Capital One Defies Even Constanza Logic

Only in George Costanza world can the President putting restrictions on your business be a good thing - Capital One Financial (COF) has surged (yet again) nearly 20% as the meeting of Obama [Apr 19: Obama v Credit Card Companies] and the credit card companies goes on. I am adding to my short here - if anything great was coming out of this Discover Financial (DFS) should also be running hard - it is up 2%. American Express (AXP) reports after the bell.. so some risk there.

I bought two batches, $16.30 which was underwater in seconds, and $16.80 - taking this up to a 4%ish type of short exposure. With analysts expectations of a stellar profit of... oh wait, -$1.18 in profits for 2009, the PE ratio for COF is... umm... nevermind. Well there is still 2010 when analysts estimate that COF will make $0.09. I will let you do the math on that PE ratio. But never fear, shorts are being run out of the building.... keep bidding it up, why not $30? 2011 should be a very profitable year. If not 2011, profits roll in 2012.

From Reuters

• President Barack Obama urged U.S. credit card company executives on Thursday to stop unfair rate increases and be more transparent and accountable, tapping into popular outrage over abusive lending.
• Obama said he wanted new legislation being considered by the U.S. Congress to protect consumers against unfair rate increases and ban "abusive fees and penalties."
• "The days of any time, any reason rate hikes and late fees has to end," he said, as he sat at a long table surrounded by the credit card executives.
• He also wants the legislation to ensure that credit card forms and statements are in plain language. "No more fine print, no more confusing terms and conditions. We want clarity and transparency from here on out," Obama said.
• Executives from Bank of America Corp (BAC.N), American Express Co (AXP.N), Citigroup Inc (C.N), Wells Fargo & Co (WFC.N), JPMorgan Chase & Co (JPM.N), Capital One Financial Corp (COF.N), Visa Inc (V.N) and MasterCard Inc (MA.N) were among those due to attend the White House meeting.
• The meeting came a day after a House of Representatives bill to curb credit card fees and limit penalties cleared a key panel. Lawmakers have expressed outrage that many of the card-issuing banks are the same ones that have received government bailout money, paid for by the U.S. taxpayers who use the cards and are being saddled with the high fees.
• Banks say the tighter rules for card issuers would hurt fee income when they are trying to climb out of a financial hole created by the collapse of the housing boom.

Again, how this is "good" is beyond me, unless the Costanza logic is that by putting in new curbs and lower fees, the consumer could actually pay back their debt hence lowering delinquencies. But that sir... is a stretch with the unemployment rate heading to double digits. And with so much money in this business made on egregious fees - what's that? late by 1 day? $39 to us! (99.9% profit margin) Next!

Disclosure:Short Capital One Financial in fund and personal account

Comments

[jessie Mart...:]

It is about time that someone took these lending lonesharks to task and removed this tax shelter for the banks to phoney up their Books .
Claiming losses that were created on their own devious practices of adding intrest amounts that made it impossable for the consumer to ever pay off their Credit card debt .
when a real hard look is taken of the accounting practices of the credit card companys the 50 Billion ponzi sceam will look like nothing but a charitable donation .
They are claiming there losses not on hard dollars but on paper that they created by being able to scam the public for years , "CapitolOne" was built on these principals .

Apr 24 09:44 AM

[History Buf...:]

The banks are at a cognitive disconnect here -- they say their loan losses are mounting but their own policies with raising interest rates and fees are causing more people to default. They are maximizing short-term profit at the cost of long term solvency. Either one side of the bank is not talking to the other, or they have figured out they can just stick it to the customers on the fee and rate increases and let the government bail them out on the loan losses that their own actions are making worse. What a fouled up mess!

Apr 24 10:07 AM

[E Nuff Sed:]

I respectfully disagree with your thesis.

COF is quite well reserved (10%+) for credit losses and has ample liquidity. It is also trading at 1/5th book value. Therefore I think the fear in the market has more than discounted the risk. The downside for the stock is "0" which I think is no more than 20% probability while the upside is over $50 in 1 - 3 years. So a "risk adjusted" fair value in my view is $40. Stock is trading at $16. Also effect of TALF on COF remains to be seen but is likely to positive be positive. COF has also received TARP money and thus may be in "too big to fail category". COF's Tangible Common equity is well over 6% (vs. 3% for BAC and 4.5% for JPM).

Apr 24 10:12 AM

[mimsie:]

You have to take on both sides when you make such statements E Nuff Said and Jessie Martin. The banks are in the business of making money. For those individuals who are high-default risks [making later and later, and later, you get the idea, payments], the banks charge them variable and high rates because they have to make sure that they will not be stuck with a loss, just because someone chose not to honor their terms of the agreement. Do you think that those with superb credit and have low debt ratio deal with the same charges as those with high debt ratio? No they do not.

In addition, have you ever asked yourself, what are the unintended consequences of comes with the government limiting credit card companies and banks collection practices? I will tell you, they will place the direct burden on those with superb credit, those who responsible individuals who chose to keep their debt ratio low. Do you think that those responsible individuals should have to carry the burden of the irresponsible? Again, I answer no.

To make it clear, I do not work for a financial institution; however, I did work in hospital finances and the same dynamics are at play. The indigent population would come in for care, by law we were not allowed to turn them away; meaning, we had to treat them. Nonetheless, they had no way of paying the upfront fees [for the most part, no insurance being that Medicare and Medicaid paid minimum], we put them on a payment plan and over fifty-percent defaulted. In order to keep our hospital afloat, we increased costs on those with insurance. Again, I ask you was that fair?

Lastly, you have to look at history, let say the Reagan years and also FDR if you choose to go that far back, you have to ask what happens to the, the fledging entrepreneur, the less fortunate and the struggling lower middle class, after the lean years? They are the ones who experience the most restrictions. It will be much harder for them to purchase homes or start businesses in the future. Remember, in the US small businesses employ over half of the population. What happens when that comes to an end?

Getting back to housing, why do you think that during the Clinton's Administration [Barney Frank included, yes the one who has the gaul to sit on the committee that is telling businesses how the should conduct business] they had to coerce businesses [Fannie and Freddy, among others] to create special lending rates for those individuals, according to mathematical analysis, were most likely to default? Fast forward to now, guess what? Those are the individuals who are defaulting. Is it fair that they are allowed to walk away from the defaults while the government and the lending institutions are saddle with their debt?

So my response to you is that the government is to incompetent to tell any business institution how they should govern their businesses being that majority of our congress are lawyers. Their field of expertise is not business. Nonetheless, for those CEOs who failed to learn from history and took the government's [meaning saddling the people with debt], then, they deserve the consequences. Again one should not that their are unintended consequences associated with those consequences.

I could be wrong, forgive me if I am, but it sounds like you are one of those individuals who was irresponsible with using your credit cards and now you have a complaint now that the years are lean. Believe me, you will complain louder in the fat years. However, during those times, no one will hear you.

Apr 24 11:55 AM

[ozcutty:]

The big problem with COF is that they don't own the network like axp and dfs, they they don't get all that fee income to help offset loan loses. DFS and AXP are better bets. DFS having the more growth potential long term.

Apr 24 06:14 PM

[It Figures:]

Most of your facts are approximately accurate but your conclusion is wrong. Those paying attention knew all these terrible things were coming months ago. That's why the stock trades in the teens today instead of near $50, where it was in the fall when they sold stock to bolster their capital. You are too late.

Apr 24 07:30 PM

[mikebrah:]

Philosophically speaking, we can't go through the biggest credit contraction in history without a major credit card company going BK, and COF is one of the crappiest out there. They've got my vote!

Disclosure: short COF

MM

Apr 25 01:04 AM

[slipperyrazor:]

their are so many abuses by the credit card companies that i do not have the time to list or write about them. when i do i will tell you a story that recently happened to me that almost sums up the whole debate. cof and bac are certainly the worse. with all the jobs lost in america cof still has call centers in india!

Apr 25 10:19 AM

[ATLBob:]

There have certainly been predatory late fees, way too much fine print and many indiscriminate changes to terms and conditions applied by the credit card companies, and I'm fine with reasonable legislation outlining guidelines to protect consumers that also allows the companies to engage in a profitable business. The root cause of the problem continues to be that too many people carry high credit card balances because were not prudent with the use of their credit cards when the economy was humming and credit was easy and available. Whenever you run up your card balance for purchases that you WANT, you accept the risk that if your economic circumstances change (i.e.--you lose your job, your bank cancels your HELOC due to the decline in real estate valuation), you won't have the available capital or capacity to pay your bill on time, and you won't have enough credit left to help pay for the things you NEED. The moral of the story is simple: pay down your credit card debt ASAP and then only charge what you can afford to pay-off in full each month.

Apr 25 11:01 AM

[Old Trader:]

E Nuff,

I respectfully disagree with your contention that COF has adequate reserves for loan losses, and that the stock is trading at 20% of book value. Given the changes in accounting standards, "book value" of ANY of the major financial institutions has become increasingly opaque. Reserves for future losses being adequate hinges on the accuracy of predictions/projections of things like unemployment. A "prudent" banker would assume a "worst case" scenario. It seems that COF has "assumed" a relatively benign economy, going forward.


On Apr 24 10:12 AM E Nuff Sed wrote:

> I respectfully disagree with your thesis.
>
> COF is quite well reserved (10%+) for credit losses and has ample
> liquidity. It is also trading at 1/5th book value. Therefore I think
> the fear in the market has more than discounted the risk. The downside
> for the stock is "0" which I think is no more than 20% probability
> while the upside is over $50 in 1 - 3 years. So a "risk adjusted"
> fair value in my view is $40. Stock is trading at $16. Also effect
> of TALF on COF remains to be seen but is likely to positive be positive.
> COF has also received TARP money and thus may be in "too big to fail
> category". COF's Tangible Common equity is well over 6% (vs. 3% for
> BAC and 4.5% for JPM).

Apr 25 11:23 AM

[Jeffrey Ber...:]

Losses in the North Fork portfolio have not yet begun to bite. COF for me...OK COF again.....I think you may be coming down with something.

Apr 25 04:45 PM

[Old Trader:]

LOL....good one, Jeffrey!


On Apr 25 04:45 PM Jeffrey Bernstein wrote:

> Losses in the North Fork portfolio have not yet begun to bite. COF
> for me...OK COF again.....I think you may be coming down with something.

Apr 25 08:41 PM

[E Nuff Sed:]

The company expects the U.S. Card monthly charge-off rate to cross 10 percent in the next couple of months. Charge-offs are part of the business model. COF is now expecting that 10% of the credit card balances will not be paid (and has reserved for them).
Based on a recent review of the balance sheet COF's tangible equity is 4.8% and tier one capital ratio is 11.
If delinquencies double from here it may well overwhelm COF but barring that I think COF will be a survivor. A dark horse is a change in bankruptcy laws.

I agree COF as a borderline "predatory" lender is a highly disliked company and many would like to see it go down. But with the steep yield curve and if the economy does not worsen much more it will more likely double from here.

Apr 26 04:30 PM

[Globel E:]

Folks, Much can be said of the need to curb those who spend beyond their means. Perhaps they are foolish, perhaps they have been mislead. But not everyone who uses a credit card is a crook, or an idiot.

That sad debt situation has never confronted me (and I suspect has never confronted most of you who declare the customer guilty, or the bank "struggling" to get those deadbeats to pay their honest bills.)

I've phoned more than once to get the issuer of my credit card to NOT increase my limit. Why tempt fate - should my card be lost or stolen, or my identity usurped. I never approach the limit, and I never carry a balance (note-the card is simply paid to zero each month.) The card is a true convenience-I often shop on line.

Last month I received a silly note saying my interest rate would be changed to 30% if I paid late?? My interest rate is calculated monthly, and has been ZERO for several years?? They could multiply my present rate by1000 and it would be zero??

Originally, I shrugged it off. But, reading through the arguments, above, I have changed my mind. The note was offensive, vaguely suggesting that I was less than honest and just might not pay. Indicating that ALL PEOPLE MUST be dishonest?

It was not based on anything identified with me or my acct. (or FICO score, or any of the 3 credit reports). It was just offensive and a bit obnoxious.

Any bank sending such nonsense, is DISHONEST. They must be thieves and they must be quite intentionally threatening people who they, as thieves, mislead into debt. I thought usury laws existed. Perhaps not. But, swindling must still be illegal.

Apr 26 05:55 PM

[derbcougkiller:]

Your assessment is on the mark. Gov't intervention in risk-based pricing strategy is like asking Rosie O'Donnell to design a counter insurgency unit for the special forces. Wake up nanny state, you are morphing into Europe.


On Apr 24 11:55 AM User 401464 wrote:

> You have to take on both sides when you make such statements E Nuff
> Said and Jessie Martin. The banks are in the business of making money.
> For those individuals who are high-default risks [making later and
> later, and later, you get the idea, payments], the banks charge them
> variable and high rates because they have to make sure that they
> will not be stuck with a loss, just because someone chose not to
> honor their terms of the agreement. Do you think that those with
> superb credit and have low debt ratio deal with the same charges
> as those with high debt ratio? No they do not.
>
> In addition, have you ever asked yourself, what are the unintended
> consequences of comes with the government limiting credit card companies
> and banks collection practices? I will tell you, they will place
> the direct burden on those with superb credit, those who responsible
> individuals who chose to keep their debt ratio low. Do you think
> that those responsible individuals should have to carry the burden
> of the irresponsible? Again, I answer no.
>
> To make it clear, I do not work for a financial institution; however,
> I did work in hospital finances and the same dynamics are at play.
> The indigent population would come in for care, by law we were not
> allowed to turn them away; meaning, we had to treat them. Nonetheless,
> they had no way of paying the upfront fees [for the most part, no
> insurance being that Medicare and Medicaid paid minimum], we put
> them on a payment plan and over fifty-percent defaulted. In order
> to keep our hospital afloat, we increased costs on those with insurance.
> Again, I ask you was that fair?
>
> Lastly, you have to look at history, let say the Reagan years and
> also FDR if you choose to go that far back, you have to ask what
> happens to the, the fledging entrepreneur, the less fortunate and
> the struggling lower middle class, after the lean years? They are
> the ones who experience the most restrictions. It will be much harder
> for them to purchase homes or start businesses in the future. Remember,
> in the US small businesses employ over half of the population. What
> happens when that comes to an end?
>
> Getting back to housing, why do you think that during the Clinton's
> Administration [Barney Frank included, yes the one who has the gaul
> to sit on the committee that is telling businesses how the should
> conduct business] they had to coerce businesses [Fannie and Freddy,
> among others] to create special lending rates for those individuals,
> according to mathematical analysis, were most likely to default?
> Fast forward to now, guess what? Those are the individuals who are
> defaulting. Is it fair that they are allowed to walk away from the
> defaults while the government and the lending institutions are saddle
> with their debt?
>
> So my response to you is that the government is to incompetent to
> tell any business institution how they should govern their businesses
> being that majority of our congress are lawyers. Their field of expertise
> is not business. Nonetheless, for those CEOs who failed to learn
> from history and took the government's [meaning saddling the people
> with debt], then, they deserve the consequences. Again one should
> not that their are unintended consequences associated with those
> consequences.
>
> I could be wrong, forgive me if I am, but it sounds like you are
> one of those individuals who was irresponsible with using your credit
> cards and now you have a complaint now that the years are lean. Believe
> me, you will complain louder in the fat years. However, during those
> times, no one will hear you.
>

May 18 11:24 AM

[mimsie:]

Quite the opposite, I have only a debit card and I do invest. I understand that a bank's business is to make money and I am fine with the banking business. I do agree with you that the government shows diminished competency to correct banking institutions.
Your response has done little to refute Sutton's premise that the government and banks have made an unholy alliance. Did not Adam Smith foretell the atrocities that would beget a nation that did not separate government and banking?
Please, you have to dig deeper than Reagan and well into history to view this alliance to appreciate the bigger picture. Point to make, businessmen never complained when the railroad companies and telephone companies pleaded with government to intervene [nationalize these companies] and block competition. What I say his historical. Do yourself a favor read Sutton's and Smith's books.

On Apr 24 11:55 AM User 401464 wrote:

> You have to take on both sides when you make such statements E Nuff
> Said and Jessie Martin. The banks are in the business of making money.
> For those individuals who are high-default risks [making later and
> later, and later, you get the idea, payments], the banks charge them
> variable and high rates because they have to make sure that they
> will not be stuck with a loss, just because someone chose not to
> honor their terms of the agreement. Do you think that those with
> superb credit and have low debt ratio deal with the same charges
> as those with high debt ratio? No they do not.
>
> In addition, have you ever asked yourself, what are the unintended
> consequences of comes with the government limiting credit card companies
> and banks collection practices? I will tell you, they will place
> the direct burden on those with superb credit, those who responsible
> individuals who chose to keep their debt ratio low. Do you think
> that those responsible individuals should have to carry the burden
> of the irresponsible? Again, I answer no.
>
> To make it clear, I do not work for a financial institution; however,
> I did work in hospital finances and the same dynamics are at play.
> The indigent population would come in for care, by law we were not
> allowed to turn them away; meaning, we had to treat them. Nonetheless,
> they had no way of paying the upfront fees [for the most part, no
> insurance being that Medicare and Medicaid paid minimum], we put
> them on a payment plan and over fifty-percent defaulted. In order
> to keep our hospital afloat, we increased costs on those with insurance.
> Again, I ask you was that fair?
>
> Lastly, you have to look at history, let say the Reagan years and
> also FDR if you choose to go that far back, you have to ask what
> happens to the, the fledging entrepreneur, the less fortunate and
> the struggling lower middle class, after the lean years? They are
> the ones who experience the most restrictions. It will be much harder
> for them to purchase homes or start businesses in the future. Remember,
> in the US small businesses employ over half of the population. What
> happens when that comes to an end?
>
> Getting back to housing, why do you think that during the Clinton's
> Administration [Barney Frank included, yes the one who has the gaul
> to sit on the committee that is telling businesses how the should
> conduct business] they had to coerce businesses [Fannie and Freddy,
> among others] to create special lending rates for those individuals,
> according to mathematical analysis, were most likely to default?
> Fast forward to now, guess what? Those are the individuals who are
> defaulting. Is it fair that they are allowed to walk away from the
> defaults while the government and the lending institutions are saddle
> with their debt?
>
> So my response to you is that the government is to incompetent to
> tell any business institution how they should govern their businesses
> being that majority of our congress are lawyers. Their field of expertise
> is not business. Nonetheless, for those CEOs who failed to learn
> from history and took the government's [meaning saddling the people
> with debt], then, they deserve the consequences. Again one should
> not that their are unintended consequences associated with those
> consequences.
>
> I could be wrong, forgive me if I am, but it sounds like you are
> one of those individuals who was irresponsible with using your credit
> cards and now you have a complaint now that the years are lean. Believe
> me, you will complain louder in the fat years. However, during those
> times, no one will hear you.
>

Aug 06 01:25 PM