Friday, November 20, 2009

Completed my first investment using the Lending Match feature of Lending Club

Last week I finally finished up my first batch of investment loans using the Lending Match feature of Lending Club. Basically, the total process took two weeks. The bulk of the investments, all but one, settled within the first week and then I had to make two multi-day attempts to get a replacement for the one loan that did not settle. I did end up with a better loan than the original one that was part of the batch recommended by Lending Match, but it did take some manual effort on my part to "close the deal." Net-net, I am done and pleased with the result. I now have twice the investment portfolio I had a month ago. A total of 17 notes.

I'll give this latest batch of investment notes two months to see that everything is okay and payments are on time, and then I'll consider a next batch to double the size of my investment portfolio again, assuming that I have work income coming in at that time.

According to the Linding Club web site, my Net Annualized Return is sitting at 13.59%. Once the new batch of loans starts "producing", this should move up to about 14.5% or so, maybe even 15%.

Note: Lending Club also has an IRA arrangement. I haven't investigated it yet.

-- Jack Krupansky

Thursday, November 05, 2009

Great progress using Lending Match feature of Lending Club, but one bug

Just under a week ago I made my first attempt to use the Lending Match feature of Lending Club to invest in a whole batch of P2P investment loans all at once. It has worked out well, with just two related glitches. Out of nine loans, eight have already been "Issued", and only one failed to reach 100% funding in the two-week funding period. Not bad at all. I was actually worried that two or three of the loans might not get funded. So, that was the first, almost-expected "glitch". I classify it as a glitch because I have to now manually intervene to "set things right." Now, I need to select another loan to substitute for that rejection. Oops... here is the second glitch. Even though that rejected loan has already dropped off the Funding/Issued list, my funding amount has not yet been credited back to my account, so I can't reinvest it yet. To me, that is more of an outright bug rather than a simple "glitch." But, I am confident that either later today or tomorrow morning the money will be credited and I can select a replacement loan for investment.

My current Net Annualized Return is displayed as 13.44%, before the new loan batch. That puts me up at the 78% percentile. The new batch of loans may push me up to 82% or so. I think I want to be at around the 85% to 90% range, rather aggressive, but not way out there with the whacky 10% fringe nuts.

Based on my quick success, I am already looking at some other "extra" cash that is earning 0.00000001% interest in my Fidelity account and trying to decide whether to "save" it with and get 2.01% APY or "invest" it with Lending Club and get maybe 17%. Maybe I'll split it in half and do both.

Further down my list of things to do is to check out the FOLIOfn Note Trading Platform. I want to see which notes might be selling at a premium and maybe sell a few to lock in some bigger gains.

-- Jack Krupansky

Tuesday, November 03, 2009

In-house proprietary trading at the big banks is a HUGE evil

I have lost count of how many years I have been ranting about the evils of in-house proprietary trading at the big banks (and formerly brokerage firms.) Now I find out that there in fact is a second person in the world who believes how evil that proprietary trading is: Jeremy Grantham. I traditionally have not been a fan of his. He is way too bearish and cynical for my taste. Still, I do like to read quotes from him and even an occasional piece that finds its way into the public domain. I actually enjoy sifting "signal" from "noise" and find that no matter how far off a piece is, usually there are some useful tidbits in there somewhere. To wit, John Mauldin just emailed out an Outside the Box E-Letter entitled "Just Deserts and Markets Being Silly Again" by Mr Grantham. I didn't find most of the piece very enlightening, but when he finally got around to recommending some reforms for our shaky financial system, his "Step 1" immediately caught my attention. he must have been reading my mind.

I agree with his starting point: "Proprietary trading by banks has become by degrees over recent years an egregious conflict of interest with their clients." Actually this conflict of interest has existed for many, many years, but in recent years it became a HUGE problem.

I also strongly endorse his thesis that: "Prop trading can easily introduce an aggressive hedge-fund type mentality into the very hearts of what ideally should be conservative, prudent - even boring - banks. This hedge fund mentality became a dominant organizing principle, particularly with respect to compensation practices. It encouraged personal aspirations over corporate goals and invited bonus-directed behavior at the clients' expense and ultimately, as we have seen, at the taxpayers' expense to rid itself of this problem."

In short, in-house proprietary trading has focused management on "easy money, fast money", and that "easy money, fast money" is not a solid foundation for what the rest of us call "banking." As Mr. Grantham suggests, this is "an aggressive hedge-fund type mentality" which put simply, has no place in what we all call "banking."

Here is the passage which I 100% agree with (and have for a number of years):

Step 1 should be to ban or spin off that part of the trading of the bank's own money that has become an aggressive hedge fund. Proprietary trading by banks has become by degrees over recent years an egregious conflict of interest with their clients. Most if not all banks that prop trade now gather information from their institutional clients and exploit it. In complete contrast, 30 years ago, Goldman Sachs, for example, would never, ever have traded against its clients. How quaint that scrupulousness now seems. Indeed, from, say, 1935 to 1980, any banker who suggested such behavior would have been fired as both unprincipled and a threat to the partners' money. I, for one, saw Goldman in my early days as a surprisingly ethical firm, at worst "long-term greedy." (This steady loss of the old partnership ethic is typically underplayed in descriptions of Goldman.) Today, Goldman represents a potential hedge fund trade as being attractive precisely because they themselves have already chosen to do it. These days, all - or almost all - large banks do proprietary trading that is pure hedge fund in nature. Indeed the largest bank, Citi (owned by us taxpayers), is gearing up to substantially increase its aggressive prop trading as I write. ("No, no, we're not!")

Some insiders have argued that we should not worry about prop trading because they claim it did not play an important part in the recent crisis. I think this is completely wrong for it misses the very big picture. Prop trading can easily introduce an aggressive hedge-fund type mentality into the very hearts of what ideally should be conservative, prudent - even boring - banks. This hedge fund mentality became a dominant organizing principle, particularly with respect to compensation practices. It encouraged personal aspirations over corporate goals and invited bonus-directed behavior at the clients' expense and ultimately, as we have seen, at the taxpayers' expense to rid itself of this problem. All Congress has to overcome is the lobbying power and campaign contributions of the finance industry itself, which I admit is no small feat. In a bank with a hedge fund heart, you can't reasonably expect ethical or non-greedy behavior, and you haven't seen it.

Of course, commercial and investment banks need to invest their own capital. They probably should have the right to do genuine hedging against investments that flow naturally from their banking business. As for the rest, they could easily be required either to limit the leverage used on prop desk trading or to be restricted to investing in government paper and, at the very least, play by the same rules as other hedge funds. What they certainly should insurance, as is now the case.

In the early 1930s, following the famous Pecora hearings, the conflict of interest between the management of other people's money as fiduciary and the business of dealing and underwriting in securities was considered so inimical to the public interest that Congress almost compelled separation of proprietary trading and client trading. Close, but no cigar. Instead, Glass-Steagall made the probably less useful step of separating commercial and investment banking. Unfortunately, they left intact the obvious conflict between the banks' managing their own money and simultaneously that of their clients. We now have a unique opportunity to revisit this matter.

(As we ponder the problem of prop trading, let us consider Goldman's stunning $3 billion second quarter profit. It appeared to be almost all hedge fund trading. Be aware also that this $3 billion is net of about $6 billion reserved for future bonuses. Goldman's CEO had, in fact, the interesting job of deciding how much of this $9 billion profit would be arbitrarily awarded to shareholders. [In this case, one-third. Could be worse!] This means that they extracted every penny of $9 billion from a fragile financial system. "Good for them," you may say, and they indeed are very smart. But surely they should not have been insured against failure by us taxpayers! Remember, they are now also a commercial bank yet very, very little of their $9 billion came from making loans. Three months later their bonus pool for the year is estimated to be a new record at $29 billion. And the whole banking industry is back to a new record for remuneration. How resilient! How remarkable! How basically undesirable for our economy!)


The separation of commercial banking from investment banking is not as vital as the removal of prop desk complicated enterprises both smaller and simpler, which characteristics I for one believe are probably essential if we are to avoid further disasters.

In summary, I wholeheartedly agree that the problem was not the combination of commercial and investment banking per se, but the existence of in-house proprietary trading (in conflict with customers) in any banking organization. The corrolary is that re-separating commercial and investment banking is not the solution per se, since it is the in-house proprietary trading that is the systemic threat.

Of course, there is no way that the big financial institutions would relinquish such a huge source of profits. But the simple truth is that the sheer level of these profits is a direct indicator of the level of conflicts of interest, both with their customers, and with consumers all around the world. These profits are essentially a hidden tax on every citizen everywhere, with no services delivered in return for the bargain.

Well, okay, maybe we do get "Free Checking" accounts in return (and the banks then turn around and use our cash to fund their in-house proprietary trading rather than making meaningful and productive loans!), but that is not a very attractive bargain considering the vast costs to all citizens of bailing out these monsters combined with their ongoing draining of productive assets from the real economy.

-- Jack Krupansky

Sunday, November 01, 2009

Trying out the Lending Match feature of Lending Club

My Lending Club investment loan account has been on auto-pilot for some time now. All has been well since I last blogged about it in early August. All of the loan payments have been on time. In fact, enough interest and principle repayment has come in that I now have enough from those two sources alone to make a new loan. I also finally have some new work income coming in again, so I am also adding new funding for another batch of loans, the same amount as my original funding. The difference is that this time I will try out the Lending Match feature which automatically selects and recommends a batch of loans given an investment amount and a target interest rate.

The feature gives you a slider bar which displays the interest rate. As you slide between lower and higher interest rates it also displays a pie chart with the percentage breakdown of each credit risk class. I was tempted to go for 18% or even 20%, but the resulting risk profile seemed too "risky" for me. I pulled back and finally settled on 15% as an optimal risk profile for me. My current annualized return is about 13.5% and loan rates have risen by 0.5% since I made my investment loans back in June, so 15% is only a modest increment above my current risk.

Lending Match selected my nine investment loans. I wasn't comfortable with two of the recommendations, so I deselected them, and Lending Match recommended replacements that I was comfortable with. I did this on Thursday. So far, two of the nine have reached full funding and are awaiting final review by Lending Club. A third is very close to full funding. Most of the rest are progressing with funding fine, with only two or three that may be questionable as to whether they will reach full funding before their two week funding period expires.

So far, I am extremely happy with the results I have gotten with Lending Club.

I will do a few more experiments in the next couple of months, and then consider a more serious investment as long as my work income holds up and I start accumulating a little cash to invest.

-- Jack Krupansky