Give Me Goldman Over Gandhi

I have to laugh when I hear about greedy, unscrupulous financiers supposedly ripping off "hard working Americans." While it might make a sympathetic story on the 11 p.m. news, my own experience in subprime lending led to big losses for me, not the borrower.

Three years ago I wrote about Prosper.com, a micro-lending marketplace where investors have made $183 million worth of loans since 2005. Prospective borrowers post eBay-style ads outlining their credit history and planned use for the money. Lenders bid on pieces of the loan and receive their corresponding share of interest payments. At one point I had invested in well over 1,000 loans. 

Some had rates as high as 36%. And while that might seem usurious to politicians in Washington, the reality is that interest rates on everything from mortgages to motor homes are not arbitrary. As a lender on Prosper, I quickly learned firsthand that the reason credit cards and other unsecured lenders must charge such high interest rates is because many borrowers quite simply do not pay them back.

We’re accustomed to ridiculing bankers as destructive imbeciles who screw the public as they pocket extravagant bonuses. The fact is that banking is a difficult business. Even with many of my microloans yielding more than 25% -- my portfolio lost money as defaults far outweighed interest income. My investment lost thousands and thousands of dollars.

What bothers me isn't losing money - after all, it's a risk I took  voluntarily that was an inconsequential part of my portfolio, rather the relentless demonization of lenders like myself who suffered large losses as a result of borrowers that didn’t pay their bills. According to a 2008 Harris Interactive poll, the majority of Americans blamed bankers for the economic crisis. Only a quarter of those surveyed this year believe banks are trustworthy and honest. 

To default on a loan is one thing. But to default and blame the lender -- that takes moxie.

“Which of these types of companies are
generally honest and trustworthy”? 

Earlier this week Goldman Sachs (GS) CEO Lloyd Blankfein was roundly criticized for saying his company was doing "God's work." Yet in a free market, lenders do perform a vital social function, facilitating people without money to borrow from those who do have money. Both parties benefit and wealth is created. "We help companies to grow by helping them to raise capital” Blankfein told The Times of London. “Companies that grow create wealth.”

Our own history validates his claim. Bankers and moneylenders funded Spain's exploration of the New World, America's colonization and productive advancements ranging from the Model T to the Palm (PALM) Pre. And even with the most altruistic and self-sacrificial intentions, Gandhi or Mother Teresa herself couldn’t have built the Brooklyn Bridge, or Wal-Mart (WMT), or Kubota (KUB), or the Apple (AAPL) iPhone. We could pray day and night for such advancements to miraculously appear or we could, to paraphrase John. F. Kennedy, realize that on earth, God’s work must truly be our own. Bankers do a large part of that work.

I lent thousands of dollars to "hard working Americans” who never bothered to pay me back. Yet in our culture, it’s the lender we demonize, not the borrowers who fail to live up to their end of the deal.

Bankers and financiers are productive, wealth-creating and essential parts of a market economy. To denigrate their efforts is to blame the victim for the scofflaw’s crime.