Warren Buffett shut a Berkshire Hathaway Inc. credit card business and sold bad loans at 55 cents on the dollar in what he called a "very expensive business fiasco."
"I finally woke up," Buffett said in his annual letter to Berkshire shareholders on Saturday. The company's chairman said the cards, issued by Berkshire's car insurance unit Geico, were his idea and popular with customers. "We got business all right — but of the wrong type," Buffett wrote.
Buffett said the idea to issue credit cards came after "many years" of brainstorming about how to best serve Geico's policyholders.
"Geico's managers, it should be emphasized, were never enthusiastic about my idea. They warned me," Buffett said. "I subtly indicated that I was older and wiser. I was just older."
Buffett describes Geico as a "low-cost" provider, and his decision to issue credit cards to the unit's customers contrasts with the strategy espoused by American Express Co., one of Berkshire's biggest and oldest investments. Amex remained profitable throughout the recession by dominating the market for affluent consumers.
"I'm sure there's some overlap between American Express clientele and Geico, but those customers probably don't need a Geico credit card," said Gerald Martin, a finance professor at American University's Kogod School of Business.
Berkshire lost $44 million selling its $98 million portfolio of "troubled receivables," Buffett said. The company also lost $6.3 million from operations before Buffett "closed the book" on the business, he wrote.
Buffett said Geico's managers had warned him that "instead of getting the cream of Geico's customers we would get the — well, let's call it the noncream."
In his 2005 and 2006 letters, Buffett encouraged shareholders to sign up for the Geico card, saying it was the one he used.
A link on Geico's Web site leads to a notice from Merrick Bank of South Jordan, Utah, saying the lender acquired the MasterCard accounts. Merrick also offers a card with the Hooters Inc. restaurant chain.
