Visa Charges On

By Justin Fox

Over the past few months, we have heard banker after Wall Streeter after mortgage lender declare that market conditions are the worst since they got into the business. Some go even further. "The worst market crisis in 60 years," pronounced investor George Soros. "The worst financial crisis since 1931," declared a top German regulator. "We have not seen a nationwide decline in housing like this since the Great Depression," said the CEO of Wells Fargo.

Not the best time, you might think, to sell shares in the biggest initial public offering (IPO) in Wall Street history. Especially not a financial IPO. Yet here we have credit-card giant Visa, now owned by its member banks, announcing plans to peddle up to 446 million shares of stock in late March for an expected take of between $15 billion and $19 billion.

Giant IPOS are usually a sign of good, or at least frothy, times. The current record haul for a U.S. IPO, $10.6 billion, was reaped by AT&T Wireless in April 2000--just after the great tech-stock bubble began to deflate but before anybody realized it. (The world-record holder is and apparently will remain the Industrial & Commercial Bank of China, which raised $21.6 billion in an IPO in 2006.)

What gives with Visa? One possibility is that the company and its investment bankers are deluded and the IPO will crash and burn--but the current thinking on the Street is that it won't have trouble finding buyers. Another is that the financial types who've been crying crisis have been crying wolf. But the housing market is in its worst slump since the Depression. Some debt markets have completely stopped functioning. The overindebted American consumer is showing signs of great stress.

So there must be other explanations for why the company that is perhaps the greatest enabler of American (and, increasingly, global) consumption, born in 1958 as BankAmericard and rechristened Visa in 1976, has chosen now of all times to go public. One is that Visa makes its money (a $424 million profit in the last quarter of 2007, up 70% from a year earlier) from transaction fees, not lending, so it doesn't have to worry nearly as much as banks do about people making their credit-card payments. Another is that the banks that own Visa stand to make more than $10 billion from the IPO--JPMorgan Chase alone should clear $1 billion--and they need the money.

The main reason Visa can contemplate an IPO now is that, for all the troubles, large parts of the global financial system continue to function just fine. If you have bad credit and want a mortgage or you run a private-equity firm and want to finance a $15 billion takeover, forget it. But if your credit's O.K. and you want to charge a trip to Hawaii or you're the profitable, growing leader of the global electronic-payments business and you want to raise $15-plus billion, go for it!

This was not remotely the case during the darkest years of the Great Depression, 1931 and 1932. In those days, financial activity of all kinds--mortgage loans, IPOS, consumer lending, commercial lending--almost entirely ceased. The result was true disaster. The economy shrank 26% in three years. Unemployment hit 25%.

Many of the forces that initially sent the economy into a tailspin in 1929 and 1930 have been at work in the 2000s as well: a stock-market boom turned bust, a real estate boom turned bust, unprecedented levels of consumer debt. The reason they haven't metastasized 1930s-style is that this time around, the Federal Reserve has acted forcefully, whereas in 1930 it was a spectator at the national train wreck.

The action started in 2001 and 2002, with the Fed bringing interest rates close to zero as the stock market melted down. It continued last fall with the frantic efforts by the Fed and its counterparts in Europe to keep skittish banks lending to one another, and this year with more rate cuts from the Fed. These policies can't cure longer-run problems like the low savings rate and stagnant wages, and they'll probably have all sorts of unpleasant side effects (inflation, for one). But you don't have to work at Visa to think they're preferable to reliving the 1930s.

More Money To read Justin Fox's daily take on business and the economy, go totime.com/curiouscapitalist