Loan sharks: the birth of predatory lending PDF
Preview Loan sharks: the birth of predatory lending
TODAY’S PREDATORY LENDING IS YESTERDAY’S PRAISE FOR LOAN SHARKING Looking for an investment return that could exceed 500 percent annually−maybe even twice that much? Private, unregulated lending to high-risk borrowers is the answer, or at least it was in the United States for much of the period from the Loan Sharks recounts the fascinating history of America’s undeclared and ill-defined Civil War to the onset of the early decades of the twentieth century. Newspapers called the practice war on usury and loan sharking from the late nineteenth century through the Great “loan sharking” because lenders employed the Depression. Geisst gives us a well-documented intellectual history of the struggle same ruthlessness as the ocean’s greatest pred- with the nation’s predatory lenders and their effects on American life, weaving our ators. State and federal governments slowly adopted current and ongoing debate over consumer lending through a larger narrative of the laws and regulations curtailing the practice, but history of American monetary policy and banking regulation. organized crime continued to operate much of —Brian M. McCall, Associate Dean and Orpha and the business. In the end, lending to high-margin Maurice Merrill Professor in Law, University of Oklahoma investors contributed directly to the Wall Street crash of 1929. Loan Sharks tells us the history of predatory In Loan Sharks, Charles Geisst takes us on a vivid, detailed historical tour of the lending in the United States, tracing the origins of CHARLES R. GEISST “gangsters and bankers” that “had more in common than their desire for gain.” is a former modern consumer lending to such older practices investment banker who currently is the Ambas- Probing the moral, political, and financial repercussions of usury from the Civil War as salary buying and hidden interest charges. Yet, sador Charles A. Gargano Professor of Finance to the Great Depression, Geisst expertly reveals the extent to which the extortion of as Geisst shows, no-holds-barred loan sharking at Manhattan College in Riverdale, New York. high loan interest from those in society least able to afford the burden exemplifies a is not a thing of the past. Many current lending rigged and sinister market place and must be thwarted as such. Those themes held practices employed by credit card companies, as true then as they do today. payday lenders, and providers of consumer loans BROOKINGS INSTITUTION PRESS —Nomi Prins, author, All the Presidents’ Bankers would have been easily recognizable at the end of the nineteenth century. Geisst demonstrates Washington, D.C. how the custom of charging high interest rates, www.brookings.edu/press especially to risky borrowers, despite attempts to COVER BY PHILIP PASCUZZO control the practice by individual states, is still PHOTO: LIBRARY OF CONGRESS PRINTS AND prevalent. Usury and loan sharking have not dis- PHOTOGRAPHS DIVISION appeared a century and a half after the predatory practices first raised public concern. Geisst_Loan Sharks_hc_9780815729006_Jacket.indd 1 12/30/16 10:17 AM TODAY’S PREDATORY LENDING IS YESTERDAY’S PRAISE FOR LOAN SHARKING Looking for an investment return that could exceed 500 percent annually−maybe even twice that much? Private, unregulated lending to high-risk borrowers is the answer, or at least it was in the United States for much of the period from the Loan Sharks recounts the fascinating history of America’s undeclared and ill-defined Civil War to the onset of the early decades of the twentieth century. Newspapers called the practice war on usury and loan sharking from the late nineteenth century through the Great “loan sharking” because lenders employed the Depression. Geisst gives us a well-documented intellectual history of the struggle same ruthlessness as the ocean’s greatest pred- with the nation’s predatory lenders and their effects on American life, weaving our ators. State and federal governments slowly adopted current and ongoing debate over consumer lending through a larger narrative of the laws and regulations curtailing the practice, but history of American monetary policy and banking regulation. organized crime continued to operate much of —Brian M. McCall, Associate Dean and Orpha and the business. In the end, lending to high-margin Maurice Merrill Professor in Law, University of Oklahoma investors contributed directly to the Wall Street crash of 1929. Loan Sharks tells us the history of predatory In Loan Sharks, Charles Geisst takes us on a vivid, detailed historical tour of the lending in the United States, tracing the origins of CHARLES R. GEISST “gangsters and bankers” that “had more in common than their desire for gain.” is a former modern consumer lending to such older practices investment banker who currently is the Ambas- Probing the moral, political, and financial repercussions of usury from the Civil War as salary buying and hidden interest charges. Yet, sador Charles A. Gargano Professor of Finance to the Great Depression, Geisst expertly reveals the extent to which the extortion of as Geisst shows, no-holds-barred loan sharking at Manhattan College in Riverdale, New York. high loan interest from those in society least able to afford the burden exemplifies a is not a thing of the past. Many current lending rigged and sinister market place and must be thwarted as such. Those themes held practices employed by credit card companies, as true then as they do today. payday lenders, and providers of consumer loans BROOKINGS INSTITUTION PRESS —Nomi Prins, author, All the Presidents’ Bankers would have been easily recognizable at the end of the nineteenth century. Geisst demonstrates Washington, D.C. how the custom of charging high interest rates, www.brookings.edu/press especially to risky borrowers, despite attempts to COVER BY PHILIP PASCUZZO control the practice by individual states, is still PHOTO: LIBRARY OF CONGRESS PRINTS AND prevalent. Usury and loan sharking have not dis- PHOTOGRAPHS DIVISION appeared a century and a half after the predatory practices first raised public concern. Geisst_Loan Sharks_hc_9780815729006_Jacket.indd 1 12/30/16 10:17 AM LOAN SHARKS LOAN SHARKS THE BIRTH OF PREDATORY LENDING CHARLES R. GEISST BROOKINGS INSTITUTION PRESS Washington, D.C. Copyright © 2017 THE BROOKINGS INSTITUTION 1775 Mas sa chu setts Ave nue, N.W., Washington, D.C. 20036 www . brookings . edu All rights reserved. No part of this publication may be reproduced or trans- mitted in any form or by any means without permission in writing from the Brookings Institution Press. Th e Brookings Institution is a private nonprofi t organ ization devoted to research, education, and publication on impor tant issues of domestic and foreign policy. Its principal purpose is to bring the highest quality in de pen- dent research and analy sis to bear on current and emerging policy prob- lems. Interpretations or conclusions in Brookings publications should be understood to be solely those of the authors. Library of Congress Cataloging- in- Publication data Names: Geisst, Charles R., author. Title: Loan Sharks : Th e Birth of Predatory Lending / Charles R. Geisst. Description: Washington, D.C. : Brookings Institution Press, [2017] | Includes bibliographical references and index. Identifi ers: LCCN 2016017493 (print) | LCCN 2016028749 (ebook) | ISBN 9780815729006 (hardcover : alk. paper) | ISBN 9780815729013 (ebook) Subjects: LCSH: Usury— United States— History. | Consumer credit— United States— History. | Finance— United States— History. Classifi cation: LCC HG3756.U54 G453 2016 (print) | LCC HG3756. U54 (ebook) | DDC 332.8/3097309041— dc23 LC rec ord available at https:// lccn . loc . gov / 2016017493 9 8 7 6 5 4 3 2 1 Typeset in Garamond Composition by Westchester Publishing Ser vices CONTENTS Preface vii A Populist Issue 1 1 A Venerable Practice 2 46 Th e States Attack 3 102 Th e Crash as a Credit Event 4 155 Th e Great Depression 5 204 Postscript 232 Notes 237 Index 251 PREFACE Before World War I, a movement began in the United States that has been all but forgotten t oday. It addressed a prob lem that reformers thought they could defeat in the name of economic efficiency and social justice. The prob lem was loan sharking, and the proposed remedy was legislation designed to put loan sharks out of business while replacing regulatory laws that were routinely evaded. The movement was a coordinated attack on loan sharks and their practices. Memories of that movement lasted for about thirty years before fading, but it left a curious legacy. In the 1940s, cartoonist and satirist Al Capp named one of his best- known characters, Fearless Fosdick, a fter one of the movement’s leaders, a New Yorker named Raymond Fosdick. On the other end of the po liti cal spectrum, the founding fathers of the con temporary Islamic finance phenomenon in the developing world cited another of the movement’s leaders, Arthur Ham, also a New Yorker, as a crusader against what they considered to be the epitome of social and religious injustice: charging interest, or riba. Not just excessive in- terest, but any interest. The original Fearless Fosdick attacked interest vii 00-2900-6 fm.indd 7 12/29/16 11:09 AM viii Preface as a menace to New York City, while Muslims attacked it more broadly as a menace to humankind. At the heart of the prob lem was the practice of usury, or high- interest lending, in the United States. Usury has been public enemy number one in most socie ties since antiquity. Despite a three thousand year history, it is still discussed in policy circles as an economic prob lem, overlooking the social prob lems it causes in favor of oft en- antiseptic discussions about market rates of interest and fi nancial intermediation. Few eco- nomic and social issues have the distinction of appearing, in one guise or other, in the Old Testament, canon law, En glish common law, and the Dodd– Frank Act of 2010 as a diffi cult prob lem doing harm to society. Th e primary reason usury has been at the center of so many moral and social debates is fairly simple. Since antiquity, legislators have fi xed the maximum rate of interest. In Rome it was 12 percent, in Elizabe- than Eng land 6 percent, and in the United States, it has ranged from 6 percent to 40 p ercent. But as soon as a rate was set, it became infl exible and out of date. Naturally, exceeding the maximum by lenders became an art, and then a science. In modern times lenders are aided by free market advocates who maintain that such rates are outdated and symp- tomatic of simple- minded adherence to an unattainable ideal. Th e mar- ket should decide how much the poor and the hard- put should pay the lenders of last resort, like loan sharks, for example. Maximum interest rate ceilings are one of the earliest examples of laws passed in one era that do not travel well to another. Th e result was an attempt to circumvent old rates with newer ones that, while usurious by most standards, sought to strike a balance be- tween borrower and lender. Borrowers get funds that may be unobtain- able otherw ise, while lenders are compensated for the risks involved in lending. But the argument does not fi nish there. If the rate is too high at 25 to 40 percent, the fi nancially distressed borrower may never ade- quately get out of the debt cycle. Th e old moral arguments about exces- sive interest lost that battle because the fairness part was defeated by the notions that lenders must be compensated for the risks they incur and
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