capital One recently put a $9 billion bid on ING Direct USA, hoping to acquire 7 million new customers and $80 billion in deposits. The acquisition would launch Capital One to the #5 position in bank deposits. If the Fed allows the deal to go through, they will own over 32% of all outstanding credit card securities and reenter the mortgage market with ING’s $41 billion in mortgage loans. Capital One would achieve Too-Big-To-Fail status, and not everyone’s thrilled about the upgrade.
The financial world is worried Capital One will launch the next subprime lending crisis. Capital One operates under a rather risky business model in which more than 75% of its profits come from credit cards alone. In addition, it is the only significant subprime credit card issuer in the US and at the forefront of subprime auto lending.
Some fear Capital One’s recent acquisition of HSBC’s U.S. credit card arm will fuel its subprime tendencies. HSBC was once Capital One’s leading competitor in subprime credit card distribution, so combining the two will create a veritable subprime giant. Capital One plans on using ING to fund the HSBC portfolio. Last time it was mortgages. Next time it will be credit cards.
Uncertainties and reassurances
Capital One is attempting to assuage the outcries by insisting the deal is more of a philanthropic benefit than risk to the financial system. John Finneran, general counsel and corporate secretary for Capital One, said the purchase “will serve as a catalyst for community development, local job creation and economic growth.” Capital One plans to hire more than 3,600 employees by the end of 2011 and create 500 jobs in Delaware, ING’s American home base.
Under the Dodd-Frank financial overhaul law, the Fed must weigh the risks of bank mergers against potential rewards to determine whether such a move would jeopardize the economy. The deal is being challenged in a series of public hearings. If approved, the merger will stimulate huge growth for Capital One and Capital One credit cards.
The decision could also have significant ramifications for the future of subprime lending. Approval would result in the expansion of subprime credit card distribution, which is a concern for those who fear another lending binge. The 2008 crisis left a sour taste in America’s mouth. Nobody wants to see subprime lending rise to such predominance again for fear of eventual catastrophe. HSBC offers like the Orchard Bank card are praised for helping people with bad credit, but too many subprime credit cards could set the stage for tragedy.
A lot is riding on this deal. The future of Capital One, the future of subprime lending, the future of bank mergers and the future of the entire American economy will be shaped by the decision. The result could be another crippling recession or a pleasant little bout of philanthropy. Time will tell.