Crisis Lending Protocol

---
name: crisis-lending-protocol
description: Evaluate opportunities to become a lender when traditional sources fail, setting appropriate terms that balance opportunity with ethics and securing adequate collateral.
license: MIT
metadata:
  author: sethmblack
  version: 1.0.3721
repository: https://github.com/sethmblack/paks-skills
keywords:
- crisis-lending-protocol
- writing
---

# Crisis Lending Protocol

Evaluate opportunities to become a lender when traditional sources fail, setting appropriate terms that balance opportunity with ethics and securing adequate collateral. This framework draws from Hetty Green's crisis lending during the Panic of 1907, when she lent millions to New York City and became the only woman invited to J.P. Morgan's emergency banking meetings. Green's approach balanced opportunity with Quaker ethics—she charged 6% when market rates exceeded 40%, explaining simply: "I am not a usurer." This skill helps you assess borrower quality, evaluate collateral, set fair-but-profitable terms, and maintain ethical boundaries in crisis situations where you have cash and others do not.

---

## When to Use

- Banks or traditional lenders are unable or unwilling to lend
- A borrower with good collateral is desperate for capital
- Credit markets are frozen or dysfunctional
- You have substantial liquidity and others do not
- User asks "They need money and banks won't lend" or "How do I lend in a crisis?"

---

## Inputs

| Input | Required | Description |
|-------|----------|-------------|
| borrower | Yes | Who needs the money (individual, company, municipality) |
| amount_requested | Yes | How much they need |
| purpose | Yes | Why they need it |
| collateral_available | Yes | What security can be provided |
| market_rate | No | Current rates for comparable lending (if markets functioning) |

---

## Core Principle

Crisis lending occupies moral territory between charity, fair business, and usury. You are entitled to premium rates because you took the risk of holding cash, maintained liquidity when others did not, and provide capital when no one else will. You are NOT entitled to whatever the market will bear regardless of fairness, rates that guarantee borrower failure, or terms designed to seize collateral rather than be repaid.

---

## Hetty Green's Crisis Lending

During the Panic of 1907, Hetty Green became indispensable:

- Lent $4.5 million to New York City months before the panic (~$150 million today)
- Lent another $1.1 million at the peak of the panic (~$33 million today)
- Lent to financiers and businesses throughout the crisis
- Was the only woman invited to J.P. Morgan's emergency banking meetings

### Why She Could Lend

1. **She had cash** - While others held securities, she held currency
2. **She had no obligations** - No debts, no margin calls, no forced selling
3. **She had expertise** - Decades of evaluating loans and collateral
4. **She had nerve** - Willing to lend when others were paralyzed

### Her Ethics

Hetty charged 6% when market rates exceeded 40%. Her explanation:

> "I am not a usurer."

Her Quaker values prevented exploitative rates even when the market would have paid them. This balance—profiting from crisis while not exploiting desperation—is central to this protocol.

---

## The Framework

### Step 1: Assess the Borrower

| Question | Answer | Implication |
|----------|--------|-------------|
| Why can't they get traditional financing? | [Reason] | Is it crisis conditions or borrower weakness? |
| What is their track record? | [History] | Have they honored obligations before? |
| Do they have viable path to repayment? | [Assessment] | Will they be able to pay, not just willing? |
| What is their character? | [Assessment] | Would you trust them on a handshake? |

**Hetty's insight:** The best crisis borrowers are good credits facing temporary liquidity problems, not weak credits finally exposed.

**Red flags:**
- They were already struggling before the crisis
- Their business model is broken, not just their financing
- They have history of default or dispute
- The "crisis" is actually their chronic condition

### Step 2: Evaluate the Collateral

| Collateral Type | Quality | Considerations |
|-----------------|---------|----------------|
| Real estate | Often excellent | Can you value it? Can you sell it if needed? |
| Government bonds | Excellent | Current value may be below par in crisis |
| Business assets | Variable | Depends on business viability |
| Personal guarantee | Weak alone | Only meaningful with assets behind it |
| Revenue streams | Good if reliable | Government revenue best (Hetty's preference) |

**Hetty's standard:** New York City revenue bonds—backed by taxing power, short-term, easily valued.

**The key test:** If they default, can you recover your principal from the collateral without lengthy legal battles?

### Step 3: Set the Terms

**Rate determination:**

| Factor | Impact on Rate |
|--------|----------------|
| Collateral quality | Better collateral = lower rate |
| Borrower quality | Stronger borrower = lower rate |
| Market conditions | Frozen markets = higher justified rate |
| Term length | Longer term = higher rate |
| Your relationship | Ongoing relationship may justify lower rate |

**Hetty's approach:**
- Charged 6% in 1907 when market rates were 40%+
- Her rationale: Reasonable profit without usury
- Modern equivalent: Above normal rates but below crisis rates

**Recommended range:** 1.5x to 3x normal market rates for equivalent risk
- Below 1.5x: You're doing charity, not lending
- Above 3x: You're approaching exploitation

**Term structure:**
- Prefer shorter terms (reduces risk)
- Clearly defined repayment schedule
- Prepayment option for borrower (goodwill)

### Step 4: Structure the Security

| Element | Requirement |
|---------|-------------|
| Collateral ratio | 1.5x to 2x loan amount minimum |
| Documentation | Clear title/ownership of collateral |
| Custody | Control or verifiable third-party holding |
| Default provisions | Clear triggers and remedies |
| Priority | First lien position required |

**Hetty's structure with NYC:**
- Short-term revenue bonds
- Backed by city taxing authority
- Clear maturity date
- Unambiguous repayment obligation

---

## Output Format

```markdown
## Crisis Lending Assessment

### The Opportunity
**Borrower:** [Who needs the loan]
**Amount requested:** $[X]
**Purpose:** [Why they need it]
**Term requested:** [Duration]

### Borrower Assessment
**Why can't they get traditional financing?** [Reason]
**Track record:** [History with obligations]
**Path to repayment:** [How they'll pay you back]
**Character assessment:** [Your judgment]
**Verdict:** [Lend-worthy / Marginal / Avoid]

### Collateral Evaluation
**Collateral offered:** [Description]
**Estimated value:** $[X]
**Collateral ratio:** [X:1 (collateral to loan)]
**Liquidation feasibility:** [Easy / Moderate / Difficult]
**Legal clarity:** [Clear / Complicated]
**Verdict:** [Adequate / Marginal / Inadequate]

### Recommended Terms

**Decision:** [LEND / DECLINE / NEGOTIATE]

If LEND:
**Amount:** $[X]
**Rate:** [X]% ([explanation vs. market])
**Term:** [Duration]
**Collateral required:** [Specifics]
**Collateral ratio:** [X:1]
**Key covenants:** [If any]
**Default triggers:** [Conditions]

If DECLINE:
**Reason:** [Why]
**What would change this?** [Conditions for reconsideration]

If NEGOTIATE:
**What needs to change:** [Specific requirements]
**Your position:** [Non-negotiable elements]

### Risk Assessment
**Primary risk:** [What could go wrong]
**Mitigation:** [How collateral/terms protect you]
**Worst case outcome:** [If default, then what?]

### Ethical Check
**Rate fairness:** [Profitable but not usurious?]
**Borrower alternative:** [What happens if you don't lend?]
**Your conscience:** [Would you be proud of these terms?]

### Hetty's Verdict
[Summary in her voice]
```

---

## The Ethics of Crisis Lending

### The Balance

Crisis lending occupies moral territory between:
- **Charity** (lending at below-market rates as favor)
- **Business** (lending at fair premium for risk and scarcity)
- **Usury** (exploiting desperation for excessive gain)

Hetty chose the middle path: profit meaningfully from her preparedness, but do not gouge.

### Justification for Premium Rates

You are entitled to premium rates because:
1. You took the risk of holding cash (opportunity cost)
2. You maintained liquidity when others did not
3. You are providing capital when no one else will
4. You are taking credit risk others refused

You are NOT entitled to:
1. Whatever the market will bear regardless of fairness
2. Rates that guarantee borrower failure
3. Terms designed to seize collateral rather than be repaid

### Hetty's Test

Ask: "Am I a usurer?"

- **No:** Your rate is premium but allows borrower to succeed
- **Yes:** Your rate or terms are designed to extract maximum pain

When in doubt, charge less. Reputation for fairness in crisis builds future opportunity.

---

## Constraints

- Never lend without adequate collateral—1.5x to 2x loan amount minimum
- Never lend to borrowers who were already failing before the crisis
- Never set rates so high they guarantee borrower failure
- Always verify collateral ownership and priority position
- Meet the borrower personally when possible—character matters
- Document all terms clearly before disbursing funds
- Reputation for fairness in crisis builds future opportunity

---

## Anti-Patterns to Avoid

| Anti-Pattern | Why It Fails | Better Approach |
|--------------|--------------|-----------------|
| **Usury Disguised as Opportunity** | Charging 40% because "the market will bear it" destroys borrowers and your reputation. | Charge premium rates (1.5-3x normal) that compensate your risk without exploitation. |
| **Lending to the Desperate Without Collateral** | Good intentions don't protect your capital; desperation doesn't equal creditworthiness. | Require collateral that allows recovery if the borrower defaults. |
| **Confusing Crisis Liquidity with Chronic Weakness** | Some borrowers need temporary bridge capital; others are fundamentally broken. | Distinguish between good credits facing temporary problems and weak credits finally exposed. |
| **Skipping Due Diligence Because of Urgency** | Speed feels important but bad loans made quickly are still bad loans. | Take time to verify collateral, meet the borrower, and assess repayment path. |
| **Predatory Terms Designed to Seize Collateral** | This is asset-stripping, not lending. It's unethical and damages your reputation. | Set terms that allow the borrower to succeed and repay. Your goal is interest, not their property. |

## Example

**Input:** "A local business owner needs $100,000 to make payroll during the credit crunch. Banks won't lend. He offers his commercial property (worth ~$300,000) as collateral. Normal business loan rates are 8%. What should I do?"

**Output:**

## Crisis Lending Assessment

### The Opportunity
**Borrower:** Local business owner
**Amount requested:** $100,000
**Purpose:** Payroll during credit crunch
**Term requested:** Assumed 6-12 months

### Borrower Assessment
**Why can't they get traditional financing?** General credit crunch, banks not lending even to qualified borrowers
**Track record:** [Would need to verify - payment history, time in business, reputation]
**Path to repayment:** Ongoing business operations; if business viable, should be able to repay from operations once crisis passes
**Character assessment:** [Would require direct meeting]
**Verdict:** Potentially lend-worthy pending verification

### Collateral Evaluation
**Collateral offered:** Commercial property
**Estimated value:** $300,000
**Collateral ratio:** 3:1 (excellent)
**Liquidation feasibility:** Moderate (real estate takes time in crisis)
**Legal clarity:** [Verify clear title, no prior liens]
**Verdict:** Adequate if verified

### Recommended Terms

**Decision:** LEND (pending due diligence)

**Amount:** $100,000
**Rate:** 12-14% (1.5-1.75x normal rates of 8%)
**Term:** 12 months with option to extend at same rate
**Collateral required:** First lien on commercial property
**Collateral ratio:** 3:1
**Key covenants:** Monthly interest payments; principal at maturity
**Default triggers:** Missed payment by 30 days; sale of collateral without consent

### Risk Assessment
**Primary risk:** Business fails, borrower cannot repay
**Mitigation:** 3:1 collateral coverage; even at distressed sale prices (50% of value), you recover principal
**Worst case outcome:** Borrower defaults; you foreclose on $300,000 property for $100,000 loan; even with legal costs and discounted sale, you recover full principal

### Ethical Check
**Rate fairness:** 12-14% is premium (50-75% above normal) but not usurious
**Borrower alternative:** Without this loan, may miss payroll, lose employees, potentially lose business
**Your conscience:** This is fair crisis lending—you're providing capital when needed at a premium that compensates your risk and preparedness without exploiting desperation

### Hetty's Verdict

The collateral is good—three times the loan amount in real property. The purpose is sound—meeting payroll, not speculating. The rate I would charge is 12%, perhaps 14%. This is premium enough to compensate my preparedness, but not so high as to be usury.

I would meet the man first. Look him in the eye. Ask about his business. If he is sound—if he has kept his word before and has a business worth preserving—I would lend.

Banks will not lend because they are frightened. I am not frightened. I have cash, he has collateral, and there is a transaction that serves us both.

But I must see the title first. And I must meet the man.

---

## Integration

This skill is part of the **Hetty Green** expert persona. Use it when evaluating opportunities to provide capital during credit crunches or to distressed but worthy borrowers.

**Related skills:**
- `liquidity-fortress-strategy` - How to have cash available for crisis lending
- `contrarian-accumulation` - Alternative to lending: buying assets directly
- `character-assessment` (Morgan) - Evaluating borrower trustworthiness