Credit Card Company Resorts to Job Cuts
By David S. Hilzenrath
Washington Post Staff Writer
Monday, July 2, 2007
As Capital One Financial chief executive Richard D. Fairbank faced a gathering of investors several weeks ago, there was no avoiding the fact that one of Washington's biggest business successes had lost momentum.
Just months after the credit card issuer had plunged into an unconventional segment of the mortgage market with its acquisition of a major bank, that segment of the market imploded. First-quarter earnings were down and the stock price was languishing.
"Do you sense any level of impatience with your shareholders in terms of translating your end-game strategy into near-term earnings performance?" the moderator at the investor conference asked, noting that he was sugar-coating the question investors were posing.
Fairbank, whose mass marketing of credit cards had generated years of stellar returns for shareholders and had enriched him personally by hundreds of millions of dollars, addressed the question head-on.
"I'd have to be, have an awfully broken antenna not to pick up on concern in terms of our shareholders," he said. Capital One had run into "market head winds," he said, according to a transcript, "but it's not our job to whine. It's our job to deliver."
Last week, Capital One announced that its effort to deliver will leave about 2,000 of its approximately 32,000 employees out of a job. The layoffs, about half of which have already taken place, are part of a plan to cut costs by $700 million.
Company spokeswoman Julie Rakes would not say how many of the layoffs will be in the Washington area. At the end of last year, the company employed 865 people at its Tysons Corner headquarters.
"I am confident that this initiative will make Capital One a stronger and more competitive company," Fairbank said in a memo to employees.
Whether the head winds can be eliminated as easily as the jobs remains to be seen.
The stock market offered one assessment: Capital One shares ended the week at $78.44, down 36 cents from the pre-announcement close Wednesday and still down from a peak of $89.92 early last year.
Fairbank was not available to be interviewed for this article, and in advance of its next quarterly earnings report the company is in a blackout period that prevents it from offering an updated outlook, a company spokeswoman said by e-mail.
Capital One's announcement "represents a major cultural shift for the company . . . and reflects the slower-growth profile and more mature nature of the company as it stands today," financial services analysts at the investment firm Keefe, Bruyette & Woods said in a report to investors.
The challenges Capital One has been facing include an unfavorable interest rate environment -- squeezing the gap between the rates lenders can pay and the rates they can charge -- and a return to what the company describes as more normal levels of trouble with consumer credit.
The bigger challenge is Fairbank's ongoing campaign to build one of the nation's dominant financial services companies.
Capital One has become one of the largest and most recognized credit card brands through its direct-mail offers and its advertising. Its television spots depict competitors as marauding barbarians and feature the tag line, "What's in your wallet?"
In its rise from obscurity, the company was a pioneer in extending plastic to people other card issuers might have rejected as insufficiently creditworthy. It helped popularize the use of low teaser rates to attract consumers.
The company's blazing growth eventually began to taper off. To keep the company growing and to avoid having all of its eggs in one basket, Fairbank embarked on a diversification plan. Today Capital One makes auto, small-business, installment and home-equity loans.
But the expansion has introduced new risks. The 2006 buyout of North Fork Bancorporation exposed Capital One to the meltdown in the market for unconventional mortgages, such as those made with scarce borrower documentation and no money down. The 2005 purchase of Hibernia Corp., a regional power based in New Orleans, was delayed by Hurricane Katrina.
When the Hibernia deal was announced, Hibernia chief executive J. Herbert Boydstun said in a news release that based on "the complementary nature of our businesses, we expect that there will be minimal disruption for our customers, employees and local communities."
In his letter to employees last week, Fairbank said the cost-cutting will affect each of Capital One's business lines.
"The job eliminations will affect associates who have performed well and have made many valuable contributions to Capital One," he said.
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