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I asked Berman if he and Ally had scotched the merger because of severe problems brewing in his portfolio. On July 9 I spoke to Don Berman to get his firsthand view of how America’s wage earners will weather the crisis. It was the death of the Ally-CardWorks merger that confirmed his worst fears: “I thought there might be a soft landing up until the CardWorks deal got canceled.” As one prominent investor who has prospered by betting on the sector told me on background: “My theory is that abandoning the deal showed that there would be all kinds of problems coming in consumer finance.” He also noted that the key metric for subprime is unemployment, and that “when you have a hiccup in unemployment, you have problems.” He went on to say that to nix the deal, both sides must have seen far worse times ahead than even the scale of delinquencies the markets were expecting.

They reckoned that the cancellation was a bellwether for a meltdown in subprime. The companies’ decision to walk, in and of itself, raised a red alert for money managers that specialize in backing low-income lenders. Brown, Ally’s CEO, provided no details on the reason for the breakup, stating only, “Given the unprecedented market conditions resulting from the COVID-19 global pandemic, Don Berman and I…believe it’s in the best interests of our customers and stakeholders to terminate the agreement.” Wall Street cheered the breakup, boosting Ally’s shares that day by 12%. On June 24, Ally issued a press release declaring that it had “mutually agreed” with CardWorks to scuttle the union. The second-largest pending financial services merger of 2020, behind only Morgan Stanley’s $13 billion acquisition of eTrade, soon fell victim to the pandemic.

Then the coronavirus crisis pummeled the outlook for all consumer credit, but especially for the low-income folks hardest hit by unemployment, making the merger look even more like a loser and sharpening the descent in Ally’s stock. When the inevitable recession arrived, the skeptics worried, subprime borrowers would revert from their unusually terrific payments record to the normal level of much higher delinquencies. That the announcement caused such backlash is somewhat surprising, given that jobs were plentiful, and low-income borrowers were making their payments most reliably, and suffering the fewest defaults, in decades.īut investors fretted that Ally was paying a big price at the peak of an unusually strong credit cycle. Ally’s shares slid 11.5% that day to their lowest level since 2014. When Ally Financial, the nation’s leading auto lender, announced that it was purchasing CardWorks for $2.65 billion on Feb. And their doubts recently helped scotch a big merger deal for CardWorks that would have brought Berman over $1 billion. Analysts and money managers are a lot more pessimistic.

Still, his best bet is that the low-income consumers who lose their jobs first, but then get hired back fastest, will on a relative basis actually outperform middle-class borrowers through the crisis.

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Berman is no Pollyanna he warns that we won’t see the full picture until the waves of government support run out. The CEO of CardWorks, America’s second-biggest subprime credit card lender, tells Fortune that his customers learned plenty about the benefits of prudence from the financial crisis, and believe it or not, they’re in better shape than before the pandemic struck. No one in America better understands the risks and rewards of financing America’s wage-earning consumers-the folks locked out of traditional banking but hungry for credit-than Don Berman.