Capital One Avoids Trouble by Sticking to Credit Cards: WSJ

Capital One, while battling some of its own credit crunch related problems in its credit card unit, avoided many of the problems of the mortgage market that led to the government takeover of Freddie Mac and Fannie Mae, the critical weakness in Washington Mutual (which recently fired former chairman Kerry Killinger) and other banks, according to a report in today’s Wall Street Journal.

Though like many other banks, Capital One did have an arm that was involved in mortgage lending, the bank shuttered that division and exited the business very early into the ongoing mortgage meltdown, WSJ points out.

Capital One had entered the mortgage market via its 2006 acquisition of North Fork Bancorp, Mellville, N.Y., and its GreenPoint Mortgage Funding, Inc., subsidiary. But Capital One closed the unit in 2007 when some of the problems in the mortgage market were just starting to emerge.

Though Capital One’s profits fell nearly 40 percent to $452.9 million in the second quarter compared to the same period a year earlier — and the company is forecasting weaker numbers ahead — the price of the company’s stock has not fallen nearly as much as many other financial institutions, which many analysts credit to the decision to exit the mortgage market earlier, according to WSJ. Many of those analysts had recommended against closing the mortgage business when Capital One did so.

This allowed Capital One to focus on its core credit card business. The bet was against the traditional thinking that secured debt is superior to unsecured debt. Even though losses at the card unit have spiked recently to 6.26 percent, compared with 3.56 percent a year earlier, much of the fallout from writing off large numbers of large mortgage loans has eluded the bank.