Financial services firm gets $1.2bn in TARP capital

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Discover Financial Services, the Riverwoods, Illinois-based credit-card company, whose stock fell 60 per cent in the past 12 months, got about $1.2bn in cash from the Treasury to boost liquidity.

Discover sold 1,224,558 shares of preferred stock and a 10- year warrant to purchase 20,500,413 shares of common stock at an exercise price of $8.96 a share, the firm said on Friday in a statement. The preferred stake will pay dividends of five per cent for the first five years, and nine per cent after, according to Bloomberg News.

The amount raised is at the top of the $400m to $1.2bn range that Chief Executive Officer, Mr. David Nelms, predicted in December. Discover is relying on federal cash and bank deposits after the market for selling bonds backed by credit card payments froze last year.

The firm follows rival credit-card lender American Express Company in becoming a bank so it could gain access to federal rescue funds. Shares of card issuers have been pummeled as the United States slipped deeper into recession, causing more customers to miss payments. The US lost more than two million jobs last year.

The lender said in a January investor conference that failed customer loans would climb beyond seven per cent in the second quarter. Discover had to add $521m to the provision for bad loans in the fourth quarter of 2008 and expects to add further to reserves this year.

The rising losses at Discover are cushioned by settlement payments from MasterCard Incorporated and Visa Incorporated. The company agreed in October to accept $2.75bn to resolve an antitrust case it brought against the world’s largest credit-card networks. Discover, which runs the number four network and also lends to consumers, expects $293m after-tax in settlement proceeds each quarter of this year, the firm said.

Discover fell 39 cents, or 5.9 per cent, to $6.23 at 4:15 pm in New York Stock Exchange composite trading. The announcement came after the close of regular trading. -punchng

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