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Collateral Damaged: The Marketing of Consumer Debt to America
Sometime in the 1970s and 1980s, the use of credit cards, which had begun as a convenience, began to grow into an addiction. Collateral The Marketing of Consumer Debt to America explains how a nation of savers became a nation of consumers and how Wall Street used consumers' addiction to spending to create the "toxic securities" that threaten to bring about the collapse of the global economy. Geisst looks at the policy implications of the credit crisis and describes how the United States can get its fiscal house in This book connects the dots from consumer spending to credit cards to home-equity loans and back to credit cards.
288 pages, Hardcover
First published January 1, 2009
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January 14, 2013
Somewhat sloppily written - by chapter 3 I've seen two thoughts repeated:
P.13 "Until the seventeenth century, interest was never stated in terms of a percentage but only as an amount to be paid. Six percent was described as six in a hundred (pounds, florin, etc)."
P.46 "One fact about medieval and ancient discussions of interest is that no stated rate of interest was ever discussed, only the number of units to be paid back."
And this pair, more obnoxious maybe because they are the same distance down on facing pages:
P.6 "in today's markets, where the odious term "debt" has been replaced by the more complimentary sounding "credit,"..."
P.7 "what previously had been known as the more onerous term "debt" now took on a positive note. Those in debt were referred to as hahving "received" credit."
I've also had two light bulbs go off, though, so I will finish the book.
The source of the 'payday lending loophole' RI activists are working to close:
P.52 "a piece of legislation caLled the Uniform Small Loan Law (USLL), sponsored by the Russell Sage Foundation and the Household Finance Corporation, which had been founded in 1878, began to be adopted by individual states in 1928 as a way of making the usury laws more flexible. Loans of $300 or less were made to individuals for household items and secured by the items themselves. The small loan law was adopted by 28 states in 1928, and the usury lawd were waived to provide for higher interest, under the assumption that rates would eventually drop."
Well damn. Questions I have - what was the Foundation's interest in these bills, was the HFC purely an industry group, how were the bills pitched, under what mechanism were rates expected to drop?
The shift in estimating the value of an asset that triggered the advent of unsecured consumer debt. The context here is financing the purchase of a car manufacturer.
P.53-54 " until the 1920s, the traditional way of valuing a merger deal was to set the purchase price using the value of the target comapny's assets. Financing for the deal then would raise more cash than necessary, with the excess going to pay the underwriters a handsome profit... Today that excess is called synergy. At the time, it was still referred to as "watering down" a company's assets... The differences in interpretation are reflected in the choice of terms. If something is sold for more than its asset value, its existing equity will erode, or be watered. If it is sold based on estimated cash flows, then its value correctly reflects investors' expectations about the future.
"Morgan made his bid for the Dodge Brothers Company, offering $155 million based on asset value, with $65 million in cash and the balance in securities. Dillon did a more complicated calculation. Originally a bond salesman, he used the tried-and-true method of bond valuation to arrive at his own price. He estimated the future cash flows of Dodge and discounted them by his assumed cost of capital to arrive at the price, which happened to be $20 million more than Morgan's. The icing on the cake was that his offer was all cash. The Dodge family readily accepted...
"Dillon's coup also made him an instant legend on Wall Street, which quickly learned the lessons of discounted cash flows and net present value... The implications for consumer credit were obvious, and a change began in credit financing that would slowly change the face of and expand consumer society. It would now become acceptable to base a person's credit on the future ability to earn and service the debt [rather than solely securing the loan with a physical asset]."
another paragraph to wince about
p.138 "Negative amortization loans were often attached to the balloons so that, after perhaps five years at a low sweetener rate, the mortgage would require refinancing or payments in full. Any interest accrued during the grace period was added to the outstanding amount when it was refinanced, increasing the homeowner's debt burden. This was known as negative amortization."
p.88 "Innovation in consumer credit usually begins by being marketed to those in higher income brackets, with the older concepts being relegated to those in the lower brackets. The result is that those in the lower brackets are still faced with methods thought to have long since disappeared: payday loans, very high interest charges, and punitive installment loans."
P.13 "Until the seventeenth century, interest was never stated in terms of a percentage but only as an amount to be paid. Six percent was described as six in a hundred (pounds, florin, etc)."
P.46 "One fact about medieval and ancient discussions of interest is that no stated rate of interest was ever discussed, only the number of units to be paid back."
And this pair, more obnoxious maybe because they are the same distance down on facing pages:
P.6 "in today's markets, where the odious term "debt" has been replaced by the more complimentary sounding "credit,"..."
P.7 "what previously had been known as the more onerous term "debt" now took on a positive note. Those in debt were referred to as hahving "received" credit."
I've also had two light bulbs go off, though, so I will finish the book.
The source of the 'payday lending loophole' RI activists are working to close:
P.52 "a piece of legislation caLled the Uniform Small Loan Law (USLL), sponsored by the Russell Sage Foundation and the Household Finance Corporation, which had been founded in 1878, began to be adopted by individual states in 1928 as a way of making the usury laws more flexible. Loans of $300 or less were made to individuals for household items and secured by the items themselves. The small loan law was adopted by 28 states in 1928, and the usury lawd were waived to provide for higher interest, under the assumption that rates would eventually drop."
Well damn. Questions I have - what was the Foundation's interest in these bills, was the HFC purely an industry group, how were the bills pitched, under what mechanism were rates expected to drop?
The shift in estimating the value of an asset that triggered the advent of unsecured consumer debt. The context here is financing the purchase of a car manufacturer.
P.53-54 " until the 1920s, the traditional way of valuing a merger deal was to set the purchase price using the value of the target comapny's assets. Financing for the deal then would raise more cash than necessary, with the excess going to pay the underwriters a handsome profit... Today that excess is called synergy. At the time, it was still referred to as "watering down" a company's assets... The differences in interpretation are reflected in the choice of terms. If something is sold for more than its asset value, its existing equity will erode, or be watered. If it is sold based on estimated cash flows, then its value correctly reflects investors' expectations about the future.
"Morgan made his bid for the Dodge Brothers Company, offering $155 million based on asset value, with $65 million in cash and the balance in securities. Dillon did a more complicated calculation. Originally a bond salesman, he used the tried-and-true method of bond valuation to arrive at his own price. He estimated the future cash flows of Dodge and discounted them by his assumed cost of capital to arrive at the price, which happened to be $20 million more than Morgan's. The icing on the cake was that his offer was all cash. The Dodge family readily accepted...
"Dillon's coup also made him an instant legend on Wall Street, which quickly learned the lessons of discounted cash flows and net present value... The implications for consumer credit were obvious, and a change began in credit financing that would slowly change the face of and expand consumer society. It would now become acceptable to base a person's credit on the future ability to earn and service the debt [rather than solely securing the loan with a physical asset]."
another paragraph to wince about
p.138 "Negative amortization loans were often attached to the balloons so that, after perhaps five years at a low sweetener rate, the mortgage would require refinancing or payments in full. Any interest accrued during the grace period was added to the outstanding amount when it was refinanced, increasing the homeowner's debt burden. This was known as negative amortization."
p.88 "Innovation in consumer credit usually begins by being marketed to those in higher income brackets, with the older concepts being relegated to those in the lower brackets. The result is that those in the lower brackets are still faced with methods thought to have long since disappeared: payday loans, very high interest charges, and punitive installment loans."
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