Imagine you lent a friend £2000 for three years at a 25 per cent yearly interest rate. That would be a nice little earner for you and, sure, it’s not a cheap loan as far your friend is concerned. But he’s not that good of a friend anyway and rent-seeking is easier than working. The first nine months pass and your friend pays up every month, right on time. But then he misses a payment. When you call his mobile, you get his answering machine and when you ask around, people shuffle their feet and mumble stuff like “I dunno maybe he’s like at the gym or something”.
This is a story of a startup going up against its most important investor and losing the fight. Each side has their version of events and the narrative is complicated by the various claims and counter-claims, but it’s a cautionary tale of how personal rivalries can almost ruin a business.
Andrew O’Hagan’s 35,000 word write up of the Craig Wright Satoshi affair in the London Review of Books has been out and circulating since the weekend. The market has had time to digest the information and yet it doesn’t look all that much like anyone has found much closure from the account. For now at least, more questions than answers persist. Some interesting snippets nevertheless included:
Consider this headline from the New York Times last year: Goldman Sachs Plans to Offer Consumer Loans Online, Adopting Start-Ups’ Tactics Alongside this one from the Wall Street Journal last week: Prosper Talks With Goldman, Others to Replace Citigroup on Loan Arrangement That’s Prosper Marketplace, the online lender whose lunch Goldman Sachs is planning to eat with its own consumer loans product, trying to get the very same investment bank to buy-to-securitise Prosper’s personal loans.
One of the rallying cries of the new businesses trying to displace old banks is “transparency”. Whereas in the past, the argument goes, banking was opaque and shrouded in mystery, in the future the financial system will be easier to inspect and therefore crises will be more effectively prevented. This line of reasoning has numerous failings, and of course we are recounting it crudely, but one consequence of this reach for transparency is that many online lenders who have sprouted up since the global financial crisis make their loan data readily accessible to investors and the public at large. The data are heterogeneous across lenders — hence the secondary industry of data analysis companies — but the information is still there, loan by loan, if you can be bothered to take a look.
Online lenders in the UK, who call themselves “peer-to-peer”, have been salivating at the possibility of tapping the ISA market for funds, with the government introducing a new “Innovative Finance ISA” from April 6. The change in the law will let online lenders stick their loans into a tax-efficient ISA wrapper, but there’s a snag — the lenders have to be fully authorised by the FCA before they can start selling their P2P/ISA wares. (Although that hasn’t stopped the likes of Ratesetter and Zopa releasing details of their ISA product in advance. Coming soon, etc).
An update on China’s big ball of money which we have seen pouring into stock, bonds etc before… Right now it’s still rolling hard into Tier 1 property — first Shenzhen, now Shanghai. From HSBC with our emphasis: Following Shenzhen’s lead from last year, Shanghai’s residential property prices rose 24% during the first two months of the year.
In early January, one of the UK’s big three “peer-to-peer” lenders, Ratesetter, began publishing more detailed data on where its loans are going. The company, which is awaiting approval from the Financial Conduct Authority under a relatively light peer-to-peer regulatory regime, said the move would help set “new standards for transparency in financial services”. The new data showed about 60% of loans went to individuals, around 30% to businesses and the final 10% or so to property developers, according to a blogpost by chief executive and cofounder Rhydian Lewis.
The UK’s peer-to-peer lending industry took fire yesterday from none other than former FSA chief Lord Adair Turner, who predicted that “the losses which will emerge from peer-to-peer lending over the next five to 10 years will make the worst bankers look like lending geniuses”. One way to respond to that kind of criticism would be to say, ‘ha, what would a former FSA boss know?’ And lo, via City A.M.:
Online lending, marketplace lending and peer-to-peer lending all refer to the same thing, in order of decreasing accuracy, but regardless of what prefix you use, the semantic assumption is that companies like Lending Club and Prosper Marketplace are lenders. In fact, they both go to great lengths to avoid being judged that way by state regulators, even as they pose to consumers as providers of credit. Although collaboration with banks is the new theme du jour for fintech, online lenders in the US have long clung tightly to banks in order to sell loans that would otherwise be illegal. This is the online lending lie, an unresolved problem full of legal ambiguity that has been prodded by the US courts but not tackled in its entirety.
From the FT’s Tom Mitchell: Chinese police have arrested more than 20 people associated with “a complete Ponzi scheme” that took in more than Rmb50bn ($7.6bn) from investors, according to the official Xinhua news agency. It is the biggest scam yet to emerge from China’s unruly and largely unregulated peer-to-peer lending sector, part of the country’s shadow banking sector. Police had to use two excavators to uncover some 1,200 account books that had been buried deep below ground, according to Xinhua.
Everyone loves peer-to-peer systems these days, right? Peer-to-peer means nasty old intermediaries, who might otherwise overcharge or front-run you, are entirely eliminated from the transaction equation. Instead you, the little guy, get to operate on your own terms and only with those counterparties you want to. And how is this magic achieved? With the power of all-encompassing algorithms. Naturally. Except, none of that is really true. Peer-to-peer doesn’t really eliminate the intermediary, it just substitutes him temporarily for a seemingly benign (though, still commercially incentivised) entity, branded as a digital platform or social network. That such a platform appears benign is only because it charges you less than the competition currently does.
A Macquarie update, on their previous free floats and nutty Chinese markets work, has landed. With our emphasis: Margin positions in the Chinese equities market have continued to rise in the past month, since we wrote our first Twilight Zone note on April 20. Since then, margin positions have risen by 9.2% MoM to RMB1.9 trillion, or an unprecedented 8.9% of the market capitalization of the combined free float of Shanghai-Shenzhen stock markets. This could already be the highest level of margins vs free float in market history…
Most of us know it as shadow banking. Others refer to it as non-bank lending. But a whole new nomenclature — “market-based financing” — is growing in popularity, making the whole thing sound a lot less shadowy, rightly or wrongly. Nathan Sheets, Under Secretary for International Affairs at the Treasury, in any case urged us to call it that when he spoke about the phenomenon in a speech earlier this year, a sentiment that has also been echoed by the Financial Stability Board. We refer to this because a similar rebranding effort is currently going on in the world of P2P lenders, many of whom now prefer to be described as operating in the sphere of “marketplace lending“. Furthermore, some analysts we’ve spoken to don’t consider P2P lenders to be shadow banking institutions at all. Some simply call this new source of financing “internet funds”.
One of the silver linings of the financial crisis has been the growth in alternative ways for people to raise money: the crowd-funders, the individuals who sell equity stakes in their future earnings, the private equity firms lending to small and medium businesses shut out by the big banks, and of course the peer-to-peer (P2P) lending platforms, among others. It isn’t yet clear how much of this boomlet in financial creativity is a structural change or a temporary response to the combination of chastened banks and ultra-low real rates. Either way, the big banks have left many profitable niches open to smaller competitors that focus on origination and then distribute loans directly to investors.
Seven months have ticked by since hedge fund Marshall Wace spun out P2P Global, an investment trust focused on lending through peer-to-peer lending platforms. About £200m was raised at flotation and, by November, with about three quarters of those initial funds deployed, P2P said it was actively considering a fresh stock offer. Two weeks ago it said it was issuing 10m “C” shares at £10 apiece. But demand from investors immediately topped 20m, so the issue has been increased to 25m shares — raising £250m.
If there’s one sure bet in China it’s that money, uh, finds a way and that shadow banking (or whatever less objectionable name you wish to apply) will do its damndest to help. Otherwise, what’s the point? In this episode, crowd funding.
Tracy Alloway hosted a session on the “death of a financial intermediary” at last week’s Camp Alphaville. The discussion featured Renaud Laplanche, CEO of Lending Club, Cormac Leech, bank analyst at Liberum Capital, Krishan Rattan, founder of Voltaire Capital and Matt Levine, Bloomberg View columnist.
Camp Alphaville reminder: Requests to bring drones to the afterparty will be considered on an individual basis. (Details here) Markets: Most Asian indices were drifting lower in spite of a third consecutive positive session for Wall Street, although Japanese markets continued to climb. The mixed performance followed a somewhat positive session in the US, where the S&P 500 rose 0.2 per cent and the yield on 10-year US Treasuries rose 6 basis points to 2.66 per cent. However, there were some concerns that robust inflation figures could elicit a more hawkish stance from the Federal Reserve which concludes a two-day meeting on monetary policy later on Wednesday. (FT’s Global Markets Overview) An FOMC scenario analysis from Nomura:
Results of placing and intermediaries offer: P2P Global Investment PLC (the “Company”) is pleased to announce that following the Publication of its Prospectus and Offer Launch announcement on 19 May 2014, the Placing and Intermediaries Offer is oversubscribed and now closed.
Hey, how would you like to invest in US credit card debt, via the UK’s tax free regime of individual saving’s accounts? You can’t yet, but the hedge fund Marshall Wace and broker Liberum are aiming to raise £197m for a investment trust listed in London to do just that. For possible catches, you might turn to the 96 page prospectus that dwells on the risks at hand. But the chief pause for thought might be that this will be an expensive way to lend money to consumers and small businesses, offset by the use of some leverage to juice the returns back up. First though, a little background on those involved may help to understand how it works.
A nice spot by Emily Badger of Atlantic Cities: “Do you have to give out 1099s?” wondered Congressman Chris Collins, a Republican from New York. “This is fascinating,” said Arizona Republican Representative David Schweikert, pondering a startup platform called 1000 Tools that enables people to rent cement hammers from each other. “You may slow down capital expenditures but actually make the economy much more efficient.” What’s the net effect of that? “Given the nature of peer-to-peer platforms, it would be difficult if not impossible to capture their contribution in official employment statistics,” argued Congresswoman Nydia Velazquez, raising a good point. “So what are the ramifications of excluding this job creation from government employment indicators?” The questions came up Wednesday at a House Committee on Small Business hearing that marked the first time Congress has peered into the sharing economy. The tone of the inquiry was more sympathetic than probing. And the event, attended by just a few dozen congressional aids and industry insiders, was low-stakes. There’s no related federal legislation waiting in the wings hoping to suddenly regulate these businesses, which are perhaps mostly notable for the fact that no one yet knows how best to regulate them.