UPDATE: Jesse Jackson, Groups Criticize Capital One On Credit Cards

Rev. Jesse Jackson and other critics took aim at Capital One Financial Corp.'s (COF) business model Tuesday, arguing that the bank's credit-card business is so risky it would pose a threat to the U.S. financial system.

Jackson, unmoved by the bank's fresh pledges to hire new workers and invest in underserved communities, said Capital One has a troubling business pattern of marketing costly credit cards to vulnerable borrowers. He argued that the bank then spreads risk to the American public by packaging that credit card debt into securities.

"As Capital One vacuums up safe bank deposits, it spits out higher-risk credit cards," said Jackson, founder and president of civil rights group Rainbow PUSH Coalition. "It is clear that Capital One has no commitment to legitimate community banking."

Jackson was one of several speakers at a hearing the Federal Reserve is holding in Chicago to give the public a chance to weigh in on Capital One's plans to buy ING Direct USA, the U.S. online-banking business owned by ING Groep. (ING, INGA.AE).

The $9 billion deal, announced in June, would make the McLean, Va., bank the fifth-largest in the nation based on deposits. It is the first acquisition the Fed is reviewing under new laws requiring regulators to judge whether a bank acquisition would create a firm so risky that the government would have to bail it out if it were to falter. The goal is try to prevent taxpayer-funded bank rescues.

Consumer interest groups such as the National Community Reinvestment Coalition are opposed to Capital One's proposal. Like Jackson, they argue that Capital One has a poor track record of lending to minorities and small businesses. Instead of offering underserved communities and low-to-moderate income consumers traditional loans, the bank provides them costly credit cards, they say.

Critics say the Federal Reserve shouldn't allow the bank to expand without requiring it to do more to help communities.

Another concern among opponents is that the bank is heavily involved in credit card securitization.

"Like the predatory and toxic subprime mortgages that eventually imploded--taking the entire financial system with it--Capital One's credit-card business is poised to become the next subprime lending crisis for America," said NCRC Chief Business Officer James Carr.

Amid the scrutiny, Capital One broadened defense of its proposal. Capital One's general counsel John Finneran rejected allegations that the bank is too entrenched in the credit card business. He said Capital One hasn't securitized any card debt since 2009, and its share of the total card securitization market has been declining and is now less than 9%.

"Capital One began a journey in 2005 to diversify our lending activities beyond credit cards into other traditional consumer, small business and commercial loans," he said, adding that the company's card portfolio has shrunk by about $17 billion, or 25%, since 2008.

In addition to the ING Direct USA acquisition, Capital One in August announced plans to buy HSBC Holdings PLC's (HBC, HSBA.LN) credit card business.

Finneran said the acquisitions won't dramatically increase the company's credit card business, which "will remain just above a quarter of our total assets.

Last week, the company promised to invest $180 billion over 10 years in low and moderate-income communities.

This week, the company highlighted another potential benefit of the deal: more jobs. Capital One on Monday announced that if the acquisition is approved, it will add 500 jobs in Delaware, the home of ING Direct USA's headquarters.

"We expect to bring hundreds of new, high-quality jobs to the state and to become an active and engaged part of the Delaware business community," said Capital One Chief Executive Richard Fairbank.

Still, consumer groups are wary, partly because the bank's jobs plan is contingent on funding from Delaware's Council on Development Finance. Capital One is expecting to receive as much as $7 million from the state.

"Apparently the state government needs to pay Capital One to create jobs, raising the question: does Capital One benefit the public, or does the public benefit Capital One?," said NCRC President John Taylor. "Capital One should be judged by its track record, not by what it promises under pressure."

-By Maya Jackson Randall, Dow Jones Newswires; 202-862-6687; [e-mail]