Time for Last Rites at Conseco

Editor's note: This column by Peter Eavis was originally published on Jan. 7, 2002. At the time, he examined the problems facing Conseco and warned investors that the company could be forced to file for bankruptcy protection before the end of the year. His analysis proved to be prophetic -- the consumer finance company filed for bankruptcy on Wednesday. Next year, Eavis' columns will be available only on RealMoney.com, TheStreet.com's sister site. Click here to subscribe.

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Conseco, 1982-2002?

While the lender and insurer may well try one last bid for survival, it's almost impossible to see how this debt-laden and cash-starved company can stave off a bankruptcy filing this year. After a truly horrible 2001, the bad news has been quick to come in 2002.

On Thursday, GreenPoint Financial(GPT Quote - Cramer on GPT - Stock Picks), a rival mobile-home lender, said it was exiting the business and forecast that bad-loan losses would skyrocket. The bombshell for Conseco(CNC Quote - Cramer on CNC - Stock Picks)? Applying GreenPoint's projections to Conseco's $25 billion of mobile-home loans would result in losses of $3.5 billion.

If a loss of this size materializes, it would eat a huge hole in the balance sheet of Conseco Finance, Conseco's lending subsidiary, and leave that entity in breach of its bank loan covenants. Granted, Conseco's own loss estimates are much lower than GreenPoint's, but analysts believe GreenPoint is more conservative and accurate in its accounting and credit forecasts.

Also Thursday, Conseco announced that Conseco Finance's chief executive Bruce Crittenden had resigned, to be replaced by Charles Cremens. Then Friday, Salomon Smith Barney analyst Colin Devine, a longtime Conseco bear, downgraded the company's stock to sell, pointing to further deterioration of credit quality and GreenPoint's loss projections. The stock tanked 16% Friday; it was down 66% in 2001.

Conseco didn't respond to requests for comment. Detox wrote frequently on Conseco in 2001. One article, citing employees and internal documents, alleged that the company was using nonstandard lending practices to hide bad-loan losses.

Requiem for a Heavyweight

Salomon's Devine thinks Conseco will struggle to remain solvent. "On a liquidation basis, we do not believe Conseco's common shareholders would receive any value," he wrote Friday. (Salomon hasn't done recent underwriting for Conseco.)

If Conseco were to file for bankruptcy protection this year, it would conclude one of the most dramatic boom-bust stories in the history of corporate America. The company, which originally focused chiefly on insurance, was built almost from scratch by the flamboyant entrepreneur Stephen Hilbert. Though Hilbert's rapid acquisition strategy drew the attention of short-sellers in the '80s, earnings soared, and the bears never tasted success. They had to wait until 1998, when Hilbert massively overpaid for the nation's dominant mobile-home lender, Green Tree Financial, later renamed Conseco Finance.

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