Wednesday, November 19, 2008

How Horses are to Blame for the Housing Crash

In my days in banking if there was one thing that went hand in hand with rich men applying for loans, it was horses.

If you had a shady real estate developer, there was a horse.

If you had some rich doctor or lawyer, there was a horse.

If you had some trust fund baby now slowing watching his parent's fortune erode, there was a horse.

And the reason there was a horse was not because they came riding into town on one, or were racing them, but their wives, without fail bought them.

This manifested itself on the personal financial documents of the people applying for loans. Typically what you'd see was a rich man making all the money (or at least borrowing all the money) and the wife, who was literally doing nothing, running some token business on some money her husband gave her to keep her out of his hair (I affectionately referred to this as "KHOMA" money - Keep Her Off My Ass - in m book). So what you'd see is the husband listing an AGI (adjusted gross income) of say $560,000 and the wife showing a perpetual loss on "Frieda's Farms" or "Heather's Horses" or some such dumb name on their schedule C.

Now while for the most part, if the husband was bringing in a decent amount of cash, I could see it definitely being worth dropping a couple grand on some horses to keep the wife out of his hair so he could effectively run the real business while she lost a grand or two on her horse hobby and play "Make Believe Businessman." But what was scary was just how many times I saw the horses (combined with other consumer spending on the part of the wife) that actually crippled and threatened the man's financial solvency.

One guy was an overweight guy and without a doubt had essentially bought his wife because he was too physically unattractive to find one. Naturally the wife, along with children, would rack up credit card bills that would wipe out what he earned, almost penny for penny. And of course
the single largest expenditure was her "horse business." So when he came in for a loan for his wife's "horse" business I was curious and started asking questions;

"So does she breed the horses?"

"Uh no."

"So she races them then?"

"Uh no."

"So she uses them to teach riding?"

"Uh no."

"Well, what does she do with them?"

"Well, she rides them and maintains them."

Meanwhile he wanted us to lend against this never-profitable operation.

Another hilarious instance was when one guy actually wanted to use his wife's horses as collateral. That if he defaulted on his business loan, then we could go and repossess the horses and sell them to recoup the money.

Well "yip yip yip yip yahoo."

Just what banks and bankers wanted to do.

Repossess on a "horse," feed it, store it, and then try to sell it.

What is sad though is that because horses were so prevalent when it came to dealing with the upper classes, they inevitably became collateral for more real estate deals than most people realize. Through the personal guarantee of the borrower, sometimes they would put up "All Business Assets" as collateral for the loan. And not just all business assets, but all personal assets as well. And though horses were never intended to be the primary form of collateral, invariably they did boost personal financial statements enough to make it look like the borrowers were solvent enough to guarantee the loan.

Alas, big dumb animals were tangentially backing up various real estate and other business deals.

Ultimately what I found is that horses are more or less a tell tale sign you're dealing with a "Bon Fire of the Vanities" type couple. The wife typically cares more about the horses than her husband. The husband is feverishly working to support his wife's spending habits and keep her loyal to him. And both are so vain about their appearances that every bit of asset and property is borrowed against and leveraged to the hilt.

But what gets me about the horses is "why horses?"

What is the freaking pull?

I suppose I could be asking the same question on any kind of frivolous consumer spending such as;

"Why shoes?"

"Why purses?"

"Why a boat you'll never use?"

But there is something about horses and trophy wives that I can't put my finger on, but I know is there.

Alas, perhaps the aspiring, junior, deputy, official or otherwise economists can tender some theories.


Alfred T. Mahan said...

I'm wondering if you ever caught the episode of "City Confidential" on A&E about the guy who professionally killed horses in Illinois for the insurance money, for their owners? He got busted for offing some older lady he was romantically involved with (neither here nor there), but...

Maybe there's more to this than you think?

Anonymous said...

Real Asset Value of Most Horses:

Dressed weight in meat and offal for dog food.

I think the horses of the kind you describe most are a " I wanted a horse when I was little girl" romantic ideal thing thing.

I have have little respect for people who own horses who don't also muck-out for them, at least sometimes. Those horse owners actually seem to like horses.

Anonymous said...

I have observed this very phenomenon also, and you have nailed it (living in Western Canada, we get to see lots of horseys and their owners). I never heard of horses being used as collateral for a loan, and always assumed that the "ranching" operation was used as a way to reduce taxes for a company or individual. The idea of using them as collateral is ridiculous on its face.

Women are predominately horse lovers, far more so than men. Men look at horses as a means to an adventure, decide "screw it" and buy a motorcycle to reach that adventure. Women, who have long been entranced with the beautiful princess bug, use horses as a way of capturing that life style. I really, truly believe that it is the romantic life style that woman fall in love with. As if mucking stalls can be considered romantic.

Obviously bikes are far more cost effective than horses in today's urban environment.

At least that is my .02 Cdn sociological/equine scatological analysis.

Bike Bubba said... thought is that your visitors/acquaintances see the horse as they drive up to your house, or at least the paddock and barn. Not so your shoes, cars, purse, or even your boat. But your horse.....

I noticed about the same thing when I lived in Colorado. Horses by a McMansion were a sure sign that the inhabitants were among the "shallow rich."

Anonymous said...

"But there is something about horses and trophy wives that I can't put my finger on, but I know is there."

Really cynical answer is that both horses and trophy wives are high-maintenance as hell. Some people confuse being rich, important and powerful with spending lots of money and being constantly in demand. So you have someone with money and a lack of confidence hook up with someone or something that takes a lot of money and constant attention. Everyone's happy (for a while).

Slightly less cynical answer is that there's a constant tension between old money and new money. Old money wants to make sure the new money knows it's the new kid in town, new money wants to prove it can do anything the old money did and do it better. Having a stable of horses, not for actual work or a profitable business or anything, but just to go out and look at and ride around on every so often when you feel like it, still has cultural associations with old money. So the new money tries to copy some of the things they see old money do so they can say "see, we're just as classy as old money too". Got an up-close look at that with a friend from a poor family who's done okay for himself, not great but okay, and who researched his genealogy, resurrected an old English grant of arms, and started hanging out with a stupid old money type (a trust fund kid who's trying to spend everything he has), some other not-so-stupid old money types, and some truly stupid new money types.

Anonymous said...

Insert joke about being a "horse's asset" here.

Anonymous said...

"Alas, big dumb animals were tangentially backing up various real estate and other business deals."

Now, now. It's not fair to call the horses dumb; they just wanted to eat oats and gallop around. They didn't make any crazy real estate investments.

Breton Man said...

You asked why women like horses. I think some women like horses for the same reason some women like riding motorcycles. Aside from the obvious comparisons about power between the legs I’m told that some women enjoy the sensation of horseback riding the way some women enjoy the vibration of a motorcycle engine. It would explain why trophy wives who married old farts that were past their prime had the need for a stable full of ponies.

Matt said...

Cap, I hope you find a good woman some day. They do exist out there :)

I had a friend whose dad bought his mom a horse and it was the dumbest thing I had ever witnessed. They kept it at a stable and visited it like twice a year. What a waste of money.

Anonymous said...

While in Chicago once I met a lady who said, "the definition of a horse is an animal that eats money".