From Lapham's Quarterly, September 21:
Rate the RoomThe early history of rating credit in America.
One new and uniquely American source of information appeared in the wake of the financial crisis of 1837: credit reporting. Instead of continuing to rely on their own informal sources of information about the creditworthiness of others, merchants could now turn to a third party, a “mercantile agency,” whose business it was to provide independent and encompassing assessments of the creditworthiness of other firms.
The Mercantile Agency (later known as R.G. Dun) was founded in 1841 by Lewis Tappan, a prominent textile merchant and ardent abolitionist who had failed in the panic of 1837. According to historian Rowena Olegario, the idea of a credit agency was already “in the air,” but it was Tappan who brought this idea firmly into reality. Organizationally, Tappan established a central office (in New York City, close to his clients) and attached to this a network of independent confidential correspondents, distributed across the country, who provided information about the firms in their local vicinity. Scholar William Armstrong gave a thumbnail summary: “Lewis Tappan…applied himself to the establishment of a commercial agency, the object of which is to ascertain, by means of agents throughout the country, the character and standing of the merchants in the different towns, so that when the New York dealers receive applications for goods from traders at a distance, they have only to refer to Mr. Tappan to ascertain their degree of trustworthiness.” Using the well-functioning national postal system, correspondents mailed information about firms to the head office. This information was transcribed and edited, and then turned into credit reports that could be sold to anyone with an interest in a particular firm. As of August 1841 Tappan had acquired 133 subscribers to his new service, mostly in the dry-goods business.
Although many organizations could be interested in someone’s ability to pay their debts (e.g., banks, insurance companies, employers, etc.), rating agencies served the mercantile community first and concentrated on trade credit. In an early advertisement, Tappan attracted customers by giving them the chance to assess for free the information his firm would provide: “Any merchant who wishes to test the value of the information can do so gratuitously. No better way has been thought of than for such to bring a list of the bad debts they have made since the establishment of the agency in 1841, and ascertain how the debtors stood on the books of the agency when the goods were sold to them.”....
....MUCH MORE
HT: An FT Alphaville Further Reading post but I've forgotten which one. So here's the lot of them.
Although the "Five C's of creditworthiness" are 'character, capacity, capital, collateral, and conditions' J.P. Morgan famously said in his 1912 testimony before the Pujo Commission:
Q: Is not commercial credit based primarily upon money or property?
JPM: No, sir. The first thing is character.
Q: Before money or property?
JPM: Before money, or anything else. Money cannot buy it.
—U.S. Library of Congress, Testimony of J.P. Morgan before the Bank and Currency Committee of the House of Representatives, at Washington, D. C., appointed for the purpose of investigating an alleged money trust in "Wall street."" (60 page PDF)Finally, an October 2010 post:
Bill Gross on Turning Down Loan Requests from Warren Buffett and Sam Walton (BRK.B; WMT)
From CNBC:
Bill Gross' Lesson Learned: Character Trumps Flash
Choosing flash over substance led Bill Gross, founder and co-CIO of bond company PIMCO, to say “pass” to two of the best investments in US history and give a thumb's-up to a major flop.
Now, to avoid a repeat of either situation, he keeps a picture of the legendary banker J.P. Morgan on his wall. Morgan had told Congress once, that "Lending is not based on money or property," said Gross.The first decision of learned lessons was when he turned down Warren Buffett and Charlie Munger for a $10 million loan for their company Berkshire Hathaway in 1975.
“It seemed like a funny company,” said Gross. He made his decision based on the exteriors of their assets—a dilapidated industrial complex in the Northeast, a See's candy store, Blue Chip Stamps, but not much else.”
Although PIMCO didn’t make the loan to those unassuming Midwesterners who eventually became among the world’s wealthiest men, Pacific Mutual, which owned PIMCO, did.
About a week later, Gross met Sam Walton, who was looking to expand his young general store operation to Ohio and Iowa.
“The two sons and Sam would drive me around town and show me the Wal-Mart , all the while with their dog named Dan.
They'd yell, ‘Git ‘em, Dan, git ‘em, Dan,’ when a dog or cat would cross the street.”
Gross turned the Waltons down, too, based on appearances, he said.*****
Shortly thereafter, Gross agreed to loan money to a new company called Itel, not Intel, a San Francisco rail car leaser, which had a plush office 30 floors up with a view of the Golden Gate Bridge.
“I said, ‘Now this is a company. Carpets, secretaries, rail cars that you can touch and feel, and the steel,” Gross explained. “So the loan was made, $5 million to Itel, and six months later the company was bankrupt.”
So whenever Gross is considering a decision, he looks at that picture of Morgan.
