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Yahoo
14-05-2025
- Business
- Yahoo
Warren prods DOJ to sue to block Capital One-Discover deal
This story was originally published on Banking Dive. To receive daily news and insights, subscribe to our free daily Banking Dive newsletter. Sen. Elizabeth Warren, D-MA, urged the Justice Department to sue to block Capital One's pending acquisition of Discover, according to a letter she wrote Tuesday to the agency's antitrust leader, Gail Slater. Warren cited an address Slater gave in late April warning of the risks that consolidation could again – after the 2007-08 financial crisis – create institutions that are 'too big to fail.' 'This transaction will reveal whether you back your words with action,' Warren wrote Tuesday. The DOJ has 30 days to sue after banking regulators approve a merger application, Warren noted. The Federal Reserve and Office of the Comptroller of the Currency gave a green light April 18 to Capital One's $35.3 billion proposed transaction. Warren wrote the Fed on May 1, urging the central bank to reconsider. 'Absent a rescission of the Fed's approval order, the responsibility to prevent this dangerous transaction now falls to the DOJ,' Warren wrote Tuesday. Slater, however, determined there wasn't sufficient evidence to challenge the Capital One deal in court, publications reported last month, citing people familiar with the decision. Nonetheless, Warren pressed that the DOJ 'does not need to have previously filed an adverse comment with regulators' about a deal to attempt to block it. The senator Tuesday expressed disappointment that the DOJ had not filed such a comment – 'despite reportedly finding competitive concerns with the deal.' Warren urged Slater to lean on the Clayton Act – and the DOJ's own updated merger guidelines – to block the Capital One deal, citing that a merger may violate antitrust law if it 'significantly increases consolidation in a highly concentrated market' or 'eliminates substantial competition between firms.' Warren noted that during its initial evaluation of the Capital One-Discover merger last year, DOJ reportedly 'told regulators that it was concerned, in part, about the deal's impact on potential credit card users who had no credit' and that agency representatives showed concern that the transaction 'would harm competition in the subprime sector.' Warren asserted, in particular, that Discover 'offers interest rates two percentage points lower than Capital One' to borrowers with nonprime credit scores – but that that offer would likely go away once the firms combine. 'Less competition among those with lower credit scores could mean Capital One can raise credit card rates for vulnerable families with limited alternative options, which could be the difference between getting by month-to-month and entering a financial downward spiral,' Warren wrote Tuesday. Warren repeated concerns that, by acquiring Discover, Capital One would carry more than 30% of the nonprime credit score market, driving the Herfindahl-Hirschman Index – a legacy measure of market consolidation – up by roughly 400 points. For new-to-credit customers, she added, the Fed's analysis found 'the post-merger HHI would increase by 766 points to 1971.' The DOJ last year withdrew guidelines that leaned heavily on HHI on the idea that the gauge is outdated. But even using it, a transaction that boosts HHI by 200 points or scores above 1,800 generally has been flagged as anticompetitive. 'A merger that creates a firm with a market share over 30 percent and increases HHI by more than 100 points is presumptively illegal under antitrust law,' Warren reiterated Tuesday. Warren added that DOJ 'has previously been skeptical of deals 'that would enable firms to avoid a regulatory constraint because that constraint was applicable to only one of the merging firms.'' Capital One has said it aims to convert its debit portfolio to Discover networks, Warren asserted. 'The reason is clear: Discover is not only a card issuer but also a card network, which means it is not subject to the limit on debit card interchange fees imposed by the Durbin Amendment to the Dodd-Frank Act,' Warren said. While Capital One, before the merger, wouldn't be able to charge merchants more, Discover can, she said. 'And in case there was any doubt about whether Capital One plans to raise swipe fees, the company told its investors that converting its debit and some credit products to Discover networks would be worth an estimated $1.2 billion,' Warren wrote Tuesday. By moving some of its credit card volume to Discover's network – but not all of it – Capital One would retain the leverage to negotiate interchange fees as a credit card issuer with Discover's largest competitors. Warren labeled that 'a recipe for coordination' among Discover, Visa and Mastercard. 'The solution to an anticompetitive market is not to anoint a new giant, but to fight to level the entire playing field, like the DOJ is doing with its lawsuit against Visa for monopolization,' Warren wrote Tuesday. Warren argued, too, that a Capital One-Discover combination would put a damper on existing innovation. She noted that in the February 2024 call announcing the deal, Capital One CEO Richard Fairbank admitted that his bank's Quicksilver card was a direct response to Discover's It card. 'As Capital One absorbs a major competitor, fewer players in this market could … diminish incentives for remaining firms to offer more generous rewards,' Warren warned.
Yahoo
05-05-2025
- Business
- Yahoo
Warren, Waters urge Fed to reconsider Capital One-Discover
This story was originally published on Banking Dive. To receive daily news and insights, subscribe to our free daily Banking Dive newsletter. Sen. Elizabeth Warren, D-MA, and Rep. Maxine Waters, D-CA, urged the Federal Reserve to reconsider its approval of Capital One's proposed $35.3 billion acquisition of Discover, according to a Thursday letter. The central bank's assessment insufficiently considered the transaction's effects on low-income consumers, competition and financial stability in the U.S., and failed to include relevant information from the Justice Department, Federal Deposit Insurance Corp. and Consumer Financial Protection Bureau, the lawmakers wrote. Warren and Waters cite a Fed board rule under which the seven-governor panel may reconsider an application if it receives a written request to do so from 'any party to such application' within 15 days of a deal's approval. Warren and Waters – the ranking members of Senate Banking Committee and House Financial Services Committee, respectively – assert that because they submitted comments on the application, they qualify as parties. The board may deny reconsideration outright, but the lawmakers are asking that the governors vote on further action – perhaps banking that they break along party lines. The Fed board now has four Democrats and three Republicans. Warren and Waters lambasted the Fed's 'analysis, or lack thereof,' adding that the approval 'displayed a troubling lack of rigor with unsupported conclusions that ran counter to the factual record.' The lawmakers noted that the vast majority (91%) of the more than 6,100 public comments on the application opposed the deal. The Fed, in its order, said many were 'substantially identical form letters that raised concerns related to competition and financial stability generally.' Warren and Waters, however, said the board 'repeatedly parroted assertions made by Capital One in its application, instead of substantively grappling with commenters' analyses and the market realities of the transaction.' The lawmakers argued the Fed unwisely evaluated the competitive effects based on deposit market concentration. 'Treating the transaction as a traditional bank merger was deeply misguided,' Warren and Waters wrote. 'These are not two traditional banks – they are credit card giants. Discover does not even have bank branches.' The Fed's competitive effects analysis did not appear to take credit cards into account, the lawmakers wrote. For customers with no or limited credit history, the Fed found 'the post-merger [Herfindahl-Hirschman Index] would increase by 766 points to 1971 … and Capital One would control 40 percent of this segment,' the lawmakers wrote. The DOJ last year withdrew guidelines leaning heavily on HHI on the idea that the measure is outdated, Warren and Waters noted. But even using them, a transaction that boosts HHI by 200 points or scores above 1,800 generally has been flagged as anticompetitive, the lawmakers wrote. Warren and Waters threw doubt on the Fed's claims that it conducted a high-level analysis of the transaction's impact on credit card consumers. 'Nowhere in any of the competitive effects analyses did the Board even attempt to evaluate whether fees, credit availability, interest rates, or non-price harms like customer service would be impacted by the deal,' the lawmakers wrote. 'The Order reads like the Board had predetermined it was going to approve the transaction and either ignored relevant facts or explained them away with baseless assertions copied and pasted from Capital One's application.' Warren and Waters argued, too, that the Fed's analysis of community benefits 'primarily focused on each bank's past performance under the Community Reinvestment Act' but 'neglected to evaluate how the combined institution would serve communities on a going forward basis.' The central bank also 'ignored the facts outlined in the CFPB's 2025 lawsuit against Capital One for allegedly cheating millions of consumers out of more than $2 billion in interest,' the lawmakers wrote. 'Instead of evaluating the facts outlined in the CFPB's legitimate complaint, the Board buried in a footnote that the CFPB voluntarily dismissed the case (like it tried to dismiss 1,483 of its 1,690 staff),' Warren and Waters wrote in a reference to attempts by Trump-era leadership of the bureau to radically downsize itself. While on the subject of regulators, Warren and Waters noted that the Fed, in its approval order, acknowledged consulting with the FDIC and CFPB. However, 'it is not clear from the Order whether the information and analyses in these formal communications were part of the factual record and presented to the Governors in their review of the transaction,' the lawmakers wrote. They asked that the communications from the FDIC and CFPB to the Fed be made public. The lawmakers also requested that the DOJ's communication to the Fed during the Biden administration be made public. Warren and Waters also asserted the Fed underestimates the effect a Capital One-Discover combination would have on financial stability in the U.S. The resulting $637 billion-asset bank 'would not appear to result in meaningfully greater or more concentrated risks to the stability' of the U.S. financial system, the Fed concluded. Capital One, after the transaction, would be larger than Silicon Valley Bank, Signature and First Republic combined, Warren and Waters noted. 'When SVB acquired Boston Private two years before its failure triggered a banking crisis, the Board similarly concluded that 'this transaction would not appear to result in meaningfully greater or more concentrated risks to the stability of the U.S. banking or financial system,'' the lawmakers wrote. However, they fault the Fed for relying 'heavily on 'global' metrics of systemic risk,' rather than focusing on the U.S. 'Under this misapplied analytical approach,' the Capital One-Discover deal would be 'well below' the global systemically important threshold but 'would have a systemic risk score double SVB's,' Warren and Waters wrote. The lawmakers also asked that the Fed reevaluate the competitive effects of the deal using data from the first quarter of 2025, rather than mid-2024 or late 2023 – and that the central bank incorporate large-bank credit card and mortgage data recently published by the Philadelphia Fed. Further, Warren and Waters repeated, as a concern, recent efforts to drastically downsize the CFPB. 'The [Fed] cannot force the CFPB's Acting Director to run the agency lawfully, but it certainly can refrain from creating the largest credit company in the country at a time of massive uncertainty regarding the CFPB,' the lawmakers wrote. Warren and Waters also noted the Department of Government Efficiency's incursion at the FDIC as a development after the Fed considered the Capital One-Discover deal. 'Keeping Capital One and Discover separate makes them easier to resolve and somewhat mitigates the impact of the degradation of the FDIC's resolution capacity,' the lawmakers wrote.
