Feds Nix NextCards

The NextCard home page still encourages people to sign up for the Internet credit card, but the feds, who seized its failed NextBank subsidiary last February, are advising about 800,000 Visa cardholders that their plastic is no longer good.

The news really should not be a surprise, as NextCard went down with a boom when banking regulators told the company that its online banking subsidiary, NextBank, would have to categorize certain fraud losses as credit losses and would have to apply them to its loan loss reserves.

The FDIC, which is now running the bank, said the ultimate cost to the taxpayers for the failure of NextBank will be between $300 million and $400 million. Many NextCard customers apparently received the news in e-mails sent yesterday; other customers won't find out until they receive letters later this week.

"We tried to give as much warning as possible," FDIC spokesman David Barr told the Associated Press. "It's been a real juggling act for us to keep these accounts active."

Regulators had been trying to sell the accounts for more than four months, but apparently Internet shoppers and cardholders were not of much interest to more established financial institutions. The FDIC finally struck a deal last week to sell about 200,000 NextCard accounts to Utah-based Merrick Bank for $126 million. Merrick Bank will take over those accounts by the end of September. The other 800,000 are being closed.

San Francisco-based NextCard saw its stock crash last October when banking regulators warned about problems at NextBank.

NextCard became a skeleton company in March when it eliminated the jobs of 90 percent of its employees and asked Nasdaq to delist its stock effective March 18. The stock is now traded on the OTCBB and is listed in the one-cent range.

NextCard account holders will lose all bonus points that they stockpiled while using their cards, although Amazon.com said it would honor them. The customers also won't receive refunds for any annual fees they may have paid to use the cards.

All customers with closed accounts will be required to pay off their outstanding balances under the interest rates previously in effect.

NextBank was a non-traditional lender whose business consisted of issuing credit cards and taking minimum $100,000 certificates of deposit. NextCard acquired the operation with the August 1999 acquisition of Textron Financial Corp.

At the time the bank was seized, the feds said that: "NextBank pursued a strategy of marketing credit cards solely through the Internet. However, the OCC (Office of the Comptroller of the Currency) found that the bank's risk management policies and procedures were inadequate and the bank's assets were of lower credit quality than initially projected in the bank's business plan. The bank failed to identify the extent of its credit quality problem or to implement effective corrective measures."

Ironically, even this morning the NextCard site was enticing new customers to sign up, saying "Click here to get your card." But when you click through, you get this: "Thank you for your interest in NextCard, unfortunately we are presently not accepting new applications for credit."