“Originate to distribute” is back with a vengeance — this time by way of fintech platforms which seemingly think they’ve discovered some hitherto unknown alchemical process which allows them to have their cake and eat it.
For the most part, this involves charging risk-free rents/commissions in exchange for bringing lenders and borrowers together on platforms in such a way that lots of lovely new loan business can be originated.
Indeed, whether it’s a P2P lender or a bank institution like SoFi (which temporarily finances the loan until it can shift it off-balance sheet to the capital markets) or even a bank which has decided to acquire a P2P platform directly, the nature of the game remains the same: risk-free arbitrage.
Yet it was only eight years ago we learned institutions which don’t have skin in the game when originating loans, don’t have much of an incentive to guarantee loan quality either. Until, of course, it’s too late because their reputations — (due to the origination factor) — have become tied to the long-term success of these loans whether they reside on their balance sheets or not.
To wit, we wonder if the BIS will be looking at P2P lenders and new-found millennial banking models as it moves to identify new pockets of so-called step-in risk in its consultations over the next few months?
IN THE next 40 years, humans will need to produce more food than they did in the previous 10,000 put together. But with sprawling cities gobbling up arable land, agricultural productivity gains decreasing, and demand for biofuels increasing, supply is not keeping up with demand. Clever farmers, scientists and entrepreneurs are bursting with ideas. But they need money to make this jump.
Financiers more often found buying and selling companies have cottoned on to the opportunity. Farm gates have traditionally been closed to capital markets: nine in ten farms are held by families. But demography is forcing a shift: the average age of farmers in Europe, America and New Zealand is now in the late fifties. They often have no successor, because offspring do not want to farm or cannot afford to buy out family members. In addition, adopting new technologies and farming at ever-greater scale require the sort of capital few farmers have, even after years of bumper crop prices.
Institutional investors such as pension funds see farmland as fertile ground to plough, either doing their own deals or farming them out to specialist funds. Some act as landlords by buying land and leasing it out. Others buy plots of low-value land, such as pastures, and upgrade them to higher-yielding orchards. Investors who are keen on even bigger risks and rewards flock to places such as Brazil, Ukraine and Zambia, where farming techniques are often still underdeveloped and potential productivity gains immense.
Farmland has been a great investment over the past 20 years, certainly in America, where annual returns of 12% caused some to dub it “gold with a coupon”. In America and Britain, where tax incentives have distorted the market, it outperformed most major asset classes over the past decade, and with low volatility to boot (see chart). Those going against the grain warn of a land-price bubble. Believers argue that increasing demand and shrinking supply—as well as urbanisation, poor soil management and pressure on water systems that are threats to farmland—mean the investment case is on solid ground.
MasterCard has used a submission to a Senate inquiry to argue for Australian regulators to move against the pseudonymity of digital currencies such as Bitcoin.
"Any regulation adopted in Australia should address the anonymity that digital currency provides to each party in a transaction," the company's submission (PDF) states.
"Contrary to transactions made with a MasterCard product, the anonymity of digital currency transactions enables any party to facilitate the purchase of illegal goods or services; to launder money or finance terrorism; and to pursue other activity that introduces consumer and social harm without detection by regulatory or police authority."
New York State’s top financial regulator has taken a big step to bring Bitcoin and other virtual currencies under its purview.
On Thursday, Benjamin M. Lawsky, the superintendent of financial services, announced proposed regulations for virtual currency companies operating in New York. The “BitLicense” plan, which includes rules on consumer protection, the prevention of money laundering and cybersecurity, is the first proposal by a state to create guidelines specifically for virtual currency.
“It’s a comprehensive framework. It’s trying to get at the whole virtual currency ecosystem,” Mr. Lawsky said in an interview. “We’ve tried to build some flexibility into these rules so, as these technologies change, we can bend to allow those innovations to continue.”
The new rules would be required for Bitcoin exchanges and for companies that secure, store or maintain custody or control of the virtual currency on behalf of customers. Merchants that accept Bitcoin for payment, like Overstock.com, would not need to apply for a license.
December 2013, the ground of the Bitcoin world was falling through. After a strong rally spanning over a month, precipitated by rumors that the Chinese central bank was to issue a ban, the prices nosedived. Fueling the panic, some of the big names in the Chinese Internet industry washed their hands. Jiasule, a subsidiary of Internet search giant Baidu removed the “Bitcoin accepted” sign from its website; Taobao, China’s biggest marketplace owned by Alibaba, threatened to punish its venders for receiving or selling Bitcoins on the platform. As such signals increased, more scared new converts jumped off the bandwagon.
Will Bitcoin ever going to recover from a setback of that magnitude? – That was the question that many Chinese Bitcoiners asked themselves back in the day. Now, half a year later – which is a long time when it comes to Bitcoin, although nobody can’t say with certainty that Bitcoin is sound and healthy, we can at least take a sign of relief: Exchange rates, though never returned to the euphoric November levels, has stabilised 1/3 higher than the half year low. Other than pure price movements, progress has been made in terms of real world use: While the established Chinese e-commerce websites had yet given their blessings to the currency, the gap has been filled by an emerging new breed of services.
French police said Monday they had smashed an illegal Bitcoin trading network, seizing virtual currency worth 200,000 euros ($272,000) in the first such operation in Europe.
Two people have been charged and are in custody following raids last week in the French southern cities of Nice, Cannes and Toulouse and in Brussels that led to the seizure of 388 Bitcoins.
"This is the first time that an illegal exchange platform for Bitcoins like this one has been dismantled in Europe," a police statement said.
The two men charged are a 27-year-old Tunisian who ran the website trading in Bitcoins and his suspected accomplice, a 36-year-old Frenchman.
Virtual currencies, most famously Bitcoin, have come under increasing scrutiny by financial regulators as their popularity has grown.
Launched in 2009 by a mysterious computer guru, Bitcoin is a form of cryptography-based e-money that offers a largely anonymous payment system.
Backers say virtual currencies allow for an efficient and anonymous way to store and transfer funds online.
But regulators argue the lack of legal framework governing the currency, the opaque way it is traded and its volatility make it dangerous.
In France, platforms that exchange Bitcoins and euros have to be approved by the ACPR, the bank and insurance supervisory body.
A Scottish retailer
will only use bitcoin for three days this week in a bid to test out
whether the cryptocurrency has the potential to take over from pound as
the country's new currency in the event of independence.
CeX,
the second-hand electronics, DVD and video game store, has turned its
Glasgow Sauchiehall store into a "pound-free zone" for the next three
days, only accepting bitcoin as payment for any good bought - as well as
only paying customers in bitcoin.
Although critics may
perceive the event as a publicity stunt, the radical move could spark
debate about the practical and mainstream use of cryptocurrencies in
Scotland in the future.
"With Scottish Independence
high up on the news agenda along with questions surrounding what
currency Scotland would use, the three day trial will give Scots the
opportunity to ditch the pound and trial a different kind of currency
altogether," said CeX commercial director David Butler.
While Jamie Dimon and Warren Buffett express doubts about bitcoin, executives running the financial industry's back offices are looking at mimicking the virtual currency's methods of moving money quickly and cheaply.
FIS, a provider of systems used by banks to handle payments, is examining whether a public ledger like bitcoin's could help securely move funds on existing networks, Fred Brothers, the firm's chief innovation officer, said. Fiserv, a provider of technology for payments and accounts, is examining bitcoin's use of encryption to ensure transfers are secure, said Marc West, a senior vice president.
Such interest shows how Wall Street could seek to reap benefits touted by bitcoin's backers without using the virtual currency itself. Bitcoin, devised by an anonymous programmer or programmers in 2008, has drawn entrepreneurs and retailers looking to popularize it as a low-cost alternative to established payment systems, supplanting credit cards and international wire transfers. Instead, a variety of financial firms might copy its underlying design to hone their own systems or services sold to clients.
IN THE town of Jingjiang, a few hours’ drive from Shanghai, Yangzijiang Shipbuilding is making 21 huge container ships for Seaspan, a Canadian shipping firm. An enormous sign declares, “We want to be the best shipyard in China.” It is certainly among the most profitable, earning 3 billion yuan ($481m) last year. But only two-thirds or so of that came from building ships. The rest came from lending money to other companies using a local financial instrument called an entrusted loan. This puts Yangzijiang at the forefront of another industry: shadow banking.
A decade ago, conventional banks, which are almost all state-owned and tightly regulated, accounted for virtually all lending in China. Now, credit is available from a range of alternative financiers, such as trusts, leasing companies, credit-guarantee outfits and money-market funds, which are known collectively as shadow banks. Although many of these lenders are perfectly respectable, others constitute blatant attempts to get around the many rules about how much banks can lend to which companies at what rates.
Although bank lending remains far bigger than the shadowy sort and is still expanding at an astonishing pace, its rate of growth has recently stabilised. The growth of some of the more worrying forms of shadow lending, in contrast, is accelerating (see chart). Shadow banks accounted for almost a third of the rise in lending last year, swelling by over 50% in the process.
Thus far, most of the concerns about shadow banking in China have centred on trusts. By offering returns as high as 10%, they raise money from businesses and individuals frustrated by the low cap the government imposes for interest rates on bank deposits. The interest they charge to borrowers, naturally, is even higher. They lend to firms that are unable to borrow from banks, often because they are in frothy industries, such as property or steel, where regulators see signs of overinvestment and so have instructed banks to curb lending. Over two-fifths of Yangzijiang’s loans go to property developers in smaller Chinese cities; land makes up nearly two-thirds of its collateral.
China’s economy is slowing. It has grown by 7.6% for the past two years, the slowest rate since 1990. Several trust products have defaulted, although investors in most of them have got their money back one way or another. Over $400 billion-worth of trust products are due to mature this year—and borrowers will want to roll over many of those loans. Many observers worry that investors will lose faith in trusts, prompting a run, which may, in turn, blight certain industries and other parts of the financial system. No country, pessimists point out, has seen credit in all its forms grow as quickly as China has of late without suffering a financial crisis.
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Just as the global economy has all but recovered from debt-fueled crises in the United States and Europe, economists have a new worry: China. They see a lending bubble there that threatens global growth unless Beijing defuses it.
That's the view that emerges from an Associated Press survey this month of 30 economists. Still, the economists remain optimistic that Beijing's high-stakes drive to reform its economy — the world's second-largest — will bolster Chinese banks, ease the lending bubble and benefit U.S. exporters in the long run.
"They've really got to change the way they do business," said William Cheney, chief economist at John Hancock Asset Management. "But they have a good track record of doing just that. I'm an optimist about their ability to make this transition."
The source of concern is a surge in lending by Chinese banks. The lending was initially encouraged by the government during the 2008 global financial crisis to fuel growth. Big state-owned banks financed construction of homes, railroads and office towers. But much of the lending was directed by local officials for pet projects rather than to meet business needs.
On Monday, the International Monetary Fund issued a warning about China's private debt. It released a report citing "rising vulnerabilities" in China's financial system, including lending outside traditional banks. Lending by that "shadow" banking system now equals one-quarter of China's economy, the report said.
The IMF also pointed to recent defaults in credit card and other debt sold to investors by banks and heavy debts owed by local governments.
If it continues, "this could spark adverse financial market reaction both in China and globally," the IMF said.
OUTSIDE China, Mao Zedong is out of fashion these days, remembered less as a revolutionary hero than as a tyrant. But the currency which sports his image on its banknotes is making headway abroad. In Hong Kong some cash machines dispense the “redback”, as the yuan or renminbi is known. In Mongolia 60% of cash in circulation is estimated to be Chinese. The yuan, whose internationalisation really began only in 2009, is now reckoned the seventh-most-used currency in the world, up from 13th a year ago. When China, the world’s biggest trading nation, becomes in the next few years its biggest economy too, many Chinese expect the currency to match its status, ready to challenge the dominance in the global monetary system enjoyed by the American dollar. They will probably be disappointed.
Russia's Foreign Ministry said on Tuesday U.S. bank JP Morgan had "illegally" blocked a payment from its embassy in Kazakhstan to insurance agency Sogaz "under the pretext of anti-Russian sanctions imposed by the United States".
In a statement on its website, the Russian Foreign Ministry suggested the action, which it called "unacceptable, illegal and absurd", would have consequences for the U.S. embassy and consulate in Russia.
JP Morgan gave no immediate comment.
"Washington should understand any hostile action against a Russian diplomatic mission not only constitutes a flagrant violation of international law but is rife with consequences that will inevitably effect the work of the embassy and general consulate of the United States in Russia," the statement said.
Sogaz is partly owned by Abros, according to the Sogaz website. Abros is a subsidiary of Bank Rossiya, according to Russian media reports.
A group of Scottish financiers came out in support of independence on Thursday to counter a flood of warnings over Scotland going it alone, cautioning that staying within the United Kingdom could mean losing European Union membership.
George Mathewson, former head of the Royal Bank of Scotland and chairman of Toscafund, and five other current and former Scottish financial players raised the possible risks of remaining in the United Kingdom in a letter to a newspaper.
Their positive view of a solo Scotland comes after a string of banks and financial services companies raised concerns over a vote for independence at a referendum on September 18, citing uncertainty over the currency, regulation and EU membership.
Morgan Stanley will be holding a microfinance bitcoin event on Thursday at its New York headquarters, despite CEO James Gorman saying the virtual currency is "totally surreal". Three bitcoin supporters, Marco Santori, Juan Llanos and Rik Willard, will present at the panel organized through the MicroFinance Club of New York titled "Digital Currencies in Microfinance: Their impact on remittances and financial inclusion".
“OUR banks earn profit too easily. Why? Because a small number of large banks have a monopoly.” So declared Wen Jiabao, China’s former prime minister, two years ago. He went on to say that the only solution was to allow more private capital in banking.
That seemed unlikely to happen soon, given the firm grip the government has had on banks in the country. The industry is tightly regulated, with deposit interest rates controlled by the authorities and all bank savings enjoying the implicit backing of the state. The biggest Chinese banks, which also happen to be the largest in the world, are all state-run.
Undaunted, the newish government of President Xi Jinping vowed to push ahead with financial liberalisation. This week it did just that. On March 11th regulators approved a pilot scheme to allow five privately owned banks to be set up in various parts of the country. The new banks will be regulated much as existing lenders are, but will be required to have clear provisions for orderly dismantlement in case of bankruptcy.
By welcoming more private capital, officials are hoping to inject competition and innovation into China’s sclerotic banking sector. The aim is for these new banks to target small and medium-sized enterprises, long starved of capital by the state-run banks (keener to lend to state-owned enterprises). Two giant Chinese internet firms, Tencent and Alibaba, are among the chosen investors. That suggests the authorities are taking a favourable view of the forays the two firms have made into internet finance.
First-movers rarely survive, but some experts see a real future for government-issued crypto currency.
In five years, might the Bitcoin market be little more than a smoking ruin?
That's the dystopian future facing crypto-currency traders, if the current pace of attacks against Bitcoin exchanges and holders continues. Both could see a never-ending onslaught of distributed denial-of-service (DDoS), hacking, and malware attacks designed to drain their virtual currency coffers.
But the possibility that Bitcoin might burn is good news for anyone who cares about crypto currencies, as well as the future of our monetary system. In other words, just because one cryptographic currency gets pummeled, the odds are that the next "Satoshi Nakamoto" will build an even better one.
Beyond Bitcoin, which has the world's largest virtual currency market capitalization (nearly $8 billion), there are at least 100 other crypto currencies, ranging from Ripple ($1.4 billion) and Litecoin ($453 million) -- also at the high end -- to Deutsche eMark ($106,000) and Grumpycoin ($88,000) at the low end. Even criminals have begun to diversify into homemade crypto currencies, because they see Bitcoins as being too volatile for storing their ill-gotten gains. Meanwhile, a Lakota Indian named Payu Harris is even promoting a new crypto currency called Mazacoin, which he hopes will provide the Lakota nation with greater independence.
When it comes to the prospect of nations minting virtual money, Harris might be on to something. According to former Central Intelligence Agency CTO Gus Hunt, in the future, the dollar could well become a crypto currency. "Government's going to learn from Bitcoin, and all the official government currencies are going to become crypto currencies themselves," he said during a recent panel discussion in San Francisco hosted by information security firm eSentire, for which he sits on the board of advisers.
Eventually, however, Bitcoin itself may be supplanted. "I believe that Bitcoin is going to go the way of Napster: it ended up being a commercially viable idea that infringed upon very, very well-financed [music industry] organizations," said G. Mark Hardy, president of National Security Corporation, speaking at the same panel discussion as Hunt. "[That industry] did rent-seeking, they went to Washington, they got the DMCA [Digital Millennium Copyright Act], and a couple of other pieces of legal action to go ahead and smack down Napster, but then [resurrected] it as a profit-oriented thing called iTunes, which generates billions in revenue for Apple," Hardy said.
“LUMPY, unpredictable, potentially large”: that was how Tim Geithner, then head of the New York Federal Reserve, described the need for dollars in emerging economies in the dark days of October 2008, according to transcripts of a Fed meeting released last month. To help smooth out those lumps, the Fed offered to “swap” currencies with four favoured central banks, as far off as South Korea and Singapore. They could exchange their own money for dollars at the prevailing exchange rate (on condition that they later swap them back again at the same rate). Why did the Fed decide to reach so far beyond its shores? It worried that stress in a financially connected emerging economy could eventually hurt America. But Mr Geithner also hinted at another motive. “The privilege of being the reserve currency of the world comes with some burdens,” he said.
That privilege is the subject of a new book, “The Dollar Trap”, by Eswar Prasad of Cornell University, who shares the world’s ambivalence towards the currency. The 2008 financial crisis might have been expected to erode the dollar’s global prominence. Instead, he argues, it cemented it. America’s fragility was, paradoxically, a source of strength for its currency.
HAS China arrived at its Bear Stearns moment? Analysts at Bank of America Merrill Lynch, an investment bank, worry it may have done so after the first default in China’s domestic bond market since the central bank started regulating the market in 1997. On March 4th Shanghai Chaori Solar Energy Science and Technology Co, a struggling solar-equipment supplier, declared that it lacked the cash to make the full interest payment on a corporate bond.
Fear of a chain reaction leading to a liquidity crunch seems excessive. After all, the troubles of the country’s solar industry (wracked by overcapacity and drowning in red ink) are well known. Suntech, once the world’s biggest solar firm, defaulted last year on debt owed to foreign investors.
Chaori itself has already escaped an earlier potential bond default, thanks to intervention by its local government. Although the amount due this week was trifling (less than $15m), no government bail-out was on offer. An insider adds that the firm may eventually default on the 1 billion yuan ($163m) principal that is owed as well as on the interest payments.
Most analysts are relaxed. Sun Jianbo of China Galaxy, a local stockbroker, argues that this default is unlikely to lead to a meltdown of China’s nascent but fast-growing market for corporate debt (see chart). He believes that there are two kinds of Chinese domestic bonds: those with strong government support and those with limited official backing. Because the market did not expect Chaori to be bailed out (unlike, say, important state-owned enterprises), panic will be limited, he says.
Fitch, a ratings agency, even declares that this default will be a “long-term positive for the market.” Voices in this camp believe that officials are allowing a default by a minor firm as a signal to investors to start pricing risks properly. Ivan Chung of Moody’s, another ratings agency, notes that the absence of defaults has left the immature market without the proper infrastructure for working out such things as creditors’ meetings, bankruptcy proceedings and the pecking order of various bondholders.
Moreover, there is little chance that a default this week will to lead to a broader bond-market seizure. Many corporate bonds are still held by banks and insurers to maturity, limiting the scope for panic.
oh. no.
pointed out in email...
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