What an interesting development in the San Bernardino terrorism case. According to Fox News, a "$28,500 deposit was made to Syed Farook's bank account from WebBank.com on or about Nov.18, some two weeks before he and his wife Tashfeen Malik carried out the San Bernardino massacre."(1)
WebBank is an Utah-based Industrial Lending Corporation (ILC). It has recently become the centerpiece of an easy access consumer loan program brokered on the internet by companies such as Prosper Funding LLC. Prosper says it has issued $4 billion in loans to 250,000 borrowers. These state regulated loans are $2-$35k loan with 3 to 5 year terms charging interest rates from 5.99 percent - 36 percent APR depending on the quality of the borrower and their payment history. Prosper states its goal is to grow to issuing over $300 billion such loans by 2020 which would be roughly 19 million people. The funding support for this lending program comes from another San Francisco start up, an investment fund named Prospectus. Prospectus investments are not deposits, are not FDIC insured, and are what are called fully at-risk investments. Prosper & Prospectus both San Francisco based, Silicon Valley financed ventures. At the center between these two entities is WebBank. They provide the infrastructure to issue the loan and distribute the finds from investor to borrower.
To qualify for such loans is relatively easy. Having a job for instance. Mr. Syed Farook had a very good county government job. He would have easily qualified for such a loan and, barring some other reason for WebBank to have transferred $28,500 to his account, may have done just that. Fox indicated that WebBank initially refused to comment for the story and it's possible that it could have been a directed transfer from someone else. However, applying for such loans on the internet is amazingly seamless. "Six clicks to money" is one of the memes that marketers of this type of lending use.
WebBank's role as the enabling banker for issuing this type of loan has been profitable. As of the 3rd Quarter of 2015, WebBank's FDIC CALL report showed a 19.7 percent Annualized Net Interest Margin (NIM). Not bad for a $278 million asset institution. By contrast, $1.6 trillion asset Bank of America N.A.'s 3Q2015 NIM was 2.89 percent. WebBank's Other Consumer Lending assets -- that's an FDIC reporting category -- comprised 31 percent of lending assets performing at an eye watering 7,132.8 basis points of gross income per lending dollar. Most banks are happy to get 300 to 400 bp right now. (2) This is a boom town business the likes of which have not been seen since Countrywide got into sub-prime mortgage correspondent lending; a sign of the times as the Internet micro lending makes its way into the American economy. The loan brokering is once again happened using state regulated independents that fall below the federal radar. The loans are sold into pools for bond securitization taking the original investors off the hook and shifting it to portfolio managers hungry for yield in a zero-interest rate marketplace. It's wide open, easy cash to minimally qualified borrowers. The industry hopes to have issued $2 trillion dollars of this type of loan by 2025. That's about the same size that the mortgage bloat got to before the last "Black Swan" hatched. Ok so maybe you're asking, "What could go possibly wrong?" That's for another time. For now, back to our man Farook. Was this in fact one of the asymmetric vulnerabilities he exploited? If I were the FBI, I'd look into it.
Obviously, funding terror attacks are not what these easy access consumer lending programs are for. But even I must admit that it's a brilliant way to fund a terrorist attack in the United States. All you need to do is find a radicalized individual with a job and you can borrow more than enough to buy weapons, ammunition, uniforms, transportation, the works. As someone who has studied and taught about asymmetric warfare in the past, most innovative. Well played. Not only were they able to finance their attack but they were able to do it in a way that hid it from detection until after the fact. Until now, using this vehicle was entirely theoretical. It's not anymore and I expect the micro-lending industry will be doing a bit more borrower vetting in the future, or should be.
This begs in my mind a rather critical question. How in the hell did this couple get the idea to use what is quite a sophisticated form of financing scheme for their plans? Micro lending using internet based loan offers backed by speculative capital facilitated by a technical process is most advanced in places like West Africa where people do it with "cell phone money" lending. But, it's a relatively new thing in the United States. So new that U.S. state and federal regulator are only just beginning to wrap their tentacles around overseeing it. As a financial analyst, I'd be suspicious that someone far more sophisticated than an agitated husband and wife had a hand in figuring out the puzzle pieces. Again, whoever figured it out was most astute. Deadly astute. Makes me angry astute.
Ok, so enough with ranting about us being outmaneuvered. It happens. The war moves on. There is a silver lining. If this enabling financial vehicle was used by these terrorists, I'm actually positive for our side. This we can defend against. We can target the use or our financial system's safeguard mechanisms to dissuade, detect and alert financial authorities at the federal and state regulation levels. Much like TSA does for physical defense, new combinations of transaction safeguards and risk management regulations can be used to mount a financial defense. Cutting off an avenue of attack denies the asymmetric attacker the one thing they need to succeed, an undefended angle of approach.
We should do so.
2. TBS Bank Monitor, www.bankmonitor.com