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The markets may have a better solution than ‘extend & pretend’ for troubled oil loans
<p>Some bankers would have you believe that as they contend with souring credits from oil and gas issuers, the regulators are putting them in an unnecessary straightjacket.</p> <p>As some bankers have done before, these bankers are taking aim at the Office of the Comptroller of the Currency, the overseer of many of the biggest banks. The OCC appears to be pushing the banks to classify some oil loans as troubled assets. Perhaps some bankers think the OCC shouldn’t remember ‘extend and pretend’, a practice whereby at times of stress in the past, bankers have extended loans in order to prevent them from appearing to require classification or workout. Classification pretty much puts the kibosh on extension without some kind of significant quid pro quo from the borrower.</p> <p>The OCC is just too rigid, some of these bankers say, and isn’t taking into account the possibility (if not, in their view, probability) that oil prices will rally and borrowers will make good on their promises.</p> <p>As oil prices yee and yaw, every day there is a new reason for optimism or pessimism. All that should, of course, be reflected in the futures market. Any banker that thinks he is smarter than the futures market deserves the question “Why aren’t you rich beyond avarice?”</p> <p>The complaining bankers are not wrong about the OCC. But the OCC is not wrong about bankers in general, either. Lenders resist classifying loans as troubled. And they almost always are more optimistic about the chances of recovery than the market is. In the case of oil loans, just look at what has happened to the prices of publicly issued bonds. Large company bonds are okay, but smaller company bonds are selling at prices that indicate default is a material possibility.</p> <p>What should happen in this situation? In my opinion, the market should work to sort the realistic recovery chances from the fairy tales. These situations are perfect for new debt or equity that the capital markets can create.  The new money can take many forms, of course. It could be subordinated debt of the debtor or convertible debt or preferred stock; it could take out part of the bank’s debt, it could provide breathing room to service the debt. Or in some cases, it could be super-senior debt and in other cases, the bank debt might have to take a haircut to induce the new money to come in. Many structures are possible. In a bankruptcy, the full panoply of structures would be on the table. The same should be true when seeking to restructure downgraded credits.</p> <p>Often it is better to face reality and to restructure something early. The new money may have to come ahead of the bank debt (old money), but if there is value in the debtor, the parties can figure out how to enhance that value rather than allowing it to diminish further.</p> <p>Sometimes, of course, the market will, in effect, tell the bank and the debtor that bankruptcy is the most likely future course—the comeback is too improbable.</p> <p>Neither bankers nor debtors like having to listen to the bottom fishing market. But if investment bankers are earning their money, they will be working hard to create competitive alternatives. And they just might do a lot of good in the process. Please ride to the rescue.</p> <p>In my opinion, the best investment bankers will work to set up competitive bidding situations so that debtors and banks have options to choose from. Different investment bankers and different types of investors often see these situations differently from each other. Bringing together disparate views of the market to create the best transaction for the parties is what should get the kudos.</p> <p>Photo: Tim Evanson</p>
I'm outta here: How institutions spoiled peer-to-peer payments
<p>When I first focused on peer-to-peer lending four or five years ago, I had great hopes for the medium. It seemed like a great use of technology to disintermediate lenders that painted with a broad brush and therefore overcharged their best customers.</p> <p>I put a little money with one of the lenders and began to invest in individual loans that I thought were safely relative to their interest rates. It took me a relative few minutes to find loans that I thought creditworthy, and they performed quite well. I felt good about it, too, because I was supplying the means for borrowers to reduce their payments and to get better control of their financial lives.</p> <p>Gradually, however, I noticed it was getting harder to find loans that met my criteria. There were more loans to choose from, but fewer good ones—and even fewer where the borrower had answered the kinds of questions that previously had been common. What was going on, I wondered.</p> <p>Then I learned. Institutions were buying the loans in bulk. They did not look at individual loans to cherry pick as I had done. They were back to their old way of doing business, merely using the peer-to-peer lender as a front end. Therefore the quality of the credits deteriorated. The companies like Lending Club became more profitable because they had greater throughput, but the original idea of disintermediating the institutions by evaluating the credits individually was pretty much gone.</p> <p>Was that progression a product of the low interest rate environment, where institutions were greedy for yield? Or was it a product of the way that value is created for the technologist in a society where going public is the logical (and, for success, perhaps necessary) end point? Or, as some people have suggested, is using the peer-to-peer lender as a front end a way to discriminate against some kinds of borrowers by using algorithms that exclude them?</p> <p>Whatever the causes, I regret the way the process has gone, and I hope competitors will arise that more truly will reflect the goals of the original peer-to-peer lending platforms. But perhaps the institutions, awash with cash and searching for yield, simply would defeat the purpose again. For my part, I am out of that market. Institutions are highly leveraged, and they look for a spread against their cost of funds, and because of their volume, they merely assume a level of defaults and write-offs. I use my own money, and my hurdle rate is higher than theirs seems to be—and I hate defaults. They are a sign that I did not underwrite well enough, and they reduce my yield.</p> <p>Too bad, there went another asset class to invest in. Nothing looks attractive recently. But who knows, maybe the time for oil has come again. Its downside seems modest and patience may be rewarded so long as one stays away from leveraged situations.</p>
Bernie Sanders pulls ahead of Hillary Clinton by 9 points in New Hampshire race, says new poll
<p>&nbsp;</p> <p>Here's a shocker for Labor Day Weekend,  Bernie Sanders is pulling ahead of Hillary Clinton for the Democratic race for the presidential nomination.</p> <p>It's all of a piece in this very topsy-turvy race in which fringe candidates are muscling in on the party-blessed candidates.</p> <p>According to the NBC/Marist poll, the Vermont senator would win 41% of votes in a New Hampshire race. Clinton garners 32% and Vice President Joe Biden would get 16% -- and he's not even running. Yet.</p> <p>In July, Clinton commanded a 10-point lead, according to the poll.</p> <p>In first-up Iowa, Clinton's lead has more than halved from 24 points to 11 points. In the caucuses, the former Secretary of State would win 38% of votes vs 27 points for Sanders. Biden claims 20%.</p> <p>And, in keeping with the theme of we-don't-care-what-the party-bosses want, Donald Trump is ahead in Iowa by 7 points and 16 points in New Hampshire. The Republican field is much more crowded than the Democratic. Seventeen candidates are vying to become the GOP nominee. Ben Carson is nipping at Trump's heels and the presumptive party choice, Jeb Bush, is trailing badly at 6%.<br /> Photo: Marc Nozell</p>
Why investment bankers are switching suits for startups: the story of Vasco Serpa
<p>After spending 17 years as a banker at Goldman Sachs, Merrill Lynch, and Banco Espirito Santo, Vasco Serpa turned to startups, investing in five lifestyle and leisure companies. One of these projects is, which is the equivalent of Airbnb for hiring a boat, Finbuzz reports.</p> <p>During his transition from banking to entrepreneurship, Serpa took a “sabbatical year” and spent much of this time on the water. Serpa sees himself as one of the leading trendmakers of banking veterans leaving the industry to invest in startups.</p> <p>A young sailor with an Olympic dream</p> <p>“I am from Portugal, but in the early stages of my life I lived in Mozambique and Venezuela,” said Vasco, 43, who looks a bit like Hemingway: bearded and tanned with a wide smile sitting relaxed with his white shirt open. The only thing missing was a captain’s hat.</p> <p>“My father was a merchant navy captain, so I grew up in the environment of sailing and sea.”</p> <p>At age 10 he went back to Portugal and started sailing in the local club in Cascais, becoming part of the national team at 15. Then he went to the junior world championship and later his boat, the “Laser” was selected as an Olympic category one. He started sailing the world with the pre-Olympic national team. Meanwhile he got into the top economic school in Portugal, Universidade Nova de Lisboa. “I can’t say that I had an urge to become a banker, but economics was what I ended up choosing. I guess at that time my mind was more into sailing…” Vasco said with a smirk.</p> <p>While finishing university he faced a choice: either participate in the 1996 olympics or take an investment banking job his uni professor offered him. He chose the Olympics.</p> <p>“Eventually I placed 7th out of 54, so I was very happy but when I got a call from a friend just after the Games, asking me if I wanted to finally come to a job interview, I decided it was time to see how far the flow of finance would take me”.</p> <p>The Investment Banker</p> <p>Vasco got the job and started as a broker at the Portuguese-based bank Banco Espirito Santo (BES). Soon after he became a fixed income trader.</p> <p>“The Industry was booming,” explained Vasco, “we were in the stage that lead to the Monetary Union in Europe. Portugal, which was closed from 1974 to 1980, and had already had an IMF intervention that ended in 1985, was now an EU member and was growing strong, it also became part of the MSCI index, which meant we joined first world’s markets. My bank was doing great, lots of young people came to the industry and their careers were flying. It was a moment of growth.”</p> <p>But Vasco was still not fully satisfied and wanted to get his Olympic medal. So late in 1998 he took off and started to sail professionally again in order to prepare for the 2000 Olympic trials. After he “only” ranked second in Portugal and was not selected to join the Olympic team, he finally decided to fully commit to his banking career, eventually becoming head of corporate derivatives sales in 2003 at BES.</p> <p>In 2005 Merrill Lynch in Madrid brought him onto the fixed income sales team that covered Institutional clients in Iberia.</p> <p>“The perception then was that the world economy was in perfect shape in many extents,” Vasco said. “But you sensed that the leverage in the economy was running a bit high. There was plenty of liquidity in the system, competition to lend was high, credit spreads were at minimum and lending criteria too loose. Yo</p>
Leapin' Lizards! The economics behind DDoS attacks and the lizard squad
<p>&nbsp;</p> <p>The cybersecurity business is exploding, and not just for the good guys. Distributed denial-of-service attack (DDoS) company Lizard Squad claimed responsibility for taking down theUK’s National Crime Agency website just last week.</p> <p>Macquarie analyst Mike Cikos recently took a closer look at the business of DDoS-for-hire companies.<br /> What Is A DDoS Attack?<br /> The goal of a DDoS attack is to make a website unavailable for its intended users for a certain amount of time by utilizing thousands of unique IP addresses.</p> <p>The two general forms of DDoS attacks are those that are intended to bog down services with traffic and those that are intended to crash the service altogether.<br /> Booter Service<br /> Booter service providers like Lizard ...</p> <p>Full story available on<br /> Photo: Steffen Ramsaier</p>
Numbers game: China’s essential indicators
<p>All eyes are are on China. Is the country really headed for a historic crash, or is this just a bump in road as the government shepherds China from an investment-led economy to one that is driven by consumer-demand? Investors will be focusing on some key indicators to gauge the country’s prospects:<br /> GDP growth<br /> This perhaps provides the best overall picture. The impact of China’s recent decision to revise down 2014 growth to 7.3%, from 7.4%, raises concerns over the economy’s health. The change is small but nonetheless significant as China  is used to making upward revisions on GDP growth. According to the Financial Times, this revision was largely attributed to the decline in the service sector - the biggest contributor to GDP.<br /> PMI<br /> Representing the health of the country’s manufacturing sector, China’s Purchasing Manager’s Index (PMI) for August slumped to a three-year-low of 49.7 from 50.0 in July, according to the National Bureau of Statistics. But that was still better than the figure given by an independent survey by China media group Caixin: 47.1.  <br /> Retail sales growth<br /> Retail sales growth edged down to 10.5% in July from 10.6% in June - August’s numbers will be released on Sunday. The number is expected to hold at 10.5% for last month. If this turns out to be the case, in the light of everything, the consumer spending has held up quite well.   </p> <p>Exports </p> <p>China’s trade data will be released tomorrow (Tuesday). According to Reuters, China's National Bureau of Statistics expects exports to swing into positive growth for August from an 8.3% drop in July - a possible indication the economy is stabilizing. That said, analysts polled by Reuters expect August exports to drop 6% compared with a year earlier. </p> <p>Debt</p> <p>According to the South China Morning Post, new data shows a surge in the debt run up by regional and local governments (RLGs), and it is worrying ratings agency Moody's. Official data shows RLG debt surged by more than a third between June 2013 and December 2014 to top 24 trillion yuan ($3.7 trillion), or 38% of economic output. Perhaps more than any, this number threatens to undermine China’s growth prospects.<br /> Photo: up to 2011</p>
The best (and worst) hedge funds so far in 2015
Hedge Funds
<p>Julian Robertson’s cubs may have been roarin’ so far this year but as good as their performance was, it wasn’t good enough for them to crack into the top five.</p> <p>Zero Hedge has just released a 20 best (and worst) performing hedge funds for 2015 list and surprisingly, none of the usual suspects – save for John Burbank’s Passport Capital – were on it.</p> <p>Burbank’s Passport Special Opportunities Fund came in third this year with a huge 29.18% return through July 31, while Simon Sadler’s Segantii Asia-Pacific Equity Multi-Strategy Fund came in second with an eye-popping 32.19% return through August 28. Topping them all though is Joseph Edelman’s Perceptive Life Sciences Offshore Fund, which boasts a Druckemiller-esque 35.34% return through August 21. Here’s the rest of the top five:</p> <p>Place<br /> Fund name<br /> Return<br /> Date</p> <p>4th<br /> Lucerne Capital Fund<br /> 23.33%<br /> July 31</p> <p>5th<br /> Alcentra Global Special Situations Fund<br /> 22.79%<br /> July 31</p> <p>And here are the bottom three:</p> <p>Fund name<br /> Return<br /> Date</p> <p>Dorset Energy Fund<br /> -24.54%<br /> August 28</p> <p>Elm Ridge Capital Partners<br /> -18.04%<br /> August 31</p> <p>Tulip Trend Fund<br /> -16.73%<br /> August 31</p> <p>Forever haters, Zero Hedge would like to point out that John Paulson has stopped publishing his performance figures entirely.<br /> Photo: Damon Green</p>
UBS is the latest bank to launch lab to test Bitcoin-inspired technology for trading
<p>Swiss bank UBS is elbowing its way into the digital vanguard with a prototype Bitcoin-inspired currency.</p> <p>UBS is developing something called “utility settlement coin” by making use of the same blockchain technology that drives Bitcoin. According to the Wall Street Journal, it hopes its virtual currency will be used by banks as a basis to settle mainstream financial markets transactions. </p> <p>The idea is that UBS will have its own blockchain-based platform to issue bonds, and another bank might have a blockchain-based stock trading platform - both will use the same utility coin for settlement. </p> <p>The advantage of blockchain is that the ownership of assets is verified by a decentralized network of computers rather than a centralized authority. This could potentially make transactions quicker, safer, and cheaper. </p> <p>The project - which is being developed with London-based fintech start-up Clearmatics - is helping to cement UBS’s reputation as a fintech player. Last month the Swiss bank launched a competition to attract fintech start-up to its incubator program.<br /> Photo: BTC keychain</p>
What finance can learn from Blockbuster
<p>The growth in the number of fintech startups threatening to disrupt the financial sector has sparked both alarm and glee in equal measure. Its not the first time an industry has been flipped on its head by a group of plucky young newcomers, so comparisons are inevitable. One of the most popular is Blockbuster Video.</p> <p>If you don't remember, Blockbuster was the offline video rental giant that pretty much had the monopoly on movie night - that is, before Netflix. To its eventual demise, Blockbuster had dismissed this scrappy young tech startup when came onto the scene in 1997 - it even turned down an offer to acquire the business. The rest is history. </p> <p>The question today is could banks make the same mistake when it comes to fintech? It is a possibility says Ryan Caldwell, CEO of digital banking platform MX. In an article for The Financial Brand he writes that banks and credit unions will only avoid a similar downfall by investing in consumer-centric services like digital account opening, digital lending, and digital payments</p> <p>They also ignore young pretenders at their peril. Caldwell cites the example of San Francisco-based loan platform Lending Club:<br /> “Some people might say that Lending Club represents such a small presence in the loan business that there’s no need to worry. However, it’s worth keeping in mind that when Netflix first started out — nearly two decades ago — Blockbuster said the same thing.”<br /> He is not the first to make this comparison, Bank Director editor Jack Milligan made a similar observation this year, referring specifically to the lending space.</p> <p> However, the extent to which big banks have sought to invest in their would-be disruptive - Barclays, UBS, and DBS to name but three - would suggest some are not prepared to make the same mistake as our erstwhile home video store. <br /> Photo: trebomb</p>
CSRC to crack down on automated trading
<p>Well, it appears all those rumors were really true.</p> <p>After slamming the volatility it helped create, the CSRC told Xinhua (Chinese) over the weekend that it will indeed tighten its grip on automated trading and curb excess speculation in stock index futures. And not only that, they also plan to add a circuit breaker mechanism to temporarily shut down trading when things start getting hairy.</p> <p>How it defines “excess” and how it plans to regulate a construct of ones and zeroes is currently unclear however, though I did find this earlier tweet about it particularly delightful:</p> <p>CHINA MAY ASK ALGORITHMIC TRADERS TO REPORT IN ADVANCE: CAIXIN - have no idea how this works in principle<br /> — Chris Weston (@ChrisWeston_IG) August 31, 2015</p> <p>Joking aside, this is the nth time China is making a mistake in regards to their stock market, and just goes to show how badly they needed the “sea turtles” – the best and the brightest of the nation’s returnees – who ended up either unceremoniously ousted by the CSRC or forced to return to the private sector.</p> <p>With them gone, the watchdog has done nothing but omnishambolic policies and witchhunts that have sullied its own credibility, from allowing margin lending to grow unhindered to blaming “hostile foreigners” for the market’s crash.</p> <p>In tightening its grip on automated trading, not only has it made itself a laughing stock, it has also built more walls against the once-rushing tide of investments coming in from the outside world. Algorithmic trading adds a massive amount of liquidity in the market, a huge plus for foreign investors seeking to invest, and Peking University professor Christopher Balding also seems to have found another benefit of their presence:<br /> “…given their importance in the market whether it is stocks or currencies, there is evidence that algorithmic trading has played a significant role in stabilizing the markets.  After falling relatively sharply beginning on August 21 for a number of days, major markets outside of China began sharp recoveries that have returned them largely to the point they were on August 21.  While we cannot say with certainty that algorithms are responsible, the rapid rebound from a fear induced sell off would seem to seem to match with how many of those types of programs especially when many of the economic fundamentals of the major markets presented here are better than China.”<br /> And they couldn’t have done it at a worse time; liquidity in the Shanghai Hong Kong cross-border connect is already drying up, CDS’ on China are comparing it to MERS-plagued South Korea, and growth is starting to go the way of the dodo.</p> <p>It’s almost as if someone’s doing this just to get Premier Li out of office. But maybe that’s just me with my tinfoil hat on.<br /> Photo: Edgeworks Limited</p>