Confirming every Wall Street stereotype that "ethics are all well and good, but money is more important," the ex-Goldman Sachs banker who wrote a book on whether the bank always put "profits above principles" has started a firm charging extremely high rates of interest (above 100% in some cases) for struggling small businesses... oh the irony.
Steven Mandis was working on a book about whether Goldman Sachs Group Inc. (GS) put profit above principles when he hit upon a new way to make money.
The former Goldman Sachs banker decided two years ago to get into lending money to struggling small businesses, a niche on Wall Street where brokers offer loans with interest rates that can climb past 100 percent to dentists with bad credit and pizzeria owners behind on their bills. To some, it’s the new face of subprime.
Doing god's work?
“If I’m going to do something, I want to focus on a really big problem so it would mean something,” Mandis said. “And small businesses, I mean, this is the heart of everything.”
Small-business lending has yet to recover from the financial crisis. Loans of less than $1 million are down 22 percent from 2007 because of tighter lending standards, Federal Reserve research shows. Even as banks have pulled back from funding businesses directly, Wall Street investors funneled at least $1.7 billion in financing over the past two years to the high-rate lenders rushing in to fill the gap, according to data compiled by Bloomberg.
Investors seeing a chance to profit from the risky loans include Chase Coleman’s Tiger Global Management LLC, early Facebook Inc. backer Accel Partners and Doug Naidus, a former head of mortgages at Deutsche Bank AG, whose World Business Lenders LLC charges as much as 125 percent.
“This is like a payday loan for a business,” said Pat Fossett, a bankruptcy lawyer in Corpus Christi, Texas, making a comparison to costly cash advances for workers. “Unless they’re making a large profit to pay that high interest, they’re shooting themselves in the foot.”
For the good of America...
“There’s this obligation to try to do something to solve a problem in America in my own way,” he said. “Providing capital to people to grow their businesses and to give jobs to people is I think a good thing.”
Not everyone's so excited...
Goins borrowed $122,000, agreeing to pay back $165,920 in about 11 months, according to a copy of the contract. While Stiles was aware of the loan terms, she said they turned out to be more onerous than she thought. Goins furloughed employees so it could afford the sums that Kalamata took daily and then weekly from the company’s bank account, she added.
“I don’t think it’s fair,” Stiles said. “He’s taking advantage of the small-business owners because of the interest rate that he charges.”
But Mendis defends it thus...
“When you put it in a percentage, it sounds big and eye-popping, but you need to have a relative sense of it all,” Mandis said. “Should we let that company just go bankrupt?”
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Whether the detritus of firms should indeed BK or not - especially if they can't function without the need to pay triple-digit interest rates for liquidity - is a tough question. Shamefully, in our new normal, everyone's a winner, there are no consequences, and 'entrepreneurs' believe very idea can be worth a billion dollars (or $5 billion in the case of CYNK) at the flip of a switch. Perhaps the real risk-adjusted cost of capital Mendis is offering should send a message to some that their idea/business is FUBAR... or perhsps he is just another Wall Street extractor.