A long while ago I did some work on Rent-A-Center – a company in the difficult and arguably immoral business of “rent-to-buy”. Rent-to-buy is how you buy a TV or a couch on credit when you do not even qualify for a credit card. The business model is disarmingly simple. You have shops with 200-300 stock keeping units (running the shop is not the business). They sell things on a very simple mark-up basis. The advertised price of the thing (a TV, a couch) in the shop is 100 percent mark-up on the invoice price. However the real price is 48 monthly (or more realistically 208 weekly) instalments based on recovering 400 percent of the invoice price. If the TV wholesales for $1000 then the monthly instalments add to $4000.
The shopkeeper is not remunerated based on the sales of the shop – but rather how well they maintain “credit”. These are RENTAL contracts – so that the ownership of the TV does not pass on “purchase” but only after the payment of the last “rental payment”. This gives the shopkeeper the right to repossess the TV after a single missed payment. And if the shopkeeper is savvy he will turn up to collect the couch during the Superbowl (when he can be reasonably sure his customer and friends are sitting on it drinking beer and can probably scrounge up the cash to keep it). This differs sharply from the credit card industry – the credit card company has no charge over the assets sold to you on credit card.
Default as such does not exist. If you don’t pay your rental payment you lose possession of the couch – but you have not defaulted on any legally binding credit agreement. The store will simply sell the couch again trying to recover the amount that remains outstanding on the rent-to-buy contract.
Whatever – this looks like usury – and some of the “contracts” clearly had interest rates above 200 percent per annum. They made the treadmill of credit card debt look mild. Regulators have been taking pot-shots at Rent-A-Center for a while but without much effect. Here is an example.
Still we are talking about regulating credit cards – and nobody much seems to mention Rent-A-Center despite the far more usurious nature of the business.
I went to visit this company determined to short the stock. I did not. The company looked like a money-machine even if it appeared to breach the intention of pretty well every consumer protection law I had ever seen. I could not see what-if-anything broke the model. Moreover the customers understood just how usurious the business was. It was not like credit cards where the hidden overdrawn and late fees – things the consumer was suckered into – were the driver of the model. This was honest usury.
But it was the nature of the people I met that most stuck in memory. This was a business where if Jesus was alive he would pull down the Temple over them. It was precisely the sort of business the bible rails against. It offended my decency. But the people were lovely. I met management and a store owner – and – frankly they seemed exactly the sort of people you would like to have Friday drinks with. I liked them.
This alarmed me of course – because I expected them to be scum. And maybe they are – but I couldn’t tell. They were the sweetest usurious bastards (notwithstanding allegations in consumer complaints about the company).
I know someone who lost a lot of (client) money in a famous financial fraud. He met the principal and described him as “one of the nicest guys I have ever met”. Indeed the disconnection between how people seem and what they do is central to many frauds – and indeed to much of the world.
Warren Buffett claims in his letters to have a judgement of people as good as his judgement of businesses. [He thinks he has got businesses wrong more often than the management that sold them to him.] That is truly amazing and perhaps the most under-recognised skill of Buffett.
He has however given us a few clues as to how he does it. One guy he really liked was late to a meeting because he spent time looking for a parking meter with unused time. More generally he likes people who are cheap, smart and opinionated. Its just that when I am like that nobody invites me to dinner let alone describes me as “one of the nicest guys I ever met”.
Alas the perils of personal judgement in business.