Money Stuff

Marcus Loans and Wells Fargo Troubles

Also mobile-phone stock gaming, a different kind of mobile-phone stock gaming, and the Yahoo hack MAC.


Goldman Sachs's online consumer lending operation, which launched yesterday, is called "Marcus," after the firm's founder Marcus Goldman. I suppose the idea of referring back to the 19th-century founder is to emphasize the old-timey-ness of the project, while calling him by his first name gives it a certain youthful coolness. I don't know about the coolness, but the old-timey-ness seems surprisingly sincere. For instance:

Borrowers from Marcus will be able to choose from a slider of monthly payments, which varies the amount of the loan, payback term, and rate. The bank says this is a big advantage of using its own money to lend.

Most online lenders offer set terms, such as three years or five years, and can’t dynamically vary the rate they offer, to satisfy the end buyers of their loans who prefer standard terms or the conditions of a credit facility from a bank or hedge fund.

Much of the innovation in finance over the past few decades has been about loosening the relationship between borrowers and lenders. Lenders figured out ways to package loans and sell them to investors, or buy credit derivatives to insure them. That can reduce capital requirements, make lending cheaper, reduce the perceived risks of lending, and allow loans to benefit from all the glorious efficiencies of the capital markets rather than being stuck on some bank's balance sheet. On the other hand ... I mean, one, there was a financial crisis, sure. But also, to package and sell loans to investors, you need those loans to be pretty standardized. A loan is no longer a relationship between a bank and a borrower; it's a commodity product that can only be sold if everyone can easily compare it to other similar commodities.

Goldman's innovation is: Nah, we'll just get to know you, give you a loan, and keep it until you pay it back. Since we don't need to sell it, we can make it any length you want. It might as well be Bailey Brothers' Building and Loan: You walk in, shake hands with Marcus, sit down, tell him about your life, his eyes twinkle benevolently, he strokes his beard, and he says, "yes, I think we have just the loan for you." Only over the internet. It is all a little ... un-Goldman? (Disclosure: I used to work there.) I mean, I guess you could call these loans "bespoke," and "bespoke" is a big Goldman buzzword, but it does seem like a big change that Goldman gets its comparative advantage here by rejecting the market and relying on its own deposits. When do they start selling exotic derivatives on the loans to hedge funds? What does it tell us about modern banking that Goldman Sachs's best and most high-profile idea is offering individualized unsecured loans to retail borrowers that it will keep on its balance sheet? 

Also, there's a podcast about it, because the way you learn about hip first-name-named products in 2016 is on podcasts.

Wells Fargo.

Hey, you know who has not had a great time in traditional retail banking recently? Here is a grim recap of "Wells Fargo’s Textbook Case of Botched Crisis Management," which stemmed from "an insular corporate culture, fostered by executives with decades of tenure," who had more or less steered clear of problems in 2008 and so were "largely untested by crisis." And so they ... just figured everything was fine? You can, at a stretch, see where they were coming from. Sure, Wells Fargo opened 2 million fake accounts, and ended up firing 5,300 employees for it, but they ended up overcharging customers by something like $2.4 million. Maybe the damage to the customers' credit ratings is an order of magnitude or two bigger than that, but compared to the multi-trillion-dollar cost of the global financial crisis, Wells Fargo still comes out pretty far ahead. But that's not the accounting that anyone else uses. If you have a scandal now, you don't get credit for being an above-average bank on a rolling 10-year timeframe. And Congress doesn't appreciate it if you act like you should.

I said yesterday that "I tend to think of a big bank as a roiling random process; the CEO sits on top of it and does the best he can to gently nudge it in a good direction, but ultimately the random process, not the CEO, is in control." I also admitted that not everyone sees it that way. For instance, here is Minneapolis Fed President Neel Kashkari:

“I actually don’t think the Wells Fargo case is an example of too big to manage,” Kashkari said, during a discussion with students and professors at Bethel University in Arden Hills, Minnesota.

The definition of a too-big-to-manage bank is when a problem is buried in the bowels of an organization and remains outside the chain-of-command, Kashkari said.

“Guess what. The CEO and board of directors of Wells Fargo were aware of this for four years. This is an example of managers making wrong decisions,” he said.

That seems more or less true. At the same time, it feels a bit like cheating, both to argue that big banks are too big to manage and should be broken up, and to argue that actual failings at those banks are entirely the personal responsibility of their managers and can't be attributed to their incomprehensible bigness. Either "too big to manage" is a thing, or it isn't.

Elsewhere, Wells Fargo's new chief executive officer, Timothy Sloan, "rose through the commercial, corporate and investment banking side" of Wells Fargo, which I guess is good now? I remember a time when investment bankers were viewed as risky, but the pendulum has swung. And: "If Wells Fargo’s board had hoped John G. Stumpf’s resignation on Wednesday and the appointment of Timothy J. Sloan as the new top executive would instantly quell the bank’s numerous critics, they were mistaken," but that is just a given. Nothing can instantly quell the critics of the latest bank hit by scandal, except the next bank's scandal. Maybe Marcus will launch with a bunch of fake accounts and take some of the heat off Wells.

Oh also: "Wells Fargo Profit Slides as Bank Battles to Restore Reputation." And: "JPMorgan Profit Beats Estimates on Surge in Bond-Trading Revenue." And: "Citigroup Profit Beats Estimates on 35% Jump in Bond Trading." Bond trading looks a lot more fun than retail banking this quarter.

Daily fantasy stocks.

There are basically four ways to bet on publicly traded stocks:

  1. stocks,
  2. exchange-traded options,
  3. over-the-counter derivatives, if you are an "eligible contract participant," i.e. an institution or multi-millionaire, or
  4. illegally.

There are a lot of good choices, so you'd think that option 4 wouldn't be that attractive, but here we are:

According to the SEC’s order, Forcerank ran mobile phone games where players predicted the order in which 10 securities would perform relative to each other.  Players won points and some received cash prizes based on the accuracy of their predictions.  Forcerank kept 10 percent of the entry fees and obtained a data set about market expectations that it hoped to sell to hedge funds and other investors.  Forcerank’s agreements with players were security-based swaps because they provided for a payment that was dependent on an event associated with a potential financial, economic, or commercial consequence and based on the value of individual securities.

Forcerank chose option 4 apparently more or less innocently: "Forcerank LLC canceled its plans after meeting SEC staff," and refunded the money it had collected, but the damage was done. (The Securities and Exchange Commission fined it $50,000.) It does sort of seem like it should work, right? If you don't think about it too much? You play it on your phone. The entrance fee was $5. As a risk to your financial well-being, this does seem less dangerous than buying options, or even stocks. And yet it is illegal: It's an unregistered "securities-based swap" not offered solely to "eligible contract participants."

I'm pretty sure we'll see more of this. My Bloomberg View colleague Elaine Ou got in trouble with the SEC last year for her own illegal stock-price-betting game. The Ethereum app store is crammed with pyramid schemes, some with "pyramid scheme" in the name. The vogue for daily fantasy sports and mobile gaming has led to an insatiable demand for new ways for people to lose money on their phones. And the vogue for fintech and blockchains has led to a sort of second childhood for finance, as many old ideas from finance -- in many cases, ideas from the 1920s that the SEC was formed to stamp out -- are revived in new, more tech-friendly forms. The SEC is probably going to have to meet some of them halfway. (Crowdfunding, for instance, is a lot more legal now than it has been for most of the last 80 years.) The lessons of 2008 may still be fresh, but the lessons of 1929 seem pretty quaint. Plus we have phones now! Why can't we rank stocks on them?


Speaking of ... the things ... we were just ... speaking of, here's Stash:

While most traditional brokers assume you know the difference between a stock and a bond, a large cap and a small cap, Stash assumes its new clients know just about nothing. It offers only 36 investments, most of them exchange-traded funds, all renamed for beginning investors. Delicious Dividends is Stash’s more appetizing name for the Schwab U.S. Dividend Equity ETF. Roll With Buffett gives you a fractional share of Berkshire Hathaway Inc. That lets Stash's investors—average age 28, 80 percent under 34—invest alongside Warren Buffett, Berkshire's 86-year-old chief executive officer.

Hey cool super, but what about diversified index inv--

“I didn’t know anything, so it was very intimidating to me,” said Peng, who lives in Brooklyn and works at a nonprofit group. Stash is “almost like a game,” she said. “They kind of hold your hand through the process.”

Yes, look, a world in which all human behaviors are reduced to playing games on phones, reading a 200-page hard-copy prospectus is just not a good phone game. The market demands investing solutions that are good phone games. Some of those solutions won't work out (Forcerank), but some will, and the overall demand for investing as mobile entertainment probably will drive a lot of regulatory changes over the next few years.

Yahoo hack MAC!


Verizon’s top lawyer said on Thursday that his company thought that the hacking of 500 million Yahoo email accounts in 2014 — disclosed last month, well after the deal was announced — had materially diminished the value of Yahoo, potentially allowing Verizon to reopen the sale discussions.

“I think we have a reasonable basis to believe right now that the impact is material, and we’re looking to Yahoo to demonstrate to us the full impact,” Craig Silliman, Verizon’s general counsel, told reporters in Washington. “If they believe that it’s not, then they’ll need to show us that.”

If you're interested, the "Business Material Adverse Effect" definition is on page 70 of the Verizon/Yahoo purchase agreement. "Any circumstance, event, development, effect, change or occurrence" that "has had, or would or would reasonably be expected to have, a material adverse effect on the business, assets, properties, results of operation or financial condition of" Yahoo could give Verizon an excuse to back out of the deal. "There are some serious questions about whether Yahoo’s customers will continue to use the service knowing that their data has been compromised," says a security expert," and I suppose if Yahoo's customers stop using it that would be ... bad? For the business? Verizon doesn't actually seem interested in backing out -- its CEO "said at a conference that the Yahoo deal made sense" -- but it could be a good excuse to renegotiate the price. Earlier in the messy Yahoo sales process, there was some speculation that deep down Marissa Mayer didn't want to sell, and wanted another shot to turn around Yahoo's core business, and was hoping that the negotiations would fall apart. It would be funny if a 2014 hack, somehow not discovered until last month, gave her that opportunity.

People are worried about unicorns.

I mean, you can worry about unicorns, but if you somehow came into possession of $100 billion, and wanted to use it to build new businesses, where else would you invest it? The public equity markets? They are mostly in the business of returning capital to investors these days; you're not going to find the next Facebook by investing in Facebook. You have to look harder:

SoftBank said it is forming a new fund to put as much as $100 billion in the global technology industry in the next five years, partnering with Saudi Arabia’s public investment fund to find companies that will become influential in the future. By comparison, all the venture capital funds in the world disbursed a record $129.5 billion in funding in 2015, according to CB Insights.

On the other hand, if you are worried about unicorns, one of your worries is that non-traditional new money keeps flooding into technology venture capital, raising valuations beyond what the fundamentals can justify. "As much as $45 billion" of new money from Saudi Arabia might increase those worries.

In tech worries at a different scale, here is Sam Kriss on two tech billionaires' efforts "to secretly engage scientists to work on breaking us out of the simulation":

The two billionaires (Elon Musk is a prime suspect) are convinced that they’ll emerge out of this drab illusion into a more shining reality, lit by a brighter and more beautiful star. But for the rest of us the experience would be very different—you lose your home, you lose your family, you lose your life and your body and everything around you. Simulation or not, everything would disappear. It would be the end of the world. Comic-book movies, in their own sprawling simulated narrative universes, have been raising the stakes to this level for years: Every summer we watch dozens of villains plotting to blow up the entire universe, but the motivations are always hazy. Why, exactly, does the baddie want to destroy everything again? Now we know.

Unsurprisingly, nobody bothered to ask us whether we want the end of the world or not; they’re just setting about trying to do it. Silicon Valley works by solving problems that hadn’t heretofore existed; its culture is pathologically fixated on the notion of ‘disruption.’

And here is a guy who thinks startups are bad, and who uses bad words to say that.

People are worried about bond market liquidity.

The SEC adopted new rules on liquidity management for mutual funds, and exchange-traded funds got some exemptions:

The Securities and Exchange Commission had originally lumped ETFs in with mutual funds last year when proposing the rules, which try to make sure that firms can more easily sell assets to meet demands from investors who want to cash out during market downturns. ETF providers had pushed back on the inclusion, with BlackRock Inc., the world’s largest asset manager, arguing that the structure of many ETFs makes them more liquid than mutual funds. Vanguard Group is also one of the biggest providers of ETFs.

Under the revised rules that SEC commissioners unanimously approved on Thursday, ETFs that redeem in-kind, or provide securities rather than cash as redemptions, and provide daily portfolio information are exempt from certain new requirements for mutual funds, including classifying the liquidity of investments and maintaining a set amount of highly liquid reserves. The ETFs will face liquidity risk management requirements however that are specifically tailored to their structure, according to the SEC.

The question of bond market liquidity and ETFs tends to create bitter divisions. Some people think that bond ETFs create far less run risk than regular bond mutual funds, and that ETF shares themselves provide liquidity as a substitute for the underlying bonds. Others think that ETFs pose a major liquidity threat, because -- more than mutual funds -- they create a "liquidity illusion" that, if it is ever shattered, can lead to crisis. I tend to be in the first camp, as is BlackRock, as is, apparently, the SEC.

Things happen.

Airlines and antitrust. Elizabeth Warren urges President Obama to remove the head of the SEC. Flight of the Brexit Bankers. Companies Hurt by Treasury Crackdown Win Exemptions. Fed Officials Concerned by Rising Corporate Leverage. Will Business Lending Spoil Bank Earnings Season? Land With Longest Stretch of Negative Rates Finds Rich Are Getting Richer Faster. Wall Street’s Latest Bond Collateral: Subsidized Rent Checks. Libya ruling set to cast fresh light on Goldman practices. Malaysian Fund 1MDB Linked to White House Visit. Tiny Bank-Beating Trading Firm Doesn’t Use Any Human Traders. Is Facebook Disappearing Oculus Founder Palmer Luckey? Short Sellers Miss Payout From Twitter Stock Tumble. Hedge Fund Firm and Supervisor Charged With Failing to Prevent Insider TradingDonald Trump says Hillary Clinton "meets in secret with international banks to plot the destruction of U.S. sovereignty." "A Trump presidency represents a threat to press freedom unknown in modern history." Trump plans to blame sexual-assault allegations against him on a Mexican. It’s Official: This Election Is Driving Americans Nuts. How Video Games Are Changing the Way Soccer Is Played. Craps is fun. You Bought a Vineyard. Now, Meet Your Staff. London Zoo Calls Police After Reported Gorilla Escape.

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