Why not garage-based lending startups?
The most infuriating moment of the first presidential debate hasn’t gotten the attention it deserves.
That moment was when former Gov. Mitt Romney, the Republican, in response to a question about regulation, declared it “essential” and went on, “You couldn’t have people opening up banks in their — in their garage and making loans.”
That sound you heard during the debate was the echo of me ripping my hair out while throwing my drink at the television in frustration at the idea of a Republican presidential nominee who portrays himself as the defender of free markets yet who also describes garage-based businesses as a grave danger that must be regulated out of existence.
Among the successful American businesses that began in garages are:
† Hewlett-Packard, which began in a 12-by-18-foot garage in Palo Alto, Calif., and grew into a company with nearly 350,000 employees.
† Apple, which assembled some of its first computers in Steve Jobs’ parents’ garage in Los Altos, Calif. Apple now has a market capitalization of more than $600 billion.
† Amazon, which for nearly a year in 1994 and 1995 consisted of founder Jeff Bezos and five employees working in the garage of a Seattle home that Bezos had rented.
† Mattel, the toy company that is known for Barbie dolls and Hot Wheels cars, began in a Southern California garage. Sen. Marco Rubio spoke about it in his maiden speech.
† Lender’s Bagels, which began in a West Haven, Conn., garage and grew into a business with tens of millions of dollars in annual sales.
OK, none of those garage-based startups was in the lending business. But there’s no reason that the same kind of garage-style innovation that brought growth and dynamism to the technology, toy and bagel businesses can’t also penetrate into lending.
In fact, it’s already quietly happening. Not all loans, after all, need to involve federally insured deposits. Regulations imposed after the 2008 convulsion, particularly the Basel III capital requirements, are making the regulated banks much more reticent to make loans such as revolvers or other lines of credit that are the lifeblood of many operating businesses.
Into this void has stepped an array of more lightly regulated players, such as hedge funds and investment partnerships.
Los Angeles-based Ares has what it calls a “private debt group” that says it “provides one-stop financing solutions to meet the distinct and underserved financing needs of small and middle-market companies and commercial project and real estate owners.”
New York-based Ableco Finance LLC has a “recent transactions” page listing revolving credit facilities, term loans and bridge loans it has provided for hundreds of millions of dollars.
These firms and others like them are the “garage guys” of lending. They are a sign of how the lending system is regenerating itself in a free-market way outside of the highly regulated banking system, because the highly regulated form has been so inefficient.
To the argument that lending is more dangerous than toys, bagels or technology and therefore needs tighter standards, the best response is airlines. What could be more dangerous than a jet plane full of vulnerable passengers who could die in a crash?
Yet after the Airline Deregulation Act of 1978 prices went down, traffic increased and airline accidents and fatalities declined.
In fairness to Romney, he’d probably be less inclined to impose smothering regulation than President Barack Obama would be. But is it too much to ask for a major-party presidential candidate who sees garage-based businesses, even in the financial sector, as something to celebrate rather than as something to regulate?
If neither the Republicans nor the Democrats get this, eventually some new political party that does understand it may arise on the scene.
Maybe it will start in a garage.
Ira Stoll is editor of FutureOfCapitalism.com and author of “Samuel Adams: A Life.”