Discover gets $1.2 billion in TARP money

Discover Financial Services, the Riverwoods-based credit-card company whose stock fell 60 percent in the past 12 months, got about $1.2 billion 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 today in a statement. The preferred stake will pay dividends of 5 percent for the first five years, and 9 percent after.

The amount raised is at the top of the $400 million to $1.2 billion range that Chief Executive Officer 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.

Discover follows rival credit-card lender American Express Co. in becoming a bank so it could gain access to federal rescue funds. Shares of card issuers have been pummeled as the U.S. slipped deeper into recession, causing more customers to miss payments. The U.S. lost more than 2 million jobs last year.

The lender said in a January investor conference that failed customer loans will climb beyond 7 percent in the second quarter. Discover had to add $521 million 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 Inc. and Visa Inc. The company agreed in October to accept $2.75 billion to resolve an antitrust case it brought against the world's largest credit-card networks. Discover, which runs the No. 4 network and also lends to consumers, expects $293 million after-tax in settlement proceeds each quarter of this year, the firm said.