BOFI Seeking Alpha

http://seekingalpha.com/article/3672236-bofi-boiler-rooms-ba…

This was posted awhile back and I just looked at it today. It does raise some worrisome issues, but it also says this…

The article mentions a related loan company named On-Deck. On-Deck is making “paycheck lender” type of loans to businesses at sky high interest rates using “scumbag” boiler room tactics…

So, in other words, it appears that OnDeck’s network of boiler rooms and unseemly loan brokers passes on loans to OnDeck, who subsequently passes them on to BOFI to originate. BOFI originates the loan, earns origination fees, and in turn, OnDeck buys the loans immediately back from BOFI. Why does OnDeck go through all this maneuvering to originate a loan? Because BOFI has a federal banking charter. This is of critical importance because the laws of some states may otherwise prohibit OnDeck from issuing the loan. As OnDeck describes:

SO BOFI is just laundering money for a fat fee. From a moral and ethical point of view that is apprehensible, but if you want to invest in BOFI, it might stay a cash cow off the fees. You could argue that BOFI is not at risk for their loans going bad, because they only hold a loan for a day. But if OnDeck gets gets nailed by the Feds, then BOFIs money fountain dries up.

Thus, by OnDeck’s own admission, it appears that BOFI may be using it’s federal banking charter to assist OnDeck in circumventing state banking laws that otherwise might prohibit the loans from being originated. Known as “rent-a-charter”, this untested model appears fraught with potential regulatory risks. The OCC’s own comptroller has historically stated that “the OCC has opposed arrangements in which third parties effectively ‘rent out’ the preemption privileges of a national bank for the sole purpose of evading state law”…
(details…) As a result, OnDeck likely has comprised roughly 15-25% of BOFI’s C&I and specialty originations in recent quarters. This is a material amount and given the obvious risks, it’s fair to question the sustainability of this income stream

This all sounds pretty shady and pretty believable. It makes me think then CEO graduated from the Enron school of accounting. It makes me want to see him fail miserably, which means I can’t root against him and for the stock. I think I will stay away.

3 Likes

This all sounds pretty shady and pretty believable. It makes me think then CEO graduated from the Enron school of accounting. It makes me want to see him fail miserably, which means I can’t root against him and for the stock. I think I will stay away.

Hi PuddinHead. I read it too and had the same reaction. Where did my lovable wonderful little bank go. Involved in all these shady deals. (This one is clearly documented). It’s like a feeling of being personally betrayed by a company you had been in love with. Oh well…

Saul

2 Likes

Where did my lovable wonderful little bank go.

It is still there Saul you have just chosen not to see it.

Andy

5 Likes

Everyone here who has invested in BOFI has waited anxiously for the H&R Block transaction to clear, to BOFI’s great benefit. That took a long time, due to the scrutiny of the OCC over the deal. The anticipated boost to BOFI’s financials was widely hailed and highly anticipated.

But, those assets were basically loans to consumers against their upcoming tax refunds, often with ridiculously high fees/impugned interest. I have always put those kinds of loans in the same bucket as pay-day loans and other usurious non-standard kinds of loans.

If BofI has found a way to make money in tax refund advances that everyone applauds, why do the same people jeer these high-interest business loans? The interest rates and fees for such loans are not hidden, and such loans are entered into voluntarily by the business. The typical use of such a loan is similar to what Big Businesses call “short term paper” – extremely short duration loans to fund fluctuating cash flow situations. Short term paper provides a significant chunk of the assets that banks and brokerages trade in money-market accounts. These C&I loans are the mom-and-pop version of “sort term paper”, and if used properly, can make the difference between success and failure of a small business. The key here is ‘used properly’… and the high default rate suggests that this is often not the case. So, where ‘short term paper’ carries very low interest costs (due to the reliability of the borrowers), these loans carry much higher costs.

A bank is in the business of making loans and charging whatever fees and interest it deems appropriate to the risk inherent in that loan. Nobody gets upset when Capital One charges 28% interest to consumers on credit card loans. It is understood that there is significant risk of default on credit card loans. Why does everyone get upset when BofI lends money to businesses that it considers riskier, and charges interest and fees accordingly?

Honestly, the whole idea of assigning ‘ethical responsibility’ to a bank is ludicrous. They make business decisions based upon their own internal system of judging a borrowers ability to repay a loan. Period.

That BofI has a diversified income stream is a good thing in my mind. Feeling sorry for borrowers who unwisely enter into contracts is a great human emotion, but looking at the entire picture, these loans are a relatively small part of the BofI portfolio.

I am not buying into the innuendo and suggestions that these short-attack articles make. Thus, I see no reason to change my mind. BofI remains a significant portion of my portfolio.

Tiptree, Fool One guide, long BOFI

40 Likes

They make business decisions based upon their own internal system of judging a borrowers ability to repay a loan. Period.

Except when they don’t as with subprime home mortgages. What counts is their ability to collect, not just from the borrower but from the derivative buyer or the tax payer. It gets even worse when management has no skin in the game: heads I win, tails you lose, and the bank goes broke.

Denny Schlesinger

2 Likes

I read it too and had the same reaction. Where did my lovable wonderful little bank go. Involved in all these shady deals. (This one is clearly documented). It’s like a feeling of being personally betrayed by a company you had been in love with. Oh well…

Saul,

As a psychiatrist, you may have seen this before. The patient is in love with her husband. There are bruises on her arms. She tells you that sometimes the phone rings, and, when she answers with “Hello,” she hears the click of someone hanging up. There are times when her husband “was out with his friends” but the stories doesn’t add up. She has left him twice before, yet she keeps coming back to him. When is enough, enough?

Is this also the story of BOFI? The stories sounds great. The efficiency ratio. The cheap price. The growth. It all sounds enticing that there might be great returns. Maybe it’s the short seller. Should I give them the benefit of the doubt? But there is so much lingering doubt. So many little things that say “it doesn’t feel right”. You want to believe nothing is wrong, but you have a feeling that something isn’t right. Is it time to walk away for good? There are so many other “husbands” who have demonstrated themselves to be honest, reliable, AND a total catch. Would you marry a Garrabrants or would you marry an Aldrich, a Fallon, a Wang, or a Greenberg?

Chris

5 Likes

Chris,
Nail on the head. I got out of BOFI more or less by accident, but I decided not to return because I consider Garrabrants untrustworthy and basically despicable.

I never invested in Walmart or MeDonalds even when their stock price was consistently rising. I felt any company that made mistreatment of their employees a key part of their business model had to take a fall at some point, it’s not sustainable.

Garrabrants not only makes this part of his business model, but puts into personal practice to ensure that it’s part of the business culture.

I too read that article on SA. I wasn’t sure what to make of it because the author was so careful to say “do your own due diligence.” And every criticism is qualified with waffle words like “may” or “could” etc. So, I don’t have much respect for the author either, all innuendo and nothing definitive. But it makes no difference to me. Garrabrants is a sleazy character. I don’t want to entrust my money with the guy.

3 Likes

Garrabrants is a sleazy character. I don’t want to entrust my money with the guy.

I am just curious how you came to this conclusion? Is it from glassdoor posts from people who may or may not have a motive to post a negative review? Is it from all the short articles coming out with that as their intent from people who benefit from the drop in the share price? Do you know him as a person?
How many other bank CEO’s do similar deals? It is the job of the CEO to get the best returns for his/her shareholders.
I don’t know Garrabrants personally, but I do know you can’t judge a person exclusively by what is in the media.
It is not the banks job to make a moral judgement on dealings. It is their job to get the best return for their shareholders.

I very strongly encourage everyone reading this article to do their fact checking on all the points made. After all the author I am sure has a lot to gain by the fall of this stock. You might notice the first story was very factual and easy to fact check. I liked how the author provided links to the material in question. He used that first example to build trust but yet making comparisons with the intent of making negative emotional connections. Later in the article the author started to release a lot more guess work and assumptions that aren’t as easily supported and sometimes downright misleading. As an example toward the end of the article he gives an example of a court case he found. The case is for a structured settlement where the bank offered $15,000 for a payout with a future value of $466,000 which would pay out from 2021 to 2036 if I am remembering the dates right. The article made at least in my case it made me feel as if the bank was approved for this deal and was taking advantage of the situation. Well if you read the full court release you find that this case was more of a hearing to approve or deny the settlement determining if it is fair. One thing the author failed to mention is this case was DENIED and bofi is not getting any money from this. I also want to point out we do not know any details of this case other then the legal document itself. We do not know who approached who or the details of the situation. Maybe the guy had a reason for wanting such a small amount. Maybe that is just what the bank could justify paying given the fact that it wouldn’t even start paying till 2021 which was almost 7 years away by the date of the court document. We just don’t know enough about the situation to make any judgements on anyone. In my view the banks job is to get the best deal they can in the interest of their shareholders. This guy who we don’t know may have had a reason truly his own that would make him willing to accept such an amount. The courts job was to determine the fairness of the deal. I am personally glad the court denied it because it did sound like an unfair deal. Though that was the courts job to determine. It is not the banks job to determine the fairness of the deal. Would you be happy if you owned a company that was knowingly turning down lucrative opportunities when they were presented?
The only thing I want to get across in this specific example is many many things could have happened. We do not know the details of the situation so it is not fair to anyone involved for us to make a call based on such limited knowledge. Sadly I think too many people in todays society are too easily convinced one way or another without getting all the facts. I only encourage you to look at the story from all sides and do your best to get all the facts before making a call.

17 Likes

What an interesting thread!
To hear people’s polar opposite reactions to the same news is quite fun.

The popular opinion generally paints Garrabrants in a very unbecoming light. After listening to him speak on several occasions including THE conference call, I don’t side with the popular vote. I see him as a businessman looking to be successful, legally.

I have an extremely good friend. He works part-time for a company that albeit much smaller, is in the same industry as OnDeck (ONDK). ONDK was mentioned in the short piece as a partner of BOFI. ONDK refers borrowers to BOFI, BOFI executes the loan and collects origination fees, then ONDK buys back the loan from BOFI the next day and services it while collecting the interest payments.

I was astounded at the interest rates my friend mentioned to me. My first question was simply, “Why?” And the answer is also simple. BECAUSE BANKS CAN’T MAKE THE LOAN.

After the subprime crisis, banks ability to loan money has been tightened with a noose. Money sure is cheap today, but in order to be approved, you almost don’t actually need the loan in the first place.

The loans mentioned in the article carry high rates because of high risk. A loan is a contract meaning there is a meeting of the minds and an agreement. There are a lot of people out there who will agree to high interest rates. Some will win and some will lose. I’m happy the BOFI is taking advantage of this opportunity. It also appears they are shedding themselves of actual liability by selling the loans almost immediately while collecting origination fees.

To end, I have two concerns:
First, all of this discourse and concern hurts BOFI reputation.
Second and more importantly, government intervention can cause problems. Here’s what I mean by that. I’m not overly worried about any lawsuits. My concern is a bit longer term. The reason the ONDK’s of the world exist is because it is hard for a small business to get money without a great historical track record. If this cause is realized, bank’s lending restrictions will loosen and hurt lenders who can only survive with super high rates.

Take care,
A.J.

11 Likes

A.J., governments usually fix things by breaking things:

What Is Seen and What Is Not Seen
http://www.econlib.org/library/Bastiat/basEss1.html

One recent example was the strict application of mark-to-market during 2008 before they finally gave it a break (and the Fed bought all the garbage assets at par). I could cite many more examples but I’ll spare the board…

Denny Schlesinger

Denny,

Since the reference was so long, can you explain what you mean please?

I presume it is the government will intervene just as they did in the subprime crisis only to make things worse. As such, this may spell ill for BofI.

Is this at all correct?

Thanks,
A.J.

Why does everyone get upset when BofI lends money to businesses that it considers riskier, and charges interest and fees accordingly?

I don’t think that is it. In the case of OnDeck, BOFI is not making the loan, they are just “laundering” the money because OnDeck can’t legally do it in many states. The short article implied this is on the edge of legality or maybe over it. I can’t know, but if it is on the wrong side, a big slice of income disappears from BOFI. Also, with people like Elizabeth Warren running around, the regulators could suddenly focus on BOFI and bang - the shorts are vindicated and stock plummets.

Right now I see a lot of big downside risks but no compensating upside potentials. That’s all.

4 Likes

A.J.

Is this at all correct?

Yes!

The market is the most efficient price setting machine in existence. It might not be perfect and it might require some regulation to prevent monopolies and cartels, but nowhere in the world has central planning created more wealth than markets. In my view, the markets’ job is to remove all unnecessary profits. The job of trade unions, guilds, trade associations, and cartels is to extract more profit from the market than the market would naturally yield. But the market is a zero sum game, one’s gain is someone else’s loss. Ignore for the moment changes in intrinsic value.

The above does not explain how the market creates wealth, only how the market works. Wealth creation is what is termed an emergent property. Wealth is created by promoting trade. You get wealthy when you trade something you don’t need (worthless to you) for something else you do need (valuable to you).

In my view, any regulation of markets that goes beyond the minimum necessary to keep markets working efficiently (preventing monopolies and cartels) makes markets less efficient. Everyone has his pet peeves or pet projects and it will be difficult to get agreement and I don’t care to discuss specifics. My only point is that excessive regulation gums up the works.

The most beautiful description of markets that I know is I, Pencil

http://softwaretimes.com/files/i+pencil.html

Denny Schlesinger

9 Likes

But the market is a zero sum game, one’s gain is someone else’s loss

Well, I have to disagree with that and if it were true the market would just oscillate around a flat like. Roulette is zero sum. Betting on a coin flip is zero sum.

In my view, any regulation of markets that goes beyond the minimum necessary to keep markets working efficiently (preventing monopolies and cartels) makes markets less efficient

Totally agree.

You get wealthy when you trade something you don’t need (worthless to you) for something else you do need (valuable to you).

Right, and as companies add value to their products, they add value to their company/stock, and that is why it is not zero sum.

2 Likes

Well, I have to disagree with that and if it were true the market would just oscillate around a flat like. Roulette is zero sum. Betting on a coin flip is zero sum.

You missed my closing comment: “But the market is a zero sum game, one’s gain is someone else’s loss. Ignore for the moment changes in intrinsic value.

Denny Schlesinger

Garrabrants is a sleazy character. I don’t want to entrust my money with the guy.

I am just curious how you came to this conclusion? Is it from glassdoor posts from people who may or may not have a motive to post a negative review? Is it from all the short articles coming out with that as their intent from people who benefit from the drop in the share price? Do you know him as a person?
How many other bank CEO’s do similar deals?

Soth,
I came to that conclusion via reading every post for BOFI on Glass Door. At the time, there were more than 50 posts, that represents about 10% of employment at BOFI assuming they were unique posters. Of those 50 virtually 100% were negative, several of them naming Garrabrants specifically and describing rather bizarre behavior for a CEO, borderline mass harassment and possibly crossing the line into EEO violation territory. The very few positive posts were from executive level management (almost as if they had been directed to go post something positive) and even these were pretty vague in nature.

For example, one poster described emails from the CEO, addressed to all employees, written at the wee hours of the morning ranting on political and religious topics. That, in my opinion, is mighty weird (and I think sleazy) behavior. And it possibly constitutes an EEO violation, a well documented one at that.

BOFI, a 500 person outfit has no HR department. In fact, they don’t even have an HR officer. I used to work in a great big aerospace firm. I was in management for 10 years. HR is there, first and foremost to protect the company from litigation (not to provide employee services, though they get that job as well). HR is supposed to stay abreast of the ever changing landscape of state and federal laws (international laws as well if the company engages in foreign transactions) that impinge upon the rights of the human capital employed by the firm. A lot of laws have to do with the special relationship between superiors and subordinates. Because management has control of salary decisions, hiring and firing, promotions and demotions - in other words decisions that directly impact the life and livelihood of the employees their are a lot of laws that are intended to insure that employees are not treated unfairly, that “favors” can not be traded for salary improvement, that an employee can not be terminated without cause, that employee religious or political beliefs, sexual preference, color of one’s skin, age, etc. can not be a factor during considerations of salary or promotions.

I am not sure, but I’m pretty sure that a 10% response rate is statistically significant. Especially considering that this is not a survey response. Rather, the employees who posted had to become aware of the Glass Door site, enroll, engage in the Glass Door process . . . Possibly Glass Door is flawed from the get go. They do not report how many posts are from unique posters. If anyone is aware of a site that consolidates multiple posts from the same person or provides some other technique for more accurate reporting that would be great - but I don’t know of it.

As for the short articles, no, they are not materially important with respect to my opinion of Mr. Garrabrants. I think the guy is sleazy primarily based on the Glass Door reports. In fact, my opinion of many of the bears is that they too are sleazy. All the encouragement for folks to do their own due diligence is pretty obviously insincere, intended to give the impression of objectivity. And the delivery of the information as being highly irregular, without providing any information of what might be considered average for the industry. Everything is cloaked in innuendo rather than outright assertion - so no not at all.

Finally. no I do not know him as a person, but I am reasonably certain that he is one. I do not suspect that he is an alien or highly sophisticated robot. I assume he’s an actual flesh and blood human. An actual flesh and blood sleazy human.

8 Likes

I don’t know anything about the internal woorkings of BOFI but if all those employees were so unhappy they could quit
And as investors we can quit too - sell the stock.
Considering thst even "good " banks are obscure to outside analysis I would not put much money into BOFI stock

OTOH many CEO of sucessful companies are not nice guys. And not all bad publicity turns out to be true.

Do you know for sure they have no HR department? Maybe
they just call it something else. Though it sounds as if the company may have gotten too large to be run by one man in an off the cuff style, more process may be needed.

I came to that conclusion via reading every post for BOFI on Glass Door. At the time, there were more than 50 posts, that represents about 10% of employment at BOFI assuming they were unique posters.

All that’s required to post to Glassdoor is a valid email address. And anyone can set up one or more AOL email accounts, a Yahoo account, and many private email systems allow you to create several addresses (usually 3-5). One person could easily create 6-8 different Glassdoor identities.

Our human resources department found a few types of people who post to Glassdoor: disgruntled current or former employees, current executive-level managers, and competitors or highly motivated short sellers. Generally, though, disgruntled former employees were among the most motivated posters… people with an ax to grind. And their comments were an almost universal disdain for our CEO.

HR is there, first and foremost to protect the company from litigation (not to provide employee services, though they get that job as well).

In my experience, human resources exists to keep everyday workers out of management’s hair and to interview and hire new employees.

HR is supposed to stay abreast of the ever changing landscape of state and federal laws (international laws as well if the company engages in foreign transactions) that impinge upon the rights of the human capital employed by the firm.

That doesn’t happen as much in the real world as you might imagine. And that’s why companies have a legal department. Most human resources people are busy shuffling paperwork and answering benefits questions (or trying to settle various minor grievances). Serious EEO complaints usually trickle up to legal or outside the company to third-party experts for resolution.

As for the short articles, no, they are not materially important with respect to my opinion of Mr. Garrabrants. I think the guy is sleazy primarily based on the Glass Door reports.

That’s kind of the problem with most of the activity on Glassdoor: it’s easy to complain anonymously and create a negative impression of the company and the CEO. It’s a “getting even” forum.

As for the short articles, no, they are not materially important with respect to my opinion of Mr. Garrabrants. I think the guy is sleazy primarily based on the Glass Door reports. In fact, my opinion of many of the bears is that they too are sleazy. All the encouragement for folks to do their own due diligence is pretty obviously insincere, intended to give the impression of objectivity. And the delivery of the information as being highly irregular, without providing any information of what might be considered average for the industry. Everything is cloaked in innuendo rather than outright assertion - so no not at all.

Clearly, the short article writers have accomplished their objective: you distrust the CEO, you distrust BofI, and you will not invest in BofI in spite of acknowledging that the Seeking Alpha articles are “cloaked in innuendo,” lack any real evidence of wrongdoing, and have a clear and stated purpose: to drive down the equity price.

BTW, the fact that Garrabrants is a jerk simply places him on an equal level with most of the CEOs I’ve ever worked alongside. It’s the rare CEO who isn’t full to the top with an extra-large helping of ego occasionally sprinkled with obnoxiousness.

23 Likes

Hello,

My comment on the legality of the On Deck arrangement is that it would be very unlikely that the bank examiners from the OCC missed this activity. While I am personally doubtful that this activity is a sustaining income source for BOFI, I do not think the current income from it is all that material.

As to Right now I see a lot of big downside risks but no compensating upside potentials. That’s all.

Why do you not believe that attaining an additional 8-9 million in net income in the upcoming March Quarter (over and above the traditional 30% growth) from the H & R Block transaction would be compensating upside potential?

We must give the shorts credit. They are savvy in their ability to get press coverage to spread their FUD and they have a very strong coordinated market presence. However, they are profit oriented and will eventually move on to other opportunities. Not to say that they won’t come back some day if BOFI’s stock price gets way ahead of its value proposition. Meantime, a prospective long term holder can see an opportunity to buy a company growing well over 30% with a potential runway to continue that growth for a long time at a price around 12 times the projected current fiscal year’s earnings.

Best regards,

Mike

5 Likes

You missed my closing comment: “But the market is a zero sum game, one’s gain is someone else’s loss. Ignore for the moment changes in intrinsic value.

You are right there. “It is but it isn’t” is always true