Conn’s Game: Subprime Loans, Subhuman Lenders

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One of the stores built by a Conn’s game, based on junk bonds and subprime loans, in Houston Texas. (Photo by Mather Rutledge/Flickr)

After some rant or another about the combined greed and stupidity of the industrial Masters of the Universe, I frequently get this response: “Look, they couldn’t be that stupid or they wouldn’t be in charge. They know what they’re doing, and we just don’t understand it.” Seriously. I get that. If a quick refresher on the Enron Bubble and the Dot-com Bubble and the Housing Bubble are not enough to put this turkey of an argument into the deep fryer for once and for all, then consider the true story of Conn’s, a Texas-based 90-store retailer who came up with the Business Plan to End All Business Plans. And it did.

Aesop could not have fashioned a better cautionary tale of greed and stupidity, and now he doesn’t have to. (I’m grateful to Wolf Richter for laying all this out on his blog Wolf Street)

Conn’s game was at first a pretty standard one. It sold furniture, appliances and electronics to people who didn’t have a lot of money. And, to increase the take on each sale, they lent the customer the money to make the purchase. So far, so good. You get an increase in sales from the convenience of in-store financing, and you get additional profit in the form of interest collected on the loan. Lots of companies do it, often successfully. GMAC comes to mind.

But when you’re running a Conn’s game, you are not content to do as well as everybody else. You want to be number one, and Conn’s gamers came up with the answer. Subprime lending. They would finance anybody, without regard for credit score or credit record or assets or ability to repay the loan. That way, they would sell lots of stuff, and become number one in retail. That apparently is where their thinking stopped. If we had asked any of the obvious questions, they would have said, “We know what we’re doing. You just don’t understand.”

And their plan worked. Lord, did it work. People who couldn’t afford to buy a candy bar flocked to Conn’s and walked out with couches, TVs, and double-door refrigerators. Sales went through the roof. In the third quarter of this year Conn’s retail revenue hit $370 million, up 20% from last year’s third quarter. Six new stores were up and running, and gross retail margin was over 40% (Conn’s is no discounter; people who can’t buy anything anywhere else will pay just about any price Conn asks, when there’s no down payment). Retail profits were up 12%.

Another American success story, another bunch of self-made millionaires made billionaires by their own hard work and initiative. They really did know what they were doing, just like the Enron guys and the Countrywide mortgage guys and the shale-oil fracking guys — as long as you did not look at the rest of the picture. As long as you looked only at the retail P&L, Conn’s game is doing fine. How’re they doing over in the finance office?

Lots of paper — $1.25 billion in loans outstanding at the end of September, with an increasing number of them standing out pretty far, as in 10 per cent of them delinquent for 60 days or more. The unit lost $33 million in just three  months, which meant that overall, Conn’s game lost more than $3 million for the quarter. The company explained to its shareholders:

“Delinquency increased year-over-year across credit quality levels, customer groups, product categories, geographic regions, and years of origination… losses are occurring at a faster pace than previously anticipated, due to the continued deterioration in the customer’s ability to resolve delinquency.”

Damn those customers, and their inability to resolve delinquency! They’ve gone and ruined a perfectly good business plan! Conn’s stock has lost 73% of its value in a year. If you are unlucky enough to be the owner of one of the $250 million worth of junk bonds Conn’s sold in June to finance its operations, you might sell it for 60 cents on the dollar if you can find a rich idiot — better move fast — and you can expect 10 cents on the dollar when they default.

Set aside the fact that usury, which used to be a sin, is now a standard business practice (but only when you’re dealing with poor people); never mind that what Conn’s did is not illegal, and not widely regarded as immoral (although it is clearly unethical); and ignore the fact that the business plan is being replicated at full speed in the auto industry, and in the real estate industry (again!); ignore all that and explain to me in what universe, under what laws of mathematics, a sentient human being can be convinced that lending money to people who do not have the ability to pay it back is a profitable enterprise.

If you do I will agree that in that universe, these people are not that stupid, and may know what they are doing. But they still have no business on this planet.