Thoughts for the day

[bouteillebleu]

Read a Rolling Stone article about the sheer volume of actual fucking fraud that is involved in many of the current US banks foreclosing on homes. Not homeowners committing fraud, the banks, and it goes all the way down (of course it's related to the pit of lies and bullshit that was the subprime mortgage market, it's just horrifying to realise quite how much lying was going on).

And in an effort to try to do something with the money that I have that isn't "spend it on stuff I don't need" and that is "help the world be better", I've signed up on Kiva, a microfinance site, and have made a loan (just one so far, but I intend to do this regularly). Check the site out if this interests you.

Comments

[king-of-wrong.livejournal.com]

Amusing juxtaposition... particularly since Kiva's business model is not just subprime CDOs but also scalping lenders on the risk premium.

[bouteillebleu.livejournal.com]

By "scalping lenders on the risk premium" do you mean the lenders through the website or the local lenders (what Kiva calls "Field Partners"), and... what do you actually mean by that?

What I took from Kiva's website - and what is explicitly spelled out in their terms of service (http://www.kiva.org/legal/terms) (section 1.5, Principal Loss Scenarios) - is that a lender shouldn't lend anything that they're not prepared to lose.

Having read a little about CDOs, I can see some resemblance between the two - loans on Kiva are paid for by many people, who may be paid back in a particular order, and they're also granted to people who can't easily get loans through local banks.

The differences are the way it's presented (Kiva does appear to be marketing in a similar way to charitable giving), the fact that you do not get any extra return when loaning to someone via Kiva, and the fact that it is not sold as a super-safe investment made of magic and unicorns despite being a loan to someone who may not be able to pay it back.

[king-of-wrong.livejournal.com]

I mean the lenders on the website are expected to lose their money by salami slices - even the Fed and BoE aren't making loans at 0% interest, and certainly not with a <99% chance of repayment. That sort of level of default would suggest that the lenders should be receiving ~3-4% to compensate for the risk to the principal and the cost of funds.

The Field Partners are presumably charging interest, and most likely in the tens of percent or more given their profit figures on the site, but are being ripped off through FX - they will lose the first 20% of any currency fluctuations and then can either lose more or "opt for currency exchange loss protection" (i.e. buy insurance from Kiva) (http://www.kiva.org/about/risk/field-partner-role). Developing economies will basically only ever lose value against the US dollar, so that is a way for Kiva to claw back some of the interest charged to borrowers.

The fine print - in the TOS and in the Risk page (http://www.kiva.org/about/risk) - does say that you can lose money 'invested' and does list some risks, but the "How Kiva Works" page (http://www.kiva.org/about/how) describes the process as "Make a loan / Get updates / Get paid back / Repeat" which is rather more optimistic. I wouldn't be surprised if the website breaches FSA regulations.

Kiva is a 501(c)3 ("charity") organisation, not - despite appearances - a financial institution; that means that monies deposited have absolutely no protection (e.g. under FDIC or FSCS). If a significant number of people all attempt to withdraw their Kiva Credit simultaneously, the company would be insolvent and everyone loses substantially everything they put in (i.e. a quarter of a billion dollars). Deposit-taking banks are heavily regulated and have been for decades in the West, so we've become soft and don't think bank runs can happen any more. They can, and do.

The repayment rate ("98.96%"!) in big bold figures ignores correlation risk. If, say, the Vietnamese Dong crashes, Kiva will still be demanding repayment in USD which will take funds from their field partner - who is a) likely to be a charity themselves, b) unlikely to be holding a large base of Tier 1 capital to cope with such costs, and c) unable to borrow in hard currency to meet the demands falling due. Such stress is likely to drive them into bankruptcy and all Kiva loans to Vietnam - potentially 10% of their entire loan book - immediately go into default. The field partners are, in my guesstimation, likely to be insolvent long before the 20% threshold is reached; I'd figure a 10% shift in one year might do it.

A similar correlation risk is if a court decision makes the loans unenforceable - one can easily picture a situation similar to the Florida courtroom that the Rolling Stone hack was getting so excited about, but in Lagos or Addis Ababa, and with Kiva as the Evil Robosigners who just can't seem to get the paperwork right. Even if - spectacularly unlikely - you wanted to enforce repayment of a loan, being the owner of just one $25 tranche would make it awkward in court to say the least.

The similarities - extreme vulnerability to correlation, dicing up loans, borrowers who are a poor credit risk, no clear chain of title, insufficient risk weighting, low capital reserves - to the subprime mortgage problems leading to the 2008 collapse are remarkable.

Obviously if you view it as charitable giving, expect never again to see a single penny you put in, and can clearly afford to do so... fine. I'm not sure it's better than just donating, though. It just seems like a fashionable way for comfortably well-off Westerners to lose more money than they expect in a new and entertaining way. Personally, I think it's likely to backfire in a few years and make a lot of people very unhappy.

I do approve of the fact that a million people who probably really dislike the "1%" and "bankers" are now bankers, though, and probably suppporting quite a few loan sharks and the odd fraudster, too.

Just my opinions, of course.

[bouteillebleu.livejournal.com]

I wouldn't be surprised if the website breaches FSA regulations.

If you believe the Telegraph, it's the Office of Fair Trading rather than the FSA that regulates them (http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8012269/Zopa-calls-on-Government-and-FSA-to-regulate-social-lending-sector.html).

It just seems like a fashionable way for comfortably well-off Westerners to lose more money than they expect in a new and entertaining way.

Yup! Sure. Shall do.

I think our approaches to this issue - and to politics and finance in general - are so dissimilar that although the information is useful, I am unlikely to come round to your way of thinking at any time, and likewise I doubt you'd come round to mine.

[king-of-wrong.livejournal.com]

The OFT regulates lending to the public, which Zopa does, but Kiva is a rather different proposition - it's somewhere between an "emerging markets" mutual fund, a bank, and a brokerage account, which is definitely FSA territory. Of course, since it's a US company, it'll probably take a court case for the FSA to assert its authority.


I am unlikely to come round to your way of thinking at any time, and likewise I doubt you'd come round to mine

Absolutely. I'd no expectation of changing your mind, and it's obvious that I wouldn't touch Kiva with a barge pole.

[king-of-wrong.livejournal.com]

Whoa, that was a long comment!