Buffett's $50 million credit card blunder

By Colin Barr, senior writer


NEW YORK (Fortune) -- Peddling credit cards isn't so easy that a caveman can do it.

That seems to be the conclusion Berkshire Hathaway (BRKA, Fortune 500) chief executive Warren Buffett reluctantly reached last year, when he shut down a money-losing credit card business he had dreamed up for Berkshire's Geico car-insurance unit.

geico_caveman.03.jpg
Making money pushing credit cards isn't as easy as it looks, evidently.

The decision was disclosed in Buffett's annual letter to Berkshire shareholders, released Saturday. The letter called Geico's brief foray into credit cards "a very expensive business fiasco entirely of [Buffett's] own making."

Since Berkshire took over Geico in 1996, the company has grown rapidly, thanks to low prices and an advertising budget that has grown 25-fold to $800 million.

Geico is best known for a series of television commercials featuring a gecko that talks with a Cockney accent. Since 2004, the company also has run spots on TV showing preppy cavemen protesting the claim that buying insurance at geico.com is "so easy a caveman can do it."

Geico has been expanding fast -- it has added 4 million policyholders since 2002 and is now the top car insurer in New York, among other places -- and Buffett says he has long puzzled over which other products the company might dangle before loyal Geico customers.

Against the advice of Geico executives, Buffett said in the letter, he lit upon the idea of a Geico credit card. The Geico Platinum MasterCard was born.

"I reasoned that Geico policyholders were likely to be good credit risks and, assuming we offered an attractive card, would likely favor us with their business," Buffett wrote in this year's letter.

Buffett was so high on the idea a few years ago that he urged Berkshire shareholders to use the card.

"Sign up for the new Geico credit card," Buffett wrote in his 2005 investor letter. "It's the one I now use."

But it soon became apparent that people significantly less well off than Buffett were among the leading users of the Geico card.

The card business eventually ran up $6.3 million in pretax losses before Buffett pulled the plug. Berkshire then sold its credit card receivables for 55 cents on the dollar, resulting in additional losses, Buffett wrote.

All told, Buffett's credit card caper cost the company $50 million.

Of course, this is hardly the first time Buffett has called out a business mistake of his own. In his 2008 letter, he said he did "some dumb things in investments," including a purchase of ConocoPhillips (COP, Fortune 500) stock with oil prices near their all-time high and a bet on Irish banks whose shares promptly fell 89%.

And a $50 million loss over half a decade is hardly worth mentioning for Geico. The insurance company posted a $649 million underwriting profit for 2009 (see editor's note below).

Still, the shutdown decision wasn't a happy one for Buffett, who claims he had brushed off questions about launching the credit card by "subtly indicating that I was older and wiser."

By last year, that assessment had given way to a less uplifting one, Buffett said: "I was just older."

Correction: An earlier version of this story incorrectly stated Geico's 2009 underwriting profit as $649. It was $649 million. To top of page

Just the hot list include
Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Company Price Change % Change
General Electric Co 11.35 -0.17 -1.48%
Advanced Micro Devic... 36.31 0.02 0.06%
Bank of America Corp... 33.18 -0.08 -0.24%
Ford Motor Co 9.08 0.04 0.44%
Walgreens Boots Alli... 62.25 3.01 5.08%
Data as of 4:10pm ET
Index Last Change % Change
Dow 27,691.49 10.25 0.04%
Nasdaq 8,464.28 -11.03 -0.13%
S&P 500 3,087.01 -6.07 -0.20%
Treasuries 1.94 0.01 0.52%
Data as of 5:47pm ET
Sponsors

Sections

Bankrupt toy retailer tells bankruptcy court it is looking at possibly reviving the Toys 'R' Us and Babies 'R' Us brands. More

Land O'Lakes CEO Beth Ford charts her career path, from her first job to becoming the first openly gay CEO at a Fortune 500 company in an interview with CNN's Boss Files. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.