Capital One buys Chevy Chase Bank: Another bailout freebie

I wrote a few weeks back about how your bailout money was being used for mergers and acquisitions to line bankers’ pockets instead of for making loans to desperate homeowners. After receiving $25 billion in bailout funds, Citigroup attempted to buy Chevy Chase Bank despite the fact it was near collapse. Luckily this deal was scuppered as Capital One has now acquired Chevy Chase, just as the Wachovia deal was canceled when Wells Fargo stepped in.

You might think we dodged a bullet then… until you read the deal terms for Capital One. Yet again, bailout money is being used, not to help out the man on the street, but to save executives at poorly run institutions. I have bolded the relevant parts.

Capital One Financial Corp. has reached an agreement to buy Bethesda, Md.-based Chevy Chase Bank for $520 million in cash and stock, boosting its presence in the Washington area and gaining a larger deposit base at a time when access to cheap funding is needed to withstand the economic crisis.

Capital One, of McLean, Va., was among several institutions to look at closely held Chevy Chase, which has $15.5 billion in assets and 244 branches in the Washington market. New York-based Citigroup Inc. was interested at one point but backed out amid larger troubles with its own stock. Others that looked at the bank were New York-based J.P. Morgan Chase & Co., SunTrust Banks Inc. of Atlanta and Winston Salem, N.C.-based BB&T Corp., according to people familiar with the process.

Capital One received $3.56 billion in capital from the federal government this year as part of an industry rescue package run by the Treasury Department. But the bank didn’t need that capital to complete the Chevy Chase transaction, according to a person close to the company.

Capital One has stayed away from mortgages in this decade, which helps explain its resilience. But analysts are still concerned about its exposure to credit-card lending as consumer delinquencies rise. More deposits give Capital One a cheap financing source amid the credit crunch, and with Chevy Chase it would have a total of $109 billion in deposits.

Capital One expects cumulative losses on Chevy Chase’s $11.8 billion loan portfolio to be $1.75 billion, according to a person familiar with the situation. Chevy Chase has $4.15 billion in adjustable-rate mortgages known as option ARMs that have come under particular strain during the housing meltdown. The bank’s profits fell 69% in the third quarter, to $5.9 million.

A company that made its name as a marketer of no-fee credit cards, Capital One became a regional bank in 2005 and 2006 through acquisitions of Hibernia Corp. and North Fork Bancorp. It now has 739 branches. Chevy Chase will give the company a combined 983 branches.

So, Capital One gets $3.56 billion in bailout money and buys a bank for $520 million (with cash proceeds of only $445 million). Sounds like a freebie to me. And wouldn’t you be willing to bet that Capital One will not be increasing ts lending. This seems to be a pattern: Wells Fargo gets Wachovia on the cheap after getting bailout money. PNC gets NCC for next to nothing after receiving bailout money. We were warned big banks would become nationalized predators. And they have.

What’s in your wallet? For Capital One, it’s free money from the U.S. Bailout Gravy Train.

Source
Capital One to Acquire Chevy Chase Bank – WSJ
Capital One offers $520M for Chevy Chase Bank – CNN Money

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.