Finimize - 💲 Capital One's capital won

What’s going on here?

Capital One planned to buy banking and payment processing firm Discover Financial Services for $35 billion, and there will be nothing humble about the US’s soon-to-be biggest credit card company.

What does this mean?

Capital One’s deal is one of the credit industry’s biggest since the 2008 crisis. It’s an all-stock transaction, where the Warren Buffett-backed credit company will pay Discover shareholders a little more than a Capital One share for each of their existing ones. That seems like a decent trade: that one-and-a-bit share was worth 26% more than a single Discover stake on the Friday before the news broke. When the dust settles, the combined twosome will become the biggest credit card company in the US, leaving JPMorgan Chase and Citigroup in the rearview mirror.

Why should I care?

Zooming in: Spend, minions, spend.

Capital One is vying to create a payment network strong enough to rival the likes of Visa, Mastercard, and American Express. More spenders use credit cards these days, after all, not least because punchier prices are making their debit cards and coin purses dustier than usual. That’s a dream for banks, since they take home a percentage every time a shopper swipes the plastic. Capital One has lined up just the right partner, then: Discover's network business means it has some sway over the fees that vendors pay.

The bigger picture: Direct debits are the American Dream.

US households now owe a record-breaking $1.1 trillion from credit cards alone. In fact, with nearly two-thirds of American homes relying on credit cards, the average household has $5,875 to pay off. Today’s eye-watering interest rates will only make those debts more expensive to keep up with. So unless the Federal Reserve suddenly decides against keeping rates higher for a while longer, American borrowers will find it increasingly tricky to pull themselves out of the red.

What’s going on here?

China cut an important mortgage rate, desperate to stop the teetering property market from toppling the economy completely.

What does this mean?

A house is the biggest purchase that most folk will ever make. So when property prices are on the slide, as they have been in China for years, that undermines homeowners’ confidence in their finances as a whole. That makes them hold back from all sorts of purchases, slowing down the economy in the process. So by cutting a common mortgage rate, China’s banks hope to drum up demand for homes and pull up house prices. If that works, China’s under-the-fire, debt-laden property developers might finally catch a break.

Why should I care?

For markets: Bigger buildings, bigger issues.

Real estate prices around the world were on a steady climb for more than a decade, when cheaper mortgage rates and more predictable economies made buying property a less loaded decision. Then the pandemic stunted supply chains, sparking higher prices and interest rates – not to mention the shift toward remote working and countryside living. That landed commercial real estate in a particularly rough patch: owners of office buildings are struggling to fill their blocks or afford more loans to tide themselves over, causing concern for the small banks that lined developers' coffers back when business was better.

The bigger picture: China’s falling off-balance.

China’s at risk of falling into a “balance sheet recession” – and that’s not just a problem for the country’s dorkiest accountants. That’s the term for when a significant portion of businesses or everyday consumers are focused only on paying off debt, steering clear of spending or investing. Not only does that stop any cash from flowing into the economy, but it turns them off borrowing any more cash. So even if China makes loans more affordable, there’s no guarantee that borrowers would bite. Economists’ mounting sense of déjà vu doesn’t bode well for China: Japan’s balance sheet recession led the country into its infamously lackluster “Lost Decade”.