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Death of a Colossus: Gargantua Swallows MBNA

MBNA's Political Pump-Priming Doesn't Wash

By Martin H. Bosworth
ConsumerAffairs.com

July 1, 2005
It was the stock jump heard 'round the world. Before the bell had even rung Friday morning, June 30th, credit card titan MBNA's stock was rising on word that they were about to be "acquired" by the vast Bank of America financial conglomerate.

MBNA America • Interest rate increases • Payoff agreements • Sales Practices • Credit protection plan • Credit line • Luring students • Pay-by-phone --- News • Bank of America Completes MBNA Buyout • Small Wonder MBNA Found Itself the Prey • Bank of America Buys MBNA • MBNA Profits Plunge • MBNA Turns Up the Heat • Supreme Court OKs MBNA's Charging Interest on Fees

Sure enough, the newswires were abuzz with the deal, at a price of $35 billion in cash and stock, and an estimation of 6,000 jobs to be cut in the merger (Not counting contractors and temporary employees, of course).

The buyout culminates a rough half year of business for Wilmington, Delaware-based MBNA. The financial services company was once lauded as a pioneer in the credit card industry, for its "affinity" cards for universities, businesses, and organizations and, later, for its tactic of "universal default" (Increasing credit card fees if the owner is late on any kind of bill payment).

After spending millions of dollars in the 2004 Presidential election cycle to ensure the reelection of President George W. Bush and Delaware Senators Joe Biden and Tom Carper, MBNA was rewarded with the passage of the misleadingly-named Bankruptcy Reform and Consumer Protection Act.

The measure makes it much harder for debtors to declare bankruptcy, which often happens due to inability to pay off massive credit card balances.

MBNA's tireless flogging of the bankruptcy bill and its massive political contributions and prolific hiring of high-level Bush Administration cronies -- turning Wilmington into Washington North -- were supposed to ensure that profits continued to climb.

But a funny thing happened.

MBNA cardholders, furious over incessant jumps in interest rates, constant tacked-on fees, and questionable customer service, started paying their debts down as fast as they could, and closing out their cards even faster.

This development came on the heels of MBNA employees cashing out their early retirement plans in record numbers. The retirement payouts, coupled with the loss of profit from paid-off and closed cards, led MBNA's first-quarter profits to drop by a staggering 94%, down to $31.7 million from their initial projection of $519 million. The profit projections crashed faster than MBNA executives' helicopter did when it plunged into the East River in New York last month.

The profit gap, coupled with news that MBNA CEO Bruce Hammonds and other insiders sold off their MBNA stock to the tune of one million shares and profits of $9 million, led angry shareholders to file a class-action lawsuit.

The suit, filed by law firm Milberg Weiss, alleges that MBNA overstated profit reports and "[failed] to recognize impairment of [their] assets by adverse interest-rate increases…As a result of MBNA's improper accounting of its portfolio, MBNA presented materially false financial results."

After that, the writing on the wall was plain to see. Bank of America, already the world's third-largest bank after its purchase of the FleetBank corporation, was hungry to acquire MBNA's massive credit operation.

The conglomerate will command mind-boggling assets of $143 billion in outstanding credit card balances, and double its customer accounts to 40 million, according to TheStreet.com writer Matthew Goldstein.

The Charlotte-based bank claims the deal will make it the biggest credit card issuer in the U.S., surpassing Citigroup and J.P. Morgan Chase.

For pundits and proles alike, the buyout was greeted with apprehension for customers' future with the new bank, and for financing in general.

In the appropriately modest state of Delaware -- its motto: Small Wonder -- the news was as welcome as a hurricane during summer beach season.

"With MBNA being [Delaware's] third largest private employer (10,000-odd jobs, remember, our whole state has under a million people), even if half of the projected 6,000 job cuts take place here, it's going to hurt pretty bad", said one poster on the popular DailyKOS blog.

Consumer advocates felt the same way. Consumer Federation of America president Stephen Brobeck said the continued consolidation in the financial services sector could only contribute to climbing interest rates.

"This can't but help raise the concern that there will be less competition providing consumers with attractive rates and other (borrowing) conditions," Brobeck said.

Writing for the Guardian Unlimited, David Teather stated that "[i]ndependent card companies have struggled of late in the face of competition from bigger banking groups."

Bank of America's aggressive merger moves are designed to shore up the company's image after its embarrassing loss of 1.2 million customer data tapes in March 2005. The customers included many military personnel who used Bank of America "Government Cards" for their travel and living expenses, as well as public figures including Senator Patrick Leahy (D-VT).

Leahy recently introduced a bill in the Senate that would enact stronger measures for protection against identity theft, cosponsored by Senator Arlen Specter (R-PA).

Even as financial analysts and investors circle the bloody waters for the next major corporate consolidation -- Wells Fargo? Capital One? -- many consumers are gleefully enjoying MBNA's fall.

One blogger succinctly summed the buyout up by saying "MBNA's profits fell 94% in April. Not that they don't deserve it, but wow! They finally got the predatory [bankruptcy] bill they wrote passed, and now it's backfiring badly."

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