Landmark Links May 27th – Can’t Kick the Habit


Lead Story… There has been a lot of negative press over the past couple of months about the growing pains that crowd funding and peer to peer lending sites are experiencing.  Last week, shares of Lending Club plunged after investors suspended debt purchases following the departure of Chairman and CEO Renaud Laplanche and the disclosure of faulty internal controls (read: investors weren’t getting what they thought they were getting when they purchased loans).  Lending Club’s rival Prosper Marketplace is having similar issues, is seeking a capital injection and plans to slash 28% of it’s workforce to cut costs.  Not to be outdone, real estate Crowd Funding platformed-turned eREIT Fundrise recently outsted it’s CFO Michael McCord who claims that his sacking was retribution for him alerting executives to fraudulent behavior.  There are plenty more examples out there.

Part of what’s happening, IMHO is that crowed funding and online lending platforms are experiencing growing pains that come when you are trying to scale an industry with a new business plan where institutional controls have not stood the test of time.  Most of these platforms were founded or at least came of age after the financial crisis.  To date, economic growth has provided a tailwind as have incredibly low interest rates.  Even still they are running into issues.  In reality, we won’t really know how viable the consumer loan and business underwriting models are until they make it through at least one downturn.  As Warren Buffet says: “Only when the tide goes out do you discover who’s been swimming naked.”

They say that necessity is the mother of invention and AIG, the New York insurer widely known for it’s role in creating the mortgage bubble and subsequent financial crisis sees an opportunity to profit from investors’ concerns about being ripped off as they invest through these new vehicles.  From the Wall Street Journal (h/t Dave Kidder):

The New York company is set to launch what it is calling “Crowdfunding Fidelity,” an insurance product developed to protect investors on equity crowdfunding platforms against fraud.

In announcing the new coverage Tuesday morning, AIG noted that there have been few instances of fraud in the sector so far. But it said its new product would help to build investor trust to ensure underlying issuer trustworthiness.

“As a sector still in its infancy, equity crowdfunding platforms are only as strong as the confidence they instill in their investors,” said Lex Baugh, AIG’s president of liability and financial lines, in a news release.

AIG is going to provide a product that insures crowd funding investors against fraud by operators.  It will receive its premium as a pass-through fee to investors when deals are funded.  The coverage is actually purchased through the crowdfunding platform itself, not the entity being funded.  The first potential issue that I see here is that AIG will be funding policies against many smaller companies that may be difficult to adequately underwrite through a bigger crowdfunding site that acts as an intermediary.  The second is that there is often a fine line between fraud and incompetence.  Some cases are black and white but many are not.  In addition, there are likely to be a lot of crowdfunding investors crying “fraud” if their investment goes south even though the failure may be a simple case of incompetent management trying and failing to get a venture off the ground.  I would imagine that the tendency of investors to claim fraud increases if they know that a fraud policy is in place to cover their loss whereas the loss wouldn’t be covered if incurred through plain old incompetence.  AIG claims that they have a way of dealing with this: they are only going to write policies to the best of class crowdfunders:

AIG will sell the coverage only to those portals it has determined have adequate processes in place to check out backgrounds of the businesses they allow to sell equity stakes, Mr. Baugh said.

That makes sense initially but I would imagine that this will be very difficult to scale as a viable business line unless it takes on incrementally more risky platforms over time.  After all, the crowdfunding business is still in it’s infancy and how many platforms really have top tier processes in place?  Keep in mind, AIG’s mortgage bond group didn’t start out insuring crappy mortgage bonds.  Instead, it started out insuring mortgages backed by borrowers with good credit and took on more risk over time in order to win more business.  From the book Fatal Risk: A Cautionary Tale of AIG’s Corporate Suicide by Roddy Boyd:

As the quality of the borrower diminished, as mortgage lenders willingly embraced more risk to feed the Wall Street machine, United Guarantee (an AIG subsidiary) had to engage in incrementally riskier levels of underwriting to get business done.  The results were predictable: they found the marginal borrowers and lent to them in the middle of a market bubble.

Insuring crowdsourcing platforms against fraud will never amount to a fraction of a percentage of the size of the mortgage bond insurance market so the risk here is far different and poses no threat to the financial industry or, for that matter AIG itself.  That being said, this strikes me as either an incredibly difficult business to scale or a recipe for incremental risk taking that could get ugly when the proverbial shit hits the fan in the next economic downturn.


Game On: The Federal Reserve is serious about being open to raising interest rates at their June meeting if conditions merit a hike.  But See: A freeze in the hiring of temp-workers bodes ill for the economy.  And: The yield curve is now the flattest that it’s been since 2007 and will likely only get flatter if the Fed hikes in June.

But it’s Comfy in Mom’s Basement: A new study by the Pew Research Center found that, for the first time on record, living with parents is now the most common arrangement for people ages 18-34 and that more Millennials live with their parents than live with a spouse or partner.  But See: Young Americans are paying less on student debt than you might think.

Lost Their Appetite: Silicon Valley venture capitalists have soured on startups claiming to be the “Uber of __.”  However, Snapchat just raised new capital at an obscene valuation of 70x sales, a $22 billion valuation (quick point of referenc: Twitter barely touched 30x sales at the peak of the social media frenzy and Facebook is currently trading around 20x sales so yes, this is nuts).


Just Speculating: Retailers are racing desperately to compete with Amazon in the eCommerce space are fueling a spec warehouse boom.


Blow-Out: The new home sales report for April was extremely strong at 619k units sold and an upward revision for previous months numbers.  Even Calculated Risk’s Distressing Gap is looking a little bit less distressing this week:

Just a reminder, if you follow economics in general and the housing market in particular and are not a regular Calculated Risk reader, you are doing it wrong.  See Also: Home buying, not refinancing is driving mortgage applications higher.

Don’t Get High on Your Own Supply: Shrinking home supply in lower-tier markets is leading to upward price pressure even while inventory builds at the high end.  See Also The Seattle market is going HAM with new listings taking an absurdly low average of only 8 days to sell.


All the Rage: Houston residents have a new way to work off anger an anxiety from the oil crash: Rage Rooms.  Facilities across the US are now offering angry people the chance to smash things to their heart’s delight. (h/t Steve Sims)

Must Read: This NY Times article is probably the most accurate thing ever written about Millennials:

Sure, the demographic group exists as an amorphous bloc. But you are as likely to come upon an archetypal millennial as you are to run into Joe Sixpack or be invited to a barbecue at the median American household. It’s hard to believe this even needs to be said, yet here we are: Macroscale demographic trends rarely govern most individuals’ life and work decisions. For most practical purposes — hiring and managing, selling to, creating products for — your company may be better off recognizing more discrete and meaningful characteristics in workers and customers than simply the year of their birth.

If your management or marketing theories involve collapsing all millennials into a catchall anthropological category — as if you’re dealing with space aliens or some newly discovered aboriginal tribe that’s suddenly invaded modernity — you’re doing it wrong. Or, as I believe my millennial friends say, “yass literal epic fail hashtag, bro.”

We’ve made this point before, mostly as it relates to housing and it’s worth stating again: 90% of what you read about Millennials and their “preferences” is nothing more than bullshit narrative.  Be careful generalizing such a massive and diverse group.

Please Make it Stop: The Pac-12 announced that it will become the first athletic conference to run and broadcast something called eSports which is a euphemism for playing video games. defines sport as:

1. an athletic activity requiring skill or physical prowess and often of acompetitive nature, as racing, baseball, tennis, golf, bowling, wrestling,boxing, hunting, fishing, etc.
2. a particular form of this, especially in the out of doors.
3. sports, (used with a singular verb) such athletic activities collectively:
Sports is important in my life.

Nothing in that definition covers the act of sitting in your mom’s basement or a dorm room playing video games online.  Although I’m not a video gamer, I get that there is some value in playing them especially when it comes to training kids to code, etc.  However, can we please stop calling this a sport when it isn’t one?

The Perfect Wave: How Kelly Slater’s top secret wave machine could change the surfing world forever….if surfers buy in.

Chart of the Day


Shitty Traffic: A truck carrying toilets crashed on a San Fernando Valley overpass, dumping the toilets onto the freeway below and clogging up traffic for miles.

Necessity is the Mother of Invention: South Korea, widely considered to be Asia’s hardest-drinking country has invented ice cream that cures hangovers.  Not to be outdone, North Korea recently announced that Kim Jong Un invented ice.

Always Flush: I would rather run through a liberal arts college campus with a Trump shirt on than sit down on a toilet in Thailand after reading this.

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