A Real World Case Study About Bad Banking

During President Obama’s State of the Union address, he made numerous references to government “investments”; for anyone with a clue, he meant government spending. Even as the federal government’s debt approaches 100% of GDP, there was Obama calling for more spending. And not just any spending; he wants it to go the liberals’ pet programs du jour, while leaving in place spending for failed pet programs that haven’t gone away. Michelle Malkin has a post featuring Obama crony and new Chairman of the Council of Economic Advisors Austin Goolsbee explaining how government plans on using these “investments”. As explained by Malkin, Goolsbee has never run a business or a bank; and yet here he is explaining how the government will give money to those who will help produce Obama’s vision. What he doesn’t say, naturally, is that our tax dollars the government will provide for these “investments” will be based on bribes campaign contributions (ie., GE CEO Jeff Immelt).

So Obama and Goolsbee want the federal government to be a bank. Of course, the federal government has been involved in some forms of banking for a long time, especially through the Federal Reserve (this post doesn’t cover the Fed), along with subsidiaries Fannie Mae and Freddie Mac. The latter two are disasters, bleeding money as if through a spigot; yet neither were included as part of the financial regulations package passed last year. Considering how many Democrats are in charge of these organizations, you can understand why they were left out by a Congress with Democrat majorities. I know of a private sector example of what happens when people who have no idea about running a bank do so.

My first job out of college was with catalog retailer Spiegel, Inc. (I left the company in the late 1990s.) At the time, it was the beginning a boom period that saw revenues increase three-fold over the next dozen years or so. Spiegel had a great business model; while it was known as a catalog company, it actually made its money selling credit at high interest rates (upwards of 22%). And people willingly signed up for such credit. For the first three quarters of any calendar year, Spiegel usually operated at a small loss. But since it was still privately held, this wasn’t a problem. The fourth quarter, Christmas season, made up for those losses and then some, ending the year with quite handsome profits. Even with the fairly high markup, Spiegel’s retail business was never all that profitable; again, it was the credit part that made the money. Plus, Spiegel had fairly reliable customers and really didn’t have a problem with its credit receivables.

In 1987, Spiegel decided to go public, offering class-A nonvoting stock. The timing was awful; it was just before 1987’s Black Monday stock market crash. Although not really impacting the business too much, the change from a private to public company meant that those three quarters of losses needed to be changed to three quarters of profits. This put a bit of a strain on the company for a short time. In 1988, this strain was reduced when Spiegel bought Eddie Bauer, the outdoor fashion store and catalog retailer. Not long after that in 1990, Spiegel bought a little-known bank called First Consumers National Bank (FCNB), whose only function was to issue credit cards under the Spiegel and Eddie Bauer labels. All three worked in tandem and the money came rolling in. After a few more moves over the next several years, Spiegel received over $3 billion in revenues in 1997.

Around that time, Spiegel changed its business. The Spiegel Group’s Spiegel catalog operations, Eddie Bauer operations, the Newport News catalog operations (they were acquired around 1993), and FCNB were turned into profit centers, meaning they all had to pay for themselves. Since Spiegel catalog was never very good at retailing, this hurt that part of the business over the next few years. Worse, people who had no idea how to run a bank were put in charge of FCNB. They changed their credit policy to hand it out to anyone that breathed. On top of that, Eddie Bauer was experiencing severe revenue declines as some warm winters kept people from buying their products. Finally, this was all occurring just as the “dot com” bubble burst. The “perfect storm” had come to the Spiegel Group.

By 2003, the Spiegel Group was in a world of hurt. They had tried to sell FCNB, but to no avail. The company had also run into trouble with the SEC since they hadn’t properly filed all of the necessary paperwork as was required by law. At that point, FCNB was liquidated. The Spiegel Group filed for Chapter 11 bankruptcy protection and was reconstituted into the Eddie Bauer Holding Company, which remains in operation to this day.

And Spiegel catalog? A stand-alone operation that had over $1 billion in revenue 20 years earlier was sold to Pangaea Holding company for $31 million (they also purchased Newport News catalog for $25 million). Spiegel and Newport News catalogs are currently owned by Lynn Tilton’s Patriarch Partners.

This is a private sector story of what happens when people who have now idea how to run a bank are put in charge of such institutions. When done by people in the federal government who have no idea of how to run a bank, it’s much worse since it’s the federal government who can just print money to cover “losses” or just compound the debt problem by adding more debt, usually without consequences for those who do so.