Warren Buffett and His Credit Card Fiasco

Warren Buffett may have thought it was a good idea to go into the credit card business, but his chief executive decided otherwise due to the rate at which the company was losing mine at the end of 2009.

The problem centers around Geico, the auto insurance company which has been famously represented in TV commercials by cavemen and a little gecko as its spokesperson. The company that owns Geico as of 1996 is Berkshire Hathaway, one of Warren Buffett’s companies. Geico made a recent attempt to release credit cards which turned out to be a “very expensive business fiasco” according to a letter disclosed by Buffett himself. As an auto insurance company, Geico has become a major contenders against other players in the industry. As a matter of fact, it is the third largest auto insurance company in the United States right now. Since 2002, Geico has acquired more than 4 million new policyholders and, as a result, has become the leading auto insurance company in many states, including New York.

As a result of the insurer’s major successes, Buffett thought it might be a good idea to issue a credit card to loyal Geico policyholders. Despite the advice from Geico executives, Buffett released the Geico Platinum MasterCard. He felt that policyholders would be good credit risks and if they were offered a credit card, they would be more likely to switch to Geico’s services. Buffett even went so far as to ask people to sign up for a Geico credit card in his investor letter for 2005. He said it was the one he uses for all his charging needs.

Unfortunately, many of the people who signed up for the Geico credit card were not as “well-to-do” as Buffett is. Before long, the credit card aspect of the business had more than $6 million in pretax losses. At this point, Buffettt decided to pull the plug on the Geico credit card and his company sold the outstanding receivables for nearly half of what they were worth. In total, the Geico credit card fiasco cost his company more than $50 million.

Buffett admits to making mistakes in business in the past. This was not the first time he jumped into something that did not work out as he had planned. One time he purchased some ConocoPhillips stocks at a time when the oil prices were at a record high. He also invested in some Irish banks whose shares fell by almost 90% shortly after making his investment.

Buffettt isn’t too worried about the situation, however. While he is not happy about losing money, he said he made a bad decision and while he isn’t as old as a Geico caveman, he has come through the experience a wiser person.