June 25 (Bloomberg) -- What’s in Capital One Financial Corp.’s wallet? About $3.6 billion less than what was in there two weeks ago, now that the credit-card lender has returned its taxpayer bailout cash. This is one decision the bank and its regulators could end up regretting.

Last week, Capital One finished buying back the preferred shares it sold to the Treasury Department in November as part of the Troubled Asset Relief Program. It was one of 10 major U.S. banks that received approval this month to repay $68 billion to the government.

There’s a big difference, though, between Capital One and the rest of those companies. While investors appear to be relatively confident in the asset values on the other nine banks’ books, they don’t trust Capital One’s, with good reason.

As of Dec. 31, for instance, Capital One disclosed that its loans were worth about $10.1 billion less than what its balance sheet showed. That was almost as much as the $12 billion of year-end capital the government gave Capital One credit for under its much-hyped stress tests. The government’s figure didn’t take the loans’ fair market values into account, suggesting a lot of the bank’s regulatory capital may not exist in real life.

This, by the way, is a bank whose chief executive, Richard Fairbank, has received about $549 million from exercising stock options during the past 10 years, according to the company’s disclosures. Now that Capital One has repurchased the government’s shares, the bank won’t be subject to TARP limits on executive compensation anymore. Lucky guy.

Believing the Numbers

Capital One has a $9.6 billion stock-market value. That’s equivalent to just 41 percent of its book value, or common shareholder equity, as of March 31, which tells you the market doesn’t believe Capital One’s balance sheet.

By comparison, seven of the 10 banks repaying their TARP money trade at a premium to their book values, including Northern Trust Corp., which trades for more than double book. Two, including JPMorgan Chase & Co., trade at slight discounts.

Now look at what was in Capital One’s $23.6 billion of book value at the end of last quarter. More than half, or $13.1 billion, was the intangible asset known as goodwill, leftover from past acquisitions of other banks, including North Fork Bancorp in December 2006. The company also showed $1.3 billion of other intangibles, such as customer lists.

Capital Cushion

Capital One wasn’t required to disclose what its loans’ fair market values were at the first quarter’s end. As of Dec. 31, the bank said its loans were worth $86.4 billion, about 10 percent less than the $96.6 billion carrying amount on its balance sheet.

The accounting rules don’t require lenders to mark their loans to market values on a quarterly basis. Instead, loans typically are carried on the balance sheet at historical cost and get written down only to reflect credit losses that the lenders’ executives have deemed probable.

Take away the intangibles and excess loan values, and my guess is Capital One finished last quarter with little hard capital. To be sure, the McLean, Virginia-based bank has slashed its dividend, and in May it raised $1.6 billion in a common- stock offering, which will help its financial position.

Asked why Capital One returned its TARP money, a company spokeswoman, Tatiana Stead, pointed me to Fairbank’s remarks at a May 28 investor conference. He said the move eliminates $250 million a year in preferred dividends and other costs, and that “removing the uncertainty of potential future TARP restrictions reduces risk” and “enhances our competitive position.”

‘Strong and Resilient’

Fairbank also said “our capital levels are strong and resilient by any measure.” On that point, if I didn’t know better, I’d have thought he must be talking about another bank.

Why did the government let Capital One pay back its bailout money so soon? The answer goes back to the government’s stress tests, which Capital One passed easily.

Under the hypothetical economic scenario used by the Federal Reserve’s examiners, the government estimated Capital One’s losses in 2009 and 2010 would exceed the bank’s regulatory capital as of Dec. 31. Even so, the examiners concluded the bank could earn its way out of the problem by using future operating profits to absorb its losses. That’s not the same as having a big capital cushion on hand today.

The preferred stock Capital One issued to Treasury wasn’t the kind of capital that investors and regulators treasure most, because it acted a lot like debt. Still, the bank could have converted the shares into common stock, much like Citigroup Inc. is doing now, if it ever got into big trouble.

Losses Mount

Tapping private investors may not be a reliable option if the bank’s losses persist, or if the stock market plunges again. For the first quarter, Capital One reported a net loss of $111.9 million, after a $46 million loss in 2008. The credit-card business may get a lot worse, too, because of rising unemployment and the sour economy.

For the other nine banks, writing that last check to the Treasury is a welcome show of strength. At Capital One, it looks more like an act of hubris. At least this time the taxpayers got their money back. There had better not be a next time.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Jonathan Weil in New York at jweil6@bloomberg.net

Last Updated: June 25, 2009 00:01 EDT