“I don’t hide tattoos, I don’t take earrings out. I just don’t do that, because ultimately if you don’t like who I am, you’re not going to like what I do.”
Who knows what that is supposed to mean, but it’s a quote from Douglas Merrill who, as Bloomberg notes [6], “has peacock feathers tattooed down his left arm, black fingernail polish, [and] chin-length hair.”
Two other things Douglas has are a Ph.D. in cognitive science from Princeton and the online version of a payday lender called ZestFinance.
Now make no mistake, payday lenders are bad because what they do is trap low-income households in a perpetual debt cycle and they do it in the name of providing credit to those who wouldn’t normally have access to it.
In other words: the pitch is that before you think about criticizing a payday lender for charging an APR that amounts to 30%, you should actually think about whether you should be praising them for helping America’s downtrodden debt serfs get into still more debt.
Of course we’re employing quite a bit of trademark sarcasm here. Payday lenders have been proven time and again to be largely predatory in nature, capitalizing off of the desperation of poor people albeit with a business model that comes with substantial risk because.. well... because the business model depends on collecting interest payments from those same poor people who have just been made poorer-er-er by the fact that they took out yet another loan they most certaintly can't afford to service.
Anyway, Fortress is ready to jump in on this to the tune of hundreds of millions:
“I don’t lie about who I am,” [Merrill] said in an interview from the startup’s headquarters among the pawn shops and souvenir stores on Hollywood Boulevard in Los Angeles. “I don’t hide tattoos, I don’t take earrings out. I just don’t do that, because ultimately if you don’t like who I am, you’re not going to like what I do.”
The funding from Fortress, which manages about $72 billion, will help ZestFinance make more of its Basix installment loans, which are capped at $5,000, last as long as three years and carry annual rates of up to 36 percent. Borrowers often use the money to consolidate credit-card debt or pay for medical expenses, Merrill said.
His unusual appearance in the financial world is a luxury he can afford. ZestFinance is among a crop of startups leading a technology-driven push to make lending easier and cheaper. Wall Street firms and other large institutional money managers have taken note, writing big checks to participate in the fast-growing businesses.
Avant Inc., one of ZestFinance’s competitors, said last week that it had raised $325 million from investors including private-equity firm General Atlantic and JPMorgan Chase & Co. Social Finance Inc., which helps borrowers from elite colleges consolidate student debt, said a day later that it raised $1 billion from investors including Japan’s SoftBank Group Corp. and affiliates of Dan Loeb’s hedge-fund firm Third Point LLC.
ZestFinance gained notoriety in recent years for its approach to underwriting some of the most challenging borrowers. By sifting through oceans of data, Merrill and his colleagues created models that are being used to provide an online alternative to payday loans. Still, they’re not cheap: Some carry annual percentage rates of as high as 390 percent.
Right.
What could possibly go wrong here?
Here's a guy with a PhD lending money provided by a firm whose cost of capital is basically zero to borrowers whose credit is terrible and these loans carry APRs that approach 400%.
Let's call this what it is: this is just nonsense and what will end up happening is that these loans will end up in the collateral pool of a CDO at some point and the very same hedge funds and PE houses that are providing the financing will end up betting against the loans they effectively made in a hilarious Abacus CDO redux that mainstreet with neither care about, remember, nor understand, which will be great news for Merrill and Wall Street because that means they can continue to perpetuate the business model.
