"Just when I thought I was out... they pull me back in." —Michael Corleone
I did not want to write this essay. I only read one article about a pair of despicable lenders. When reading the profile of the dynamic duo, one feels disbelief, disgust and then the urge to murder. The story then reminded me of another borderline criminal lender who made millions, Josh Sason, profiled by the same writer for Bloomberg. Some elements were different, and the profile reminded me of a third profile, by again the same reporter, of Noah Breslow of OnDeck Capital. Why oh why did these profiles all sound familiar? Details reveal all. Bloomberg dutifully documents it, and indirectly the problem of our FIRE-based economy.
All three despicable lenders engage in a different form of usury by servicing customers who normal banks cannot reach or feel uncomfortable lending to. Here is a line from the dynamic duo of lenders who made a cool $40 million.
Zeines and Hurwitz made their money in a field that’s now called merchant cash advance. It’s a legal way to lend money to small businesses at interest rates higher than Mafia loan sharks once charged. Completely unregulated, last year it surpassed the U.S. Small Business Administration as a source of loans for less than $150,000, according to the industry newsletter DeBanked, one of the few places with reliable information. The business was developed a decade ago in a boiler room full of ex-Lubavitcher Jewish teenagers in downtown Manhattan. They figured out how to hook people such as florists and pizzeria owners with promises of fast cash and discovered just how ridiculous the profits could be—even if it meant driving their borrowers into bankruptcy.
Wow, sounds like a good, honest business meeting an underserved need (eyeroll). If you read the details, these men preyed upon serviced smaller, immigrant-owned businesses. Here is another knock-on effect of immigration that should key people into why some others push for open borders: new sheep to shear. It sounds a bit like a drug dealer. There is a vulnerable client, a little drug is introduced, then a full-fledged addiction begins, leading to a crash. You can hear their defense now: "I'm just makin' a mahket; look, we provide a survice to people dat da banks don't want."
Driving their borrowers into bankruptcy sounded familiar. It sounded a lot like the business model of Magna from another article I read earlier this year. Let us read on about Josh Sason. Mr. Sason operates in a very familiar manner but in a different territory. Please read Bloomberg's words that inform us citizens of his work "creating businesses".
Actually, it’s a little more complicated than that. What Sason discovered is a way to get shares in desperate and broke companies at big discounts by lending them money. Magna has done deals with at least 80 companies. Of those, the stocks of 71 have gone down since the investment. He can still turn a profit, because the terms of the deals allow him to turn debt into equity at a fixed discount. No matter where the stock is trading, he gets it for less.
Magna functions as a pawnshop for penny stocks—shares of obscure ventures that change hands far from the rules of the New York Stock Exchange. His customers have included a would-be Chilean copper miner, an inventor of thought-controlled phones, and at least two executives later busted for fraud. They come to Sason to trade a lot of their stock for a little bit of money. Often they’re aware the deal is likely to be bad for their shareholders.
He does deals with businesses where 90% of the businesses fail, but he still makes money off their deaths. I am surprised shareholders of these firms have not filed any lawsuits since the loans are not in their interest. These actions are "legal, but the loopholes in securities law it exploits are too sketchy for most of the Ivy League types at banks and hedge funds". Read that again. Too sketchy for banks and hedge funds, who when I read about them weekly, are not paragons of virtue and ethics. Legality aside, what disgusting human beings engage in such a dirty business with such questionable ethics? Loan sharks. These are white-collar, legitimate loan sharks. We have an entirely different realm of the financial world (death-spiral financing) from the first duo, but a similar situation and similar tactics: someone raises capital, makes incredibly risky loans at high rates with provisions to protect themselves to desperate borrowers, and it is in an unregulated field. Once again the defense would be that they are providing a service that traditional banking doesn't meet; they never answer why it was not serviced.
The profile of Noah Breslow is just an echo of what you have read in these two other profiles. With the same reporter for all three, one wonders if he just used a template and then played Financial Mad Libs.
Rather than disrupting bank lending, it’s more accurate to say that OnDeck is part of an industry known as “merchant cash advance”—essentially payday lending for businesses. It’s a high-risk market, and interest rates can exceed 500 percent a year, or 50 to 100 times higher than a bank’s. (OnDeck’s rates average 54 percent, according to a document it sent to investors in the spring.) To fuel its rapid growth, OnDeck has worked with independent brokerages, which at one point found takers for nearly 9 of every 10 dollars the startup lent. It’s the equivalent of Priceline getting old-fashioned travel agents to enter orders into its website.
If Google Ventures and Goldman Sachs (GS) represent the prestigious end of OnDeck’s dealings, then merchant cash advance brokers are at the other extreme. The field is rife with unsavory brokerages, staffed by many of the same people who pushed subprime mortgages a decade ago and worked the bottom rung of the stock market in the boiler rooms of the 1990s. One of them is Mario Figueroa, president of Chadwick Cashflow Advances, a brokerage in Saddle Brook, N.J. He got into high-interest small business loans in 2011, shortly after doing time in a Newark halfway house for stock fraud.
Breslow does dealings with fraudsters who did time. Same repeated actions from the mortgage bubble and '90s stock bubble. There is reward for their risk taking. If one were to call them obscene rewards and profits, then you must be aware of the obscene risks they are taking. The media calls for windfall taxation the moment oil jumps in price. The interesting thing to read about Breslow's firm is how the founder bashed merchant cash advance lenders for being sketchy and usurious, but once Breslow took over, the tone changed. They reached out to kiss up to every small-time broker to keep the fees and borrowers coming. Breslow had no scruples working with scumbags.
Now you hit the link because I gave it a funny title. Am I right? Is this a hat trick? Yes, yes it is. Our first dynamic duo was made up of Orthodox Jewish boys turned atheists. Josh Sason is Jewish. Searching around, Noah Breslow is Jewish, too. As I opened this post: every time I think I'm out, the Jews pull me back in. "I'm just making a market" is their answer to every criminal, borderline illegal scam enterprise that they engage in. Porn? Hey, there's a demand! The decline in media? Hey, we just give them the Kardashians they want! I like capitalism and the free market, but I am also smart enough to know that usury laws were put in for a non-theological reason.
Usury laws were put in because one cannot price for all risks. There are two schools of thought: "A price for every risk" and "some risks cannot be priced". The second approach is not just pricing something so that the market can sustain it, but pricing the actual, underlying risk. Your loan and return requirement for a particular risk will be too high for some projects to operate and pay you for your risk. Those projects should not be funded until they can be engineered, designed or altered to fit a lower return, signifying a safer risk. Some loans with your terms might even send a struggling business into bankruptcy (look at the late '80s LBOs vs. early '80s LBOs). Yes, the risk takers should be rewarded and should fail, it's their risk, but why even allow opportunities for mass casualties? It ends up creating asset-stripping opportunities and groups with capital to work the system to create short-term money conduits.
This also gets to the heart of the issue of what should be the goal of a government or governing body. Should we be maximizing the GDP or maximizing societal well-being? Due to FDR and the Depression, we all fell into the "grow grow grow GDP" trap. Our usury repeals were to keep the dollar as the reserve currency and kickstart the FIRE economy era. Payday lenders are an object of scorn by polite society, yet they exist, and the men discussed above are doing the business version of it. We unleashed usury on Americans in the name of anti-discrimination. Home lenders needed the proper rate to lend to minorities, and our usury laws capped them from doing so. We repealed usury laws and watched as, yes, minorities could get home loans... and more baggage came through the loopholes created.
This is our FIRE economy's ugly side. This is due to our desire to paper over the strain and dysfunction of society. We papered over with cash at first and debt followed. These outsized returns on insane risks only exacerbate our misallocation of capital problem. We do not just need to reboot our government. We need to reboot our goals and priorities. We need to resist the sip of money that only leaves us thirsty for more. It is going to take intense soul-searching across society and a reëvaluation of our culture. As a first step, we need to say to loathsome usurers like the men profiled above, and say, "that... is... enough".