Rebuilding Credit

Arriving at their cubicles on the morning of Wednesday, April 3, employees of troubled credit card lender Providian Financial found their message lights ablaze.

When you work in a ho-hum, midlevel post for a company with more than $20 billion in assets, you do not expect to hear, "Hello, this is Joe Saunders," in the CEO's gravelly Chicago accent over your voice mail.

At least not without cringing.

Based on recent events, the odds that Saunders' message would bear good news were long. Saunders had come to Providian in November, after the previous CEO left in disgrace. Waves of layoffs have been besieging the company, which, during an improbable and mercurial rise to industry prominence, elevated the sneaky, slimy reputation of credit card lenders to new heights. Its marketing tactics were so suspect that it earned the largest federal fine ever slapped on a credit card provider. And this was a company whose honest business premise -- aggressively seeking out vulnerable customers with spotty or nonexistent credit histories (the so-called "subprime sector") -- basically involved exploiting the financially challenged.

The past eight months, however, have been a pretty good argument for the power of bad karma: After it was learned that accounting irregularities had concealed the company's business plan just long enough for top executives to dump their stock, most of Providian's leadership resigned. Subsequently, 10 percent of the company's workers were laid off. And Providian's stock, once worth more than $66, plummeted as low as $2 before bouncing back to its modest current price of around $7.

The message that morning, though, wasn't announcing more layoffs -- which Saunders has promised. Neither had the company been sold or folded.

The message contained a three-minute pep talk.

"I thought this might be a good time to talk about the kind of company we're trying to build," Saunders said. "It is easy to look good when we're giving out good news, but when we decline a customer's credit, when we call to collect a debt, when we have to let an employee go or terminate a business relationship, those are the key moments. And at those moments we will always remember decency because all of us know now how it feels to get bad news. If we can do that ... then people will say and we will know that this company believes in basic decency."

From topic one, "decency," Saunders moved to "clarity": "Our marketing will be clear so our customers know what they are buying, and our disclosures will be clear so that our investors know exactly how our business is doing ....

"Will we ever get to the point that everything is perfectly clear, or that we are conducting all of our activities with perfect decency? No," said Saunders, his tone suddenly flashing a wary knowingness worthy of Father Knows Best. "It is a great thing to work for a profitable company, but if you want to build a franchise with long-term value, making profits at the expense of core values is a fool's bargain.

"We will not be fools."

Not again, at least.

In its short history, Providian Financial has been an extremely profitable company rarely associated with the words "decency" and "clarity." Unless, of course, they followed the phrase "lack of." But that, says a batch of freshly imported executives, was then.

Today, even if Providian didn't want to change, with its losses still accelerating it doesn't have a choice. Staying in business requires, among other things, drastic adjustments in whom the company lends to and how it markets to them. "In essence," company spokesman Alan Elias says, "we're creating a new Providian."

But most startling of all, perhaps, is that the new company envisioned by Elias and his colleagues won't just be smaller and smarter.

The reincarnation of Providian, which had arguably the worst reputation in one of the most universally loathed industries, will be nicer. "We don't even use the word '"subprime' anymore," Elias says. "Because, to us, it's kind of like '"subhuman.'"

In retrospect, the rise of Providian looks nearly as dramatic and improbable as its fall. But the entire arc can be explained by the singular focus of the company's first chief executive.

Shailesh Mehta had a one-track mind, and that track was growth. When he joined the small subsidiary of Kentucky insurer Capital Holding in 1986, the company managed only about $414 million in outstanding balances. In a little more than a decade, its cards would be in one of every eight American wallets.

After taking over the company that would become Providian in 1989, Mehta had a singular goal and a revolutionary approach to achieve it. A masterful problem-solver with mathematics degrees from Case Western University (where he graduated first in his class) and the prestigious Indian Institute of Technology, Mehta eschewed traditional credit-scoring methods in favor of his own studies of customer behavior.

Mehta's ideal customer wasn't a frugal one. Providian wanted chargers who took on loads of debt and paid only the minimum amount each month, without defaulting. One much-written-about Providian method involved sending unsolicited checks to prospective customers that could be cashed instantly, and then paid back at a high interest rate. Anyone who took on the high-interest debt immediately would be accepted. Declining the checks probably signaled debt-wariness and, as such, could be cause for rejection.