As financial reform is being finalized, I was thinking about the causes of the crisis and I was brought back to the days when I was starting my credit education and then was a senior instructor with Chase. At that time in the early and mid 1980s, we were facing a similar crisis and were emphasizing what we called the 5 Cs of credit: character, capital, cash flow, collateral and (financial) condition. This discipline was important and helped us get through that crisis and several more over the next three decades. Those principles remain as valid today as they were back then.

Capital and financial condition are key variables that can tell you that a borrower is healthy, well run and has adequate reserves to face the unexpected. Cash flow is the best measurement of the ability to pay you back.  Whether it be a business or an individual, if cash flow is not adequate, you will not get your payments on a timely basis. Collateral is there as a fall back in case your analysis of these variables failed to discover some weakness or flaw.

However, character was probably the most important variable and the one hardest to assess. As my first mentor in banking liked to say, “You never make character loans, but you never make loans without character.”

If capital, financial condition, cash flow and collateral measure repayment ability, character determines the willingness to pay. Being willing to pay, committed to paying back a debt, is even more important than being able to pay.

Too bad so many so called lenders forgot this little axiom.

“The game of life is the game of boomerangs. Our thoughts, deeds and words return to us sooner or later, with astounding accuracy.”   Florence Shinn