June 2015 - Bankers Anonymous

June 28, 2015

Dueling Mortgage Gurus and Uncertainty

One of the things that makes finance endlessly fascinating (to me!) is that perfectly sound logic for one situation turns out to be perfect madness in another situation.

In my best moments I appreciate the ironies and contradictions. In my worst moments I despair for people whipsawed by the seeming complexities of financial choices.

Most middle-class folks grapple with one of these important choices – a home mortgage – at least once in their life. I’m a big fan of the choice to buy a home with a mortgage but even there, a controversial battle rages.

Anti-debt

On one side of the ring stand the anti-debt gurus like Dave Ramsey. While Ramsey really wants his followers to pay cash for their homes (which is fairly absurd), he has strong rules about what to do if you decide to borrow. For example, Ramsey says

Always make at least a 20% down payment, to avoid high interest charges and expensive private mortgage insurance.
Always get a 15-year mortgage rather than a 30-year mortgage because you will pay it off sooner, typically enjoy a lower interest rate, and you’ll pay significantly less interest over the life of the loan.
Never take on mortgage debt with a monthly payment that will command more than 25% of your take-home pay.
Always avoid adjustable rate mortgages which shift the risk of higher interest rates from the lender to you.
Never borrow additional home equity in the form of a home equity loan or line of credit.1

Ramsey – who built a real estate fortune and then went bankrupt by the age of 30 – preaches a low-debt or (preferably) no-debt financial lifestyle as a curative for people with past debt problems. He knows of what he speaks, and he has a certain strong logic for his points.

On the other hand, personally, I’ve broken each and every one of his rules. So I can’t actually advocate following his advice.

Pro-debt

On the opposite side of the ring, another financial guru Ric Edelman advocates the opposite approach.

Since Edelman’s contrarian position flies in the face of conventional wisdom, I enjoy presenting his points even more.

Only make the bare minimum down payment on your house – thereby freeing up your remaining capital for investing in the market, where you can earn an annual return higher than what you pay on your mortgage debt.
Always get a 30-year mortgage rather than a 15-year mortgage, to take advantage of the tax deduction on mortgage interest.
Never pay off your mortgage early or at all, because mortgages are the best way to borrow extremely cheaply. Again, use the borrowed money to invest profitably in the market.
If the value of your house rises, consider freeing up the equity to invest, through a home equity loan or line, rather then let your net worth stay locked up and unused in the form of your house. That way, Edelman says, if the value of your house drops you’ll at least have withdrawn the money and have use of it for emergencies.
Quickly paying down and eliminating your monthly mortgage payment is not an important goal because, as a homeowner, you’ll always have to pay insurance and real estate taxes anyway. Since you can’t eliminate those obligations, why bother trying to eliminate your mortgage payment?

You get the idea. When Ramsey says “Zig” Edelman says “Zag.”

Edelman presents some compelling math for his arguments. If you accept his assumptions then you could end up wealthier in the long run.

However, Edelman does not account for the psychological difficulty of saving money. Specifically, many of us benefit from the ‘forced savings’ of paying a mortgage, and few will have the discipline to take the extra monthly cash flow as a result of a 30 year mortgage and invest it for the long run, rather than squander it on iced latte frappuccinos.

As a result, I’m pretty sure some portion of people who take Edelman’s advice to heart will end up like the proverbial broke guy having to wear a barrel for pants. It kind of all depends on your specific situation.

My choices

In my own life I’ve had both adjustable rate mortgages and fixed rate mortgages. I’ve borrowed more than the conventional 80% limit. I’ve had 15-year and 30-year loans. I’ve paid extra principal on a biweekly basis, and I’ve also borrowed heavily against my home equity line of credit. I’d like to think I had compelling logic for each decision, or at least a sober mind for understanding what I was doing.

How to decide

I think my point is that the more wholly convinced a guru is, the less certain you should be. The stronger they lean in, the less likely they are to be correct in all circumstances, for all people. Ramsey’s got a great plan, for example, for people who’ve been bankrupt in the past or who have a history of debt problems. Edelman’s approach is closer to my own experience because he’s linking some risk-taking to long-term wealth creation, which I tend to do in my own life. But where you fall on the risk spectrum is a key determinant of their relevancy to your own situation.

Big Ideas vs Little Ideas

Nate Silver’s 2012 book The Signal And The Noise presents the dichotomy of a guru or pundit’s ‘big idea’ vs. ‘small ideas.’ While punditry rewards people who have ‘big ideas’ and ‘hot takes’ on topics, the reality is that certainty and big ideas come at a cost. Predicting the future – one of Nate Silver’s specialties – is a difficult business for people with big ideas. They rarely get it right. Instead, Silver advocates adopting a nimbler approach to observing the world.
When I read gurus like Ramsey and Edelman, I remind myself that their certainty is a sign of the ‘big idea’ thinking that Silver warns against, when we might be served better by smaller ideas, more responsive to changing conditions.

The more certain I am, the less likely I am to be wholly right.

A version of this post ran in the San Antonio Express News.

Please see related posts:

Book Review: The Signal And The Noise by Nate Silver

My 15-year mortgage – I am a Golden God

Rent vs. Buy a house

Home Equity Lines of Credit are awesome

The Latte Effect in my own life

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I have strong pro-HELOC views, as I’ve written about in the past . ↩

June 28, 2015June 28, 2015

Greece On The Brink: Notes From The Island

Editor’s note: The following is from The Banker’s Editor-in-Chief, aka Mom.

Mom spends a month every year on a Greek island, populated by ex-pats. She has watched the island move from the drachma-economy of extremely cheap living, to a much more expensive, but possibly unsustainable, economic model. All sides blame others for this crisis. In the details of her note are some hints at the causes and tensions of the crisis.

Greece is in the midst of a financial panic, likely the last few moments before they officially leave the euro and default. ¹

———–

From Mom, June 28, 2015

Afternoon update – I left the beach and went to the port village hoping to use the ATM to get euros for my return to Athens and then the States. Empty.

Morning update – Two summers ago, at an island luncheon, a Greek central banker remarked that in light of the ongoing crisis, Greeks would have to start paying the taxes they owe. But now, as default looms in a few days, I see little change here. Only about half the restaurants give bills rung up on cash registers; the rest still write them down on paper and presumably do not report them as income. On my way here, one taxi driver from Athens proudly submitted his bill to me with the tax listed, but he is a notable exception. All encounters with bureaucracy, whether at the bank, the town hall, or the ferry ticket office take enough time to infuriate me and that inefficiency may discourage tax-paying. The Greeks, mostly self-employed entrepreneurial taverna owners that I deal with are delightful, helpful, and fatalistic about a bankruptcy over which they have no control. A few consider themselves and fellow countrymen to blame for overspending and over-borrowing, but others talk about the rape and pillage of Greece by the Germans in WWII as a reason for not paying the current debt. The majority of the island residents voted for the current government, which has said the existing debt terms are unacceptable because of the suffering of so many unemployed Greeks.

The Brits, Dutch, and Germans who have summer houses here love Greece and the Greeks they know, but they are very annoyed that their high taxes, funneled here through EU projects, have been wasted by poor planning and execution as well as by outright corruption in Greece. Lots of unhappy jokes about the 22 million euros spent on the new island reservoir that leaks and the small amounts for hiking paths that tourists use that are now overgrown and have rotting picnic tables. The Europeans are keeping only a bare minimum of euros in their Greek bank accounts so they won’t lose much if those accounts are converted to a devalued “Drachma.” A German partner of the retired local priest who lives here year round, however, has resisted that euro flight and proudly kept significant savings in the local National Bank of Greece.

Germany_invades_greece — Some historical context on the strong views from Greece

When I first came to the little Greek island – where I spend a month every summer – 30 years ago, the Old Village (high on the mountain) had no electricity, one telephone, no paved roads, but many tavernas with beautiful views and fairly quiet generators. Now, especially since joining the EU, and having years of a huge influx of Northern European cash, we have too many cars and scooters, but tourism has never been truly busy since the conversion to the Euro. When the super-cheap prices of tours using the drachma finished, those tourists moved on to Turkey and Bulgaria. Other Europeans and the few adventurous Americans who can afford the new Euro prices either don’t find Greece “shaped-up” enough or resent the ugly things some Greeks have been saying about them as “pillaging” creditors.

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Either default ‘again,’ or default ‘officially’ for the first time on their sovereign debt, depending on your view of what happened over the past few years of debt restructuring and debt extension. ↩

June 22, 2015June 22, 2015

FICO Part II – When To Ignore It, And Why Its Awesome

Last week I wrote about the personal credit score, used by virtually all lenders in this country, known as FICO.

But I know there are some of you who you can and should ignore your FICO score.

I also want to mention the risk of paying too much for your score, the benefits of boosting your score, and a reason why I think FICO is kind of awesome.

Maybe disregard all this?

I made the case that everybody should spend up to $20 to buy their FICO score (and credit report).

But personal finance guru Dave Ramsey makes the following fine point about FICO scores: Ignore them.

That’s fine for his larger lesson, which is to urge people to live entirely debt-free. If you live a cash-only, debt-free financial life, you don’t need a FICO score because you don’t ever need to ask a bank for a loan.

For people at the extreme ends of the financial spectrum, I endorse Ramsey’s hard-core approach to FICO scores and borrowing.

If you can always pay cash because you’ve got unlimited amounts of it, by all means ignore your FICO score. And if you’ve been in distress because of a debt problem that needed curing through bankruptcy or by going cold turkey on borrowing, again I think Ramsey’s right. Ignore your FICO score.

But for the 90 percent of us in the middle, we need to pay attention to our score.

When you know your score before you walk into a bank, you know whether the loan you got offered by the bank is at the lowest rate possible.

If you don’t know your own FICO score, you’re entirely at the mercy of your lender.

Call me crazy, but maybe you don’t want to do that?

What else NOT to do

While I do think we should spend a small amount of money to learn our FICO score, I want to caution people about the FICO-purchasing process.

Do not spend too much money on this. Achieving the right balance of FICO knowledge means not overdoing it. Each of the three credit bureaus, plus the Fair Isaac Corp., will try to encourage you (“trick you” is maybe too strong a word, but that’s basically what they’re doing in my opinion) to sign up for “monthly credit monitoring,” for something like $25 per month or $120 a year.

Don’t do this.

Also, all these folks will offer a “free” credit report and score, as long as you make a long-term (read: expensive) commitment to buy more of their services later.

Again, don’t do this.

Having been through the experience a few times, I will warn you that they make it relatively difficult to simply purchase one credit score from one bureau for under $20, but that simple purchase and price should be your goal.

And it is doable.

Benefits of FICO repair

What’s clear from the FICO formula is this: If you have unpaid bills, taxes, judgments or liens weighing down your credit score, you can turn around your credit score.

Not without settling up with creditors on what you owe, and certainly not quickly, but it can be done. Consider it a marathon, not a sprint. And if you can survive the marathon, you’ll reap considerable rewards.

On your car, with a 720 FICO qualifying you for a prime loan, you might lower your loan’s interest rate by 10 percentage points. On a $20,000 loan over seven years, you’d pay about $100 less per month with a prime loan instead of a subprime loan, or about $8,575 less in interest over the life of your auto loan.

On your home, the differences are much more dramatic still. With a 720 minimum FICO, you might lower your mortgage by 5 percentage points, moving from a subprime to a prime mortgage. On a $200,000 mortgage over 30 years, you’d end up paying $655 less per month, or $236,000 less in total interest over the life of your mortgage.

Even more, a low credit score could lock you out of the chance at homeownership entirely, which might have even more dramatic financial results given the advantages of homeownership.

That’s why small changes in solving past credit problems can lead to big financial results in the long run.

No discrimination

Besides the financial advantage of knowing whether you qualify for a prime loan, I’m a big fan of the FICO score because of its essential “fairness.”

In a way, FICO scores are awesome — because they do not discriminate based on anything about us except our own past borrowing behavior.

I’m not certain the George Bailey “It’s a Wonderful Life” world of banking ever existed — where a banker could personally decide to lend, or not, based on judgments about a customer’s reputation and character. If it did exist, we can imagine that discrimination played an important part of lending decisions.

A FICO score however, does not discriminate based on income, wealth, profession, geography, education level, race, class, gender, sexual orientation, physical ability or the three timeless banker’s questions posed by the Zombies back in 1967: “What’s your name? Who’s your daddy? Is he rich like me?”

When you think about it that way, FICO does something amazing that none of us can do, since we are all (hopefully unwillingly) bundles of human discrimination at all waking moments.

Yes, a FICO score reduces our glorious individuality into a dehumanized series of digits, to be fed into a banking conglomerate’s Sylvester McMonkey McBean machine and spit out the other side. But, if you understand this dehumanization as the opposite of discrimination in lending practices, you might decide that’s actually a good thing.

A version of this post ran in San Antonio Express News

Please see related posts

FICO Part I – What goes into the scoring?

Ask an Ex-Banker: Monthly balances and FICO scoring

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June 18, 2015April 14, 2017

Ask An Ex-Banker: FICOs Score and Monthly Balances

Note: See Part I on FICO Scores, which inspired this question from a reader.

Dear Banker,

I’ve been getting copies of my 3 credit reports annually since 2005.

I’m concerned about a change in the reported information from Capital One and Chase. My reports used to reflect
1) amount billed
2) scheduled (minimum) payment
3) actual payment

The latest reports from Transunion and Experian no longer reflect the “actual payment” amount, so although my reports show all payments made on time, it doesn’t reflect the full balance being paid monthly as opposed to the minimum payment.

I feel like I have to alternate credit cards in order to have a zero balance every other month so it doesn’t appear that I’m making minimum payments and carrying an unpaid balance.

I’ve contacted Capital One and Chase to ask them to report the actual payment amount as they used to, but all I get is a standard response “we’re correctly reporting your account” to the credit bureaus.

Am I wrong in thinking that if they report amounts in addition to whether or not the account is “paid on time”, they should include actual amount paid as well as amount billed?

Thank you
Bette in SA

—

Dear Bette,

Thanks for reading, and for your good question.

The most important element for FICO scoring (35%) is whether bills are paid ‘on time,’ so if you’re consistently doing that, your score will reflect that, and the fact that there’s a balance on your report is (mostly) irrelevant.

The FICO algorithm doesn’t care whether you make minimum monthly payments or full-balance payments. As long as payments are being made ‘as agreed’ according to the fine print you signed with your credit card company, your FICO score can’t distinguish between people who carry a balance and people who pay off their balance every month. What I mean is your score won’t be hurt by minimum monthly payments, nor can you really boost your score by making maximum/full balance payments. There is (almost) no distinction between them, for scoring purposes.

Small caveat: One small part of your score reflects your ‘usage amount,’ meaning what proportion of your available credit balances are used at the time of the score. Meaning, if you had a total of $10,000 in available credit among all your cards, and you were using $9,750 of that with a credit card balance, that could slightly lower your score. Not much, but a little.
Conversely, If you had a total of $10,000 available credit, but only showed up with a monthly balance of say $300 (leaving you with $9,700 available unused credit), that would slightly raise your score. Not much, but a little.

credit_score_auto_loans — A useful graphic linking credit scores and auto-loan rates

That would be the only sense you could be concerned about the monthly reported balance as you described. However, if you have many thousands in available credit and only hundreds in reported balances, those reported balances are basically irrelevant for your score.

As for you question to Chase and Capital One – I’m sure they won’t change their reporting methods. They just do an automated snapshot on a monthly basis to send to the credit bureaus. On any given day of that snapshot, we (the consumer) may have an outstanding balance on our card, even if we don’t carry any balance month-to-month.

My strong advice – don’t try to alternate card usage, and don’t worry about it, it’s not hurting your credit.

Michael

Please see related Posts

FICO Part I – What’s in the Score?

FICO Part II – Ignoring FICO and also why FICO is awesome

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June 15, 2015June 7, 2018

FICO Scores – Part I

I’m 43 years old and I have a terrible confession to make: I still know my SAT scores by heart. Wait, it gets worse. I still know my PSAT scores by heart. I know, I know, I’m that guy. I’m not proud of this so let’s move on quickly to another semi-related topic: FICO scores.

Unlike the SAT, everybody should track his or her FICO score throughout adulthood.

I bring up the SAT analogy because you should no more apply for a loan without knowing your FICO score than you would think of applying to college without knowing your SAT score. Like the SAT, FICO serves as a sorting mechanism determining your eligibility, in this case, for lending products.

Any credit card, auto-loan, mortgage, or business loan application you submit will prompt your lender to pull your credit score as a major determinant of your access to their best, or worst, products.

Unlike the SAT, however, you only need to remember one single number to achieve total success: a 720 FICO.

An online universe of FICO-score nerds exists and I’m not writing with that audience in mind, any more than I would encourage SAT nerds to remember their scores 25 years too many. (Yes, I’m looking right at you, mirror.)

FICO determines loan quality
If you’ve got a 720 FICO, considered by most banks the cutoff for “Prime” loans – the ones with the lowest interest rate and best terms – then you can stop nerding out about your FICO score. A higher score than 720 gives you nothing but bragging rights.

If you’ve got lower than a 720 FICO, expect to pay more in fees and interest, with fewer options. Borrowers in the high 600s may still qualify for what’s known in the banking world as “Alt-A” loans. Borrowers with a FICO score in the mid 600s or below either qualify for Subprime loans – a high interest rate, high fees, and somewhat punitive terms – or no loan at all.

What to do

So how do you access your score? The FICO company, as well as the three credit bureaus Equifax, Experian, and TransUnion each offer personal credit reports and scores for less than $20 each. You can spend a couple of minutes online to access your report and score, and I highly recommend doing this before applying for a loan anywhere.
You really don’t need to buy more than one score with one report from one bureau, so you should be able to accomplish your goal for under $20.

Free credit report?
Consumer advocates trumpet the idea that you can get a free credit report each year, which is true.
But that report does not come with a FICO score. I don’t think that a credit report without a credit score fully equips you with all the knowledge that you need.

To return to my college analogy, a free credit report with no FICO score is like a college application full of essays but no SAT score. You are not getting the full benefit of seeing your application the way a bank sees it, which is ultimately one of the main points of reviewing your credit profile. I advocate spending the money to get the score along with your credit report.

Inputs to FICO
So what does FICO measure? The Fair Isaac Corporation, the company behind FICO, reports that five factors go into their mathematical formula, all of them measurements of past borrower behavior.

I’ll list the factors in order of importance, according to their formula.

First: – Have you ever missed debt payments, and if so, how often and how recently? (35 percent)
Second – How much do you owe now? High debt lowers your score, while low debt compared to your available credit actually raises you score. (30 percent)
Third – How long have you been borrowing money? A longer time raises your score, while a shorter time lowers your score. (15 percent)
Fourth – FICO considers some types of credit like installment loans riskier than other types of credit like mortgage loans, and adjusts your score as a result. (10 percent)
Fifth – Have you applied recently for credit? This lowers your score a bit, as it shows you need to borrow money. (10 percent)

Lesson One: Time
Reviewing these five factors, we can see that the biggest determinant of your score is time: Specifically, are you timely with your bills, and how long have you responsibly handled debt?
Because of the impact of time, even younger borrowers with perfect credit history cannot achieve very high FICO scores (in the 800s), whereas older borrowers have a natural advantage because they may have very ‘old’ credit lines boosting their scores.

Lesson Two: No tricks
You should never make a financial or borrowing decision based on how it will affect your FICO score. Instead, just do the ‘right thing’ in your situation, and the FICO will work itself out. Paying your bills on time, lowering your balances when you can, building up a long-term track record of ‘safe’ borrowing behavior is the only reliable method for boosting your FICO.

Plenty of ‘services’ claim to be able to boost your credit score, but I would never recommend attempting any of these. Like many other areas of finance, the best practice is to ignore short cuts and tricks. Just stay focused on the long-term unsexy practice of paying back your debts. The FICO score will work itself out in the long run.

When I say you should avoid tricks and mostly ignore your FICO score, I don’t mean to ignore the underlying issue of settling past debts. The best practice is to make like a Lannister, and always pay your debts.

Next week I’ll write about when to totally ignore your FICO score, but also the financial advantages of not ignoring your FICO.

A version of this post ran in the San Antonio Express News.

Please see related posts:

Ask an ex-banker: FICO scores and monthly balances

FICO Part 2 – When to ignore FICO, and why FICO is awesome

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June 8, 2015June 8, 2015

In Defense of John Paulson

I feel like there are lessons about philanthropy in John Paulson’s $400 million gift to Harvard that I haven’t seen explained yet.

I don’t know John Paulson (maybe that’s already obvious?) but I feel like I know a little bit about how he thinks, having worked with, for, and as a mortgage bond professional, and with, for, and as a hedge fund investor.

John Paulson is most famous for making $4 Billion in 2008 via the The Greatest Trade Ever, shorting sub-prime mortgage bonds through his eponymous hedge fund. Last week he shot back into the public eye for his philanthropy and the subsequent negative reactions to his gift, spearheaded by smart guys like Malcolm Gladwell and other pundits.

In reviewing reactions to his $400 million gift to Harvard’s School of Engineering and Applied Sciences, I’m struck that I haven’t heard an accurate description of Paulson’s reasoning, based on what we know about him. The overwhelming reaction of the smart guys is to complain that Harvard is one of the least deserving ‘charities’ around. Further, the conventional-wisdom smart guys complain, couldn’t he have found a charity to address poverty, or something more worthy, rather than make an already elite institution more elite?

Having worked with guys like Paulson, and understanding a bit about his professional background and track record, I know the following four things:

1. He’s focused on value. He would prefer to die rather than overpay for something.

What I mean by that is that when Paulson pays $400 million to Harvard for naming rights and also to get credit for the largest gift ever to a University, he’s not being careless about the amount. If he could get that kind of value for $375 million, he would have paid $375 million, not $400 million. Whatever the ultimate purpose of the gift (and I don’t pretend to know that, any more than I really know the inner thoughts of Paulson) he didn’t come up with $400 million by accident. And whatever his reasoning, and no matter how large the headline number, he was not overpaying.

2. He wants the #1 best thing. Not tenth best, not seventh best, not second best. Just the number one best thing. This next statement may sound flippant, and it may sound like I’m being Harvard-proud, and I really don’t mean to be. But if Paulson felt like he could have gotten what he wanted by donating to Dartmouth he would have done it. He chose Harvard because it struck him as the best.

Giving to ‘the best,’ obviously, is a different mind-set than giving to the ‘most worthy.’

Paulson’s critics feel he should have found a worthier cause than Harvard. Maybe so. But is that theoretical preferable charity the absolute best in the world at what they do? I suspect that criteria mattered to Paulson, as it does to many people who think like Paulson.

3. Risks matter tremendously. If he’s going to pay good money, the risks should be minimized. I think this point is probably key to why he didn’t give $400 million to a program to combat poverty, or end malaria, or whatever it is that Gladwell would have preferred he do. By giving to Harvard, Paulson can be certain that the institution will continue to thrive and be a steward of his funds 50 years from now. Did Paulson analyze the existing anti-poverty charities and find them too risky? I wouldn’t be shocked if he did.

Short of giving to the Bill and Melinda Gates Foundation ¹, I’m not sure how one gives huge sums of money to an anti-poverty charity at that scale while still minimizing one’s risks.

I’m not trying to argue that anti-poverty charities (or whatever Gladwell wants him to give to) are inherently risky. I actually have no idea. What I mean is that Paulson – by trade and by training as a hedge fund guy – has to be incredibly focused on risk management. You can’t succeed the way he has without applying the same eye for risk to one’s philanthropy. The one thing Harvard has over almost any other ‘charity’ is its image as a prudent low-risk investment.

Why would anyone like Paulson give to a ‘charity’ that already has a $36 billion endowment? Its a safe bet, that’s why.

4. The “smart guys” like Gladwell who represent conventional wisdom? Paulson does not give a fuck.

Just to expand for a moment on this fourth point, and to boil it down further with mathematical precision: Paulson gives precisely zero fucks what Malcolm Gladwell writes on Twitter.

Paulson’s “career trade” was made by understanding which way the entire mortgage bond market was positioned in 2008, and then he made the exact opposite bet, at extraordinary risk to himself and to his investors. In hindsight, he was a genius, but that move was incredibly difficult to make at the time, when every other short-seller of the mortgage bond market up until that point had gotten their ass handed to them.

Paulson’s smart enough to understand how the rest of the world thinks, but iconoclastic enough to lay that aside to determine what he alone thinks.

Most of us have a hard time going that strongly against the grain of public thought. Paulson’s entire career success is based on extreme contrarianism.

Lessons of Paulson’s gift

At the risk of trying to tie this all up with a neat bow, I think philanthropies can learn from the lessons of Paulson’s gift.

To appeal to a certain type of giver like Paulson, the point shouldn’t be to try to be the ‘worthiest’ cause in the universe, but rather to offer good value for the money. People who have made a lot of money in their lifetime tend to respond to value arguments – how will their gift have a bigger impact with you, rather than with someone else?

Further, are you the absolute best in your category? Forget neediness or worthiness. I suspect neediness is in fact a major turnoff for big donors. But excellence and being #1? Are you the Harvard of your category? I bet that’s very attractive to Paulson.

Next, are you a low risk? People who manage money for a living and who have a large fortune to steward want to see their money managed wisely, even after it’s given. Especially after it’s given.

Finally, does your donor give in order to be part of the in-crowd? Or to be an iconoclastic contrarian? We know by reputation that Paulson’s going to do whatever he thinks, not what the rest of the people think. That’s probably rare, but in the case of Harvard as a recipient, to their ultimate benefit.

I bet most people are social givers, eager to become or remain as a member of a social group, and philanthropic efforts to keep them appreciated as part of an inner circle probably matter a lot. Contrarians are rarer, but in Paulson’s case, can turn out quite nicely too.

[Fake full-disclosure/non-disclosure: I have given precisely zero dollars to my alma mater Harvard in the twenty years since I graduated from there, and I also give precisely zero fucks about Harvard’s philanthropic needs.]

Please see related posts

On Philanthropy Part I – Giving Money Away

On Philanthropy Part II – Asking for Money

My actual preferred philanthropic interest, the Greatest High School In The World

TED Talk on Philanthropy

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