Busting the Predatory Lending Myth

It's interesting that month after month we hear about large corporations and their double digit growth. The business economy in the USA is booming. Tax benefit programs and governments trying to prevent outsourcing to other countries are helping many businesses to be extremely profitable.

While many of the rich continue to grow richer in our great capitalistic society, conversely, many American families are being hit hard as the housing bubble's burst, turns their wallets inside out. What I find so amazing about this bubble bust and the resulting multiplicity of foreclosures is that it seems that nobody saw it coming.

The biggest cause of all these foreclosures isn't people losing jobs or taking pay cuts, it is the average American's misunderstanding of how to manage their finances. It's not that I don't sympathize with families going through such troubled times but I can't fathom entering into some of the mortgage agreements that these families have.

The late 90's and early 2000's brought lower interest rates for mortgages along with an increase in the types of mortgages available which made the American dream available to almost anyone that met minimum requirements.

Two things bother me about how this has unfolded one about the medias coverage and one about peoples expectations:

1. Placing the blame on "predatory lenders"

This isn't to say that there aren't real predatory lenders out there. There are those despicable that truly take advantage of people. However, a lender that provides legitimate options to qualified individuals are not predatory! The media doesn't seem to understand the difference. When adjustable rate mortgages (ARM) became popular it was perfectly clear that once the introductory rate expired that the rate would adjust UP. Sure there was talks that no one new for sure and that they could possibly adjust down but the writing was on the wall. I say this with confidence because it was clear to me and I was a young high school student without a real interest in real estate. Now as a homeowner, while an adjustable rate mortgage made it easier for me to afford my home, if I don't refinance or something happens with my income that is not GMAC's problem, nor should it be. Sympathy is nice, lending is business.

2. Bailing everyone out.

Once again the media cries foul if the Government doesn't step in with programs to protect those that have become less fortunate because of bad decisions. It's not that I am against bailing people out but you can't have that or expect it (New Orleans) unless you are willing to pay through taxes BEFORE the fact. Our society is so against higher taxes until something affects THEM or the people that have the ability to elect them and they need the money.

Remember there is a huge difference between PREDATORY and Subprime lenders. This is fast becoming a huge political issue and everyone is jumping in to save the people that can't make sound financial decisions.

Billions in unredeemed gift cards!

It's a great feeling to find a gift card that you had lost or forgot about but have you ever thought about what happens when cards go unused?. I started thinking about how great an idea gift cards are for the large corporations that use them. Gift cards are incredibly cheap to make, package and sell at stores. When you buy a gift card you are essentially fronting money for a purchase, accelerating the cash flow of the company. But what happened when that card is never redeemed? Free money for corporate America!

I started a little research by flipping through my Best Buy 2007 Fiscal Report. Best Buy realizes income from unredeemed gift cards two years after the card is purchased. At that time the likelihood of a card being redeemed is "remote". In fiscal year 2007 Best Buy realized $46 MILLION in unused gift cards. I started looking for information from several other companies and found some interesting information.

Unfortunately, as far as I can tell there are not any universally accepted accounting practices for unredeemed cards but in general retail companies determine a time when they no longer expect a card to be redeemed and then either at one time or based on a model they transfer the money from the liability column the the asset column, therefore realizing what is essentially free profit.

Here's some information that relates possible assets from unredeemed cards compared to some other company metrics. All financial information was taken from the company's most recent annual report.


Abercrombie and Fitch
3.3 Billion in total sales
65 Million in unsed gift cards.
88.1 Million shares outstanding
This means (ANF) has about 73.7 cents per share in earnings potential from unused cards.
Abercrombie and Fitch currently pays 70 cents per share per year in dividends

Kohls
1.1 Billion in total sales
15 Million in unused gift cards
322.6 million shares outstanding
This means Kohls has about 4.6 cents per share in earningspotential from unused cards.
Kolhs (KSS) currently does not pay dividends

Borders Group
4.06 Billion in total sales
151 Million in unused gift cards
58.8 million shares outstanding
This means Borders has about 2.56 dollars per share in earnings potential from unused cards.
Borders (BGP) currently pays 44 cents per year in dividends
*Note that Borders does not clearly separate the amount of unused cards which they believe the probability of being redeemed is remote which means that the 151 million pay include gift cards that are still likely to be redeemed.

Best Buy
35.9 Billion in total revenue
46 Million in unused gift cards
473.9 Million Shares outstanding
This means Best Buy has about 9.7 cents per share in earnings potnetial fromunused cards.
Best Buy (BBY) currently pays 56 cents per share per year in dividends

With these four as examples it is clear that across the retail sector there are billions in unredeemed cards just padding the bank accounts of corporate america.


I encourage you to do your own research into the windfall corporate America continues to gain from people buying gift cards and then them never being used. If you find anything interesting please comment back to this post and I'd be happy to add it to this or a subsequent blog. If you find any inaccuracies in my research I also encourage you to let me know so I can do updates.

There's certainly nothing wrong with this practice. But next time you are buying a gift card, ask yourself, is the person I am buying this for actually going to use it or am I just making a non tax-exempt donation?

Happy researching!