December 18, 2008
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News: Discover's Attractive Outlook.
The move Discover is embarking on is not unique. AmEx lead the way a while back of trading their independent style of credit card networking for the more mainstream approach of fitting into the banking scheme. The time is now to bolster financial health amid a crumbling economy which is decimating credit card lenders on Wall Street. As well as Discover is doing, relative to credit card industry in general, their trade ratings on Wall Street have still dropped a staggering 65% as they were orphaned by Morgan Stanley in mid 2007.
With over a million job losses this year and the strong down-turn forecast into 2010, things are certain to spiral to new depths of despair for this country. This tends to be a double-edged sword for the credit card industry. On the one side, card holders will exhibit unparalleled default rates on their credit card loans (possible as high as 10% before leveling off). On the other side, we have found that in times of extreme unemployment and low-pay, cash fluidity dries up. This occurred during the 1929 crash and was disastrous. The grace that has temporarily sustained us from such a fate today is the innovation of a credit card industry.
The credit card industry has that enviable position of being vital to our nation's economic recovery. Not that it's the fix. The fix is good jobs (which have all but vanished on Bush's watch). But credit cards provide the temporary fluidity to allow our economy to not crash completely before we can build a new infrastructure which provides and protects American jobs.
So, in the meantime, the credit card lenders who can remain the most robust have the opportunity to prevail over those who can't. This is where Discover shines. With the added capital from the ‘go-bank' move, Discover will look better than the rest to Wall Street and securitization investors who place strong emphasis on performance. In this move, Discover is considering the acquisition of a bank by offering preferred stock shares to the US Treasury in order to raise funding somewhere between 400 million to $1.2 billion. Right now, their credit-load of risk-based assets is at $40 billion.