--- Gordon Fitch <gcf at panix.com> wrote:
> I was using the term "kiting" rather loosely. Here's what I
> meant: one has, say, three cards. When it's time to make a
> payment on card one, one gets cash from card two to pay it.
> To pay card two, one goes to card three. The banks prohibit
> one from borrowing to pay an account from the same account,
> but they do not as yet (to my knowledge) prohibit one from
> borrowing from another account to pay it -- in fact I get
> solicitations from banks to do just this every week, in
> spite of the fact that I have no debts. (But then, so does
> a neighbor who has been dead for some time.) Perhaps I
> should
> have used a different word, but I like "kiting", which
> reminds
> me of a breezy summer's day in the park.
>
ahhhhhh ... now that's actually quite interesting. The strategy you talk about isn't really kiting, and it isn't /per se/ illegal. To digress:
Kiting is the business of opening two or more checking accounts and writing a check drawn on each payable to the other, thus exploiting the cheque clearing cycle to create a loan which the bank never intended to make. So, I open an account at Bank A and write a cheque for $1000 which I pay into my account at Bank B. Since Bank B will allow me full use of the money right away, while Bank A will take a few days to process the debit, I have effectively conned Bank A into lending me $1000 for the time it takes to process a cheque (for this reason, kiting works better in countries like the USA where there are lots of small banks and where you get your cheques back -- it was never that popular in the UK where the clearing cycle is much shorter).
To digress for a second time, kiting is about the least serious problem with respect to this kind of unintentional loan. Because a lot of interbank transactions still take a long time to settle, it can often be the case that Bank A has an exposure to Bank B running into tens of millions, created through the same kind of phenomenon as kiting. (NB that banks *permit* each other to have this kind of exposure). The problems are particularly nasty when banks are in different time zones. When a clearing cycle exposure involves more than one currency, it is known as "Herstatt Risk", after Bankhaus Herstatt which went belly-up in the 70s, causing an extremely nasty surprise to a lot of banks who found themselves hugely exposed to it through transactions which in the normal course of business wouldn't have been considered as lending.
To return to my earlier digression, the reason that kiting is illegal is twofold a) typically, the only interesting thing you can do with such a short term loan is skip town and steal the cash, and b) you are not telling Bank A that you are creating this loan for yourself; they may not want to lend you the money and you are conning them into doing so. It's fraud, pure and simple.
The strategy that Gordon discusses, however, is by no means always illegitimate. If you have a large debit balance outstanding on one credit card, and if someone offers you another credit card, then there is nothing wrong with transferring that balance, particularly if they are offering an attractive "introductory rate" to do so. The banking system encourages this behaviour. While this in no way alters the illegality (and, IMO, fundamental dishonesty) of taking out a loan which you do not intend to pay back, the fact remains that unlike check kiting, this kind of behaviour would not raise any sort of comment on a bank's anti-fraud systems and could, in the hands of a cool fraudster, make it materially more difficult to investigate and prosecute a fraud. (I reiterate at this point that none of this is advice; good fraudsters don't need my advice and bad ones wouldn't be able to put it into practice. I also reiterate that there is no regular poster on lbo-talk who I would regard as capable of getting away with a significant credit card fraud.)
The question of loan consolidation was also raised (I forget by who; apologies), and is quite interesting. If you took a financial institution up on its kind offer to "consolidate all your loans into one", and if this consolidation loan included your student loan (I don't know enough about student loans to know whether this is likely), and if you then ended up defaulting on the consolidation loan, then this would be part of the normal cost of doing business for the consolidation lender, and it would appear that you would have benefited from precisely the kind of bankruptcy arbitrage which Maureen floated. If you did this without criminal intent, you would not be committing fraud.
Since it is not criminal to make an honest assessment of the likelihood and severity of going bankrupt, and it is not criminal to take into account in that calculation the difference between student loans and other types of loans, it is not inconceivable that someone who knew a lot more than myself about this sort of thing might give advice of this sort to someone in the position of Dennis or Chris (however, for this precise reason, I would very much doubt that anyone offering consolidation loans will let you refinance a student loan in this manner). However, since you can never have enough health warnings, I'll remind everyone that Justin is *right*; to take out a loan without the good faith intention of paying it back is to commit fraud, and fraudsters go to jail. Furthermore, if you go bankrupt for a large sum of money, experienced people with access to a lot of investigative resources will be trying to ascertain whether you were committing fraud. If they think they have a case, they will certainly prosecute and if they prosecute they will almost certainly win. Student loan defalcation seems to me to fall in the middle category; neither a small enough fraud to be reasonably confident of getting away with it nor a large enough one to retire to the Caymans.
and that's quite enough on the subject from me!
dd
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