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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Knighty Tin who wrote (94486)	2/12/2002 6:33:47 PM
From: TimF	Read Replies (1) \| Respond to of 132070

U.S. Seizes Bank Business of Web Credit Card Issuer By SAUL HANSELL The government last week seized the banking operations of NextCard (news/quote), a company that issued credit cards over the Internet, saying that it had grown too fast and with scant attention to lending quality and had endangered the safety of its $525 million in government-insured deposits. The Federal Deposit Insurance Corporation said late Thursday that it had taken over the operations of NextBank, NextCard's main banking subsidiary. The company has stopped issuing new cards, but existing cardholders can continue to use their Visa accounts, paying their bills for the benefit of the government insurance fund. The F.D.I.C. is seeking a buyer for some or all of NextBank's assets. Depending on its success, depositors stand to lose up to $29 million, representing deposits in accounts in excess of $100,000. The seizure is the first time that regulators have had to close an Internet-only bank. But in fact there were very few Internet banks to start with. One reason is that bank regulations are tight enough to prevent some of the casual start-ups that took place elsewhere on the Internet. Another is that the Internet did not create opportunities for start- ups to challenge existing banks with substantially better products, in the way that Web stock trading shook up the entire brokerage industry. NextCard cloaked its marketing in new-economy imagery and let customers check balances and pay bills on its Web site. But its main distinction was that it sought new customers through banner advertisements and e-mail solicitations rather than through the mailings used by most credit card companies. It analyzed applications in 30 seconds, assigning credit lines and interest rates immediately to those it approved. The company was a marketing success. At the end of September, NextCard had 1.2 million accounts with balances totaling $2 billion, double the balances of a year ago. But the Web was NextCard's financial downfall, regulators and banking experts said, because it attracted too many of the wrong sort of customers, a phenomenon known as adverse selection. The borrower's lament that banks want to lend money only to people who do not need it is largely true. Lenders who find customers by mail get a mix of people who want their cards because of a low rate or attractive benefit, rather than simply a need for cash. But NextCard's instant approval process turned out to be sort of an online slot machine, tempting both criminals and those in dire financial straits to keep applying until they were approved. NextCard had long said its system attracted far more bogus applications than a typical bank, but it insisted that it had proper safeguards and standards. In an examination last fall, however, the government found the company's credit quality was far worse than it had claimed. In the third quarter of 2001, NextCard wrote off 7.89 percent of its loans, up from 4.92 percent a year earlier. The government also raised some accounting issues reminiscent of the problems at Enron (news/quote). Like most credit card issuers, NextCard raised money by selling securities backed by pools of its card loans to investors. The company bought back from those pools some defaulted accounts it claimed were a result of fraud. The government argued these losses were simply from bad lending decisions, rather than from fraud. That was an important distinction, because under the terms of its securitization deal, the investors in the card-backed bonds — not NextCard — were supposed to absorb losses from bad loans. Once the government determined that NextCard was actually taking responsibility for all of these losses by buying them back, it said the bank needed $140 million in additional capital as a cushion against $1.2 billion in assets it had supposedly sold. John Hashman, NextCard's chief executive, did not return calls seeking comment yesterday, but he has said that the regulators are holding the company to stricter accounting rules than apply to larger banks. Last October, NextCard said it had retained Goldman, Sachs to find new capital or a buyer to bail it out. Goldman came up empty-handed, and once the government decided NextBank could not recover from its problems on its own, the bank was seized. Trading in the shares of NextCard, which was backed by such top venture capitalists as Kleiner Perkins Caufield & Byers, was halted on Friday, pending an inquiry by Nasdaq. The shares last sold for 14 cents. nytimes.com