Chicago 28-year-old made $70 million off cash loans, now he's buying slums

http://www.chicagobusiness.com/cgi-bin/article.pl?articleId=31483

by wushupork • 17 years ago

59 102 17 years ago

ReTelTech• 17 years ago

He was an angel investor for a start-up founded by two friends of mine. A very decent guy, with high moral and ethical standards. There can always be an exception to the rule - even in the cash loan business.

cia_plant3• 17 years ago

I'm puzzled how you can claim that he has high ethical standards when he ran a business whose entire model is to rip off poor people.

quizbiz3• 17 years ago

Take issue with payday loans not him.

pchristensen5• 17 years ago

These "poor people" can't get regular bank accounts, so they have no way to cash paychecks. They have no access to traditional credit. The payday loan industry is competitive, so if it could be done cheaper, someone will do it. If it can't be done cheaper, those entrants will fail (too much risk). If poor people with no or bad credit history find another way to get credit, the payday loan industry will dry up. It's business. Live with it.

breck• 17 years ago

> when he ran a business whose entire model is to rip off poor people.

I don't have any good data to back this up, but my guess is that Bank of America, Wells Fargo, etc., rip off way more poor people than this company.

$2 atm fees, $35 overdraft fees, monthly fees unless you have high minimum balances, all the "0%" interest credit cards you can handle (until bankruptcy), and my personal favorite---"keep the change", a debit card card that deposits the change into a savings account to help you save more! What they don't mention is that the savings account pays significantly less interest than the inflation rate and that the average consumer spends over 10% more when using a card than cash holding all else equal. You get to "keep the change" while bank of America keeps the 2% merchant fees on debit card transactions...

If your poor, the big banks don't care about you at all. They'd rather take all you have then kick you to the curb. Now if you have money, the banks are great. But I wouldn't attack this business because even if may be an expensive deal, at least they care about the low income market.

pchristensen5• 17 years ago

ReTelTech - I'm looking for respectable angels in Chicago. Could you introduce me to your friends he funded? Thanks

peter [at] pchristensen [dot] com

sachinag2• 17 years ago

There are none who do it even semi-seriously. Move.

jhancock10• 17 years ago

I'm sure you will find some crack dealers that are real sweethearts as well.

No one involved in any form of usury has high moral standards. The cash loan business only exists because state politician were paid off to build loopholes around existing state usury laws. Who do you think pays off these politicians to create such a loophole? Someone that doesn't make money off the industry? I seriously doubt it.

Timothee• 17 years ago

I wished the article explained a little better why his business was not shady. From the article, it doesn't sound much different from the paycheck cashing places...

Maybe his new real estate business is more respectable but it was made possible by his previous business.

Can anyone explain why we should look up to him? I understand that there might be a need for "payday loans" but it still looks like exploitation.

quizbiz3• 17 years ago

He has a very high net worth to age ratio? You make a good point I hadn't properly considered.

This is so against the current mindset of how purpose comes way before profit is even considered but this guy is apparently very good at making money. It's contrarian to the start up culture Google inflicted on all of us, but smart business is effective business. He is doing well even when times are very tough, he targeted potential growth and effectively switched from one business front to another.

maybe...

BobbyH2• 17 years ago

Payday loans may have a high interest rate, but if the cost of a payday loan is less than the alternatives, then it seems ethical to me. For instance, say a payday loan for $200 costs $30. That's translates into a high interest rate, but it's worth it to you if it helps you avoid a $50 late fee on another bill that's due before your next payday. The trick to running a payday business ethically seems to be fee transparency and not charging excessive fees such that borrowers must borrow an ever-increasing amount. This article about a payday company in LA talks about these issues: http://www.nytimes.com/2008/11/09/magazine/09nix-t.html

smanek2• 17 years ago

I would argue that a cost of a payday loan is always less than the alternative (as long as the borrower knows what it is upfront - and if they don't it's fraud).

If there were some lower cost alternative, the borrower wouldn't take the payday loan. They would use the alternative.

Hence, if you are providing a product (without lying), I think you are doing the world a service. And the magnitude of the goodness you are doing is measured by your profit.

nostrademons2• 17 years ago

There's a big negative externality with payday loans - or really, any sort of consumer credit - that I wish more people were aware of...

As more people use credit for everyday purchases, fiscally responsible people get priced out of the market. The additional cash on hand drives prices up, because there's always some idiot who's willing to pay more now with a credit card or payday loan than he can afford to pay back later. He crowds out prudent buyers who only purchase goods if they have cash on hand. Eventually, it becomes rational for everyone to pay with money they don't have, because otherwise they're simply priced out of the market and have to do without.

An example might make this more concrete. Say that there is a limited supply of some highly-demanded good - say, cupcakes. In economic equilibrium, the price of a cupcake may be $2, and there is enough supply for 25% of the population to have one. This being a functioning market, the cupcakes go to the people who most deserve to have them, "deserve" being a function both of means (how much money they have to spend, a proxy for how much they've contributed back to the economy) and of desires (what fraction they're willing to part with to get that cupcake).

Now say that one person discovers a payday loan shop. He suddenly has much more cash on hand, because he can get a full advance halfway through the pay period. So he gets a cupcake even though he couldn't normally have afforded one, and then has to pay back more in the future. This is still legit though: maybe he just really wanted that cupcake, and is willing to take the future hit to income to have it now.

Imagine now that 25% of the population has discovered the magic of pre-approved credit offers, and suddenly have lots of cash on hand. They bid up the price of cupcakes to $10, and suddenly these profligate folks get all the cupcakes. The fiscally responsible folks who make a decent income but refuse to go into debt have been completely priced out of the market, so their only choices are to join the debtors, or do without. So the number of debtors grows even more, people start needing to take on debt just to survive, and folks have no intention nor ability of ever paying this back.

This is happening in several areas of our economy right now.

There are a limited number of houses. They go to the highest bidder. Therefore, if some idiot pays 0% down on an interest-only options-ARM, he can get more cash on a given income/savings level, and outbid the prudent folks who insist on paying 20% down. This is why it has been essentially impossible to buy a house lately (well, up to 2008) if you have any intention of not being foreclosed upon.

There are a limited number of spots in colleges. There is also massive financial aid available. When families take out loans to send their students to college, they can pay higher prices. Colleges raise their tuition to compensate. It then becomes impossible for people to attend college without taking out loans. (Except for certain elite schools that give outright grants for everyone on financial aid.)

There is a limited amount of food. When large numbers of lower-income people have more immediate cash, thanks to payday loans, grocers can raise their prices accordingly. Other people in the neighborhood are faced with the choice of either taking out loans themselves or going hungry.

I've read a few economic histories that suggest that these debt-inflation cycles hit countries every 80-200 years, and that the end result is necessarily that the money supply spirals out of control. People need to borrow to live, and yet the borrowing fuels further increases in the cost of living. They almost always end in war, which serves as a giant reset button by bankrupting everybody equally. ;-) WW2 was fueled by the debt spiral of Weimar Germany, where they physically couldn't repay their WW1 reparations. The American Revolution was fueled by the Stamp Act ("No taxation without representation"), which was to cover rising indebtness of British war debts. The French revolution was caused the bankruptcy of the French royals.

lakeeffect2• 17 years ago

What bill has a 50 late charge? Most payday loan people customers dont have a banking account let alone a mortgage or something else.

They are excessively high loans. Do they help change the overall economic disposition of the customer? No, customers are usually repeat business either weekly or biweekly.

iigs3• 17 years ago

Can anyone explain why we should look up to him?

I've never heard of this guy before today, but I'd venture to defend an honest loan agency.

Simply, loans are only profitable for lenders if they get back more money than they lend out. As a lender there are two ways you can recover the money you lend -- you get your money back in the negotiated payments or you can accept a security (the lien on a car or house) and repossess/foreclose on it if the terms for repayment are not made. Because there's some chance that the security would be insufficient to cover the debt (house is trashed or loses value, or car is neglected/destroyed), the difference is made up in interest, calculated by the probability of failure (represented by credit score) and the financial exposure if failure occurs (this fed into the feedback cycle where banks were basically giving money away, assuming houses were always going to appreciate). Any remaining delta is operational expense (salary for the lady behind the counter, rent for the buildings) or profit for the lender (presumably where the "exploitation" is).

Paycheck loans are not securitized, in that there's no asset the lender can recover if the paycheck draw doesn't clear -- this means it's down to interest. Paycheck loan shops (AFAIK) don't check your credit, and their very existence (withdraw repayment on payday) assumes that the customer has bad spending habits (otherwise the customer could get more favorable terms from credit cards) -- high probability of failure to pay * high exposure = high interest rate.

But how high is too high? I honestly don't understand the modern notion of usury. It looks like any other business exchange to me: if you need the service and nobody will provide it for less, the prevailing rate is that high, even if it feels like a screw. If it truly is a screw there are generally other businesses who want to get in on it and capture some of the profits. To the extent that this guy was profitable, it was down to either a lack of competition (this can be a bit of a tautology, but he did have competitors, including the one that eventually bought his business), reduced cost structure (yes -- online only), or better actuarial discipline (perhaps marketing to people likely to pay -- unsure in this case).

The article doesn't talk about how much money he made from the operation of the business itself, rather it was focused on the $70m proceeds from the sale of the business. They seem like two different sources of income to me: if the valuation was way off he exploited Cash America instead of his customers.

In summary, I feel that it's not exploitative: while paycheck loan houses have high interest rates and often a poor clientele, they serve an underserved market (as evidenced by the popularity and profitability), and are often a loan of last resort for certain people. They don't operate any other businesses that eventually coerce you into using their loan services. They're certainly a better choice than the criminal "loan shark" element that some people suggest they replace.

jimbokun• 17 years ago

"It looks like any other business exchange to me: if you need the service and nobody will provide it for less, the prevailing rate is that high, even if it feels like a screw."

The argument is to save people from their own poor judgment.

Not too long ago, I would have opposed this philosophy. Now, I'm not so sure. We allowed people to trust their own judgment, particularly people in the finance industry, and they obliterated our entire financial system. On a smaller scale, consumers did similar things with credit card debt and houses they could not afford. Neither side (consumers or the finance industry) could have caused all this damage without the willing consent of the other.

So, the argument that we need to sometimes constrain the choices people have in order to save them from themselves, and ultimately to save people making good choices from the consequences of people making poor ones, seems more reasonable now.

jhancock10• 17 years ago

"I honestly don't understand the modern notion of usury. It looks like any other business exchange to me"

Usury laws date back thousands of years. Its hardly a modern notion. They exist because its well understood that all forms of high interest add to wealth distribution problems. Which in turn causes all sort of other problems in society.

nuggien• 17 years ago

is it just me or does every rich guy always have some super smug look?

pg• 17 years ago

The photographer for an article like this might take 50 shots. The editors then pick one that looks the way they feel the subject ought to look.

If you look at pictures of US presidents in Japanese newspapers, they look slightly Japanese. The photos haven't been edited; the editors just select pictures that look right to them.

slance• 17 years ago

Really? Have you got a link?

PostOnce3• 17 years ago

I'm watching The Merchant of Venice right now, then I pop over here and read an article about a 28 year old Jew from Chicago who made millions of dollars lending people money at an extortionate rate. I'm not saying there's anything wrong with that; I'd do it myself had I but the wherewithal. I just found it funny. Like, you know his friends have to mention it to him occasionally, rib-jab style. Heh.

tjic3• 17 years ago

> read an article about a 28 year old Jew

The most salient adjective that you can think of is "Jew" ?

WT* ?

I'm not someone who sees racism and anti-Semitism under every rock and leaf... but, seriously, WT* ?

I, for one, enjoy Hacker News more when commenters use phrases like "28 year old entrepreneur" and "40 year old physicist" and enjoy it less when the phrases are "28 year old Jew" and "40 year old Black".

begemot2• 17 years ago

This is the internet, you can write F.

elidourado• 17 years ago

One of the main characters in The Merchant of Venice is Shylock, the Jewish moneylender. That's where Goldstein's Jewishness comes in. PostOnce was just noting the coincidence of having read this article after some Shakespeare. It's not remotely anti-Semitic; calm down.

pchristensen5• 17 years ago

Whatever philosophical complaints you have about the check cashing business, CashNetUSA was a well run, professional business with great technology.

I interviewed at CashNetUSA last year. It was the second most-appealing job I've ever been offered (I interviewed for my current job, the most appealing, at the same time so I didn't end up working there). They had a great tech team, extremely smart and experienced guys. They employed 400 people (mostly call-center reps) and paid well (not sure how they're doing post-bust). They sponsored and hosted meetings for the Chicago Lisp User Group when we were active.

Site in RoR, they programmed their own call center using Asterisk, self-managed Linux infrastructure, quants generating real-time risk assessments for customers to determine individualized rates, etc.

jhancock10• 17 years ago

I received a call from a recruiter last summer. It was about flying to Chicago to interview with Cash America. They needed a director of IT and had a lot of RoR stuff on hand.

I politely made myself unavailable. Maybe its because I spent a decade, the 90s, building financial apps at large banks and insurance companies. Like so many other IT guys, I know I had a hand in building some of the machinery that has destroyed America and those that trusted it.

But even if you had never worked on the inside of Wall St. firms, you should be able to spot a crack dealer when you see one (what do you think those call center reps were doing?). I don't care if they are using Linux and pay well. There is a reasons usury laws exist. The same reasons drug laws exist...usury and drugs both eat at the bottom of society and destroy it.

dantheman2• 17 years ago

I'm going to have to completely disagree. Sure these loans are pretty bad, but if you need cash at a moments notice and have no other options it can be better than not having it. As for drug laws, you are very misinformed -- I don't want to get into a long debate, but US drug policy is horrible and in fact harms the bottom of society.

madair• 17 years ago

Rob the poor when they need loans, then snap up all the properties in distress and rent them out with high technical proficiency. Hmmm, if you don't see the serious problems here you should be asking yourself some really tough questions about where the state of your personal ethics is.

HeyLaughingBoy2• 17 years ago

OK, I'll bite. Tell me what's wrong with what he did.

A person needs money to feed their children and will be broke 3 days before payday. That person can either (a) not get any money at all, or (b) borrow it at a high rate of interest. What, exactly is wrong with option (b)? Don't add extra details like hidden gotchas, loopholes, what happened to a friend of your sister's etc. What is wrong with the situation exactly as I proposed it and why do you find it unethical?

Likewise, if I decide to snap up a property in distress and rent it out, why is there a (as you put it) "serious problem here?" Why is it better to just let the property rot? Again, answer to the facts instead of letting your bias add conditions I haven't specified.

I'm serious: I'm approaching this with an open mind. Tell me why I'm wrong.

wwalker3• 17 years ago

It's immoral to tempt someone into harming themselves, especially when it also benefits you.

Payday loans tempt the weak with options that help in the (very) short run, but harm in the long run.

The very existence of payday loans encourages self-destructive habits among the poor. Why budget carefully when you can just get a payday loan and kick the can down the road to next month?

And since many payday loan customers get these loans every month, the loans are really just an additional monthly bill for poor people.

spkthed• 17 years ago

This guy might be the best guy in the world but payday loans are predatory lending and regardless of the situation, puts people in a worse spot than they were before.

Depending on the situation, they can charge over 1,000% interest. If payday loans were to charge 30% interest they'd still be able to cover the people that wouldn't pay.

It's a dumb saying but "don't be evil" springs to mind. Taking money off of the backs of the people that can least afford it isn't capitalism, it's greed.

supahfly_remix2• 17 years ago

Let's do a little research. The trader in the article, David Shorr, lists himself as a CashNetUSA founder on linkedin.

http://www.linkedin.com/ppl/webprofile?action=vmi&id=659...

He also appears as a manager in some of the SEC documentation.

http://searchwww.sec.gov/EDGARFSClient/jsp/EDGAR_Query_Resul...

David Shorr is 45 according to pipl.com

While Mr. Goldstein was a founder, he wasn't the only founder, and he had some more senior, connected talent to help him.

neilc• 17 years ago

If you read the whole article, this would be clear:

Mr. Goldstein had spent a summer during college at the Chicago Board of Trade interning with David Shorr, one of his mother's patients. Mr. Shorr left the trading floor in 2003 because of an injury and was looking for a new venture. He hit on the payday loan business — "You borrow money at one rate and you lend it out at a higher rate," Mr. Shorr says — and e-mailed Mr. Goldstein to get his thoughts. "Al sent me an e-mail back with bullet points, action items, and I realized my first action item had to be to get him," Mr. Shorr says. He offered Mr. Goldstein a 75% pay cut but also the chance to build a business from scratch. Mr. Goldstein jumped.

supahfly_remix2• 17 years ago

Reread my comment. I didn't say he wasn't a founder, but Mr. Shorr's contribution is underrated in the article. He's only mentioned in that paragraph.

I constantly see mentions of boy geniuses in the popular press. He's undoubtedly bright, but it's his access to connections and money, and in particular Mr. Shorr, that made the difference between a mom and pop payday check cashing operation and growing to sell a business after two years. Readers of HN should recognize that it's not through his brilliance alone.

jsteele• 17 years ago

Fail. We don't need another subprime lender. This country has seen enough shenanigans from IndyMac, Countrywide, and the other clowns on Wall St. Entrepreneurs, find something else to create because this is a lousy way to make money and taxpayers are done with bailouts.

If you still want to do finance, see this link from HBS for ideas on how to build a nontoxic, sustainable form of it:

http://blogs.harvardbusiness.org/haque/2009/04/manifesto.htm...

jakehow• 17 years ago

Seeing Woods's law play out is always amusing.

"Whenever the private sector introduces an innovation that makes the poor better off than they would have been without it, or that offers benefits or terms that no one else is prepared to offer them, someone—in the name of helping the poor—will call for curbing or abolishing it."

http://en.wikipedia.org/wiki/Thomas_Woods#Woods.27s_Law

ahoyhere2• 17 years ago

Where's your proof that it makes the poor better off?

There's lots of research, on the other hand, that because the interest rates are so high, people fall very easily into an endless cycle of debt, using Pay Day Loan B to pay off Pay Day Loan A.

weegee• 17 years ago

all hail the new slumlord! good god that's what this world needs...

Chicago 28-year-old made $70 million off cash loans, now he's buying slums

Related Stories