It was the spring of 1985, and I was in my second year as a reporter for The Record, a small weekly published in my home county an hour north of Baltimore.
A state-chartered thrift, Old Court Savings and Loan, failed – spotlighting all sorts of unseemly behavior about the institution's insiders, as well as folks who "did business" with it. The collapse – which resulted in 35,000 depositors having their accounts frozen (some wouldn't be paid back until the 1990s) and cost the state of Maryland millions of dollars – also highlighted the dark side of financial regulation.
For an aggressive cub reporter like me, the collapse was indoctrination by fire. I was introduced to the "land flip," where a single piece of property was sold three or four times in a single day – with each transaction adding 50% or more to the land's assessed "value."
And I learned about the changing culture of the once-staid banking and thrift industries.
A Money-Making Noun
The lending business used to be a simple one – so simple, in fact, that it was said to be governed by the "3-6-3 rule."
Here's what that meant: During the four decades that spanned the 1950s through the 1980s, the lending industry was so stable that the standing joke was that bankers could take in deposits at 3%, lend the money out at 6% – and be out on the golf course by 3 p.m.
Deregulation turned the market on its head – especially with S&Ls. New rules let thrifts venture into commercial real-estate lending – even taking stakes in projects. And once-staid thrifts – originally created to finance home mortgages in their immediate communities – went global, advertising for deposits and attracting them by offering the highest possible rates (11.5%) on the "jumbo" certificates of deposit (CDs).
Money poured in, bolstering the risk the S&Ls faced.
In short, deregulation was a game-changer, an "agent of change" that altered the field of battle on which thrifts waged financial warfare.
Those game-changers come along more than you might expect. Shah Gilani, a retired hedge-fund manager and editor of the Capital Wave Forecast service here at Money Map Press, refers to these game-changers as "Market Disruptors."
Don't confuse this with "disruptive" technology – an adjective.
He's talking about "Disruptors" – a noun – and each one an agent-of-change entity all to itself.
Disruptors come from every facet of life – economics, politics, weather, energy, education, finance, investing, and, of course, technology. And they are paradigm-shifting, rule-bending, playing field-altering catalysts, Shah told me during a long talk last week.
And while the Wall Street veteran employed a bit of wit as he talked, his main point was clear…
When Disruptors are present, profit opportunities are at their apex.
"Think about it, Bill: Disruptors are already changing how we communicate [smartphones]; how we date [Match.com, eHarmony]; how we mate [Tinder… or so I've heard]; what we eat [genetically modified and so-called "super foods"]; how we work [Monster.com, Jobr]; how we get heat, cooling, and light [fracking]; how we get around [Uber and Tesla]; how we get where we're going [GPS] – and where we stay once we get there [Airbnb]," Shah said. "It's exhilarating – but it's daunting, too. What investors need to realize is that hidden behind each of these changes is a major opportunity to make money."
That's what prompted me to think back to the Old Court debacle and the S&L crisis of the mid-'80s.
You see, financial Disruptors have again struck the banking-and-lending sector.
In the 1980s, it was deregulation that "disrupted" this key part of the finance market.
This time around, it's technology – the Internet – and the "crowdsourcing" mentality that's creating an egalitarian, open-to-the-masses marketplace culture.
Lending has been opened up to the masses.
"William Shakespeare, in "Hamlet," tells his audience, 'Neither a borrower nor a lender be' – in essence saying to avoid both borrowing and lending," Shah explained. "But a new lending model has opened up a rare investment – one that offers high yields and capital-appreciation potential. Usually you pursue one or the other. But that underscores the opportunities that emerge when Disruptors work their magic."
Two Developing Stories
One of the new models that has taken hold in banking is peer-to-peer (P2P) lending. You can join a P2P lending platform in minutes and start "funding" someone's loan request with as little as $25.
The returns can be well above what you'd earn as a depositor – even after you factor in default risks. But, as Shah says, why lend money to strangers – sweating it out until they hopefully pay you back?
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About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.
BDC'S ARE NO RISK-FREE LUNCH
BDC's May Indeed be Making Loans While Regulations Restrict the Large Traditional Banks from undue risks (loaning). The mainline banks abused their franchise and the regulators and politicians reacted with new Laws ( Dodd Frank) and "clipped their wings".
Remember, if you are getting 8% interest or dividends, they are charging their business clients much more and as a result, its another variant of high yield bonds ( "junk bonds"). Risk may lie in the nuances of their borrower's creditworthiness. You can bet their are probably some Cowboy BDC's out there somewhere on the horizon at sunset.
BDC's emerged as non-traditional sources of loans. However, as unregulated entities, I expect human nature to play-out as always. At first they will be beneficial, then in time greed will set in, more people will pile-on and eventually, publicly listed BDC's will crash some day.
It will probably start with some high profile BDC failure that scares the market. A future "disruptor", as you say. Then, everyone watching the news will hear "BDC" mentioned over and over. It will cause shares to sell at a big discount after a long rise.
A interest rate spike could also capitalize such a repricing. Someday, long interest rates must go up. However, it may be quite awhile until that happens or it may not be so long. Risk and uncertainty are unavoidable. Its only a matter of time, because we already have too much (bad) debt at large as it is and human nature is the one constant you can count on in an otherwise changing world.