Was George Bailey Just A Subprime Lender?
It's A Wonderful Life is a heartwarming classic film — but it now seems to have wrecked our economy. Whoops!
Portfolio is taking another look at It's a Wonderful Life and they're wondering if the villain of the film — the cold sensible businessman, Mr. Potter, was right all along.
To figure out the answer, let's take a look at the scene in which George Bailey and the leaders of the town, including Mr. Potter, discuss the fate of the Savings and Loan started by George's father, Peter.
In it, Mr. Potter questions a loan given to a taxi driver to build a house. Mr. Potter says the bank turned down the loan because the taxi driver could not afford the house that he wanted to build — but the Savings and Loan approved it. He wants to know why. George Bailey defends the loan — saying that he inspected the man's finances and could vouch for his character. Mr. Potter believes that loans should not be given out on the basis of character.
Mr. Potter: Friend of yours?
Bailey: Uh-huh.
Mr. Potter: You see? If you shoot pool with some employee here, you can come and borrow money. What does that get us? A discontented, lazy rabble instead of a thrifty working class. And all because a few starry-eyed dreamers like Peter Bailey stir them up and fill their heads with a lot of impossible ideas. Now, I say...
Bailey goes on to defend his father's good intentions and explain that his father never made any money off these ill-advised loans, but that he did help people get out of slums. Then...
Bailey: ... What did you say a moment ago? That people should wait and save their money before they even thought of a decent home? Wait? Wait for what? Until their children grow up and leave them? Until they're so old and broken down that... do you know how long it takes a working man to save $5,000?
Portfolio says that they aren't comparing idealistic George Bailey to Angelo Mozilo — but they are looking a little kinder on poor mean old Mr. Potter:
But consider this: Perhaps Mr. Potter wasn't just a heartless Scrooge. Perhaps Mr. Potter, in the absence of sufficient regulatory oversight, was the one voice of sanity keeping the good people of Bedford Falls from over-leveraging themselves.
Perhaps, if we had all taken Mr. Potter a little bit more seriously, we wouldn't be in this mess to begin with.
George Bailey, Subprime Lender [Portfolio]
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Comments:
@PhilVillarreal: Throw in a payday loan place and some pawn shops and it's a pretty amazing prediction of a lot of current cities. Pottersville must have been a military town.
I was speaking the other day, I believe over latkes, about how Bedford Falls was a better place for not having George Bailey around. Reminded me of the Simpsons episode where Col. Klink showed Homer how everyone was better off with him dead.
Bailey's houses weren't overpriced like Potter's. Lower priced house equal lower payments. Overpriced houses is what ruined our economy.
"Perhaps Mr. Potter wasn't just a heartless Scrooge. Perhaps Mr. Potter, in the absence of sufficient regulatory oversight, was the one voice of sanity keeping the good people of Bedford Falls from over-leveraging themselves."
Perhaps Mr. Potter was BOTH a heartless scrooge and a voice of sanity. It doesn't necessarily make his message useless, just a little lacking in moral authority.
That's the thing, though - both Bailey and Potter are right. Subprime loans aren't evil in and of themselves, when they're used how they're supposed to be used. They're supposed to be given to people who can pay for the loan but who have issues with documentation or regular pay, i.e. self-employed people.
Bailey wants to give out a loan to the self-employed guy because he genuinely believes the self-employed guy will be able to pay it back. That's the point of a sub-prime loan. Potter is worried that Bailey is too willing to accept the risk without the documentation. From a risk-minimizing position, he is correct.
However, there's a big difference between giving a loan to someone you know, and giving a loan to people with falsified documentation, or approving a loan for someone who really can't pay it back. I don't think George Bailey would have given the taxi driver the loan if he didn't think the cabbie could pay it back. That's what the banks have been doing for the last five years.
I seemed to miss the part where Bailey S&L was creating mortgage backed securities. If a bank wants to put itself at risk, they should be permitted to do so. It's when you start to sell that risk to others and claim that it's AAA that you run into the subprime meltdown!
Ooopss...I should have read that more carefully. The article did say he was a Scrooge. My bad.
Actually, here's a thoughtful post that points to why Bailey was right:
"The core idea is that the natural reality of sound credit is that it is not transactional but social."
@Jim: There WAS a pawn shop featured prominently on Main Street.
I should know, I just watched it last night :-)
You have to be a real soulless bastard to side with Potter. George Bailey was doing a good thing. If the politicians infused his business with public funding and started dictating who he approves in an attempt to buy votes from the lower income voters, you'd have some semblance of a comparison. Potter was a corrupt greedy man. Does no one remember when he stole the $8k?
@Krylez: He technically didn't steal the money. George's uncle unwittingly handed it to him. And you know as well as I do it's against the Christmas spirit to return a gift. Potter was actually pretty generous, offering George a nice job with great benefits and travel.
If George Bailey had been repackaging first and second and third mortgages for a quick resale, that would be analogous. Especially if he called his senator and demanded free government money when the economy went bad.
Instead, his whole business depended on making as few bad loans as possible. He wouldn't let a part-time janitor buy a half-million dollar house. He had an incentive to work with borrowers in trouble instead of foreclose, because he didn't want to live in a town with derelict houses and homeless families.
@nicemarmot617: thank you for your voice of reason. sub-prime lending has a place in society. abuse of sub-prime lending does not.
Both Bailey and Potter were committing the first rule of banking -- Know thy customer. Only Bailey knew his customer better and was willing to share a risk with the other members of the S&L.
One of the principal reasons for the Housing bust has been that it did not matter that you knew the customer. The originating bank was going to sell the note off anyway and hedge their bets with CDS paper. So the condition of the customer did not matter so long as the computer said yes.
@Krylez: Potter was a rat bastard, if you watch the film again you see him smiling and chuckling over the money. I think Portfolio is writing this article as a Christmas gift to their wealthy readers to make them feel better about where we all are now.
Handing someone something doesn't magically impart ownership. He knew that the uncle didn't intend to hand him 8 grand, yet kept it anyway. That alone was a crime. He didn't tell George he had the money. another crime. He then went ahead and called the local banking regulators and the police to say that George stole the money. Probably the biggest crime of all.
@JohnMc: the condition of the customer did not matter so long as the computer said yes.
certainly that, but also if the computer said no, the data was manipulated in such a way to make sure it said yes the second time. this is how mcdonald's workers making minimum wage became restaurateurs with a stated salary of $180,000/year - plenty to afford that new 6000 sq ft estate.
Thanks Consumerist, for ruining classic, lovable Christmas movies. :)
@dream-king: Handing someone something doesn't "magically" impart ownership. It "actually" imparts ownership. And Potter was just doing his civic duty, letting the bank inspector know that the building and loan was underfunded and the community's accounts were at risk.
I don't know about you, but I always was offended that crazy senile old Uncle Billy was able to lose all that money...what a way to run a bank! And George Bailey was an old crab anyway - remember how he yelled at that teacher because his kid got a sniffle or something? What a nasty creep. Never liked that movie and could never figured out how it evoked the holiday spirit.
Someone is angling for a big lump of coal in her stocking (okay, shapely stocking), and her name begins with "Meg" and ends with "Marco".
@Krylez: This assumes that kindly George Bailey demonstrated a profuse level of racial discrimination in past loans, which isn't the case with Bailey S&L, while unfortunately was the case with our real-world ones.
Bedford Falls would have been a lot better off with a credit union....
He was nasty to the teacher because his life was basically ruined at that point. No, the teacher didn't deserve it, but the stress had been building for the entire movie, and losing the money was the breaking point for him.
And no, George was not a sub-prime lender. He actually knew the people he was lending to, and knew they would pay back the loans.
Before we canonize Potter, didn't he pocket $8,000 that wasn't his? If he's not Scrooge, he's Madoff.
Don't forget that Potter also stole the bank deposit...
@PhilVillarreal: By your definition, if I overpay at a store, they don't have to give me the money back, b/c I gave it to them.
@Krylez: Hi, I'm Diamondmaster1, and I'm a soulless bastard.
It's a wonderful feel-good story, but Bailey's Building and Loan would collapse pretty quickly using those business models.
Pottersville FTW!!
Potter had another huge motivation for not giving out loans. He was a slumlord. If the poor couldn't get a loan, they had to rent from him in Potter's Field. Potter wasn't upset that George was stealing his loan customers, he was upset that George was 'stealing' the customers who rented in his slums.
@SWAK_GitEmSteveDave loves->★: If you hand them a newspaper full of money and ask them to throw it away and they do so that's not theft. Potter didn't need or spend the money. He was just happy the Baileys no longer had it so their business would fail.
@nicemarmot617: George Bailey reminds us all that it's not just the borrower that must be responsible, but also the lender. If the lenders started thinking of the borrowers as real people, sub prime mortgaging would be a staple of the American Dream. Damn you, George Bailey, for being just one person.
@PhilVillarreal: I'm sorry, but isn't Potter an officer of the bank? Is it appropriate for an officer of the bank to receive funds from an account holder of the bank...while in the bank...and not properly receive it as a deposit and update the account accordingly???
Potter may have been a good businessman, but he certainly only helped himself. You can do for others and still be a good businessman. And yes, he was a thief, because he took 8000 dollars from an account holder of the bank as an officer of the bank.
@Sarcastikate: I think you need to watch the movie again, and pay closer attention this time. So he yelled at a teacher, so what? No, he shouldn't've done that, but he was financially and legally screwed at that point. Would you be in a good mood if that were you?
@TLD_GitEmSteveDave loves->★: I think that's probably the most abused parody out there. Every show with even a tiny speck of dark humor will do a Wonderful Life parody, where one of the characters discovers the world would be much better if it weren't for them. There's a TVTropes.org page about it that's a mile long.
My favorite is probably the Rupert Murdoch one from Fry and Laurie.
There wasn't a Federal Reserve in that movie.
@Citizen Kang: Yeah, from what I see, it seems like Potter is more rational in how he gives out loans, while Baily is willing to trust his good friends to earn enough money to pay off the loans.
Of course, this could just show poor accounting on Baily's part rather than laziness, assuming this does lead to a subprime mortgage crisis. The fact he knows thees people personally seems to show he knows more than the average mortgage broker, though. He probably understands their jobs, their work ethic, a rough idea of their fiscal earnings, so he knows more than most subprime mortgage loaners knew in the late stages.
@Roclawzi: I'm not saying Potter was right or morally sound for accepting the money. Just that he wasn't a thief and was a shrewd businessman.
@pete: There's probably more elemants than that. However, most of it does come down to having the work ethic to keep a job that earns enough to pay off debt, as well as the willpower to restrict spending enough to set aside enough money to pay for everything and work towards losing debt to save money on interest. And, of course, organization to keep track of income and spending, as well as just getting the bills/payments off on time.
I think emotional intelligence can tell a person a lot about those things, to a degree. Of course, you also need the hard numbers to back up your hunches, but intuition probably will hint at most of the social aspects.
@PhilVillarreal: But it's not a matter of fraud, if you were in a bank and you handed 8 grand to an officer of the bank, they don't have status of a regular citizen, they are responsible for it. To fail to report the receipt of funds would constitute fraud, wouldn't it?
I actually thought Mr. Potter wasn't that bad of a person. And he's actually pretty sensible. If only he weren't such a d-wad like George.
@PhilVillarreal: Correct, as they do not take possession of the money if they throw it out. Even though I was MADE to watch this movie every year in High School, I just went online and gave myself a refresher as I had blocked it out. From what I read, Uncle Billy leaves the paper in Potters office. He then discovers it. He knew the ownership of the envelope. He is under the same obligation to return it to it's known owner as someone who finds a wallet or purse with ID in it is.
@TLD_GitEmSteveDave loves->★: Yes, Potter would have been legally on the hook for the money, morally and legally. But no one knew of the phantom transaction other than him. So, shrewd business.
If Bailey was smart he would have cut interest rates lower in order to loan larger amounts of money to people who were underemployed...then he could have dabbled in derivatives and default swaps, raking in insane profits. When the house of cards finally came crashing down he could simply ask the government for help.
Remember, it was the Bailey BUILDING & LOAN. The charter was to provide BUILDING LOANS.
And also remember, under the rules, the Building and Loan had 60 days to pay withdrawals. George paying them on demand was above and beyond. And he used his own money that was wedding gifts...
And also remember, when the building and loan was endangered BY A CORRUPT BANK (remember Potter had the lost deposit, knew what it was, and pocketed it for himself like banks today with the bail-out), the people who were helped by the Bailey Building and Loan came to his aid.
Nice. I also like what Potter did with Bedford Falls in the alternate reality in which George was never born. Looked like one groovy place. Peep shows, casinos, prostitutes. Vegas before its time!