Introduction

I received my first bank loan when I had no credit history to speak of, no credit cards and no idea what a credit rating was. Oh, and no collateral. The banker, from National State Bank in Boulder, CO, came to my 2-bedroom cabin west of Boulder, saw a few loudspeakers I had built, interviewed me, and decided I was a good credit risk. Assuming that he wanted at least some form of security, I eagerly offered him the title to my ‘66 VW bus, which I had purchased used for $600 a few years prior. “No thanks.”, he said, “We are lending you the money personally.”

The banker was white, as am I. As was just about everyone in Boulder. Would he have lent me the money if I was black? Would that have tilted his view of my character and prospects? To avoid even having to address such questions, the lending industry has turned to an all-numbers approach to lending. Must that be the end of giving consideration to character, drive and potential in lending money, or in business decisions in general? In our diverse world, can we be trusted to make decisions based on things like trust and character?

That is the subject of today’s 10-minute episode. 

Continuing

There was no credit check involved in my first loan. No loan portfolio filled with numbers about income, net worth, credit history, collateral or a business plan. The banker liked what he saw, and lent me the $5K I needed to get my business off the ground. And in 1971, that was real money. From that meager start, with a believing banker, my company grew to be the 2nd largest independent audio/video chain in the Rocky Mountains.

The banker used his subjective judgment, and made a ton of money for his bank over the years of doing business with my growing company. More importantly, an entrepreneur, me, was given an opportunity he would never have had if the bank had been forced to go purely by the numbers.

We have many other instances where loans are made without regard to numbers-based creditworthiness. Student loans come immediately to mind. The student--or a parent--can sign for as many and for as much as they’d like. No questions asked. About work history, credit history, wage prospects after graduating with that degree from that college, etc. Nothing. Sign and get the money. And there is no trust test here. In the end, the taxpayers will pick up a trillion plus dollar tab, either from mounting individual defaults, or government forgiveness.

Another example was exposed in the aftermath of the 2008 financial crisis. The Federal government had been putting pressure on lenders to make home mortgage loans to people who were simply unqualified. The lenders responded by making tens of thousands of bad loans--loans that could not be repaid. Wall Street added to the mess by consolidating these bad loans into bundles with other, better backed mortgages, and sold these bundles off as mainly good loans. When the bundled loan buyer realized he had been had, he looked for the “greater fool” and re-sold the package. Inevitably, this house of cards crashed, and the financial markets crashed with it, bringing on what was called the Great Recession of ‘08. (Does this remind anyone of Robet Louis Stevenson’s “The Bottle Imp?”) Again, there was no trust test here, and the taxpayers have already picked up this tab.

One of America’s favorite movies is, “It’s a Wonderful Life.” The protagonist, George Bailey, played by Jimmy Stewart, is the head of the Bailey Savings and Loan Company. Sacrificing his dreams for a larger life outside of the fictional small town of Bedford Falls, George dedicates himself to the Savings and Loan. And he makes that sacrifice because he is committed to fulfilling other people’s dreams, specifically the dream of owning their own homes. When Bailey’s S&L lends money, it is clear they know and trust the borrower. Trust.