Discover Card Complaint - Bailout MONEY
Discover reaches for bailout funds
By: Steve Daniels Dec. 18, 2008
(Crain’s) — Discover Financial Services Inc. is joining the growing ranks of firms reaching for federal bailout dollars.
Discover has applied to sell up to $1.2 billion of preferred shares to the federal government and to become a bank holding company, reversing its previous position that it likely would not participate in the Treasury Department’s financial rescue program.
The Riverwoods-based credit-card issuer disclosed its about-face in its fourth-quarter earnings report today. In a conference call with analysts, CEO David Nelms characterized the decision as a prudent response to deteriorating economic conditions.
“We’re positioning Discover to be one of only a handful of winners in the payments industry,” he said.
In seeking to convert to a bank holding company, Discover is following the lead of the other big stand-alone credit card issuer, American Express Co., which opted to convert to a bank earlier this year. Assuming the Federal Reserve approves the application, Discover will become the second-largest bank holding company in the Chicago area, after Northern Trust Corp.
Mr. Nelms declined to disclose how much Discover asked for in equity from the Treasury Department. If it were a bank holding company today, Discover would have risk-weighted assets of $40 billion; that would put it in line for between $400 million and $1.2 billion in federal funds. The company hopes to receive a response to its application by yearend.
Discover executives emphasized that the company is well-capitalized without a federal infusion, even as it’s writing off more consumer debt each quarter and expects write-offs to grow next year. It also is funding the vast majority of its loans through deposits, which have grown an average of $1.6 billion per month over the past six months.
“We think (becoming a bank holding company) is consistent with our conservative approach to managing the business,” Mr. Nelms said.
But the consumer spending meltdown is hitting Discover’s bottom line. The company posted fiscal fourth-quarter earnings of $444 million, or 92 cents per share, from continuing operations. Discover would have suffered a loss without $535 million in after-tax proceeds in the quarter from its $2.75-billion antitrust settlement in October with Visa and MasterCard.
Net charge-offs of delinquent accounts were 5.48% of Discover’s managed loans in the fourth quarter, up from 5.2% in the third quarter. Mr. Nelms said he expected the first quarter charge-off rate to exceed 6% and couldn’t predict how high write-offs would go after that.
“We cannot predict the U.S. economy and the state of the consumer with a great deal of certainty,” he said.
Other large card operations, like Bank of America Corp. and Citigroup Inc., are reporting higher charge-off numbers than Discover, and industry analysts are predicting that overall loan losses in the industry could be a record in 2009.
Do you think they are COMUNIST BASED? Think about it getting tree money and then borrowing your own tax dollars back to you at more then 12% interest. Do You think that is a part of COMMUNISM? Write a comment back.
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