Eighty-Five Years Later and They Still Don’t Exist

By David Langlieb

Finance is a peculiar business, and we at the Philadelphia Accelerator Fund do not pretend to understand more than we do. Like most, we were surprised and unnerved by the recent Silicon Valley Bank failure and subsequent federal rescue of depositors. How strong is our financial system, really? And how vulnerable are we, individually and collectively, to a run on our depository institutions? 

These are tough questions to answer, as banks and credit unions vary greatly. We accept the now-conventional wisdom that Silicon Valley Bank suffered from unique vulnerabilities related to many high-dollar accounts within a small, interconnected depositor community. But speaking more generally, we have a historical guidepost that transcends the calamity du jour—complexity within financial institutions is a leading indicator of disaster. 

Home mortgages—a safe and stable financial tool for many decades—became the root of the 2008-09 financial crisis. Once bankers started chopping mortgages up and selling mortgage-backed securities designed to obscure the weak credit quality of their borrowers, minor issues became major disasters. In a regular market, banks can handle foreclosures. But once mortgage-backed securities slip into investment portfolios where nearly everyone has a stake (as they did in the early 2000s), it creates the potential for a global financial collapse.   

Today, we remain awash in financial products with no real utility aside from the fees earned by the bankers who sell and trade them. Previous crises, like the Savings and Loan debacle of the 1980s and the late 1920s runup to the Great Depression, were similarly motivated. In both instances, the pressures to juice fee income by bending practices within financial institutions and encouraging speculation eventually broke the system.  

We take risks at the Philadelphia Accelerator Fund, but we calculate these risks and keep them within the confines of traditional, proven loan products. We take risks not to generate fees and maximize profit centers but to expand opportunities in line with our mission. Most importantly, we recognize that good loans, carefully considered and responsibly deployed, can help build communities. 


The Customers’ Yachts

With the possible exception of Michael Lewis’s entertaining and revealing memoir Liar’s Poker, the finest book about finance is now closing in on 85 years old. Where Are the Customers’ Yachts? by Fred Schwed is a cautionary tale about the pitfalls of financial speculation and a near-perfect distillation of the lessons we evidently need to relearn every generation (and perhaps more often than that).

The book opens with a short anecdote:

Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides showed some handsome ships riding at anchor. He said, “Look, those are the bankers’ and brokers’ yachts.” 

“Where are the customers’ yachts?” asked the naïve visitor.

The takeaway, of course, is that the customers have no yachts; the corollary implication is that the way to generate wealth on Wall Street is as a banker or a broker rather than as a client. Unfortunately, this has been the case in America since at least the Industrial Revolution and arguably longer. The mortgage-backed security is a direct descendant of the watered stock issued by Erie Railroad in the 1860s: a financial product created to fleece the buyer by obscuring the underlying asset’s actual value. 

Schwed has another set of maxims that every person of any means should have drilled into their minds from an early age:

Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort that should be successful in preventing a lot of money from becoming a little. 

At PAF, we believe this is the correct way to see investing—as a way to avoid becoming poor. 


Keeping it Boring

Credit analysis is informed by this principle as well. Since the Philadelphia Accelerator Fund requires personal guarantees on most of our loans, we routinely review personal financial statements for borrower net worth and asset mix. We see all kinds of assets on these statements—classic cars, motorcycles, whole life insurance policies, cryptocurrency, jewelry, etc. Every lender has a set formula for valuing assets to determine adjusted net worth. But nothing makes a credit analyst smile more broadly than a loan applicant who keeps most of his money in a boring, low-cost index fund. Real estate is fine, too, so long as it isn’t over-leveraged. The duller, the better.

Lenders love boring. There’s nothing more boring than a borrower who makes his debt service payment on time every month. And while no one can predict the future with real precision, the loan applicant who presents as boring is likely to stay boring for a long time.