Bailout helps Capital One

So far, the one Richmond-based financial firm that's getting help from the federal bailout is the one that says it doesn't need it.

The bailout money -- in the case of Capital One Financial Corp., $3.56 billion of taxpayer funds -- is meant to encourage financial firms to lend more money.

But Capital One, with its main operations in Goochland County, expects to reduce car loans 45 percent this year. And barely two weeks after getting the bailout funds, it moved to snap up a healthy Maryland-based savings bank that would make Capital One the largest bank in the Washington area.

Capital One says it did not use the federal money to finance the deal, and its financial filings with the U.S. Securities and Exchange Commission were unusually direct in saying it "did not need to participate" in the U.S. Treasury's $250 billion program to invest in banks.

But Richmond-based insurance giant Genworth Financial Inc. does. It is buying a savings bank in Minnesota as a way to tap into the program, after it failed to tap another bailout program aimed at companies that had been frozen out of short-term loan markets.

Federal bailout initiatives have not kept the nation's third-biggest title insurer, Henrico County-based LandAmerica, from filing for bankruptcy, after it was stuck with impossible-to-sell securities on its books when another sector of the credit markets collapsed. The company still hopes to take advantage of yet another federal bailout program, though.

Besides Capital One, three banks with major Virginia operations and Bluefield-based First Community Bankshares also are getting taxpayer-funded federal investments. Others are seeking the money.

"Many banks have decided to take advantage of this whether they needed it or not," said E. Joseph Face Jr., commissioner of financial institutions for the State Corporation Commission.

"It's actually a healthy-bank program," Face said.

Capital One is healthy. Financial reports to the Securities and Exchange Commission show its capital base was already three times as large as regulators said it needed and it had just raised $750 million from private investors.

Treasury officials believe the infusions will mean more lending, by increasing banks' financial capacity to lend, spokeswoman Brookly McLaughlin said.

They do not expect bankers to simply park funds from their federal capital infusions in havens such as government bonds because they can make bigger profits lending, she said.

"The more capital [a bank] has, the more lending it can undertake," said Bruce T. Whitehurst, president and CEO of the Virginia Bankers Association, adding that the additional money also makes banks "better prepared to deal with losses."

If the program lets some banks buy up others, that's not a bad thing either, Whitehurst said. "There's more than one path to more lending."

But healthy banks like Capital One -- or Bank of America, SunTrust, BB&T and First Community, the other banks with Virginia operations to get Treasury capital -- already had enough capital to support stepped-up lending, economists say.

"To go just injecting capital without a quid pro quo doesn't make sense," said Robert Pollin, an economist at the University of Massachusetts. "It's sort of dumb."

So far, there are few details about how banks are using their federal money.

The funds "will enable us to originate more loans than would have been possible without it," Capital One spokesman Julie Rakes said, without offering any details.

Capital One said it used proceeds from its sale of stock to investors, and not the Treasury investment, for its $520 million acquisition of Chevy Chase Savings Bank last week.

The company, meanwhile, is refusing loans to car-buyers it considers too risky, a move it expects to reduce the car loans it makes this year by 45 percent from last year.

In a little-noticed move, Capital One is increasing minimum payments for customers who are behind with credit-card payments, while decreasing minimum payments from customers who are current. The company said the change came because it has new regulators, after consolidating some of its subsidiaries.

The change will mean more people falling behind on payments. Capital One said it will increase the percentage of card balances it designates as uncollectable by 0.5 percentage points next year -- that's roughly equal to $60 million of credit-card balances on its own books and $250 million of balances on credit cards it manages for other investors.

Its customers' troubles keeping up loan and credit-card payments have hit Capital One hard, leading it to more than double its accounting provision for late payments and defaults.

Neither its lending business nor its specialty of bundling loans and credit-card receivables to sell them to investors is growing -- the total of loans made is down 4 percent so far this year, and cash received from "securitizing" or selling loans to investors is down 14 percent from last year's level. The company uses proceeds from those deals to make more loans.

Capital One completed $5 billion of such loans in the first half of the year but has not needed to arrange any more since, Rakes said. Its growth as a traditional bank means it has other sources of funds for loans.

For the first nine months of the year, its profit from continuing operations fell 29 percent. Its dividends to stockholders, though, increased 14-fold.

Wall Street, even in the latest panic, seems to like what Capital One is doing -- its shares have outperformed the Standard & Poor's 500 index and banking giants such as Bank of America and JPMorgan Chase and credit-card firms such as American Express and Discover.

All in all, Washington plans to pump $250 billion into financial firms, on top of other programs to extend credit lines and buy up bad assets.

"You can't escape the vague impression that they are making it up as they go along," said Ronald Michener, an economist at the University of Virginia.

"The plans all presume that the federal government can raise trillions of dollars in debt market -- during a credit crunch, for the express purpose of buying bad investments -- without imperiling the government's own credit rating," he added.

"There is too much whistling past the graveyard in that for my taste."
Contact David Ress at (804) 649-6051 or dress@timesdispatch.com.

Contact Michael Martz at (804) 649-6964 or mmartz@timesdispatch.com.