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Predatory
Bender
Toxic Credit in the Global Inner City
Jack
in The Bronx
The West Farms Mall was
built in the former South Bronx in the second year of the new
millennium. While ostensibly the fruit of three decades of community
struggle, the land beneath the mall was owned by Anguilla-based
EmpiBank. The anchor tenant, too, was a part of Empi's empire: a
storefront office of the high-rate lender EmpiFinancial. Jack Bender
had worked for EmpiBank on the outskirts of Charlotte, North Carolina,
the so-called Queen City. He was offered the position of deputy
branch manager for EmpiFinancial in The Bronx and he took it.
And so it was that Jack
Bender parked his Ford Taurus under the towering halogen lights that
late-May dawn, fumbling with his keys to open the storefront of
EmpiFinancial.
It was Jack's custom to
come to the office an hour early, alone. He poured himself a cup of
yesterday's cold coffee, slipped into the machine a dry filter-bag and
pushed the orange "On" switch. Jack used this silent hour to review
the promissory notes his staff had managed to cajole from South Bronx
residents the day before.
Bertha Watkins had agreed
to pay twenty-four percent interest for a $2,500 loan to buy a new
bedroom set at the Sicilian Furniture outlet on 161st Street. Gina
had creamed her for credit insurance too. Two hundred dollars a
month, prepaid, to protect a garish canopy bed that EmpiFinancial
would never foreclose on because it couldn't be re-sold. Jack nodded
as he reviewed Gina's handiwork. She was getting more and more
vicious, which was just what EmpiFinancial liked in its employees.
Vicious and smiling. Jack closed his eyes and pictured the closing:
"This way if you die, Ms.
Watkins, you can rest easy that no one will come repo your beautiful
new bedroom set. This protection, this peace of mind, costs only
pennies a day."
Jack chuckled, lighting
his first unfiltered cigarette of the day. Pennies a day was the
classic phrasing, impervious to challenges from state attorneys
general, or from Bush II's Federal Trade Commission, if for some
reason they freaked out and sued. Any dollar figure was composed of
pennies, wasn't it? EmpiBank's chairman was paid pennies a day --
63,562,600 pennies a day, to be precise. Jack has calculated it.
$232 million a year, all told. Divide by 365, multiply by a hundred
and you had it. Jack was lighting his second cigarette of the day
when Gina came in, her shoulder-length hair not as neat as usual.
"Gina, baby," Jack said,
standing up from his desk. "I like the way you reamed this Bertha
Watkins. The credit insurance on the bed? It's priceless."
Gina smiled but inside she
cringed. This all wasn't what she'd expected when she'd paid to
attend EmpiFinancial's seminar at the Courtyard by Marriott conference
center by LaGuardia Airport. "The sky's the limit," the trainer had
said. "You'll be sellin' a good product -- always remember that we
have a product that people want -- and you'll be getting EmpiBank
stock options that have never decreased in value. Never!" The
trainer jangled his gold Rolex watch -- Patek Philippe, perhaps: from
the audience it was hard to see -- and clicked to the next slide of
his PowerPoint presentation. How after a year selling personal loans
EmpiFinancial would train them down at its corporate campus in
Baltimore to take the Series Seven, so they could pitch variable
annuities to retirees. "You'll be workin' for Wall Street," the
trainer said. "The sky's the limit."
That EmpiBank was based on
Anguilla -- to Gina it sounded like a kind of lizard -- was not
explained. Gina figured it was just smart tax planning. Who wanted
to work for a company that was a sucker for the government anyway?
If they didn't know how to manage their own money, what would they pay
you with? Gina answered Jack without looking at him too closely.
"We can flip her in a month," she said, going to the coffee station
and filling her cup. "There's no way she can afford the monthly
payments. She'll be back in here before summer's out and we can rip
her on the refinance too."
"That's my girl," Jack said.
Gina left the coffee station without putting in the non-dairy
creamer. She didn't want Jack to get within five feet of her. The sky
was the limit..
Somewhere Micah Levine was
thinking: bait and switch. Actually Micah was picking a jury on 161st
Street and the Grand Concourse, just eight blocks west, in the case of
a baby whose forehead was pierced with forceps by a Filipino
doctor-trainee who'd worked forty hours straight -- but that's another
story, for later.
* * *
Elizabeth or the
Apocalypse
In Midtown Tom Bain watched or played
at watching the Bloomberg machine because that was his job. He was a
stock analyst whose beat was the euphemistically-named field of
"specialty finance," otherwise known as subprime lending or, less
politely, loan-sharking. Bain tracked publicly-traded loan sharks and
issued research reports on their future prospects under different
interest-rate scenarios. Bain had concluded that the Federal
Reserve's interest rate moves had little impact on the loan-sharking
field. The customers were not, the catch-phrase went, "interest rate
sensitive." In his off-hours Bain didn't attend to the Wall Street
niceties: the subprime customers were desperate, or ignorant; in any
event, they didn't rush out to refinance when the Fed lowered rates,
as it did after the September 2001 plane-bombing of the World Trade
Center. Bain had used to work there, across the street from the
Towers in Seven World Trade.
The building didn't get hit by a plane
but it collapsed nonetheless. By then Bain was in his studio
apartment in Battery Park City, watching the chaos and breathing the
dust. He drank three six packs of beer that day, and now had gone
back to smoking pot, taking crystal meth and ecstasy, partying away
the few hours he was not glued to his Bloomberg screen. Occasionally
he thought about his girlfriend from college, who hadn't cared about
money at all -- she read Emily Dickinson for fun, for God's sake.
She'd gotten married then divorced and now lived in Greenwich,
Connecticut. Once a week or so Tom thought about calling her and
trying to revive things. But it was probably too late. He was at the
tail end of being a young Turk and it was already too late.
Sometimes Tom took crystal meth at
lunchtime. Maybe al-Qaida would blow the whole thing up, the whole
island or the whole country, and none of it would matter anymore. For
now he analyzed EmpiFinancial's tracking stock, breaking out its
fundamentals from those of its EmpiGroup parent, and issued reports
touting its business model as positively Darwinistic. His college
girlfriend would have liked that phrasing. And so again he thought of
calling her. Anything to avoid ending again at midnight standing
naked in front of the plate glass window of his living room waiting
for al-Qaida's planes to give his life meaning.
This afternoon, though, he couldn't
get naked, couldn't take drugs, had to put on his tie and squint his
eyes like any other Midtown wolf. Empi's chairman was presenting, as
they called it, at the Securities Industry Association's 21st Annual
conglomerates conference. They'd be a Q&A and Bain was expected to
ask a question about EmpiFinancial, whether the same model could work
equally overseas as it did in the United States. Maybe Bain would get
to take a trip to kick the tires of Empi's 200 percent interest rate
loans on bicycles in India. Bain traveled three or four times a
month, always first class. Since "The Event," he'd gone to
Birmingham, Alabama, to spot-check AmSouth Bank's home equity loan
portfolio and meet -- which meant drink with -- its risk-management
staff. He'd gone to Charlotte, North Carolina, where he snorted six
lines of coke in an absurd skyscraper with a guy who issued lines of
credit to payday lenders. He'd interviewed a wannabe loan-shark in
Cincinnati, who spent half his time ranting about riots and ingrates
and Over-the-Rhine. Pittsburgh, where you could smoke in the airport
and the steel industry had apparently entirely disappeared. His next
step was Southern California, where many loan sharks liked to put
their headquarters, million dollar faux Mediterranean villas
with home-offices with maps full of pushpins on the wall. Maybe he'd
do some surfing, in the three-foot waves of Laguna Beach. But now he
had to mock-grill Empi's chairman, issue a glowing report and then get
high.
Since the collapse of Seven World
Trade Bain had been working out of temporary digs in one of the dozen
faceless office blocks on Park Avenue north of Grand Central Station.
The street was wide and filled with well-tailored despair. The SIA
conference was in the amphitheater of the building that used to be
Bankers Trust, before BT got taken over and most key functions moved
to Frankfurt. Globalization cut both ways -- witness EmpiGroup's
tax-dodge shift to Anguilla. Empi's chairman Sandy Vyle spent three
months a year down there, getting as sun-burnt as a blood-red beach
ball. He must have just returned, because up on the stage, standing
alone at the podium with a white wall behind him, he looked to be on
fire. Vyle wore a bright yellow tie and one half-expected him to pull
a tropical drink out from under the podium, a daiquiri with a
turquoise paper umbrella, some houseboys and a native girl physical
therapist. Vyle was bioviating about EBIDA -- Earnings Before
Interest, Depreciation and Amortization -- as Bain walked in. Tax
wasn't mentioned; taxes had been evaded a long time ago. Bain hadn't
missed much. He found a seat near the front and loosened his tie so
he could speak when the moment came.
Vyle had supposedly named a successor
but he still ran the show. He thought he would live forever and
perhaps that had been arranged down on Anguilla. Maybe he was
video-taping corporate pep-talks for the next decade, doing an
as-told-to memoir with some sycophant journalist, buying spare organs
in Chile and keeping them on ice. In business school, Vyle was all
that Bain had wanted to be: the hard-charging Brooklyn-born
hard-lender who now ruled Wall Street from a tropical tax haven. Now
Bain no longer knew what he wanted to be when or if he grew up. He'd
worked on a boat one summer; he supposed he could do it again if al-Qaida
destroyed his nest egg's value.
On stage, Vyle was racing through the
consumer finance numbers. Delinquency rates had been stemmed, Vyle
said, and more and more sales finance contracts were being converted
into home equity loans, the hammer of the threat of foreclosure, the
very definition of having them by the balls. Bain jotted down the
phrase about sale finance conversions. When the Q&A came, Bain asked a
question. Some in the audience laughed, that the supposedly-expert
analyst didn't know this basic scam.
"I'm glad you asked, Tom," Vyle said,
smiling hearty and false. Vyle had a photographic memory for the
stock analysts who covered Empi: he knew where they lived, and you
knew what that meant. "These are, you know, private label cards,
loans made through retailers, all at twenty-plus-percent interest but
what's most promising is our demonstrated ability to convert
these loans into liens, to lower the rates slightly in exchange for a
mortgage on the borrower's house." Vyle smiled contentedly.
Bain's face was turning red; he
regretted now asking such a rudimentary question in this public
forum. So he tried to make it seem like a set-up: "But how can you
include in next year's projections this same rate of conversion? With
the economic slow-down eventually the pool of home equity will be--"
"It's all explained in the footnotes,"
Vyle cut in. "We've stress-tested our model under more than
sixty-four scenarios. I'd happy to speak with you off-line, Tom."
"That'd be--" But Vyle had already
pointed to the next questioner. And soon Bain would be high and
naked, waiting for Elizabeth or the Apocalypse.
End of section
- More of this sample chapter is available on
http://www.innercitypress.org
Predatory
Lending
Toxic Credit in the Global Inner City
An Afterword to Predatory Bender: A
Novel of Subprime Finance
One: This is
How It Works
Borrowing money is a way
of life and death. To buy a home or start a small business, to build
a dam or fight a war: it all requires finance. It is doled out by
banks and their casino called Wall Street. In alleyways from The
Bronx to Beijing there are loan sharks as well, offering fast cash and
then collecting with baseball bats and foreclosures. That the World
Bank and the International Monetary Fund do this as well will be
explored later. We start with transactions in their simplest form:
two thousand dollars, say, to buy needed household goods.
In the United States in
the first decade of the 21st century there are many storefronts
offering such loans. Some are old -- Household Finance and its sister
Beneficial, for example -- and some are newer-fangled, like
CitiFinancial. Both offer credit at rates over thirty percent. The
business is booming: the spreads, Wall Street says, are too good to
pass up. Citibank pays under five percent interest on the deposits it
collects. Its affiliated loan sharks charge four times that rate,
even for loans secured by the borrower's home. It's a can't-miss
proposition. Even if the economy goes South they can take and resell
the collateral. The business is global: the Hong Kong & Shanghai
Banking Corporation, now HSBC, wants to export it to the eighty-plus
countries in which it has a retail presence. Institutional
investors love the business model and investment banks securitize the
loans. These fancy terms will be defined as we proceed.
The root, however, the
fodder on which the whole pyramid rests, is the solitary customer at
what's called the point of sale. It's a magic trick, really, perhaps
a form of bad religion, the way the points and fees can be added to
the money that's lent. CitiFinancial and Household Finance both
suggest that insurance is needed. This they serve in a number of
flavors -- credit life and credit disability, credit unemployment and
property insurance -- but in almost all cases, it is included in the
loans and interest is charged on it. It's called "single premium" --
instead of paying each month for coverage, you pay in advance with
money on which you pay interest. If you choose to refinance, you will
not get a refund. It is money down the drain, but at the
point-of-sale it often goes unnoticed.
Take, for example, the
purchase of furniture. A bedroom set might cost two thousand
dollars. The sign says Easy Credit, sometimes spelled E-Z. The
furniture man does not manage these accounts. For this he turns to
CitiFinancial, to HFC or perhaps to Wells Fargo. While the Federal
Reserve lends money to banks at below five percent, these
bank-affiliates charge twenty or thirty or forty percent. You will
have insurance on your furniture: to protect you, they say, from
having it repossessed if you die or become unemployed. Before the
debt is discharged, dead or alive, you will have paid more than the
list-price of a luxury car or a crypt with a doorman.
Midway you'll be approached with a
sweet-sounding offer: if you'll put up your home as collateral, your
rate can be lowered and the term be extended. A twenty-year mortgage,
fixed or adjustable. The rate will be high and the rules not
disclosed. For example: if you satisfy the loan too quickly, you'll
be charged a pre-payment penalty. Or, you'll pay slowly and then be
asked to pay more, in what's called a balloon. If you can't, that's
okay: they knew you couldn't. The goal is to refinance your loan and
charge you yet more points and fees.
If it's a regulated business, where
then are the regulators? One of them's the same cabal which sets the
rates: the Federal Reserve. The Fed has jurisdiction over all bank
holding companies, including Citigroup, Morgan Chase and Wells Fargo.
Each owns a subprime lender. Bank of America, among other things,
underwrites the predatory loans. But the Fed, at least under
Greenspan, has had its eye on bigger, more ideological quarry. And
so there are, of course, non-federal opponents. Consumer watchdogs
and community-based groups, and, seemingly in a different sphere,
class action lawyers. State attorneys general also play a role: just
prior to HSBC's bear hug, Household International settled with states
for half a billion dollars. Citigroup, given the political juice it
enjoys, paid half that amount, to six times the victims. These
settlements, in the language of Wall Street, are a cost of doing
business. At most, Citigroup pays back sixty cents on each dollar it
stole. In exchange it gets a waiver: the people accepting the
settlement checks cannot sue Citi again.
While this may sound like
organized crime, that is not how it's put at the time of recruitment.
To get their employees, the CitiFinancials and HFCs of the world don't
say "come and be predatory." Citi for example says, come get on the
train before it leaves the station. You will work for Sandy Weill.
He has always doubled money; why should it now be different? The
hardest-chargers are given a dream: one day they too can sell stocks.
It's a form of religion: heaven re-branded as economic freedom.. From
loan shark to Wall Street: that is the trajectory. That and a journey
to the East: the 21st century, it is said, will belong to Asia. And
there the predatory lenders will be. They salivate to enter China,
with its one billion pawns, its mud-brick homes to lend against.
Citigroup buys five percent of a bank; HSBC has already got eight.
Soon it will be all for sale. And so there the watchers must go.
From Sichuan and back; from Xinjiang and New Zealand. The revolving
door between the industry and its regulators; the sick flow of money
that can still now buy elections -- all of it must change. New songs,
new plays, new forms. New ways to bottle wine, and also to sell it.
Or to give it away...
A Note on Sources
"And so there the watchers
must go" -- see, e.g., Hong Kong Standard, April 29, 2003,
"Advocacy Group Tries to Stop [HSBC-] AMP Deal." See also,
Wall Street Journal, November 15, 2002, "HSBC Sets $16 Billion Deal
for Household International;" Financial Times, April 4, 2003, Pg. 18,
"Big Lenders Forced to Bank on 'Untouchables' of the Past." See
also, Newsday, April 16, 2003, Pg. A51, "Activists [at] Citigroup
Meeting." On redlining, see ABC News Nightline, April 10, 1995,
Transcript # 3621: The Community Reinvestment Act [and Inner City
Press/Community on the Move’s advocacy work in the Bronx]; Newsday,
November 30, 1994, Pg. A32, "About Banks and The Bronx: Fair is Fair."
For a less
cryptic (and more global) approach, see "Community Reinvestment in a
Globalizing World: To Hold Banks Accountable, From The Bronx to Buenos
Aires, Beijing and Basle," by Matthew Lee, in Organizing Access to
Capital: Advocacy and the Democratization of Financial Institutions,
Philadelphia: Temple University Press, 2003; another chapter, on
international predatory lending, is forthcoming from Praeger.
End of
sample - Longer excerpts are available at
http://www.innercitypress.org
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