Broke, USA

by Gary Rivlin

  The $484 million settlement sounded enormous—until one did the arithmetic. The money was to be divided among the roughly 300,000 people in forty-four states who had refinanced with Household between 1999 and the fall of 2002. Even forgetting about legal fees and the money set aside for compliance, that worked out to an average of $1,600 per person. Household, by contrast, had logged sixteen straight record quarters in a row. In 2001 alone, the year the Myerses signed their deal, Household reported $1.8 billion in profits. The company had made big promises but its executives told analysts that they didn’t expect its consent agreement to cost them more than ten cents a share over the coming year. Household’s share price spiked by one-third in the forty-eight hours after news of the settlement spread. Investors seemed relieved that the penalty hadn’t been larger or the reforms more sweeping.

  The national settlement presented the Myerses with a difficult decision. The state attorney general had announced that Ohio residents who did business with Household could receive up to $5,200 per family. But agreeing to a settlement meant the Myerses would have to drop out of their lawsuit. They opted out of the negotiated deal so they could continue to press their specific case in court.

  In the end, it hardly made a difference what they chose. The confidentiality agreement Myers and Marcia signed with Household means they can’t reveal the size of their cash settlement, but suffice it to say that in retrospect the monetary difference between the two deals was minimal. They received a better payout than the state would have given them but not so much more that it had been worth all their anguish. The bottom line is that it was a mere pittance compared to what Household had cost them. “It wasn’t worth all the fuss, I’ll tell you that much,” Myers said. “I told my lawyers, ‘The only ones making any money on this are you people.’”

  One month after settling with the attorneys general, William Aldinger stood before the cameras for one more blockbuster announcement: Household was being acquired by HSBC, the London-based financial giant, for $16.4 billion. Later, long after the financial crisis of 2008 had done so much damage, Floyd Norris, the New York Times columnist, would dub this acquisition, consummated in 2003, “the deal that fueled subprime.” This sector, the CEO of New Century Financial, a large subprime lender, said at the time of the acquisition, gets “beat up on a regular basis. So it’s refreshing when a highly-qualified suitor sees value.” Under the deal, Aldinger was paid an immediate bonus of $20.3 million and given a new contract that guaranteed him at least $5.5 million a year over the next three years.

  Myers was not nearly so fortunate. Even factoring in his wife’s medical costs and the loss of her income for almost a year, Myers figures that he would have saved enough to retire in 2002 or 2003 at the latest if he had not been lured into a deal with Household. Instead, shortly before resolving their legal case, the Myerses filed for bankruptcy. “You know, you hear all these people saying they’re ashamed to have filed bankruptcy,” Myers said. “That’s not me. They screwed me, and the way I figure it, one screw job is good for another screw job.”

  Myers was still working when I visited him at the end of 2008, a week shy of his seventy-fourth birthday. He was too old to be delivering boxes to restaurants so his boss put him to work in the warehouse, packing boxes of tomatoes and the like. His workweek starts on Saturday night at midnight. He works until 8 or 9 A.M. on Sunday morning and then returns to the plant Sunday night to work the same hours. He picks up a third shift during the week. “Ain’t too bad,” he said with an amiable smile.

  Harder to swallow has been their slide down the housing hierarchy. The trailer park in the south suburbs, the one with trees and a swimming pool, raised its rates to $400 a month, which proved too steep a price for a part-time produce boxer and a cafeteria worker. That meant the Myerses had to move—again. They looked for a place that cost $200 a month or less, which is how they ended up at Pine View.

  Marcia misses her old flower beds. The small patch of dirt available to her now is nothing like the garden she had in those few years they owned a home. But she tells herself she had lived in trailers before and they would do just fine in one now.

  It helped that they had recently visited the old place. The couple was shocked by what they saw. They had read about foreclosures in the paper but it was nothing like seeing it up close. The old place was still white with the teal trim but it was as if the house had been physically moved out of the stable working-class neighborhood that they knew and dropped into a deteriorating ghetto. There were vacant houses everywhere, with plywood over windows and garbage strewn about. Several payday lenders had opened storefronts in the area, as had a check casher and a rent-to-own place. “We didn’t feel so bad after that visit,” Myers said.

  Yet he can’t help but feel lousy sometimes, he said. It’s not the lost house, or the fact that he’s still working hard into his mid-seventies. It’s the feeling that he let Marcia down and also himself.

  “After I first found out about the shafting I took, I felt dumb,” he said. “I felt really, really dumb for a good long while there.” He confessed as much to one of his attorneys. “He says back to me, ‘Hey, there are people with a lot more mental capabilities than you that got took. We got police chiefs in these lawsuits, we got schoolteachers.’ He listed off a bunch of people with better educations than me.

  “It made me feel better. At least it was everyone who was took.”

  One

  Check Cashers of the World Unite

  LAS VEGAS, 2008

  The stomping piano chords and tambourine slaps blaring over the loudspeaker are at once familiar. They are the opening notes to the early Motown hit “Money (That’s What I Want).” The nation’s check cashers and payday lenders have a dangerously low sense of irony, I mused. We are a respectable business, their leaders have been saying since the founding of the National Check Cashers Association in the late 1980s. Sure, we cater to a hard-pressed, down-market clientele but we are not the money-grubbers the popular culture makes us out to be. We provide a useful service critical to the working of the U.S. economy. Our products are heavily regulated and fairly priced. Yet here they were kicking off their twentieth annual gathering in October 2008 with a musical production based on a song whose lyrics repeat, more than thirty times, that what the singer wants, more than love and more than happiness, is lots of money.

  The convention was being held in Las Vegas. The women dancing across the stage were young and buxom and dressed in skimpy sequined outfits. The men were buff and tan and similarly underdressed. We could have been sitting in any show room on the Strip except that the lyrics had been rewritten for the occasion. Instead of an unconscious self-parody the skit was actually aimed at a handy target in those dark and unsettling days in the fall of 2008: the country’s bankers. If not for the behavior of the banks, their industry would not be nearly so robust. The banks abandoned lower-income neighborhoods starting thirty years ago, creating the vacuum that the country’s check cashers filled. The steep fees the banks charge on a bounced check or overdue credit card bill fuel a lot of the demand for payday advances and other quick cash loans. The big Wall Street banks had stepped in and provided money critical to the expansion plans of many in the room, but never mind: These entrepreneurs selling their financial services to the country’s hard-pressed subprime citizenry are nothing if not opportunistic. The nation’s narrative, they argued, was theirs. The banks, who were booed lustily throughout the two-day conclave, would serve as the poverty industry’s new bogeyman.

  “I get my money (when I want), I get my money (when I want),” the troupe sang as they danced and pantomimed various financial transactions. Those playing the part of bankers (picture a tie over an otherwise naked male torso) were emphatically shaking their heads “no” (“At the bank I feel like I’m on trial; I’d rather get fast service and a smile”), but when those in the role of customers knock on the door of their local “financial center,” they are greeted by friendly people who are only too glad to cas
h their checks or to loan them cash until their next paycheck. Apparently salvation is sweet. Suddenly a dozen or so very good-looking young people were dancing through a blizzard of fake twenty-dollar bills while singing, “I got my money (and it works for me).” The extravaganza brought down the house.

  There’s no single gathering place that routinely brings together more of the many strands of the poverty business than this one, held this year in a cavernous hall in the bowels of the Mandalay Bay convention center. Those who pioneered the payday advance industry in the mid-1990s started showing up at meetings of the National Check Cashers Association because they didn’t know where else to go and, over time, other parts of this subculture of low-income finance—the pawnbrokers, Western Union and MoneyGram, the country’s largest collection agencies—followed. Eventually the check cashers hired an outside consulting firm to give them a new name, and since 2000 their organization has been called the Financial Service Centers of America, a rebranding at once more respectable and opaque. When expressed as an acronym, FiSCA, the name sounds quasi-official, like Fanny Mae, Freddie Mac, or some other agency playing a mysterious but vital role in the U.S. economy.

  Business remained good in the poverty industry, despite hard economic times and also because of them. People struggling to get by, after all, are often good news for those catering to the working poor and others at the bottom of the economic pyramid. Everywhere I looked there were people flying their corporate colors. Competing battalions were dressed in look-alike pants and pullover shirts bearing company logos, each representing another big chain booking hundreds of millions of dollars in revenues each year, if not billions.

  Yet despite flush times, the weekend felt like one extended, oversized group therapy session for an industry suffering from esteem deficit disorder. The CEO of one of the industry’s biggest chains, ACE Cash Express, even brought a video created for the occasion aimed at bucking everyone’s spirits. A montage of warm black-and-white photographs flashed on a screen hovering above the stage as an ethereal cover of the song “Over the Rainbow” played and a narrator intoned, “They need to pay their rent. They need to feed their family. They need someone who understands them.” Joseph Coleman, the group’s chairman, had offered similar self-affirmations in his welcoming remarks. Virtually every person in the room made his or her living catering to customers with tarnished credit. So Coleman opened by assuring them that they were not to blame for the financial hurricane that was leaving the global economy in tatters. Feel proud of what you do, he told an audience of more than one thousand people. “While consumer advocates were organizing against us for charging fifteen dollars on a two-week loan,” Coleman said, and while well-meaning community activists and pinhead bureaucrats were wringing their hands over those choosing to pay a fee to a check casher rather than establishing a checking account, “the big boys were selling toxic six-figure mortgages that threatened to bring down the worldwide financial system.”

  “No one matches the service we give our customers,” Coleman, who runs a small chain of check-cashing stores in the Bronx, New York, reassured his cohorts. “No bank matches our hours. Our products fit our customers’ lifestyle.” Look at any member of the easy-credit landscape, whether the used car dealer offering financing to those who could not otherwise secure a loan or those who saw the fat profits that could be made pitching faster IRS refunds to the working poor. We’re ubiquitous in the very neighborhoods where businesses tend to be scarce, Coleman said. We’re willing to serve these people who otherwise would do without. And yet—here a picture of Rodney Dangerfield appeared on the giant overhead screen—“we don’t get no respect.” With that the room erupted in appreciative applause.

  The business of making money off the poor dates back to the first time a person of means held a ring, a brooch, or a pocket watch in hock in exchange for a cash loan plus interest. The Chinese supposedly served as the globe’s first pawnbrokers and in fifteenth-century Italy the Franciscans ran nonprofit pawnshops called monte di pietà—translated, the “mount of pity.” In his Inferno, Dante reserved the lowest ledge in his seventh and final circle of hell, below even the murderers, for money lenders guilty of usury, and of course Jesus famously knocked over the tables of those moneychangers conducting business in the temple. More recently, a person could get Cadillac-rich by running an inner-city policy wheel or reign as a minor land baron on a small patch of dirt running a tenant farm in the rural South. There no doubt were ghetto grocers and poverty pimps long before the coinage of either of those terms and it was the writer James Baldwin who famously noted that it was very expensive being poor. But the poverty industry—making money off the impoverished and the working poor as big business—can be said to have started in 1983 when an oversized Texan named Jack Daugherty sought to strike it hundreds-of-millions-of-dollars rich as a pawnbroker.

  By that point Daugherty had burned through $300,000 in savings. He had lost money pursuing his fortune in the oil trade and frittered away more of it on a Dallas area nightclub. Left with nothing except the small pawnshop he had opened in a suburb of Texas while he was still in his early twenties, Daugherty told himself that men had started with less. He dubbed his new business Cash America and set out to buy up as many pawnshops as he could.

  He tried arranging financing through Merrill Lynch, Goldman Sachs, and the other big investment banks but none would even agree to meet with him. Rich acquaintances shunned him as well. The pawn trade meant dealing with people with grime under their nails and mud on their boots, and, depending on the state, it meant charging shockingly high interest rates that ranged between 60 percent and 300 percent annually. “If you said ‘pawnshops’ at one of the local country clubs,” Daugherty said, “they wouldn’t even talk to you.” But he was not a man easily deterred. He grew the business more slowly, one store at a time. He focused on mom-and-pop pawnshops run by aging couples whose children wanted the cash more than the headaches of running the family business.

  Daugherty was up to thirty-five stores when he convinced an investment bank to take his company public. In 1987, Cash America began trading shares on the American Stock Exchange. The AMEX lacked the cache of the Big Board or Nasdaq but Daugherty was able to raise $15 million and fund his first buying spree. By the end of 1988, Cash America, based in a suburb of Dallas, operated 100 pawnshops. By 1995, it was up to 350, including 33 in Great Britain and 10 in Sweden. The company changed its name to Cash America International and was invited to join the New York Stock Exchange. By 2009, Cash America was operating 500 pawnshops in the United States and another 100 in Mexico. By that time Daugherty was doing business with many of the same brand-name lenders—Bank of America, Wells Fargo, and JPMorgan Chase, to name just a few—that had ignored him when he was just starting out.

  Competition was inevitable and it’s no wonder, given the numbers Cash America was reporting. In the early days, Daugherty’s people were borrowing money at 9 percent and loaning it out at an average annual interest rate of 210 percent. Its profits grew by more than 20 percent a year, ranking Cash America among the country’s hottest growth companies. Several more pawn companies went public in the late 1980s and at the start of the 1990s. To the prosperous, the pawnshop might have seemed an archaic, throwback business that hit its zenith in around 1955 but those with poor credit or no credit knew better. The number of pawnshops in the United States doubled during the 1990s. Though the pawn business can seem penny ante—in 2009 the average pawn loan stood at just $90—Cash America now tops more than $1 billion in revenues and churns out in excess of $100 million in profits a year.

  Other businesses that belonged to what might be called the fringe financial sector followed more or less the same trajectory as the pawnbrokers. The rent-to-own furniture and appliance business was born in the late 1960s when the owner of Mr. T’s Rental in Wichita, Kansas, a man named Ernie Talley, told a family that they had rented a washer-dryer for long enough to have paid for it in full. The enterprise he created went public in 1
995 and today is called Rent-A-Center, a company that delivers profit margins more than twice that of Best Buy, which sells, rather than rents, its electronics and appliances. Rent-A-Center, based in Plano, Texas, another Dallas suburb, reported that its 3,000 stores booked just under $3 billion in revenues in 2008 and $220 million in pretax profits. If anything, its closest competitor, Aaron’s, based in Atlanta, had an even better 2008 as its stock price soared 38 percent in perhaps the market’s worst year since the 1930s.

  Wall Street money started washing through the check-cashing industry in the early 1990s when ACE Cash Express went public. Though ACE’s senior management, in league with the private equity firm JLL Partners, paid $455 million to take the company private in 2006, today at least a half dozen publicly traded companies are in the check-cashing business, including Dollar Financial, a diversified, $500 million, 1,200-store mini-conglomerate based in Berwyn, Pennsylvania, that sells its customers everything from check-cashing and bill-paying services to payday loans, reloadable debit cards, and tax preparation services.

  Yet when compared to the cash advance business, all these other enterprises catering to those on the economic fringes can seem pint-sized. Payday lending was a late entry in the Poverty, Inc. phenomenon—the first payday lender didn’t go public until 2004—but it is at once more pervasive than any of its scruffy, low-rent cousins and far more controversial. There were so many payday outlets scattered across thirty-eight states at the industry’s peak a couple of years back—24,000—that their numbers topped even the combined number of the country’s McDonald’s and Burger Kings. An estimated 14 million households in the United States (of 110 million) visited a payday lender in 2008, collectively borrowing more than $40 billion in installments of $200 or $500 or $800. A list of name-brand banks that have helped the industry fund its expansion includes JPMorgan Chase, Bank of America, Wells Fargo, and Wachovia. “Free and equal access to credit for any legitimate business that complies with all laws is a cornerstone of the free enterprise system,” a Wells Fargo spokeswoman told Bloomberg News in 2004, representing one of the rare times a large bank was asked about its subprime activities prior to the credit meltdown of 2008.