CommunityLend blog

The problem with mathematical finance – it ignores people

November 10, 2008 · 2 Comments

Niall Ferguson [Laurence A. Tisch Professor of History at Harvard University and a Senior Fellow of the Hoover Institution at Stanford, and the author of The War of the World: Twentieth-Century Conflict and the Descent of the West.] offers analysis and conclusions on the world of financial services, and the historic lead up to the current financial crisis. 

Wall Street Lays Another Egg | Vanity Fair

The author charts the emergence of an abstract, even absurd world—call it Planet Finance—where mathematical models ignored both history and human nature, and value had no meaning.

Its a long piece and worth the read for those interested.  He speaks of systemic issues and highlights one in particular – the obscure world of derivatives, which amount to over $400 trillion around the world.  This amount is significant, when compared to world GDP of $49 trillion, or the combined stock markets’ value of $51 trillion. [note:  1 trillion = 1,000 billion]

All this to display the runaway value in a financial market that surprisingly few understand, and which is hidden behind a complex mathematical formula developed in the late 90’s.  The results of this formula drove the derivatives market. 

The result of the belief in this formula, developed by Nobel prize winners, was as Ferguson goes on, that normal lending practices and risk assessment were replaced by computer models based on the formula.  Thus we saw securitized sub-prime mortgages magically transitioned into AA commercial paper, and sold off around the world.

If ever there was a time to bring back transparency of information between borrowers and lenders, that time has come.  While mathematics will always play a part, the relationship between lenders and borrowers is more than mathematics.

For borrowers transparency allows them to be assessed on their merits, and the right balance of information about them.  For lenders transparency offers the insight and information to get back to basic risk assessment, and to provide appropriate to the right borrowers.

→ 2 CommentsCategories: Canadian Banks · social lending

Will “social capital” be the next big industry to emerge?

October 30, 2008 · No Comments

Here is a link to a recent thought-provoking article from VentureBeat journalist, Chris Morrison, entitled "Will "social capital" be the next big industry to emerge?"

His central example in the piece is the emerging field of "Microcredit" and specifically the work of Nobel Prize winning Mohamed Yunus.  I especially like Morrison’s quote on this defining nature of the success of these emerging models:

"Contrast that to aid organizations that have spent hundreds of years providing selective handouts — with little result. In just three years, microfinancing by both non- and for-profit organizations has taken flight, with a huge effect. The key was simply adding old-fashioned capitalism and a business model to charity."

The founders of CommunityLend have been greatly influenced, as they develop the social lending model, by the amazing work of Yunus and others challenging the rules in the world of microcredit.  We thought it fitting to provide a shout out.

Michael

→ No CommentsCategories: social lending

SIT User Conference: Interchange 2008

October 28, 2008 · 4 Comments

We were fortunate enough to have the opportunity to speak and provide a demo of our lending system a the SIT annual user conference in Markham yesterday.  The audience comprised a broad group of banks, credit unions, and technology providers.

lannigan

Patrick Lannigan who organised the event introduced us following an overview of their strategy.

SITinterchange

Then on to our presentation …

sitcrh

and live system demo …

CLdemo

→ 4 CommentsCategories: social lending

StartupEmpire conference | Nov 13th & 14th Toronto

October 25, 2008 · No Comments

I wanted to highlight an upcoming conference in Toronto aimed at startups and entrepreneurs.  Its been organised by the irrepressible David Crow, and Jevon McDonald who have put together a great speakers list, including:

Click through for details, and if the purpose, timing and location works then its one to think about.

They have just announced an innovative idea that will see the Blackberry Partners Fund provide $500K funding during the conference.

StartupEmpire | Startup Conference Toronto | Nov 13th & 14th

StartupNorth is Canada’s only grassroots conference for startups. Created for entrepreneurs and by entrepreneurs, StartupNorth aims to educate and inspire by connecting you with other entrepreneurs, mentors and the ecosystem of support needed to create and operate a successful startup in Canada and the world.

StartupNorth, the conference, is being produced by the team that has created StartupNorth.ca, DemoCamp, Founders & Funders, and and Startupindex.ca. StartupNorth.ca is Canada’s most popular community of web entrepreneurs and DemoCamp has been voted Toronto’s best “un-conference” and has been held in over 15 cities attracting over 10,000 individuals.

Register Now

→ No CommentsCategories: Uncategorized

Canadians are heavily into unsecured debt, and will go back to "old fashioned saving"

October 23, 2008 · 2 Comments

Good wake up piece here indicating the relative appetite for credit and in particular credit card and unsecured lines of credit in Canada vs the US.  Not sure the numbers sound completely right, but the indication is that Canadians have relatively much more unsecured debt that Americans, and that might come as a surprise to most Canadians. 

The article goes on to draw out the distinctions between passive saving while the stock market was rising, versus the current situation, whereby saving must come from monthly income - old fashioned saving as the CIBC economist calls it.

Plastic Nation: Canadians Drowning in Credit Card Debt | Epoch Times

“People have put themselves in this situation where they’ve got cars on lease or on loan, they have a huge mortgage on their homes and they may have $30,000 to $40,000 on lines of credit and unsecured debts such as credit cards and that’s just not sustainable.”

CIBC senior economist Benjamin Tal says savings rates went down because net rates went up. In recent years people were making a lot of money in the stock market and in the housing market, he explains, and this was their way of “passively saving.”

“But beyond that, now with the housing market levelling off we will see a situation in which people will go back to old fashioned saving, especially in an economic slowdown,” Tal predicts.

→ 2 CommentsCategories: card debt · credit cards · economy

A strange month for the financial services industry; Social Lending is no exception

October 16, 2008 · 1 Comment

  It’s been a strange month for the financial services industry as a whole and the burgeoning industry of Social Lending is no exception.

These last few weeks have seen  a number of major announcements in the Social Lending space including the following:

- Zopa US announced that it has restructured its operation in the US in collaboration  with their credit union partners.
- LendingClub announced it is reopening its US business following its successful registration with the SEC and with the innovative addition of a secondary trading market for their loans.
- Prosper announced that it is closing to new Lenders in order to register promissory notes with the SEC similar to the process just undertaken by LendingClub.
- Zopa UK announced their best month ever, with borrower volumes more than doubling as a result of the credit crunch.

So, how does one sort out all of these announcements?  Is it, as TechCrunch and the New York Times have recently suggested, that the international “credit crunch” is adversely affecting social lending platforms in the same way as it is adversely affecting more traditional lending?  If this was true, then the Zopa UK announcement of drastically increased volume and the LendingClub announcement of asuccessful registration with  the SEC would seem quite out of place.

As insiders in the new, exciting and entirely human industry of social lending, we at CommunityLend see these announcements in a very positive light.  We see them as a sign of the maturation of this young industry.  In social lending’s early days a few years ago, most of the companies who launched their services had very little, if any, regulatory approval by the traditional financial services or securities regulators.  And yet, the core of the business is to create a new asset class for investors and a new lending channel for borrowers.  As time has progressed and these services have shown a significant and expanding audience of folks interested in using them, the appropriateness of regulation has been accepted.  We embarked on regulatory consultation early and understand the need very directly.

The result is what we are seeing with the Prosper and LendingClub announcements and, to a certain degree, what we are seeing with the Zopa US announcement. (As we interpret it,  the Zopa US model was really a compromise market entry by Zopa due specifically to their attempts to deal proactively with the relevant US regulations.)

We at CommunityLend believe that this phase of traditional regulatory compliance is a necessary evolution for the social lending industry in these troubled economic times.  We also believe that it will make us even stronger and more appealing to customers by making us more disciplined in our approach to the very serious business of managing people’s money and of helping people to get access to much needed capital at a reasonable price.

Michael

→ 1 CommentCategories: CommunityLend · P2P Lending international · social lending

Prosper enters a ‘quiet period’ while seeking regulatory approvals

October 16, 2008 · 1 Comment

The pace of registration with regulatory authorities for social lending companys in North America continues to heat up.  Following fast on the heels of the LendingClub announcement, Prosper have sent an email to members with this note that they are no longer accepting lender registrations, pending regulatory approvals.

Lending Club Reopens to Lenders while Prosper Shuts Lending Down | budgetcents.net

Until we complete the registration process, we will not accept new lender registrations or allow new commitments from existing lenders. If you’re an existing lender, your current lender agreements will be unaffected; your existing loans will continue to be serviced; you’ll be able to track and monitor your loans; and you’ll be able to withdraw funds from your Prosper account.

If you’re a borrower with an existing loan, you will continue with your current borrower agreement and be unaffected by the registration process. If you’re a borrower seeking a loan, you will still be able to create a new loan listing, which we will endeavor to fulfill through alternative sources.

→ 1 CommentCategories: P2P Lending international

LendingClub announce registered broker dealer partnership

October 14, 2008 · 4 Comments

Lending Club have come out of their quiet period with an astounding announcement for themselves and social lending. 

Lendingclub blog

Today, we’re delighted to announce that we have completed this process and are now available to both borrowers and lenders. We believe that this SEC registration is a major step forward for the Lending Club community and social lending in general, as it helps establish the space as a investment alternative to the traditional debt instruments and credit products offered by large financial institutions.

Much of this remains to be digested, but the immediately obviously novel parts are:

  1. Partnership with FOLIOfn Investments, Inc.,
  2. On the trading platform, lenders who become customers of FOLIOfn will be able to put notes up for sale in the event they need liquidity before the completed term of a note.

Clearly social lending is undergoing consequential changes and shifts that will determine ultimate viability, and LendingClub are leading the current next wave with securities regulation under their belt and apparently unlimited access to lenders and borrowers.

→ 4 CommentsCategories: regulation · securities regulation · social lending

Not so good news, and some great news | Zopa

October 9, 2008 · No Comments

It is a little sad that we see Zopa US close shop apparently following the participating Credit Unions inability to adequately fund the loans.  We had always known the US Zopa was an entirely different model, with the Credit Unions being the sole lenders, and then the credit crisis came along.  Nonetheless we will miss them.

Zopa US

So while our model is doing very well in current market conditions, the US has been adversely affected in a way that just couldn’t have been predicted when we launched in the US and is no way the fault of our partners. For us, a real shame is that we weren’t able to launch the original model over there for regulatory reasons.

On a related not Zopa UK is showing double digit increases in volume since the credit crisis hit, reflecting all our belief, that the time is ripe for consumers who are seeking financial alternatives.

P2P lender Zopa reports soaring uptake as credit crunch bites | finextra

Zopa says that between July and September an average of 3700 borrowers joined per month, compared to 2500 a month in the previous quarter.

Explaining the surge, Sarah Kennedy, head, customer proposition, Zopa says: “Clearly the tightened lending criteria at the banks is helping to drive borrowers to look for alternatives.”

→ No CommentsCategories: p2p lending · peer to peer lending · regulation · social lending

Unlike the US banks, Canadian banks hold back on dropping rates

October 8, 2008 · 2 Comments

The Canadian banks choose to rebel against the Government of Canada direction to reduce interest rates.  The Central Bank dropped rates by a half percentage point indicating concern about the economy and in an attempt to ease credit.  However the Canadian Banks are choosing to keep 50% of the drop for themselves.  Story at the Globe and Mail.

Banks trim prime but lag BoC cut | Globe and Mail

OTTAWA — Major Canadian banks said they would lower their prime rates by just a quarter of a percentage point, refusing to pass along all of the Bank of Canada’s half-point decline.

The rebellious move is a departure from the past, when the big banks have fully matched central bank rate cuts, despite complaints they couldn’t really afford it.

→ 2 CommentsCategories: Canadian Banks · economy