From: nobody@huge.cajones.com (Huge Cajones Remailer)
Date: Wed, 11 Dec 1996 15:07:09 -0800 (PST)
To: cypherpunks@toad.com
Subject: Re: Redlining
Message-ID: <199612112306.PAA19358@mailmasher.com>
MIME-Version: 1.0
Content-Type: text/plain



At 11:25 AM 12/11/1996, Douglas Barnes wrote an excellent article:
>Another interesting aspect -- there's been huge growth in the "making
>loans to folks with non-traditional or bad credit histories" market
>recently, as the market for folks with good credit histories has 
>become saturated. This has been done largely by various NBFIs operating
>outside of the normal "bank" structure, and specializing in certain
>kinds of consumer loans.
>
>It is vitally important to realize that to a bank, a loan is a "product,"
>that they "sell" to customers.  It is how the bank makes money. If
>the market is operating properly, irrational refusals to loan on the
>part of some institutions will create a market opportunity for other
>institutions.

This more true than ever before.  Nowadays, banks commonly find
themselves in the mortgage origination business.  Once a mortgage is
originated, it is packed up with many similar mortgages and sold off
as a CMO.  This means the bank can specialize in what it is good at,
rather than speculating in interest risk.

The CMO market is intensely competitive.  Many people spend a lot of
time looking for misperceptions of default rates and the like.
Traders are not racists when they are trading, God bless their greedy
souls.  If it is really the case that mortgages are not being
originated irrationally, there is an unbelievable opportunity.
Originating mortgages does not require a great deal of capital and the
turn around of what investment is needed should be well under a year.

>The problem with banking & financial services is that they are already
>so heavily regulated, and the barrier to entry is so high, that the
>market seldom operates properly. Thus we see _more_ regulation piled
>on (such as the CCRI) to address the problems that come about from the
>previous piling-on of regulations. 
>
>When there is little competition between banks, this creates a situation 
>which, viewed in isolation, seems "unfair" to those at the fringes of the 
>loan market. The superficial answer to this problem is to force banks
>to lend in areas that are less profitable for them than their traditional
>areas -- at this point banks almost begin to resemble monopoly public
>utilities, which, when you look at the regulations they operate under,
>is almost the case.
>
>The more enlightened answer is to back off enough on the regulation so
>that marginal loan markets become attractive business opportunities,
>and any truly irrational lending practices (e.g. based on race) lead 
>directly to losing business to a competitor.

I would add that the purpose of the regulation is generally not to the
benefit of customers, but the banking guild.  Increased legislation
and control favors people who can afford lawyers or have the political
connections to prevent the need for lawyers.  Regulation favors the
established and not the poor Albanians.

Opening a bank should be as easy as forming a corporation.  There have
been brief periods in U.S. history when this was the case.  I have
heard it worked quite well.  Curiously, preferred stock in the banks
was such a liquid market that it became treated as cash.  Instead of
making a deposit, you could buy some preferred stock.  Note that this
solves rather elegantly the problem of bank runs.

Red Rackham