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For Credit Card Lending Woes, Watch Capital One

Now that many mortgage-laden financial institutions have fallen or been badly damaged, the next victims are expected to be credit card lenders.

Common wisdom is that once the recession truly kicks in and unemployment increases, defaults or tardy payments will start crumbling the vast mountain of credit card debt. Companies will get crushed by the avalanche.

A leading company to watch is one that has built itself on credit card lending: Capital One Financial, the "What's In Your Wallet?" people who broadcast those amusing television commercials featuring Visigoths or monsters.

Capital One owns something like $50 billion in credit card debt and is the fifth largest such lender in the country. As Merrrill Lynch recently wrote, credit card costs are likely to rise more aggressively "due to the rapid pace of economic deterioration" once unemployment and other financial stress increase.

Another problem is that Capital One is also exposed in automobile financing, not exactly a wonderful sector at the moment.

Last year was not a great one. Chairman and CEO Richard Fairbank wrote in his annual report that total shareholder return had come in at minus 38 percent in 2007. That's likely to get a lot worse this year.

Stock prices have been high relative to a number of other major financial companies. Capital One shares have been trading in the mid-$30s, but that's way down from about $90 in April of 2006. Sensing trouble ahead, Capital One has applied to the U.S. Treasury to sell stock worth $3.55 billion.

Capital One, based relatively close to me in McLean, Va., is a bank I've covered occasionally over the years. Back in the credit go-go years earlier this decade, I was talking to a local economist. "I just can't figure out their business model, how they stay afloat," she told me.

We'll find out soon enough what's in their wallet.

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