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    Announcing the release and availability of Predatory Lending: Toxic Credit in the Inner City, the 100-page non-fiction advocates' afterward to the novel Predatory Bender: America in the Aughts.  The first (sample) chapter of Predatory Lending: Toxic Credit is below on this intentionally text-only page; the first section of the novel Predatory Bender is available here.   Some reviews: Paul Elie in Commonweal ("a brilliant act of subversion"); American Banker; and here (UK), in context of financial fiction genre. .  CBS MarketWatch of April 23, 2004, says the non-fiction section has "global statistics and first-person accounts, and quotes the Rev. Jesse Jackson that the author "is an enemy of predatory exploitation." The Washington Post of March 15, 2004, calls Predatory Bender: America in the Aughts "the first novel about predatory lending;" the London Times of April 15, 2004, "A Novel Approach," said it "has a cast of colorful characters."   The Pittsburgh City Paper says the 100-page afterword makes the "indispensable point that predatory lending is now being aggressively exported to the rest of the globe." (Click here for that review).

To order, either mail payment here, place credit card order to 1-800-247-6553, or order through (click here, directly to Amazon's Predatory Bender page), or through Powell's Books, or other booksellers.  But why not cut out the middleman, and get it faster, by mailing payment to the publisher Inner City Press here? Each book is $19.95,  add $3.95 shipping & handling for first book and $1 for each additional book.


Toxic Credit in the Global Inner City

An Afterword to Predatory Bender: A Novel of Subprime Finance

Copyright 2003 by Matthew Lee
[ISBN 0-9740244-1-4]

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.

    In prior centuries, this was called debt peonage. Today it is the fate of the so-called subprime serf. Fully twenty percent of American households are described as subprime. But half of the people who get subprime loans could have paid normal rates, according to Fannie Mae and Beltway authorities. Outside it's the law of the jungle; the only rule is Buyer Beware. But this is easier for some people than others.

    Why would a person overpay by so much? In the nation's low-income neighborhoods, sometimes called ghettos or, in a more poetic euphemism, the inner city, there's a lack of bank branches. In the late 20th century, many financial institutions left the 'hood in the lurch. They refused to lend money; they refused to write insurance policies. This is called redlining, since in one apocryphal case the bank drew on a map a line in red pen around the neighborhood to be avoided. The South Bronx was one; so too Chicago's South Side and Watts in Los Angeles. In the District of Columbia, Anacostia and Southeast were allowed to go to seed. The city of East St. Louis nearly disappeared amid weeds and empty buildings. This is redlining, a major explanation for homelessness.

   But the postmodern twist is for the same banks which left to return with loan shark affiliates. It's one thing to sell cups of water for one hundred dollars in a desert. But when the seller is the one who slashed and burned the land, creating the need, it is something else. In the New Testament, Jesus whipped the money changers. The Koran, going further, prohibits the lending of money at interest. But today's new religion is stock-price and it's measured in quarters. In the absence of law there is only the jungle.

* * *

    There are, of course, 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. Worse, if or when Citigroup forecloses on their homes, the settlees cannot raise as a defense the fraud of the loan. That sin's been purged, through the mystery of a nationwide class action the filing of which Citigroup itself solicited. [See Section 21 of the Afterword.]

    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. As Atlas Shrugged, Mr. Greenspan raised his brow. He believes in free markets, while setting the rules of the game with his rates. When friends of his fail -- take Long Term Capital Management, co-run by the ex-Fed Dave Mullins -- he can arrange some new loans. The subprime borrower, however, is on his or her own. When Citigroup bought Associates First Capital in late 2000, the Fed required nothing, not even a public hearing. Subsequently the Fed said it would examine CitiFinancial -- and then dragged this on for nearly two years. There were foreclosures; there was crying. But the Federal Reserve's temple, white marble in front of the Mall, is sound-proofed.

    For the Fed it's enough if banks say they have safeguards. Citigroup, for example, says it does mystery shopping. It tests itself, which the Fed likes to hear. But the test's answer code was passed out in advance. Employees were told in what months they'd be tested, and what the topics were. Not surprisingly, there was a very high pass rate. The list of the failures was kept confidential. As it is in the confession booth, so it is with the Fed: what banks say is secret. One submission by Citigroup had half its pages obscured by magic marker. An application by Lehman Brothers, 500 pages in length, was all withheld except twenty six pages. It is dangerous, the regulators think, for the public to know too much. But how can the buyer beware when the rules are all secret?

    A Fed governor named Gramlich admits there's a problem. The word "scourge" is used, and then quickly qualified. There's a need for study, he says. There's a need for public comment, not against mergers, but on the abstract issue which the Fed puts in quotation marks. "Predatory lending." The banks complain that this term is not defined. But when states propose laws that make the definition crystal clear, the banks lobby against it. It is good to leave it loose, they think. They can say they're against it without changing what they do. When cities pass local ordinances directed at the problem, a concept is invoked that might surprise the Founding Fathers: preemption. When the larger body legislates, the smaller unit can't. Towns in California tried to cap teller fees. The laws were thrown out, at the urging of the Comptroller of the Currency, who "regulates" -- quotation marks are needed -- all national banks. New York has a quaint prohibition on usury, but for naught: any national bank, set up in South Dakota or Delaware, can circumvent it. States pass easy laws to attract lenders' headquarters. There are dozens of banks in Sioux Falls, South Dakota, and an equal fleeing number in Salt Lake City, Utah. It's a race to the bottom: the jurisdiction which regulates least, gets the jobs. Then others weaken their laws to compete. In the U.S. and beyond, it's a jungle.

    There are, of course, the freedoms of speech and of the press. The scourge of redlining is annually exposed, using data that's filed pursuant to the Home Mortgage Disclosure Act. The Ur text of this genre was a series in the Atlanta Journal-Constitution called "The Color of Money." It revealed how African Americans were denied loans four times more frequently than similarly-situated whites. A small bank named Decatur was sued, and quickly settled. The larger banks barely changed their practices. Bank of America, for example, still denies Latinos three times as often as whites, in 2002.

    The new buzzword, predatory lending, is becoming a media mainstay. More graphic even than a loan denial is a widow who's slated to lose her home. Sixty Minutes and Primetime Live have hoed this row for television broadcasts. Even the Wall Street Journal has printed, snickering, the most egregious cases. The first protagonist was The Associates, with its high-rate loans for meat. A man in Alabama paid thousands of dollars in interest and fees to buy his pork and chicken in advance. It was a Page One feature, complete with pencil drawing. But when Citi bought this lender, the Journal applauded the business savvy of Sandy Weill, Citi's once and future chairman. He was feted as CEO of the Year; his donation of blood money for the naming-rights to hospital wings was respectfully reported. If profit's the only measure, then the purchase of loan sharks makes sense.

   If stock prices are like football or movies, as by the media's focus appears to be the case, then reporters need access to the coaches and moguls. This is how the discipline (not to say censorship) works: the grant or denial of access. The financial press needs face-time with Sandy. If they dig in the gutter and expose Sandy's sins, Citi's scoops will be directed to more compliant outlets. This is a global phenomenon: in Edinburgh the Royal Bank of Scotland demanded a particular journalist be taken off its beat. The ink-stained wretch stood tall, and was then encouraged to resign. This was a story it was not in his interest to tell: he would be blackballed. The carrot of face-time, the advertising stick: but who'll watch the watchers?

* * *

    It is important to ask how this madness began. Because it's the largest, we'll start with Citigroup. Its beginning, like its end, was as a subprime lender. Sanford Weill, hard-charging Brooklynite on hiatus, bought a bottom-fishing company that was called Commercial Credit. Its headquarters, then as now, was in Baltimore City. It ran hundreds of storefronts in marginal towns. It lent at high rates and it force-placed insurance. It settled some charges with the Federal Trade Commission; it beefed up its network with a purchase from Barclays.

    But this wasn't enough, for the hungers of Sandy and the team he had built. There was a lawyer named Prince and a math-whiz named Willumstad. Later a woman named Marge Magner joined the cabal. They wanted more and soon they got it, in the form of the much-sued A.L. Williams insurance company. This they branded as Primerica, a slick mix of patriotism and we're-number-one. This was a more visceral scam: rather than wait in the storefront, Primerica would come to you. Like Amway and other pyramid schemes, it recruited new members and gave them commissions. They in turn found new blood, new victims. They asked you your dream right there in your kitchen, then opened their briefcases with documents to sign. "Sell whole life and invest the difference" was their mantra, and it almost made sense. Except that the investments they offered were second-rate and shoddy.

    The trick of Sandy Weill is to cut out the middleman. Why sell others' product when you can brew your own? Or buy a brewery, as the case may be. They bought Travelers Insurance and took on its vaunted name. They bought Smith Barney and left that brand in place. They grabbed Salomon Brothers, then a loan shark franchise called Security Pacific. Driving the onslaught was the profit from storefronts. They developed a system to track their employees. It was mockingly called Maestro: the computer chirped when a sales-chance was missed. "Always be closing," it went without saying. The final trophy Sandy needed was a bank. And soon he would get one.

   There was a problem of course -- but it was only a law. Wall Street's crash of 1929 had led to some restrictions. They called it Glass-Steagall. It prevented insurers and securities firms from also controlling a bank. Attempts had been made to break down this wall, but small banks and consumers had in each case fought back. The last years of Clinton were the best window yet. The market was booming and the Dems had gone corporate. Glass-Steagall remained after a '98 onslaught. Then Sandy gave the wall a push.

   One Monday in April a bombshell was dropped: Sandy'd buy Citi, all firewalls be damned. The New York Post screamed, "The Deal of the Century." Some asked if it would be illegal. "Only under current law," came the answer. Because laws, like history, belong to the victors.

   The range of complaints at the time was quite broad. Commercial Credit had been charged with loan sharking; Salomon Brothers had paid a big fine. Travelers Insurance was said to redline; Smith Barney was arbitrating a slew of sexist scandals, the largest of which was called the Boom Boom Room. At a branch on Long Island, the boys drank Bloody Marys from big garbage cans. Strippers were summoned and then the real meat: the whores. Women who worked there were scoffed at and fondled. When they sued, Sandy's response was mandatory arbitration.

    The first of the bankers' injunctions was this: safety and soundness, a strong financial system like plumbing in a house. To give the largest bank to a loan shark like Sandy: was it wise? Alan Greenspan seemed to like it. It would lead to yet more mergers and the Dow Jones average climbed. This was Greenspan's measure; he saw his mug on glossy. The details of an outmoded statute were much less important.

   There were, of course, opponents. In high postmodern fashion, this text's originator was among them. From the tabloid Daily News, consider this invective: "'For groups that are focused on banking in poor neighborhoods, this is the one to go to the mat on. This is a watershed,' said... the activist attorney behind Bronx-based Inner City Press / Community on the Move. 'They need to get fairer, and if they don't get fairer, their application should be denied.'"

   The how's-and-why's of location and pedigree are not our concern here. Rather, the context: the Community Reinvestment Act is a law that's on the books. To combat redlining, it requires that banks serve the poorest of neighborhoods. It is enforced on mergers, through comments to regulators opposing the deals. Let's call it ICP -- in Spanish, La Prensa del Pueblo -- and jump forward in the action. A hearing is held, at the Fed's castle near Wall Street. Travelers, it seems, is not without defenders. With the money from storefronts, Sandy's bought friends. He's gotten a hospital wing named after himself. He is repairing, and renaming parts of, Carnegie Hall. Sandy's consigliere Chuck Prince is in attendance, smirking from his entourage, assured of approval. Soon he will be CEO. In this kangaroo court, there's no cross-examination. It's a ritual theater, and not without its costs: "Michael Green, a member of Bronx, N.Y.-based Inner City Press-Community on the Move, had to spend an hour on the subway, miss half of a workday, and bring a Spanish-speaking translator to the hearing on Citicorp's deal with Travelers Group. But he said the hassle was worthwhile because it gave him the chance to speak out on how his community would be hurt. 'It is very important to come, because maybe they will take it more seriously,' Mr. Green said through a translator."

   Among the things lost in translation is the will of the people. The money on the table -- $83 billion -- is simply too much. The merger is approved; the law be damned. What's now called Citigroup is not without a plan. Having broken the law, they will now have it repealed. The Senator in charge is a Texan, name of Gramm. He too knows a chance with he sees it: he will repeal Glass-Steagall if another law goes down. The CRA, Gramm says, is nothing but extortion.

   To counter this charge, there's a trade association. The National Community Reinvestment Coalition, it is called, with an office near the White House. There are meetings and then there's the closer. His name is Robert Rubin and he is king of the Wall Street liberals. He ran Goldman Sachs and then, per Time, he ran the universe. He assuages Gramm by reducing the scope of the CRA law. Then he declares victory and takes a job at Citigroup.

   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, ride jets, wear flashy gold watches like Charles Plumeri. Primerica holds revival-like meetings in Madison Square Garden. It's a form of religion: heaven re-branded as economic freedom. The National Association of Securities Dealers holds the keys to selling stock. It's called the Series 7, or among its initiates, simply The Seven. 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...

    Predatory lending has gone mainstream in at least two ways. It affects more and more Americans and is taken overseas. The second way is culture: the time has come for a movie about the Wall Street loan sharks. The Enron scandal is dramatized for television, structured around a romance so its ending can be happy. Does this conform to the structure of the human mind and its hunger for stories? Or is it a way to make individuals, and therefore a one-off, the systemization of fraud?

    The script for this story is not in need of fiction. It is not always photogenic: there are dusty fax machines and hours above them; there is legal research and the opening of mail. The documents, however, tell stories of their own. A travel budget, to film it, is required: the expression on the faces of HSBC directors in London and Hong Kong, for example. Contra Hollywood, it does not have a neat ending. It is America in the Aughts. The struggle is ongoing, like everything worth doing.

Selective Notes on Sources

1 - "HSBC wants to export it": Wall Street Journal, November 15, 2002, "HSBC Sets $16 Billion Deal for Household International."

2 - "This is called redlining": see, e.g., ABC News Nightline, April 10, 1995, Transcript # 3621: The Community Reinvestment Act [and Inner City Press/Community on the Move’s victories in the Bronx].

3 - "the Fed said it would examine CitiFinancial": 87 Federal Reserve Bulletin 600, September 2001, "Citigroup - European American Bank."

4 - "Gramlich admits there's a problem": Financial Times, March 26, 2001, Pg. 29, "New Fed Proposals to Curb Growth of Predatory Lending."

5 - "in Edinburgh the Royal Bank of Scotland": The Scotsman, August 29, 2001, Pg. 1, "Legal Threat to Royal’s Mellon Deal;" see also, Thue Guardian (London), June 4, 2003, "Royal Bank's U.S. Arms Faces Allegations of Race Discrimination," by Jill Treanor

6 - "Some asked if it would be illegal": see, e.g., American Banker, April 14, 1998, Pg. 5, Activist Group Opposing Citi-Travelers Merger."

7 - "From the tabloid Daily News": N.Y. Daily News, April 8, 1998, Pg. 55, "Merger Rivals Emerge: Consumer Groups Draw Line in the Sand."

8 - "the watchers must go... New Zealand": see, e.g., Hong Kong Standard, April 29, 2003, "Advocacy Group Tries to Stop [HSBC-] AMP Deal."

9 - "Predatory taken overseas": see, e.g., Financial Times, April 4, 2003, Pg. 18, "Big Lenders Forced to Bank on 'Untouchables' of the Past;" and 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 section]

To order, either mail payment here, place credit card order to 1-800-247-6553, or order through (click here, directly to Amazon's Predatory Bender page), or through Powell's Books, or other booksellers.  But why not cut out the middleman, and get it faster, by mailing payment to the publisher Inner City Press here? Each book is $19.95,  add $3.95 shipping & handling for first book and $1 for each additional book.

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