This year brought a lot of good news for those in passive management - 2015.
Passive is popular, that's for sure.
As Bloomberg's Eric Balchunas reported earlier, 2015 has seen a record $365 billion in net inflows to low-cost and passively managed index funds and exchange-traded funds (ETFs) at the same time that $147 billion has been withdrawn from active mutual funds. Unfortunately for Wall Street and active managers, Bank of America Merrill Lynch analysts led by Savita Subramanian suggest the trend will continue.
"In the past four years, passive investments have gone from one-fifth of long-only assets under management to one-third today," the BofAML team said in a note. They added: "Passive funds still only make up about one-third of the U.S. large cap space, far from critical mass."
Here's a look at the flows into or out of active and passive funds since the end of 2008, with passive managers dominating.
Despite this rapid increase for inflows to passive investments, it still makes up a small share of total funds, as Subramanian said.
If active managers were delivering stellar returns, the trend might change. Alas, they haven't been.
According to BofAML, only 40 percent of active managers are beating the indices they are measured against. Those focusing on value plays have proven the most adept at beating benchmarks this year, while core managers have the lowest success rate, the bank said.
What could help turn this around?
According to the BofAML note, active managers tend to have a bias toward growth stocks, an aversion to foreign-exposed companies, and a preference for lesser-quality names, as measured by Standard & Poor's common-stock rankings. The funds will need to outperform in those areas to start having better luck against their benchmarks.
With support dwindling, funds almost depleted, and ex-board members under criminal investigation, bitcoin’s pioneering advocacy group is a symbol for the digital currency’s growing pains.
Bruce Fenton, executive director at the Bitcoin Foundation, opened its Dec. 15 board meeting with a sense of urgency: “We need additional funds if we wish to retain employees.” The numbers didn’t look good. In two years, the foundation had seen at least $7 million evaporate. As of Nov. 30, its total assets stood at $12,553.06.
To sustain the Bitcoin Foundation’s operations, which have included lobbying, putting on conferences, and providing technical support for the digital currency, Fenton urged the group to find ways to raise money quickly. They considered cold-calling ex-members, and Fenton said he’s working on marketing materials for prospective donors to explain the organization’s purpose. “There is no material saying what the foundation does,” he said.
Eventually, Jim Harper, a board member and senior fellow at Cato Institute, a think tank, interjected. He questioned whether the foundation was offering its members enough value to warrant its existence, according to minutes released on Dec. 21 from the meeting. “Asking for money is just throwing money away,” Harper said. Olivier Janssens, another director, suggested that the organization may not be “fixable.”
The Bitcoin Foundation has become a symbol of the challenges facing the digital asset it was designed to steward. While advocates have promoted bitcoin as a global, decentralized currency for the Internet age, it’s proved to be more volatile than many penny stocks. Its role in money laundering and other illegal activity is a constant source of questions, and the price fluctuates with each regulatory clampdown or criminal investigation. In November 2013, it reached a high of $1,137 before falling to $183 in January 2015 following a slew of problems, including the collapse of Mt. Gox, once the world’s largest bitcoin exchange.
Police officers carry pieces of evidence from the house of Mark Karpelès, head of defunct Bitcoin exchange Mt. Gox, in Tokyo on Aug. 3.
Photographer: Jiji Press/AFP/Getty Images
Beyond financial trouble, two former Bitcoin Foundation board members have been charged with crimes. Mark Karpelès, former chief executive officer of Mt. Gox, wasarrested in Tokyo and charged with embezzlement in September. Charlie Shrem, former vice chairman of the Bitcoin Foundation, resigned before pleading guilty to helping launder money for transactions through the illicit online marketplace Silk Road. He’s currently serving two years in a federal prison.
Several people still involved with the Bitcoin Foundation said the wounds may never heal. “I don't know if the foundation has a future,” Gavin Andresen, a former board member who now holds the title of chief scientist, wrote in an e-mail. “It is very difficult to regain trust once trust has been lost, and the illegal behavior of two of the foundation's former board members destroyed a lot of trust.”
When the Bitcoin Foundation was formed in 2012, the group was intended to give legitimacy to a relatively unknown technology. By the end of that year, bitcoin traded at about $13. The organization grew almost in lockstep with the popularity of bitcoin. Comprising pioneering coders and entrepreneurs behind the digital currency, the Bitcoin Foundation would soon become a familiar face in Washington, spreading the gospel of bitcoin around the world.
U.S. lawmakers and congressional committees appreciated having a central figure to represent bitcoin, but foundation members have sometimes become punching bags for politicians. At an event in 2013 attended by Andresen, who was appointed to lead bitcoin development by the anonymous creator, Satoshi Nakamoto, a Justice Department prosecutor compared bitcoin with child pornography, according to a reportin the Washington Post.
A man named Satoshi Nakamoto, one of many people believed to be the creator of bitcoin, fends off photographers. He's denied involvement.
Photographer: Allen J. Schaben/LA Times via Getty Images
Techies bought into the promises of bitcoin and were eager to donate to further its cause. At the end of 2013, the Bitcoin Foundation reported $7 million in assets, according to meeting minutes. As demand for bitcoins rose, so did the value of the foundation’s funds, much of which were held in the digital currency. In 2014, its ambitions began expanding with the addition of a lobbying operation in Europe.
Then things changed. By mid-2014, funds were down to $4.6 million, and the burst of the bitcoin bubble that year took a toll on the foundation almost immediately. “I hired lobbying in Brussels in 2014, and then we scaled it right back because the money was gone,” Harper said in an interview after the contentious Dec. 15 board meeting. According to the minutes from that meeting, the organization has cut its budget by 95 percent from previous years. Its conference business now faces stiff competition from other events, such as Inside Bitcoins and Money20/20.
About a year ago, when bitcoin’s price had fallen to about $374, the foundation said it would discontinue public policy efforts and concentrate on providing technical development to bitcoin. The reason was simple: It didn’t have the money to do both. “It thrived while the bitcoin price was rising, so it never put a plan in place to sustain it,” Harper said. “When the price dropped, the foundation ran out of money. The last year has just been cutting costs, shrinking budgets, bringing things under control.”
The pressure revealed the foundation’s underlying weaknesses. Supporters were inexperienced at raising money, and until recently, few paid attention to expenses, Harper said. “They were spending thousands of dollars per month on Web services that would have cost a couple hundred,” he said. Bobby Lee, a Bitcoin Foundation board member, referred questions about expenses to Fenton, who didn’t respond to a request for comment. In a further e-mail, Lee acknowledged “budget and leadership problems in the past.”
Bitcoin has weathered hard times better than the foundation has. The price is back up to $426. Venture capital firms have invested more than $1 billion in bitcoin-related startups, according to research from CoinDesk. Finance and tech companies, including IBM, Overstock, Nasdaq, and the biggest banks, are experimenting with the technology for use in everything from money transfers and contracts to issuing stock. Coin Center, a year-old organization with backers such as BitPay, has staff in Washington developing bitcoin policy. There’s also the Digital Chamber of Commerce, a trade association. Those two organizations recently formed the Blockchain Alliance to help law enforcement investigate criminal activity involving bitcoin’s underlying technology.
Roger Ver, whose evangelism for the digital currency earned him the name Bitcoin Jesus, provided the Bitcoin Foundation with funds early on. An ex-convict who had been sentenced to 10 months in federal prison after selling about 14 pounds of explosives without a license on EBay, Ver said the foundation’s demise, if it were to happen, wouldn’t affect bitcoin. “There are lots of different bitcoin foundations, so the name may change, but the mission will carry on,” he said. “I don’t think it matters at all if the Bitcoin Foundation were to close. The Bitcoin Foundation laid the groundwork for the ecosystem that we have today.”
But Lee is determined to resuscitate his organization. “Despite the recent negativity about the Bitcoin Foundation, there are still many people who believe in the need for a global non-profit platform that advocates for bitcoin,” Lee wrote in an e-mail. “The past 18 months were tough for bitcoin and its entire ecosystem; I did not give up on bitcoin then, and I will not give up on Bitcoin Foundation today.”
At the December board meeting, Lee suggested that dissenters should resign. “If someone does not want to be on that ship, they should step off the board,” Lee said. After much debate, Janssens and Harper elected to dissolve the organization, but they were outvoted by Lee and the two other directors.
By the end of the meeting, Harper agreed to step down, and Janssens was removed from the board. “None of this is personal,” said Chairman Brock Pierce. The two ousted men were dismissed. “Don’t thank me,” Janssens said. “I was removed for a bulls--- reason.”
On Dec. 22, the Bitcoin Foundation said it appointed three new board members. The foundation is also considering a revised mission statement, with a focus on technical development, advocacy, and regulatory efforts. Finally, the board “voted to continue the existence of the foundation” and established an optional board seat for bitcoin’s mysterious creator, “if and when Satoshi ever reveals him or herself.”
On the largest island in Australia’s Great Barrier Reef World Heritage Area, $60 billion of liquefied natural gas terminals are helping feed China’s hunger for energy. The next major construction project may appeal to its tourists.
Four decades after his father bought a cattle property on Curtis Island, American businessman Tim Reigel is seeking government approval to turn it into a five-star holiday destination. It’s the latest chapter for the 30-by-15-mile strip, located beside the famous coral reef, which state authorities predict will become one of the world’s largestLNG hubs.
The gas-to-guests transition is a microcosm of the economic shift happening in Australia. The nation, at the tail end of the biggest resources boom since the 1850s Gold Rush, is counting on tourists, especially from China, to help soften a plunge in mining and energy investments. These days, the majority of people coming to the tropical isle are there to help build the LNG facilities, not for the pristine beaches or endangereddugongs and snubfin dolphins. Once the projects are completed, most of those workers will leave.
“LNG is a tiny part of the Curtis Island story,” Reigel said by phone from his Los Angeles home. “I don’t care how many billions they’ve spent on it. Most of the island experience is very divorced from that.”
Yellow Patch, Curtis Island.
Source: QRE Pty
The three LNG projects on the island, about twice as big as Martha’s Vineyard, occupy about 2 percent of the land area on its southwestern tip, a couple of miles from the central Queensland port town of Gladstone.
The island’s workforce has already halved from a peak of 14,500 people last year and will drop to a “very small number” next year, according to contractor Bechtel Group Inc. The last project, a ConocoPhillips-Origin Energy Ltd. venture, is due to begin production this month.
The exodus is hurting local businesses, such as Scotties restaurant, two blocks from the harbor, which once counted among its clientele directors of BG Group Plc, operator of the $20 billion Queensland Curtis LNG plant. The U.K. company said Wednesday that the second stage of the plant’s development is finished.
“I had three fantastic years, like everyone else, when all the big guys were coming to town -- the engineers, the executives,” owner Scott McCarthy said. “Now, it’s been going downhill at a rapid pace. What we need is another big project to be announced, but with the commodity markets being as low as they are, that’s probably not about to happen.”
Cheaper Holiday
Fresh sources of income are needed to fill the gap, said Janu Chan, an economist with St. George Bank Ltd. in Sydney. Tourism may help, especially after the Australian dollar slipped against all but three of the Group of 10 currencies in the past year, making it cheaper to holiday in Australia for most overseas visitors.
Nearby Gladstone, originally named Port Curtis, is starting to woo travelers. Carnival Corp.’s P&O Cruises is scheduled to dock there six times next year, enabling passengers to visit the reef or even take a boat tour of the LNG plants, said Mayor Gail Sellers. Still, she’s not counting on Curtis Island drawing crowds of vacationers anytime soon, she said.
Yellow Patch
Unlike the Whitsunday Islands, about 600 kilometers further north, with their white-sand beaches, azure water and dense rain forest, the island that English explorer Matthew Flinders landed on in 1802 is more rustic and rugged. Among its features are a 20-story-high sand dune, called Yellow Patch, tranquil billabongs and flatback turtle nests.
Its raw beauty may pose a challenge to resort developers, said Graham Reynolds, a Brisbane picture framer who wrote a book about Curtis Island’s history.
“Perhaps you might get clever operators who can wrest some of that latent charm out of the place,” said Reynolds, who spent part of his childhood on the island, where his uncle was a maritime pilot.
Universal Partners BV, a Dutch real estate investment company, had planned to develop the northern tip of Curtis Island, which it said was the largest freehold, or non-leased, island-property in Australia. The plan didn’t gain traction with state and local governments and was shelved almost a decade later, said Rob Johnson, a designer who worked on the project and is now based in Jakarta.
Luxury Villas
“Sooner or later there will be a resort on Curtis Island,” said Reigel, who is pushing ahead with his plans for Turtle Street Beach Resort, a A$100 million ($72 million) project featuring 177 luxury villas and apartments, tennis courts, pools, a bar and restaurant. The proposal has drawn interest from Chinese investors, he said.
If approved by the Australian government, design work could begin immediately with the first stage of construction finished by the end of 2017, according to documents that Reigel’s company, QRE Pty, filed last month with environment authorities.
Reigel’s father, Bill, a former stockbroker, led a group of U.S. investors that acquired the cattle property, Monte Christo, in the mid 1970s with the goal of building a resort there. The proposal stalled in the 1980s, while the government considered setting up a naval base on the island.
In 1989, three years after his father died, Reigel started the effort to obtain state and local government clearance, the filing shows. The plans have been tied up in a “complex” approvals and negotiation process with government agencies since, while about 14,000 hectares have been given up for national and conservation parks.
Tourism Drive
The impetus for tourism developments is increasing. The Australian government estimates thousands of extra rooms are needed in capital cities and in Queensland state to meet its target of doubling visitor spending to as much as A$140 billion by 2020, and investors are responding. The country has the strongest hotel pipeline in more than a decade, said Karen Wales, senior investment specialist at the Australian Trade Commission.
Current projects in Queensland include the A$600 million redevelopment of Lindeman Island and plans by Aquis Group, controlled by Hong Kong developer Tony Fung, to build an A$8 billion casino-resort with 7,500 rooms on a former sugarcane farm north of Cairns.
Although industries outside minerals and energy are helping the economy, they are unlikely to plug the investment hole that resources companies have left, St. George’s Chan said. Resources-related infrastructure projects total more than A$90 billion in the Gladstone area alone.
“We’re a fly on an elephant’s behind in terms of the size and type of projects that happen around Gladstone,” Reigel said. “But the role we fill is helping to provide diversity to the industrial base.”
The Celtic Tiger rises, China holds up, Brazil and Russian sink deeper
When the final numbers are tallied, 2015 will probably count as another disappointing year for global growth.
The muted performance came even as central banks continued to pump in liquidity, oil prices plunged again and inflation was moderate.
It was also a year of divergent performers. While tumbling commodity prices took the shine off big emerging markets Russia and Brazil, other emerging economies like India and Vietnam surprised on the upside. In the developed world, robust U.S. jobs growth prompted the Federal Reserve to tighten monetary policy for the first time since 2006, while the gloom around neighboring Canada deepened.
With the year drawing to a close, here's a look at some of the winners and losers:
Mixed performance:
In advanced economies, smaller European nations were among the best performers. Ireland's economy grew by 7 percent in the third quarter--faster than China--and well ahead of the euro area's 1.6 percent growth in the same period.
By contrast, the picture was more subdued in Finland. The northernmost euro member, which was among the most vocal critics of Greece during its crisis bailout negotiations, is suffering as key industries like paper making and consumer electronics struggle. Weak export demand from Russia is also hurting.
In the emerging market world, clear standouts included Vietnam, Tanzania and, wait for it, China. Even after a $5 trillion stock market rout and what's tipped to be the slowest growth in 25 years, China's overall gross domestic product growth remains relatively robust compared to its peers. India's economy also expanded faster than expected in the third quarter when GDP rose 7.4 percent from a year earlier, after a 7 percent expansion in the previous quarter.
The weakest performers included the usual suspects. Russia is on track for its longest slump in two decades mostly because of lower oil prices. Brazil has been dogged by the commodities slump, political turmoil, a corruption scandal and a widening budget gap. Goldman Sachs Group Inc. warned that the nation is sinking into “an outright depression."
A notable absentee from the list is Venezuela: that's because the central bank hasn't published GDP data for the year.
Honorary mention:
Japan gets a special mention for the recession that never was. A data revision meant that GDP expanded in the third quarter rather than contracting as previously thought, meaning the world's third largest economy avoided a second recession in three years. Some economists say the performance shows Japan's economy is on an overall improving track, even if significant challenges remain.
Employment:
Away from the GDP numbers, employment data around the world paints a mixed picture.
The lowest jobless rates can be found in nations such as Japan and Switzerland, or Thailand and Singapore, but Western Europe remains stricken by high levels of joblessness. Double digit unemployment in places like Greece and Spain underscore the challenges ahead.
Note: All unemployment data reflect national measures, some of which might have different methodologies.
World is experiencing a low oil price for a reasonable period. Various economical aspects tries to define and explain the ongoing economic activity. With all these activities, there is one key explanation which everybody does not in a comfortable zone to utter.
Whether this climate is really a actual or neutral climate created by the equilibriums of the world economy ? or by with force ? some artificially created ?
Who has created ? who get the benefit and who will suffer ? Who will be targeted by this ?
Various questions will be popped up.
Whether it's been an artificial or not ... below is one of articles who has included lots of information I found with Yahoo.
It basically creates a dilemma or and excitement of looking at the relationships among low oil price and Japanese Yen.
Oil prices extended their losses Monday, adding to worries about the global economy, while Tokyo led most Asian markets lower as a stronger yen hurt Japan's exporters.
With Wednesday's US Federal Reserve interest rate hike well in the past, analysts said concerns about the global economy returned and traders were now looking ahead to the next increase.
However, while markets will begin winding down for the Christmas break Friday there are some key economic figures due for release this week, including US economic growth and home sales as well as Japanese inflation and spending.
Crude continued to slide as an ongoing supply glut showed no sign of easing, with figures Friday showing an increase in the number of US rigs drilling, fuelling worries output will continue apace.
US benchmark West Texas Intermediate lost 0.6 percent to $34.50 a barrel and Brent sank one percent to $36.50 in early Asian trade.
Prices have slumped by almost a fifth since December 4 when the OPEC oil producers' group decided against limiting its production, despite tepid demand and the supply glut.
The commodity has sunk more than 60 percent from above $100 in summer 2014 and are now at levels not seen since the financial crisis.
"There hasn’t been any significant signs of a pick-up in demand and we haven’t seen any meaningful cuts to production," Ric Spooner, a chief analyst at CMC Markets in Sydney, told Bloomberg News.
"Nothing has really changed in the oil market over the past couple of months apart from the price."
- Toshiba plunges -
Japan's Nikkei suffered hefty selling pressure as the dollar retreated after Wednesday's Fed-fuelled rally, hitting exporters whose goods are made more expensive overseas.
The greenback slipped to 121.17 yen Monday, well below last week's high above 123 yen touched after the US rate rise. The dollar was also down against the euro.
Tokyo-listed Toyota and Fast Retailing, which operates the Uniqlo clothing brand, each shed more than two percent.
Scandal-hit conglomerate Toshiba lost more than nine percent following a weekend report in the leading Nikkei business daily that it will likely record a fiscal year net loss of about $4 billion.
In a statement Monday, Toshiba said it would hold a board meeting later in the day and discuss "structural reform".
The 140-year-old company was this year hit by revelations that executives systematically pressured underlings to inflate profits in a years-long scheme to hide poor results.
Tokyo's Nikkei stock index ended the morning session 1.7 percent lower. Among other markets Sydney shed 0.4 percent and Singapore was 0.5 percent lower.
However, Hong Kong was up 0.4 percent and Shanghai added 0.8 percent. The losses tracked a sell-off in New York and Europe.
- Key figures at 0300 GMT -
Tokyo - Nikkei 225: DOWN 1.7 percent at 18,664.32 (break)
Sydney - S&P/ASX200: DOWN 0.4 percent at 5,085.30
Hong Kong - Hang Seng: UP 0.4 percent at 21,831.63
Euro/dollar: UP to $1.0882 from $1.0870 late Friday
Dollar/yen: DOWN to 121.17 yen from 121.26 yen
New York - Dow: DOWN 2.1 percent at 17,128.55 (close)
London - FTSE 100: DOWN 0.8 percent at 6,052.42 (close)
Venezuela's recent experience is instructive. The Chavez regime had moved away from the fiat US dollar and had the bulk of its reserves in gold. Last month, Venezuela's reserves had been drawn down to about $19 bln, of which $14 bln was thought to be gold.
Venezuela has found out the hard way that dollars are better than gold. At the end of last month, it swapped 1.4 mln troy ounces of gold for $1 bln with a large US bank.
Venezuela's gold was discounted by a little more than 40% and it will pay interest on the dollars it receives. The swap is four years in duration, and at the end of it, Venezuela has the first right to buy the gold back.
It is true that Venezuela has a relative extreme macro economic situation. The IMF expects the economy to contract 7% this year after 4% contraction in 2014. Inflation is projected to be well over 100% and the fiscal deficit may be 20% of GDP. The black market rate for the bolivar has depreciated by nearly 50% so far this year. We suspect that when push comes to shove, and it will, Venezuela is more likely to officially devalue than default on its local debt.
One of the advantages for Venezuela of the gold swap is that by some accounting it may still count the gold as part of its reserves. This underscores that central bank reserves many not always be what they seem. Central banks have used a number of ploys to hide the extent of their intervention, like operating in the forward market or conducting off-balance sheet operations, like Brazil's currency swaps. Similarly, Russia had included its sovereign wealth funds in its reserve calculations, but they are not liquid or available.
The dollar's status as the primary reserve assets is partly a function the liquidity and depth of the US capital markets. Gold is not a particular liquid or deep market. Countries cannot service their debt with gold. To monetize it, Venezuela is paying a steep price--a 40% haircut plus interest on its dollar borrowings.
This is not about the present or future price of gold. Venezuela's experience speaks to the use of monetary gold. To service one's debt and pay for imports, one needs paper money or claims thereof. About three quarters of the US reserves are in gold and almost 70% of German reserves are in gold. Greece and Portugal also hold a high proportion of reserves in gold.
This says something about the low level of currency reserves as well as the gold holdings. US gold reserves are worth around $800 bln. Portugal 's economy is about a tenth of the size of the UK, but it has about 70 tonnes more of gold.
As Money Pours Into Peer-to-Peer Lending, Some See Bubble Brewing
Is peer-to-peer lending out of control?
There’s certainly some cause for concern. Consider these facts: P2P loan volume is poised to hit $77 billion this year, a 15-fold increase from just three years ago. LendingClub, the No. 1 player worldwide, is trading at a market value of about $7 billion even though it lost $33 million last year. And in a flashback to the subprime mortgage boom, P2P startups have begun bundling and selling off loans through securitizations.
The business of matching lenders with borrowers online—which still amounts to only 0.08 percent of the $96 trillion in global corporate and household outstanding debt—may truly be an innovative way to distribute capital. But is P2P a revolution or just another bubble?
Money managers are betting it’s the former as they pile into one of the fastest-growing asset classes in finance, Bloomberg Markets reports in its June issue. Some are taking equity stakes in P2P startups. In February, Third Point, the hedge fund founded by Daniel Loeb, led a $200 million investment round in Social Finance, which refinances student loans.
The deal valued the three-year-old San Francisco company, known as SoFi, at $1.2 billion. Others are investing in the loans themselves. In April, Victory Park Capital, a private equity shop in Chicago that backs a number of P2P platforms, announced it was increasing its funding pipeline for one-year-old Upstart Network to $500 million from $100 million.
Third Point and Victory Park are hardly outliers in pursuing loans that are generating 5 to 12 percent annual returns in an era of nonexistent interest rates. Goldman Sachs, BlackRock, Alibaba, and even Google are making deals in the space.
In the U.K., holders of tax-free savings accounts known as ISAs may even soon be allowed to invest in P2P loans, a move that could draw Britain’s top asset management houses and provide £150 billion ($220 billion) in fresh cash by 2020, according to Liberum Capital, a London investment bank. “Every single lending product that a bank provides is vulnerable to this model,” says Cormac Leech, a senior analyst at Liberum.
And now Wall Street is cranking up the volume by running these loans through its securitization machine. In November, Morgan Stanley and Goldman led the sale of securities backed by $303 million in student loans originated by SoFi. In February, BlackRock unveiled the first investment-grade-rated package of P2P consumer loans with a $281 million offering of notes from Prosper Marketplace, a site that lets users apply for loans as well as back them.
Such deals will help P2P platforms spread risk and multiply loan volume, which isn’t necessarily a bad thing. Growth is good, right? Still, the specter of the subprime-mortgage bust looms over this nascent market.
“Yes, these platforms are low-cost distributors of loans, and investors are frantically chasing yield,” says Tania Modic, the head of Western Investments Capital, a family office based in Lake Tahoe, Nevada. “But loans take time to season and go bad, and Wall Street loves to package and pass along risk. The music will stop—it always does—and this will not end well.”
Peer-to-peer stalwarts counter that their industry doesn’t look like the toxic mortgage market of the 2000s. Many platforms in the U.S. and the U.K. post their loan books online so investors can analyze the quality and performance of their debt on a loan-by-loan basis. London-based RateSetter maintains a “provision fund,” which stood at £13 million as of May 14, to make lenders whole should borrowers default, a feature other sites are now imitating.
Most P2P firms also shun subprime borrowers. Zopa, a 10-year-old British firm that’s issued more than £800 million in consumer loans, approves only one out of five applicants. Both Zopa and RateSetter have default rates of less than 1 percent, while bad loans at LendingClub and Prosper are below 3 percent.
“There’s always tension in any credit business between how fast you grow and the quality of your loan book,” says Giles Andrew, Zopa’s co-founder and CEO. “We publish data on every loan. So any signals that bad debt had started rising would be very visible.”
But as institutions pour money into P2P, some platforms may relax their credit criteria and welcome riskier borrowers to accommodate the flow, especially if they can offload risk through securitizations, says Michael Tarkan, an equities analyst at Compass Point Research & Trading in Washington who covers P2P companies.
In the U.S. market, LendingClub and its brethren have enabled consumers to pay off pricey credit card balances with cheaper P2P term loans. So what’s to stop consumers from levering their credit cards back up? Such behavior could spell bad news for investors in P2P loans if an interest rate hike or an unforeseen shock pressures borrowers, Tarkan says.
“We’ve created a mechanism to refinance a credit card into an unsecured personal loan,” says Tarkan, who’s rated LendingClub a sell. “This may prove to be a superior model, but we just don’t know because it hasn’t been tested yet through a full credit cycle.”
Renaud Laplanche, the founder and CEO of LendingClub, says borrowers may indeed max out their cards again. But so far, he says, they’re boosting their creditworthiness after converting card debt into P2P loans by paying lower interest rates. Moreover, Laplanche says, the global lending market is so vast that platforms like his, which is multiplying its volume by 20 percent a quarter, won’t have to take on riskier borrowers for years.
“There’s no need to loosen standards,” Laplanche says. “It’s all growing very fast, but it’s a controlled growth.”
It may well be that the speed and efficiency of the Web fundamentally changes the business of lending. Institutional investors are certainly betting that way. The P2P boom won’t just test a new business model. It will also show whether Wall Street has learned its lesson.
