Unregulated banks

In the New York Times, Gretchen Morgenstern has an interesting suggestion -- pierce the veil behind unregulated lenders (in this case, a financial corporation operating under Indian law on a reservation with, it is safe to say, no financial experts in its structure) to learn who's really behind it.

There's a lot of it going around. The Times is among several papers to have called attention to the way the biggest banks put money into questionable microlenders operating among the poorest of the poor, so while the Rez may not be implicated in the bulk of abusive lending, the problem is a big one.

Followers of RtO may want to read the whole thing, because, as so often happens in good print journalism, there's a nugget way, way down in the story. This goes to the phony claim that the CRA (and not a market failure) was behind the crash of '08. Morgenstern is an expert on the subject, one of a handful of reporters who saw it coming and published stories that were ignored in the frenzy to make easy money. So her passing remark carries weight:

 

The funding arrangements used by Western Sky and Cash Call are reminiscent of what occurred in the recent mortgage mania. The most egregious predatory lending wasn’t done, for the most part, by big national banks. It was done by smaller subprime mortgage companies like New Century, NovaStar and Fremont General, which made thousands upon thousands of loans.

But these companies wouldn’t have been able to make even 100 loans had they not gotten the money they needed from the big Wall Street banks. The warehouse lines of credit provided by those banks, therefore, enabled the underwriting of billions of dollars in dubious mortgages. Without access to that money, most of the worst loans would not have been written. When Wall Street cut off the credit spigot, these companies folded almost overnight.