Broke, USA

by Gary Rivlin

  Jones emerged from the fog of those lost months fighting with Logan more determined than ever to grow his expanding empire of payday stores. For that, he needed cash but all the bankers he knew proved to be squeamish about venturing into this shadowy world of fringe financing. He ended up securing the $3.5 million he was seeking from a private equity firm at an interest rate of 14 percent. Check Into Cash opened more than two stores a week through 1997. Jones secured an additional $11 million line of credit from NationsBank at the end of the year, allowing him to open an average of three stores per week through the first half of 1998. Jones promoted Steve Scoggins to president and gave him a 2.5 percent share of the company.

  What is there about the entrepreneur who, if he owns two stores, can think of little else but growing his holdings to four or six or ten? Or the corporate executive successfully managing 100 outlets dreaming of running 500 or 1,000? Blame it on Sam Walton, the founder of Walmart, or travel further back in time to the turn of the last century and blame Frederick Winslow Taylor, who might reasonably be dubbed the world’s first efficiency expert and also its first management consultant. It was Taylor, a student of the manufacturing process, who championed the notion that a business was nothing but an immense and expandable management-designed machine populated by replaceable cogs whose only job was to learn the processes that the top managers had put into place.

  Allan Jones has never heard of Frederick Taylor; nor did he attend any of the symposia put on by those who had rediscovered Taylor’s ideas. He is not a man who has much use for management theories, but Taylor would certainly have approved of his approach to growth. Jones established the systems and routines intended to make his business run most efficiently and then ruled over his burgeoning empire with an iron fist. Hiring the best and the brightest was not necessary. With an effective template in place, the only thing that was required was obedience by all those replaceable parts residing in the lower reaches of the organizational chart.

  Simplify, routinize, monitor, control—those were the watchwords of Taylorism and they were also the principles that Jones and Scoggins employed as their budding payday loan empire grew. Marketing, payroll, human resources, and other functions that could be centralized were handled by the home office and an expanding core of vice presidents were charged with keeping close tabs on the performance of individual stores. The company would hire a new regional manager every time they added ten to fifteen new stores, depending on the size of the region, and a new divisional vice president would be hired in Cleveland for every five to seven regional managers. Bonuses were granted based on the performance of those directly below them on the organizational chart. If the stores under a regional or district manager saw an increase in fees collected—assuming those financial gains were not washed out by bad debts—they would receive a bonus for that month. If not, well, the disappointed divisional managers chewed out their regional managers, who in turn dressed down the laggards among their store managers, who also were paid bonuses only if their numbers rose.

  Store managers tended to have a year or two of college on their résumés; assistant managers typically had high school degrees. The managers were flown to the mothership for four days of intensive training and then, according to a Check Into Cash document, “closely monitored on a daily basis for two to three months.” While in Cleveland they were given a policy manual that they were instructed to treat as if it were the word of God handed down from the mountaintop. The manual spelled out in intricate detail the most mundane of tasks, from the proper storage of bank receipts to the number of times a day a manager should phone a bank to see if a customer’s postdated check (the check a customer had written when initially taking out the cash advance) was good. There were daily business reports that were to be faxed to the company headquarters at the end of each day and also weekly and monthly summaries.

  Study, evaluate, jigger, refine. With time Scoggins and company perfected their system for scouting out new locales. First they would seek out a town’s name-brand grocery stores and discount retailers. The Holy Grail was a shopping center anchored by a Walmart, but a shop close to a Kmart or a Kroger was also pretty much a guaranteed winner. The next choice was typically a strip mall because it tended to offer cheap rents and ample parking. Trial and error taught the Check Into Cash brain trust that they should cluster stores rather than renting wherever a scout happened to find a good spot. Clustering meant better oversight and a more efficient use of marketing dollars. It wasn’t uncommon for Check Into Cash to open one store in an area and then open a bunch more, even if that meant opening branches no more than a few miles apart. On average a new store would start showing a profit less than five months after opening. By its ninth month, it had typically generated enough cash to cover the initial start-up costs.

  The new stores all looked exactly the same. Uniformity meant expediency—the ability to move in quickly and cheaply while also helping to build a brand. By 1998, a Check Into Cash team could open a new store in less than two weeks at a cost of $20,000. The new look conjured up something like a bank branch, though one outfitted by the local Office Depot. The walls of each new store were painted the same pale yellow, its floors covered by the same industrial-strength tufted mauve carpeting, the furniture made of particleboard finished with the same cherry wood veneer. Male employees were instructed to dress in a starched blue or white cotton shirt and tie; female employees were told to wear similarly professional attire. Clothing expenses would be borne by the employees, who were paid salaries in the high teens or low twenties.

  When Jones first got into the payday business, he was cautious about how much Check Into Cash would lend a borrower, but he gradually loosened those guidelines and by the late 1990s the company established the lending standard that it still uses today: A person can borrow as much as one-quarter of his or her monthly paycheck. Predictably, that increased the proportion of people unable to pay back the money they had borrowed (the percentage of loans the company wrote off doubled from 2 percent in 1993 to 4 percent in 1998) but the company’s financial statements from that period show that the change made economic sense. The increased revenues more than made up for the jump in people who failed to pay back a loan. Profits soared.

  Jones, as well as McKenzie and the Davis brothers and others, moved into Ohio. They competed out in California and in Missouri, North Carolina, and Washington state. In 1997 Check Into Cash generated $21 million in fees; it brought in that same amount through the first six months of 1998. By then, the average store in Jones’s growing archipelago of shops was generating $46,000 in profits. The only thing stopping him, Jones concluded, was a shortage of money. He sold his collections business. He started meeting with investment bankers about a possible public offering. It was time, Jones decided, “to really throw the hammer down.”

  Four

  Confessions of a Subprime Lender

  DURHAM, NORTH CAROLINA, 1980–1998

  When conservatives defend the Bush administration against the charge that its devotion to deregulation helped bring about the 2008 global economic collapse, they like to talk about the past. The real culprit wasn’t unbridled capitalism as it was practiced in the early years of the twenty-first century; it wasn’t missed opportunities to rein in strange new creatures, such as credit default swaps and collateralized debt obligations, that had been birthed by Wall Street. Instead, fault lies with all those inept if well-intentioned liberals who forced otherwise sober bankers to extend credit to marginal borrowers to buy houses they couldn’t afford. They blame legislation like the Community Reinvestment Act, or CRA, a Jimmy Carter–era law that forced banks to make loans in every neighborhood in which they had branches.

  Allan Jones, though, is more specific. He blames the evaporation of trillions of dollars of global wealth in only a few months’ time on just one man: Martin Eakes.

  It’s easy to see why Jones might name Eakes. It was Eakes who, in the mid-1990s, convinced the Federal National Mortgage Association—Fann
ie Mae—to help his organization, the Center for Community Self-Help, create a first-of-its-kind secondary market to buy and sell subprime mortgages. With Fannie’s backing, Eakes and Self-Help were able to buy up billions of dollars’ worth of subprime loans from banks across the country and repackage them into mortgage-backed securities sold on Wall Street. It was the failure of so many subprime loans buried in mortgage-backed securities that accelerated the global credit crisis.

  There’s no doubt that Eakes possesses a revolutionary’s desire to change the world. Eakes and Self-Help started making home loans in the mid-1980s to African-American families and others of modest means. As if targeting the kinds of neighborhoods other banks expressly avoided weren’t enough of a challenge, Self-Help deliberately sought borrowers with a credit score below 620 “because we wanted to prove that this number says as much about the lack of wealth in a family as it does the lack of character, which was the dominant stereotype at the time,” Eakes said. Over the years, nearly half the homebuyers who have received financing through Self-Help have been black or Latino and nearly half were single mothers at the time they took out a loan. Its borrowers paid an interest rate around a percentage point above the going conventional rate and a fixed 1 percent in fees and points. That was more than enough, he found, to compensate him for the additional risks he took lending to those of modest income.

  Eakes himself never put up much of a fight when someone dubbed him a subprime lender. “It used to be, we were happy to describe ourselves as subprime lenders,” said Eric Stein, a top Eakes aide until taking a post inside the Obama administration as deputy assistant Treasury secretary for consumer protection. “We would say, ‘We’ve been subprime lenders since 1984,’ or whatever.” Self-Help has dropped that sobriquet but Eakes is unapologetic about making loans to all those single mothers with tarnished credit and meager savings. If he harbors any disappointment about his years as a subprime lender, it’s that Self-Help never made nearly enough loans and that the secondary market didn’t grow larger than it did. “I’d rather put my faith and my money in a person who knows what it means to work hard,” Eakes told me when I visited him, more than a year after the start of the subprime meltdown, “than someone who has paper credentials.”

  In person, Eakes seems an unlikely candidate for bringing the worldwide capitalist system to its knees. He’s on the short side, about five feet, five inches tall, a wiry and good-natured man in his fifties who seems more jokester than master of the universe. He has an old woman’s cackly laugh and a tendency to playfully propel his eyebrows into a dance to punctuate a point. He certainly hasn’t grown rich off subprime mortgage lending. When I visited with him, he was driving a sixteen-year-old Chevy Corsica with a moldy backseat that for years had a crack that ran the length of the back window. Eakes’s foes, and they are many—“half the people I know would take a bullet for me,” he likes to joke, “and the other half want to fire the gun”—work hard to blacken Eakes’s name so I feel obliged to check: His is among the bigger homes on his block but that’s only because he lives in a working-class neighborhood in Durham, North Carolina, where homes sell for $150,000 to $250,000. He meets frequently with bankers, politicians, and regulators yet owns a single suit, and his wife, Bonnie Wright, still cuts his hair to save money. He claims, and Wright confirms, that he has never had so much as a sip of alcohol in his life.

  Eakes had tried warning others about the coming collapse in subprime as early as 2000. That’s when he stood up at a meeting convened by the Federal Reserve to report that overpriced subprime loans were a growing problem across the country. If anything, he made a pest of himself trying to sound the alarm about what he saw going on around him. He is not a man without connections. He has met a president (Clinton) and I heard him speak at a one-day conference sponsored by the Federal Deposit Insurance Corporation (FDIC) that also featured appearances by Ben Bernanke and Henry Paulson. He has testified before Congress at least a dozen times. Yet to Eakes these appearances only underscore how little clout he truly has. “If they had listened to me up in Washington, we wouldn’t be in this mess,” he cackled. In 2002, he created the Center for Responsible Lending (CRL) to fight predatory lending in all its forms, whether overpriced and destructive mortgage loans or any of a long list of products entrepreneurs had devised to grow rich off the working poor over the previous decade or two. If anything, people inside Self-Help chide themselves for having taken so long. “We were way late to this fight,” said David Beck, a longtime Self-Help staffer who handles media and policy for Eakes. “Some people here thought we were embarrassingly late.”

  It’s an interesting question whether Martin Eakes was a culprit in the Great Crash of 2008, but his creation of the CRL seems a more reasonable explanation for how Allan Jones came to blame him for the subprime meltdown. The payday loan has taken a close second behind the predatory subprime mortgage as the CRL’s top issue. Eakes and his organization were behind the payday lending industry’s first big political loss in the late 1990s and they would play a critical part in every big loss payday would suffer in the ensuing years. Unsurprisingly, Eakes was involved in the Ohio fight over payday lending that preoccupied the industry through most of 2008.

  At his home, Eakes has a framed photo of himself in Ohio, posing in front of a roving billboard that his payday foes had leased specifically to discredit his organization as a “predatory charity.” It’s one of Bonnie Wright’s favorite photos of her husband, who is smiling happily despite the smear. The attacks help to sustain him, Wright said—and on occasion cause him even to betray the memory of his beloved mother. A few years back, Eakes told me, someone inside the payday industry tried scaring him with the news that they had created a $10 million fund not just to counterbalance the CRL’s attacks on the industry but also to destroy his reputation. “My momma raised us that any level of pride is a sin,” Eakes said. “But that got me pretty close to making me feel real proud.”

  His mother was the bleeding heart in the family. A demure college graduate from the mountains of western North Carolina, she would make sure to show up at the polls if for no reason other than to cancel out the vote of her husband, a Jesse Helms Republican. “You could say I grew up genetically confused in terms of my politics,” Eakes said. It was more than just politics. His mother, with her simple adages and generous heart, was frequently described as a “living saint.” His father, by contrast, was a tobacco-chewing farm boy who taught himself the heating and air-conditioning business and then grew rich installing systems for businesses around Greensboro. The elder Eakes was outspoken and opinionated, a real brawler. “He makes me look tame,” Eakes said.

  Allan Jones saw his birth as a sign he was destined for greatness. Eakes’s birth seemed a testament to his determination. His mother had tied her tubes after having her first two sons but then gave birth to this one, a so-called “blue baby” whose very survival required an immediate blood transfusion. Eakes’s friend Gordon Widenhouse recalled when the two played Pee Wee football together. Eakes was scrawny and small but, Widenhouse said, “Martin always insisted on playing nose tackle.” The position normally calls for someone beefy and wide but “that was Martin; he wanted to show you how tough he was.” Marshall Eakes recalls the time a bigger kid challenged his brother to a fight—and the bigger kid got the living tar knocked out of him. “What sums up Martin,” Marshall Eakes said, “is a refusal to give up, a refusal to give in, a refusal to lose.”

  Eakes was around eleven years old when his parents moved into a white brick mansion with a two-acre farm on the southwestern edge of the Greensboro metro area. His father wanted to teach his sons a love for working on the land but the move seemed to have had the opposite effect. “All that experience taught us is that none of us would ever want to be farmers,” Eakes said. The senior Eakes miscalculated on a second front as well. “What he didn’t realize,” Eakes said, “is that the community he moved us to, like many rural communities in the south, was ninety-five percent black.” A
nd so this red-haired son of the Old South with a love for basketball spent much of his time running with a largely African-American crowd, and a housing activist was born. He saw how hard the mothers and fathers of his friends worked and how modestly they lived. “The people I grew up with would do anything they could to pay back their loans if ever anyone gave them a chance to borrow money,” Eakes said. “I know that on a gut level.”

  Over lunch Eakes chose to tell me three stories from his childhood, all relating to race relations in Greensboro in the second half of the 1960s and early ’70s. These three events shaped his life, Eakes told me. The first took place when he was eleven or twelve, in the office of the preacher of his church. Eakes had a good friend from the neighborhood and he was there to ask to let his friend join the congregation so they could both play football in the church league. His friend, an African-American, had accompanied him. Eakes remembers the preacher being kind about letting them know the friend couldn’t join their whites-only church, but he also remembers the tears that welled up in his friend’s eyes. “He says, ‘I don’t understand,’” Eakes said. Neither did Eakes. “Little kids don’t understand why we have to tolerate inequity—which is a pretty good trait,” he said.

  The second event happened during the integration of the Greensboro public schools in the late 1960s. Eakes was fifteen at the time and in the ninth grade. There was one black student on their bus and it bothered Eakes to watch the way the other kids taunted and abused him. After several weeks Eakes stood up next to the kid and declared, “I’m not going to let you pick on this person again.” That prompted a bigger boy at the front of the bus to walk straight at him and, without a word, smack Eakes to the ground. Yet what sticks most with him, Eakes said, was the reaction of the kid he was standing up to protect. “He pulls me up to the seat beside him and says to me, ‘You can’t fight hate with anger, you can only show people who you are by how you live your life.’”