JPM: What Kind of a Deal Could Jamie Dimon Get for Capital One?

While the consensus continues to believe the credit cycle has a long ways to go on the downside, bank stock prices (prior to Tuesday's rally) were starting to reflect distressed scenarios not quite warranted given broader economic news outside of the mortgage sector. We suggested buying this group on the capitulation in the financial sector over the last week or so, and we suspect this sector rally will carry further and higher than many believe. JP Morgan Chase (JPM) ($44.50) which avoided much of the trouble by limiting mortgage and consumer credit growth during the recent bubble years, and with Jamie Dimon at the helm, will no doubt be rummaging through the trash, fixing up or buying distressed assets.

This is what he has done in the past at BancOne and in his prior life as the mastermind behind Citigroup's (C) ($35.00) meteoric rise in the Nineties under Sandy Weill, before being unceremoniously (and unfortunately for Citigroup shareholders), dismissed. He can reignite growth both internally and externally now that its competition is so severely weakened. With his photographic memory, the rigor of an actuary assessing morbidity, and the single-minded determination to maximize ROE for a given level of risk and leverage in every line of business, he seems likely to attempt a first strike as this credit cycle reaches its terminal phase in 2008. That now seems especially true, given JPM's stock's relative strength as a currency for acquisitions vis-a-vis its competition.

One potential target, and one that should be on his radar is Capital One Financial (COF) ($56.00). A long-admired management team, which put a small-time credit card company on the map of global financial services companies in the Nineties, may have stumbled one too many times through its own over-reach in its banking acquisitions. In a quest to reinvent itself, Capital One struck out too early, at the wrong time in the mortgage cycle acquiring NorthFork and Hibernia, despite having negotiated the minefield of consumer credit reasonably well in the earlier part of this decade. But, with long-time believers having been burned one too many times, and the credit cycle not yet in its terminal phase, its optimal solution may be to sell itself, the reluctance of management notwithstanding

At COF's current price of $56 and .84 of Book Value, Jamie's advisers are no doubt crunching numbers to see whether a deal like this could work. He gets three companies in one shot. COF shareholders get a stake in the best run bank in the country.