The Richest Man You've Never Heard Of

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The ensuing trip to Manhattan was even more harrowing than that initial visit to the Muskogee bank. Sitting white-knuckled in the imposing lobby of a gold-plated investment bank, Bartmann suddenly and acutely felt like a high school dropout from Dubuque. "It was like going to a foreign country," says Bartmann, who, for all his scrappy assertiveness, still gets overawed by titles and pedigrees. "These were guys with M.B.A.'s, the elite of the world, the rocket scientists, brighter than the sun."

Once Bartmann was inside the banker's office, the meeting was depressingly short. Plenty of small assets, such as home mortgages, had been bundled and securitized before, the banker noted. But those debts were both performing and collateralized. The debts Bartmann was talking about had the doubly unpalatable distinction of being nonperforming and unsecured. How could they provide a predictable payment stream to investors? "This can't be done," the banker told Bartmann bluntly. "It will never be done." The next six banks sent Bartmann packing as well. But the seventh, Banc One Capital Corp., of Columbus, Ohio, listened. It could be done, the bankers believed, because Bartmann's systematizing had yielded a collection-industry miracle: margins that were not only huge but also predictable.

It took more than a year to pull off, but in May 1995, CFS completed its first bond issue, selling it to two institutional investors in a private-placement deal. Today the company has done 10 such securitizations, totaling more than $1 billion, which have consistently received "A" ratings from Standard & Poor's. (The issues bear average returns of a modest 8%.) The effect on the balance sheet is immediately evident. "See that? That's cash on hand," says Bartmann, repeatedly tapping a blue pen on a line that reads a stunning $147,054,045.

Securitizing paved the way for a second, crucial masterstroke. Ever since the FDIC's inventory had dried up in the early 1990s, Bartmann had been buying bad loans from the Resolution Trust Corp., the entity responsible for sifting through the rubble of the savings-and-loan debacle. But by 1995 that source, too, was a dwindling pool. So Bartmann began spending millions to research an untapped reservoir: consumer debt. "Nobody else," says Sheerin of Duff & Phelps, "had deep-enough pockets to do that." Bartmann had observed that banks were issuing credit cards to just about anyone with a mailing address, creating a huge volume of charge-offs--bad accounts that had to be written off banks' balance sheets after 180 days of nonpayment. Occupied with managing assets, not recovering them, bankers suddenly found themselves overwhelmed by the blitzkrieg of charge-offs.

Bartmann moved with the land-grabbing urgency of a Sooner. He'd found little data to suggest how collectible those credit-card debts were--and at $3,500, the average balance was much smaller than what CFS was used to--but Bartmann went with his best guess. Raising the money through securitizations, he bought billions' worth. "It was a very bold, very brilliant move," says Manny Occiano of West Capital Financial Services Corp., a smaller competitor based in San Diego.

"We're here first," Bartmann declared, "the market is terribly inefficient, and there's a giant spread to be made." He was correct: CFS typically collects more than three times what it pays for a bad loan, pocketing an average of 35¢ on every dollar of debt. "Those numbers have never been hit in the history of the industry," notes Eric Woldoff, vice-president of Account Portfolios Inc., a competitor in suburban Atlanta. Another industry insider states flatly, "I don't believe his collection rates." But by now, Bartmann is accustomed to such skepticism. "CFS is such an anomaly that people have a hard time believing in it," says Sheerin.

So far, though, the rates are holding up. And adding to CFS's system and strategy breakthroughs are three other factors: First, CFS benefits from enormous economies of scale. It owns so much of the charged-off credit-card market (about 43%, or 2.2 million accounts), that it sometimes ends up owning three separate credit-card accounts for one debtor. Second, while banks must press debtors for nothing less than full payment for fear of earning a reputation for being too lenient, CFS can offer debtors deep discounts. Finally, while traditional, commission-based collection shops are given six months to squeeze a pool of loans before the bank recalls them, CFS can set up long-term payment plans over a period of years. That provides the time and the incentive to analyze the loans in depth.

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