Rebuilding Credit

San Francisco's Providian Financial was once the most despised company in the credit card industry. Now, after a humbling fall, it just wants to be loved.

No matter how obvious the Enron comparison seems, don't mention it within earshot of Providian executives unless you're prepared -- or hoping -- to see them erupt.

"Let me explain that, because, frankly, it's a bunch of bullshit," says spokesman Alan Elias, the mere mention of the name turning his face from stern to sour, his tone from guarded optimism to righteous anger. "The mistake we made was an optics mistake, because we determined from a legal perspective that [the bankruptcy change] wasn't a material event [and therefore didn't have to be mentioned in government filings]. We didn't frankly take enough consideration of how the optics of it would look. Hindsight being 20/20, we should have communicated that more clearly to the street. ... But as far as some allegations of trying to hide this or that, it's bullshit."

Elias is sitting at a small conference table in one of the many Spartanly decorated offices on the executive floor of Providian's corporate headquarters at 201 Mission St. The main floor of the office is composed of cubicles with walls so high -- and so apparently sound absorbent -- that it's impossible to tell if anyone is actually working there. Lining the walls surrounding these cubes are the offices of top executives.

Spokesman Alan Elias says new card designs, such as see-through Smart cards, can help give Providian a fresh image.
Brandon Fernandez
Spokesman Alan Elias says new card designs, such as see-through Smart cards, can help give Providian a fresh image.
Konrad Alt runs Providian's office of risk management and reputation.
Brandon Fernandez
Konrad Alt runs Providian's office of risk management and reputation.

Because Elias' office doesn't have a conference table, he's borrowed the office of Warren Wilcox, Providian's marketing vice chairman, who worked with Saunders at Fleet. Today's meeting is supposed to give Elias an oppor- tunity to articulate Providian's survival strategy.

That plan was developed by Saunders' new management team -- consisting of two other recent Fleet expats -- which has the considerable task of cleaning up the mess Mehta left behind. All they have to do is plug the unfathomably large stream of losses, refill the company's drained coffers, and remake Providian as an up-market lender.

The first step was made shortly after Saunders arrived on Nov. 26, when the new CEO promptly sold $8.2 billion of the company's highest-quality accounts to J.P. Morgan Chase for $2.8 billion, money Providian needed to survive in the short-term. It also sold operations in the United Kingdom and Argentina.

The next step was far trickier: The company had to convince the OCC -- which can shut down banks -- that its business plan was viable enough to keep it alive. The OCC process involved a painstaking give-and-take, with the government agency and the bank negotiating the next three years of the company's life in excruciatingly minute detail.

The plan approved by regulators begins with an absolute ban on further lending to the subprime sector. It also mandates hiring freezes, layoffs, and tighter controls on the credit line increases the company once gave away like so much Halloween candy. In addition, Providian has had to reprice its riskiest loans. (That was bad news for its subprime customers, whose interest rates were hiked from 23.99 percent to 29.99 percent.)

And last, the company needs to stifle its losses. That means finding a taker for its massive subprime portfolio.

"I'm very skeptical there's anyone willing to buy it," says Matthew Park, a New York-based Thomas Weisel analyst. "Maybe if the discount is heavy enough."

The problem, everyone from Park to Providian agrees, is a credit card industry phenomenon called "account seasoning," which makes Providian's continued holding of the accounts the financial equivalent of palming a hand grenade. The theory of account seasoning, industry watchers say, is tied to the tendency of new credit card holders to be more diligent about paying off their bills on time. Accounts that will end up defaulting often won't offer a hint of that until at least six months have passed, and sometimes longer. Subprime accounts are always particularly sensitive to seasoning, but they are even more so in Providian's case.

That's because during the third quarter of 2001, when the company was scrambling to preserve a picture of growth for Wall Street, it began issuing cards to customers it would have previously rejected. That wave of accounts figures to be even more prone to drastic losses than the accounts that sank Providian in the first place, and that reckoning is drawing near. "When a company is growing, [seasoning] isn't that big a deal," Park says. "Once you stop growing, it can be like a rabid python in your system."

And Providian has stopped growing. Three months ago, Park says, it would have been nearly impossible for Providian to survive without dumping its subprime portfolio. With the economic picture looking up, however, things aren't so bleak. "Their numbers will be uglier with it, but they'll probably survive," he says. "If the recession were deeper, they would have suffered worse.

"There's no question they were lucky."

(The company's good fortune was evident Monday, when Providian announced it had sold $2.6 billion in higher-risk assets. Also evident was its urgent need to shed the subprime accounts: It took an after-tax loss of $240 million in the deal.)

Park, though, isn't the only analyst who sees the company's fortunes looking up. Even Charlotte Chamberlain, who called trusting Providian the biggest mistake of her career, recently upgraded her rating of the stock to "buy."

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