Worth reading the whole thing, but here’s a taste: “What we missed in holiday seasons past is that Potter, snarling and bald, was right. George was making a lot of imprudent loans. But George was right, too.”

Scene: 1923. A spare bedroom in the Munich home of Ernst Hanfstaengl. A lean young man with a little mustache sits on a bed, with a 6mm automatic pistol. His hand shakes as he raises it toward his mouth. An angel appears, imploring him not to kill himself. After half an hour’s chat, the young man smiles and says, “I suppose you are right. It’s not really hopeless, is it? I am not so much of a weakling.” He puts the pistol back in the nightstand as the angel vanishes, saying, “I know you will go on to lead a virtuous life, Willy Bungerschmidt!”.

The young man goes to a pitcher and washes his face. That was odd, he muses. Who the hell is Willy Bungerschmidt? My name is Adolf Hitler.

I’m sure that’s _exactly_ how it happened ;-)

But I see this as a challenge more than anything else. We need to up the level of our game, because there are a lot of people out there who are interested in this sort of discourse.

That is both good and bad news :-)

I did see that New York Times article, by the way. I found it uncomfortably close to OverthinkingIt’s modus operandi. The guy even checked with a D.A. to see if Bailey would still be arrested for losing the money, even if he repaid it via donations. Hey New York Times, back off the quirky nitpicking.

The two really important things George Bailey does:

1. KYC – Know Your Customer. Knowing the people you lend money to is not just about networking and opportunity – it’s mostly about anticipating potential problems and avoiding fraud. Good KYC lowers all sorts of practical risks for a bank, to the point that it is now, much much more than it was back in the day, required standard operating procedure for banks.

Your bank teller or lending agent is under orders to know who you are and what your normal behavior is like, so that they can keep an eye out for anything unexpected or suspicious.

Not everybody is equally good at doing this these days, and not everybody prioritizes it to the same degree, but it’s very important – much more important than the credit ratings of loans.

2. Income verification. George Bailey verifies Ernie Bishop’s income and knows he will be able to keep up his obligation to this loan. Failing to do this reliably across the board was probably the main reason the subprime crisis happened. Lenders did not verify that a person’s current and expected income would be enough to make payments on loans that reset to higher levels after early teaser rates, because by that time the salesman would have her commission, and the loan issuer would have packaged the loan in a security and sent it.

The two sides of the subprime coin are, on one hand, “Don’t offer credit willy nilly to everybody who asks for it,” but also, “Don’t deny loans to perfectly good borrowers because of your prejudice as to who they ought to be or what they look like.”

George has done his due diligence and has determined Ernie is creditworthy. Potter’s company is eager to take the construction business – Bedford falls is pretty underdeveloped and a building and loan in the old mold like Bailey Building and Loan is filling an important role when banks don’t want to get involved with this kind of borrower – partly because their KYC is unsophisticated and they rely on platitudes and generalisms to determine the people they should lend money to (as in, “Not cab drivers, because they must be lazy”).

I think George has been a model borrower here – he even goes to bat on his customer’s behalf to make sure the loan money is being used the way it’s supposed to be used.

There were a lot of things that went wrong in lending that drove the subprime crisis, but it was a bit more specific than just being too high-beta, than just being too easy with credit. There are a lot of things a banker can do to make loans to unlikely clients work, and George seems to have gone above and beyond to do the most important ones very well.

Quite an enjoyable article. I plan to watch that movie at some point during the holidays, and I’ll give these issues some thought when I do.