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This story appeared in the March 2009 issue of Collections & Credit Risk.
Ten years after his revolutionary debt-buying firm, Commercial Financial Services, closed amid a huge fraud scandal, entrepreneur William R. "Bill" Bartmann - vindicated by the law, if not his peers - is back in business.
Love him. Hate him. Among collectors, debt buyers and creditors, there is rarely middle ground. But understanding his relationship with the collection and debt-buying industries requires a history lesson.
CFS bid up the price of bad debt and monopolized forward-flow contracts with major banks in the late 1990s. Described at the time as either a maverick, a genius, a loose cannon or an incredibly kind and generous man (employees were treated, with their families, to lavish perks such as all-expense paid vacations), Bartmann was the first to securitize bad debt on Wall Street. This gave him access to huge amounts of capital that none of his competitors enjoyed, an approach that helped him quickly build his Tulsa, Okla. company into a $3 billion giant.
His peers and rivals questioned Bartmann's methods from the start, arguing CFS would never be able to sustain the inflated rates he charged for bad debt. Bartmann paid up to twice as much for charge-offs as most of his competitors. The banks that sold to him fell madly in love.
"We started CFS from scratch in the middle of a downturn and built it into a substantial organization," Bartmann tells Collections & Credit Risk. "Today the volume of bad debt is increasing exponentially."
With that in mind, Bartmann says $50 million will be invested in the business this year, between himself and a group of private investors he will not name. "I raised $3 billion on Wall Street," says Bartmann, who sees parallels between today's debt crisis and the Savings & Loan debacle of the 1990s that gave CFS its start. "[Investors] see the opportunity I see and they want to participate."
Through the new enterprise (see sidebar for details) Bartmann already has purchased debt worth $1 billion (face value).
Many in the industry are surprised by Bartmann's return, and skeptical about his chances for success. Today's collection market is different, tougher and securing financing to purchase bad debt is difficult. Says Lou DiPalma, managing partner at Garnet Capital Advisors, a debt broker in Harrison, N.Y., "I would have concerns with non-professionals entering the distressed debt arena. But who knows, maybe it's a better mousetrap."
The CFS Model
The Bartmann saga is as epic as the industry gets: his rise from a previous bankruptcy; the founding of CFS and its innovative financing and collection methods; his vision, charisma and slick salesmanship that convinced the credit card industry what he was doing was no magic trick; his plunge back into bankruptcy; the closing of CFS; his federal court case - where a jury found him innocent of 57 counts of conspiracy, fraud and money laundering; and finally, his return.
From the February 1999 issue of Collections & Credit Risk:
When Toto drew back the curtain, he revealed "the great and powerful" Oz to be nothing more than a carnival huckster using smoke and mirrors to befuddle the good citizens of Emerald City. Now, an anonymous letter may be similarly exposing the inner workings of CFS, and its founder, to be little more than sleight of hand.
As CFS works its way through a Chapter 11 reorganization plan and responds to allegations of fraud, Bill Bartmann no longer can deflect criticism with his characteristic good old boy charm and wit. Industry players, especially those in the business long before Bartmann arrived, have long been whispering that Bartmann was exaggerating recovery rates to build up investor interest in CFS bonds and paying a premium for debt portfolios to drive out competitors.
Collections is what got CFS in trouble. The company purchased bad debt, then securitized bonds that were sold based on the ability to collect. In late 1998, an anonymous letter sent to bond rating agencies revealed a shell company had been set up to purchase bad loans at inflated prices to make liquidation rates look better than they were.
CFS closed in June 1999. In December 2003, Bartmann's federal trial ended favorably for him. But Bartmann's reputation remains tarnished and some still question his innocence, even though it was his partner, Jay Jones, who pleaded guilty to a conspiracy charge. Jones could not be reached for comment.
"In hindsight, I wish I had gone through (Jones') garbage can, credenza and computer every night after work," says Bartmann. "But I didn't."
Bartmann has spent several years since the trial working as a consultant and motivational speaker. Then, the economy's downturn got him thinking.
The New Deal
As U.S. Treasury Secretary Henry Paulson pleaded last fall with Congress for $700 billion in bank bailout funds, Bartmann felt that a rare chance to buy bad debt was about to unfold. Around that time, he says he took a call from investment bank Goldman Sachs asking him to help liquidate "significant portfolios." Bartmann would not offer details, but, he says, "Bells went off in my head. I wasn't the only one who thought this would be an unprecedented opportunity."
His new venture operates under the umbrella of Bill Bartmann Enterprises, from offices in Tulsa. The firm has eight staffers, a far cry from the 3,900 that CFS once employed.
Some insiders doubt whether Bartmann's new venture is even real, but no one doubts what a good salesman he is and how far that might take him. Still, despite his acquittal, some believe Bartmann's business was still a failure.
Louise Epstein, president at Charge-off Clearinghouse in Austin, Texas, is a vocal critic of Bartmann who, unlike others in the industry, does not mind being quoted.
"Even if his partner created the scam," she says, "The fact remains his business model did not make money and his secret model to price portfolios did not work."
Epstein, whose firm stopped brokering bad debt last year because of the difficulty of financing purchases, handled work for the bankruptcy trustee in two CFS-related cases and currently acts as an expert witness in court cases.
"I hope the most money these people lose is the money they pay for the workshops," she says. "If these people buy any debt [with Bartmann], they will lose their money."
Bartmann counters: "The company failed because the government accused me of a crime they couldn't convict me of. I don't apologize, blink or blush."
He sees the trajectory of his career differently. In his view, he built a business from nothing and grew it into a $3 billion company. Later, he was accused of something that he was acquitted of. "So what's the beef?" he asks.
The homespun Bartmann laughs off his critics with a quote from Mark Twain: "The reports of my death have been greatly exaggerated."
Regardless of one's feelings about Bartmann, his role in building the industry is undisputed. He revolutionized the bad-debt market by securitizing pools of charged-off card receivables and catapulted CFS to the top of the bad-debt buyer's roster, signing purchasing agreements with more than half of the nation's 25 largest card issuers.
In the process, he propelled the collection industry to a higher profile in the world's financial circles. Conservative estimates had him cornering a third of the card charge-off sales market. Bartmann, at the time, boasted that he commanded about half.
Bartmann is as bold in 2009 as he was in 1999. Asked if he plans to return to Wall Street and securitize bonds to finance purchases, he laughs, "Of course I do." He expects to be welcomed, too. Perhaps not now but, given time, securitizations will rise again. He thinks small deals will get done by the end of this year.
For the near-term, Bartmann expects to tap private equity to finance debt purchases. He says these groups have shied away from real estate and equities and need a place to put their capital. Others in the collection industry counter that all types of financing is hard to come by, even private capital.
Of course, ultimate success hinges on buying debt at the right price. Many doubt whether he has any more knowledge than industry pros.
Bartmann says his business processes are part of his "secret sauce," a folksy way of saying that he will not reveal his methods. But, he maintains, his basic formula is simple, and it starts with pricing comfort. "Collectability of loans has been reduced but the price one pays for loans has come down even more, so profitability is up," he says.
At 60, Bartmann says he is no longer obsessed with money. He and his wife of 35 years, Kathy, are enjoying their grandchildren. "I see life a little differently than I have in the past," he says.
His goal in business is to help others make money, he says, though he still expects to make plenty for himself.
"At the end of the day, I'm still a businessman." CCR
