Looking Back on What we Said at the Beginning of the Financial Crisis

Mike Ginsberg

Since grade school, we are taught to learn from the past.  Text books will be written and courses will be taught about the financial events that unfolded in the past few years.

Recently, my friend Brad Dey sent me a copy of a blog that I posted and he responded to almost three years ago.  It is worth taking a few minutes to re-read.

Enjoy and I hope everyone has a wonderful 4th of July weekend.

- Mike

Tracking the Storm in Financial Markets – What Will it Mean for ARM?

Posted by Mike Ginsberg
Kaulkin Ginsberg Company on September 16, 2008

On September 15, we watched as Lehman Brothers and Merrill Lynch, two of Wall Street’s oldest and largest firms, disappeared from the playing field only months after the U.S. Government stepped in and brokered the sale of Bear Stearns.  Three of the top five stand-alone investment banks have gone through catastrophic change at virtually the same time, an event not seen since the Great Depression or dare I say ever before in U.S. history.

How will this impact the ARM industry?  Owners, clients and investors alike want to know how debtors will react, which agencies and debt buyers are poised to fail and which are positioned to weather the storm during these tumultuous times, and how will issuers and other credit grantors change recovery strategy.

Banks, healthcare providers and government agencies are the largest sources of business for collection agencies and debt buyers.  When a major market segment is in such disarray that three large players have to sell out or file for bankruptcy, the simple answer is to say that everyone will be impacted.  However, the impact on ARM companies will be in felt over the next few years in ways that most of us are not even thinking about yet.

First, let me take a moment to clarify.  Broadly defined, the banking world is divided into 2 business segments: the less-regulated stand-alone securities firms such as Lehman, Bear Stearns, Goldman Sachs and Merrill Lynch, who make their living off risky investments; and the heavily-regulated, less glamorous commercial banks like Citi, Bank of America, Wachovia, and even Capital One, that take deposits and make loans.  The preponderance of new business that comes from the banking sector to ARM companies has always, and will continue to come from commercial banks in the form of placements and the sale of defaulted credit cards, auto loans, student loans, and mortgage loans – not from securities firms.

From my post as a strategic advisor, I look under the hood of a lot of ARM companies.  I can’t tell you the last time I saw Lehman, Merrill or Bear on the top client list.  In fact, I can tell you that I have never seen a securities firm on any client list of any consumer collection agency or debt buyer ever.  In rare instances, we’ve seen commercial loan workout situations arise involving large investment banks and commercial ARM companies. The real impact will not be on placements volumes or debt sales coming from Merrill, Lehman or Bear.  The impact will be a trickle-down effect from a number of fronts:

• Banks of all sizes will continue to hoard cash and restrict lending ways at a time when their customers need it most.
• Rising default rates among consumer and commercial borrowers will challenge recovery efforts from lenders and agencies alike.
• Placement levels among some creditors will surprisingly start to level off and even decrease as some credit card issuers and lenders curtail their lending ways.
• Some issuers and debt buyers will flood the market with inventory at the same time, resulting in plummeting prices in both the primary and secondary markets.
• Capital-constrained debt buyers who see purchase opportunities in the market might not have the financial means to capitalize on them.
• A growing list of troubled banks that appear on the FDIC watch list (126 as of 8/26 up from 90 at the beginning of the year). Most of these are relatively small institutions that local businesses rely on for financing to operate or expand their business and that consumers rely on for mortgage loans.
• Regulators notorious for making hasty changes in troublesome times.  Just yesterday, for example, regulators proposed a new rule that would reduce the cost for healthy banks to buy distressed ones which will fuel yet another round of consolidation among local and regional banks.

Are we heading toward another crisis like the Savings and Loan disaster of the 1980s and 1990s when almost 750 S&L institutions failed costing over $160 billion?  It is too early to say for sure.  One thing is certain.  For ARM service providers, debt buyers and credit grantors alike, managing receivables has been closely scrutinized for a long time and will escalate to levels of critical importance during these tough economic times.  This will create opportunities for those who are well positioned and challenges for others who sit by and wait.

The early chapters of this long and gripping novel are only being written now, and the impact on the broad economy overall and the ARM industry in particular will not be fully realized for years to come.

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Comment from Brad Dey on September 17, 2008 at 9:19AM EST

Mike- thanks for a great read, especially tackling such a complicated topic (I am not a finance major, after all). I couldn’t agree more with your opinion, in that the second-order effects will be where we see it in our industry.

However, I think the single-biggest effect will be the consumer (debtor) uncertainty that will be created from all of this. I have to point out that the news marketplace/medium has changed DRAMATICALLY since the S&L crisis of ’80s that you called out, thanks to the proliferation of the internet & the news media networks (CNBC, Fox, MSNBC, CNN, HeadlineNews). The average US consumer now has information/coverage on bank failures/Fed cuts/missed earnings that used to primarily reside on Bloomberg, for example.

SO, how will the consumer react with this info? Will they pull their money out of local banks? Will they start to default on the credit card loans that are the majority of our ARM business? Will they pay down balances?

Regardless, it is going to take smart analysis & operational execution to make the most of this opportunity, as ARM companies will have to work SMARTER, not harder- as liquidation rates are certain to decline even further. Who is best positioned to do this?

- Brad Dey, President of Dey’s End Consulting, LLC