Adam Enbar. Tumbling.

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Jul 27

Michael Lewis’s The Big Short is considered the definitive history of the financial crisis. But to understand American finance, you need to understand Ace Cash Express as well as you do Goldman Sachs. Which is why Gary Rivlin’s Broke, USA is a necessary companion. While Lewis tells the story of mortgage-backed assets and the bankers who flogged them, Rivlin tells the story of the underlying mortgages and the folks who bought them. “To me, it was so counterintuitive,” Rivlin says. “People with no money in their pockets is good for business?” But they were profitable. By 1996, there were more payday lenders than all the McDonald’s and Burger Kings in the land combined.

Welders looking for an advance on a paycheck became unwitting cash cows for big banks. Schoolteachers taking out home loans became the collateral for leveraged bets on housing worked out in London and Greenwich, Conn. But before they were Wall Street grist, the working poor had to first become big business.

Unlike traditional banking, it wasn’t about finding good credit risks who could repay their loans promptly. Quite the opposite, actually. The central insight was that you wanted people who couldn’t quite stay ahead of the loan. Then you could use late fees and new loans to bleed them.

- Ezra Klein, on one of the under-reported aspects of the financial meltdown. For a fantastic account of this whole ugly business, see Daniel Brook’s really nice “Usury Country” in Harpers. (via newsweek)

Reblogged 1 year ago from newsweek

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