Legendary investor Warren Buffett lives by two main rules: Rule #1: Never lose money. Rule #2: Never forget rule #1. Well, even billionaires make occasional slip-ups. And unfortunately, for a billionaire, a small slip-up doesn’t just translate into a $39 late fee, but into real money. The cost of Buffett’s five-year business experiment as a credit card issuer? A not-so-cool $50 million.
At the onset, it seemed like a great idea-why not issue Geico-branded credit cards to existing customers of Geico Car Insurance? Best know for its charming, Cockney-accented mascot gecko and its recent cavemen ads, Geico was bought by Buffett’s Berkshire Hathaway in 1996 and it is today one of the largest car insurance companies in the country.
Issuing credit cards to millions of already existing customers seemed like an easy way to tap into the often lucrative profits of the credit card market. And so, the Geico Platinum MasterCard was born. However, what seemed like a natural fit, quickly turned out to be a bad idea. Before the MasterCard venture, Geico executives had warned Buffet that instead of getting the best of Geico’s customers, the credit card offers might attract the less credit-worthy segment of Geico customers. They turned out to be right.
As a so-called “low-cost” provider; Geico attracts consumers who are concerned about saving money, which for the most part are those with lower incomes. While the risk of issuing car insurance to a high-risk clientele is negligible, issuing credit cards turned out to not be such a hot idea. Before selling off its debt portfolio, Geico suffered an immediate $6.3 million in losses from bad credit card debt, according to Reuters. Another $44 million went down the drain, when Buffett finally decided to get out of the credit card business and sold Geico’s $98 million portfolio of “troubled receivables” for 55 cents on the dollar. All told, Buffet’s self-titled “very expensive business fiasco” cost $50 million-not exactly chomp change, even for a billionaire.
The failure of the Berkshire Hathaway venture was in part spurred by bad timing: in the wake of the 2008 credit debacle and the ensuing economic recession, all credit card issuers have been struggling with record credit card defaults.
However, Buffet’s misadventures also highlight the risk that credit card issuers face when issuing credit cards to people with bad credit and poor borrowing habits. Bad credit card issuers enter a high stakes game with the odds against them: those with a history of bad credit often perpetuate the financial mistakes that created the bad credit in the first place—which include being more likely to take on too much debt and then fail to repay it.
Still, while the loss is considerable, in Buffett terms it is still just water under the bridge. Over the past four decades, Buffett has built Berkshire Hathaway into a company valued at almost $200 billion. And despite recent losses, Geico is doing just fine; it remains the third largest car insurer in the U.S., adding two million customers in the last three years alone.
