Remember that fuss about the dire danger of having an unknowable but evidently substantial number of banks that are Too Big to Fail? The message was: "Stop that!"
But now the Fed is making it look like TBTF is a rarity. You can count today's TBTF banks on one hand — and still have a finger left over to stir your coffee.
At least, that's true if the Fed doesn't block acquisitions by Capital One that would make it the #5 U.S. bank by deposits. They'd have had to turn those acquisitions down flat if they made this bank TBTF-right?
Yes, even after these transactions, Capital One will be small compared to Bank of America and a couple of others. But gigantic compared to almost everyone else.
This institution is less than 25 years old. Its current CEO has run it for that entire period. Any capacity for executive succession is unproven. Sixty-six percent of its net income continues to come from credit cards, which is its original business.
After buying out HSBC, Capital One is likely to be the sole significant subprime credit card issuer in the US. It is also a leading subprime auto lender. But it does not have a sustained, substantial track record in any major businesses except card and auto.
Not in consumer deposits. Not in services to any market except consumers. Previously it tried and then gave up on some other lines of business, such as mobile phones.
Why worry? One concern might be that at least in recent decades, there have been no large scale, long-term successes in American subprime lending. Household International collapsed a few years after its purchase by HSBC. The mobile home lenders are all gone, as are the subprime mortgage companies and the finance companies. CIT went under. Whatever happened to CompuCredit?
There seems to be a pattern here, and it existed long before the recent financial crisis. Subprime is unstable, dangerous.
This is a sensitive point, evidently. Capital One's most recent Form 10-Q is approximately 300 pages long. I am unable to find the term "subprime" anywhere in those 300 pages. I can't find "FICO" or "score" either. Maybe I should look under a rock instead.
The riskiness of this business helps to explain Capital One's stock price volatility. After big gyrations, it's no higher now than it was in 1999 — though the company has grown immensely, with multiple acquisitions. Shades of Bank of America under McColl and Lewis, its two prior CEO's.
Chase involuntarily took on a subprime card business as part of its assisted acquisition of WAMU-but Chase has been running off those card accounts. Meanwhile, Capital One card marketing is reported to have expanded aggressively.
Either Chase, a far more diversified bank, is wrong — or Capital One is wrong. Which one would you bet on?
The pending acquisitions won't serve to diversify Capital One away from subprime consumer lending. HSBC was for years #2 in subprime card, behind Capital One. The ING deposits will fund this lending along with the more up-market cards. These ING deposits are among the most expensive in the U.S. banking system.
Twent years ago they would have been called brokered deposits. Now the Internet with marketplaces such as bankrate.com accomplish the same thing. It's volatile, super costly money, but no longer stigmatized by regulators. Why?
Meanwhile, other banks complain about regulatory pressure to accept deposits on which they pay 0% — although some of them have large portfolios of high-yielding prime credit cards.
Again, someone's got it wrong. Who: Chase and U.S. Bank, or Capital One?
The Capital One strategy is way off center.
Maybe there are more jokers in the deck. Economic stagnation could cause another spike in losses. Capital One might not be able to raise the new capital that it needs. Highly price-sensitive depositors might be offered a more lucrative deal elsewhere, or one they perceive as less risky. And the CFPB could decide that subprime cards, as now practiced, are "unfair." Capital One has not always been on happy terms with its regulators.
How much of this, if any, did the Fed weigh before it gave Capital One an informal green light? Maybe Rep. Frank was right to express concern. Even a stopped clock is right twice a day.
Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian. He can be reached at firstname.lastname@example.org.