Capital One Financial
, the latest company to get hit in the lending crisis, "is an interesting situation and potentially a buy," Jim Cramer said on TheStreet.com TV's Wall Street Confidential
Web video Tuesday.
The credit card company "stumbled" on its
acquisition "because they didn't really understand the mortgage market and they didn't really understand credit cards," he said. What Capital One wanted to do with the purchase was to "develop a steady source of money to be able to back up a deposit base."
That is what Capital One did with its acquisition of New Orleans-based Hibernia, and then it did it with North Fork and got the GreenPoint Mortgage business as part of the deal.
Cramer said he remembers speaking with Capital One's CFO off line, and the finance officer commented that the company doesn't really understand the mortgage business.
"It is hard to understand," Cramer said. "They bought it at the top and they've taken the ride down. Why I'm interested in
the stock is because the credit card business is holding much better than the housing business, and that's because it makes economic sense to walk away from your house, but not your credit card."
When people walk away from their house, they go back to renting, he said. However, they have to keep their job, and, in turn, their car. They also have to be able to spend, so they keep their credit card. "The house is the expendable item."
Typically what happened in 2005 and 2006 is homebuyers took out a loan for 100% of the value of their homes and then took a home-equity loan for 25% of the value.
"So you have 125% of the value in loans, then the house drops 10%, it makes just a great deal of sense to walk away from those," Cramer said. "But you don't want to lose your credit card. If you keep paying your credit card, your
credit rating goes fine, so Capital One is actually in a pretty good position."
Plus, Capital One is raising the APR on its credit cards, which is "great," Cramer said. With short-term rates coming down and credit cards rate going up, "the net interest margin is just going to be gigantic."
One thing Cramer said he's not happy about is the fact that Capital One threw away $2 billion buying back its stock higher. He owned the stock for his charitable trust,
Action Alerts PLUS, but decided to get out of it, breaking about even, because he lacked confidence in its mortgage business.
But now that Capital One's mortgage business has been sold, the stock has become "quite an interesting situation," Cramer said. "It's basically a pure play on credit cards, with a steady deposit base where the net interest margin is gaining.
"I would be a buyer of this stock here," he said. "That's quite a different view from everyone else."
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