"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.
But aren't new entrants eating away at the gargantuan spreads as we speak? Maybe not. Bartmann promises to keep the industry "as inefficient as possible for as long as I can." He's gotten 15 of America's 25 largest card issuers--the very banks that would reap higher prices if there were more competition for their charge-offs--to collude in his monopolistic design. Persuading them to forgo the extra income in exchange for CFS's reliability and squeaky-clean image, Bartmann has locked many of them into exclusive, forward-flowing contracts. "Working with CFS is a very professional, very smooth process," confirms Robert J. Frame, senior vice-president at Wells Fargo, a major supplier. CFS still has few competitors worthy of the name.
Nevertheless, skeptics exist. Some in the industry whisper that CFS, in its zeal to become the biggest and the baddest, might end up overpaying for inventory. "You make one mistake on that," says Occiano of West Capital, "and it'll eat up your profits real fast." If the economy takes a downturn and debtors become more stubborn--and experts stress that there are myriad variables that can affect the collectibility of debt--CFS might find it can't recoup as much as it had hoped. That could lead, theoretically, to a default on its bonds. Investors would scream loudly. The securitization window would close. "I'm wary about what he can bring down on the industry," says one industry expert, who goes so far as to suggest that CFS "is bringing on the next S&L crisis."
Bartmann just smiles. After all, everything's working. More than working, actually. "The asset type is still in its infancy," says Robbin Conner of Moody's, acknowledging that none of the CFS bonds have yet reached maturity, "but CFS is performing above what it had projected." And 48% net margins provide a fellow with plenty of room for error. Besides, the skeptics are badly outnumbered. "Bartmann was there first with the most troops," says Cristopher Donnelly of Duff & Phelps. "He just blew it out to a scale that no one else had ever dreamed of. Nobody else is in the same weight class as he is." So CFS continues to reap what Bartmann calls the "pioneer's profits, the obscene profits" that economics textbooks say are supposed to be quickly competed away.
"In'nat cool?" says Bartmann, grinning.
Patron Saint of the Second Chance.
The story of Bartmann's early failure has receded into the haze of personal mythology, taught to all incoming employees at CFS University. Yet when you listen to him talk about the undoing of Hawkeye Pipe, 12 years ago, it's as if the wounds are still fresh. "No matter how much money I make or how many good things the newspapers say about me, there will always be a scar," he says. "You never forget how one time, somewhere, something happened that you couldn't control." Though Muskogee is only an hour's ride away, the Bartmanns haven't returned there for more than five years.
Ask Bartmann to pinpoint when he felt he'd finally made it all the way back from the Muskogee collapse--when he'd finally "arrived"--and he'll describe a moment in 1994. His general counsel was summarizing the terms of a line of credit CFS was about to finalize with Nomura Bank, reviewing the bullet points, when it struck Bartmann that something was missing.
"Where's the personal guarantee?" he interjected.
"They haven't asked for it," said the lawyer.
Bartmann figured it was a case of accidental omission. The counsel assured him it wasn't. Bartmann called Kathy. "We've made it, hon," he said. "I think this is how you tell."
This story of Bartmann's "arrival," though, isn't very convincing. It leaves something out, something hard to define but obvious nonetheless. Call it ambition or obsession. Call it hunger. Call it the idea that, despite what Bartmann says, he's nowhere near feeling that he's arrived.
There's a story Bartmann likes to tell about his wayward youth. He was in a teenage gang known as the Manor Boys, and as the gang's smallest member (he says he weighed the proverbial 98 pounds; even now, he's a tight-strung 150), it was his job to serve as bait on Friday nights. The script varied little: Raging drunk, Bartmann would saunter into a dance hall while the beefier gang members lurked in the shadows. He'd order a beer. "I'd walk up to the biggest guy in the room," he recounts, "hold it up in front of him, and say, 'I'll make you a bet that you hit the floor before this beer does.' Then I'd drop the beer and punch him." It mattered not who the victim was; the ensuing brawl was more recreational than personal. It was sport. It was the white-hot, macho thrill of taking on a challenge that seemed impossibly big.
