How to Circumvent the Banking Industry

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The Daily Reckoning | Saturday, June 30, 2012 How to circumvent unnecessary regulation... Readers weigh-in on government term limits and how the US perceives itself... Plus, all this week’s reckonings archived for your stress-free weekend perusal... --------------------------------------------------------------- Build Generations of Lasting Wealth from These Radical Breakthroughs On Wednesday, June 27, 2012, a tiny firm this expert tracked for over two years received a positive ruling from a government agency. His readers could’ve booked an enormous gain. To get you in position to benefit from his next major win, you can join his VIP-level research service for almost 75% off the normal price. This rare offer closes at 5pm on Monday, July 2. Click here to read all the details and see a full picture of this expert’s track record. Joel Bowman, checking in today from Paris, France... Joel Bowman As regular readers of these pages know, we’re big fans of private action and public inaction. If there’s real world demand, you can bet your bottom dollar there’ll be a capitalist pig (read: entrepreneur) there to try and meet that demand. That’s especially true in highly regulated industries, like the banking sector. In this weekend’s feature essay, Addison Wiggin takes a look at a peer-to-peer solution that takes the middle man out of the picture and, in doing so, offers a “five-10-fold boost over annual savings and CD rates.” Please enjoy... [The following essay first appeared in these pages on Monday, June 25, 2012] The Daily Reckoning Presents A Different Kind of High-Yield Investment Addison Wiggin Only 16% of the stock market is traded by flesh-and-blood human beings. So tallies Morgan Stanley, which has been keeping tabs for the past 10 years, in a recent Financial Times article. Computerized high-frequency trades (HFTs) dominate the other 84%. These trades, known as “black box” trades, are governed by complex algorithms that analyze data and transact orders in massive quantities faster than you can blink. We wonder where the tipping point is. On top of it all, the Fed and Treasury keep interest rates at historic lows and dollar printing at historic highs, punishing savers and rewarding spenders. The special interests come first and the little guy last. We believe we have found a way to avoid those “search and destroy” HFT programs, along with a lot of big-government and big-banking waste. We’re talking about a free-market solution to earn income by letting an individual be their own bank. This idea may be able to safely generate a 6-15% interest on your savings — allowing you a five-10-fold boost over annual savings and CD rates. It’s so transparent that you can actually access the detailed financial history of those on the other side of your trades through precise filtering tools. You won’t have to worry if you’re going up against a machine. It’s called peer-to-peer lending. Two services caught our attention: Lending Club and Prosper Marketplace. These two have basically identical business models, but we believe that the former has the better overall record, so we’ll focus more on Lending Club. The concept itself is simple: Peer-to-peer lending creates the shortest possible distance between individual investors and individual borrowers, the source of capital and the use of capital. When you cut out the big banks, you create some savings that can then be passed on. You can get started with the money found lying underneath your car seats — just 25 bucks, the value of one note. And there’s no limit to what you can invest, allowing as much upside as you choose. Lending Club also does all the “back-end bank” work for you. You won’t have to worry about seeking borrowers or loan origination, transaction or late fees. It’s all done automatically. The return on a loan is calculated by the same equation: They start with total interest received, add late fees received, subtract service fees and the outstanding principal for defaults experienced and divide by total outstanding principal for the period. They make their own money by taking a 1% annual cut. To best explain this opportunity, let’s run through an example of how it works. Let’s say right now, I go to the Lending Club site, sign up and get right into it. I then click “Browse Notes” under “Accounts.” The top row on this page indicates the essential qualities of the loans I’m looking at: rate, term, FICO score, amount, title/purpose, percent funded and amount/time left. But this alone won’t do for the smart investor. I want to diversify investments across specific kinds of borrowers. That’s where the site’s user-friendly filters come in. I can easily narrow down my list to desired levels. First thing’s first: Choose between 36-month loans or 60-month loans. Next, I’m going to filter the potential borrowers by their risk levels. Lending Club categorizes, grades and prices loans by rating them A- G. This leaves the choice of which applications to fund and how much to fund each borrower. I consider myself more on the conservative side, so when I check the loan grade, I choose B-rated (11.88% interest rate) loans because their interest rates are better than A- rated, but I’m not willing to take the risk of C-rated or below. Now it’s time to get down to the nitty-gritty. I click “More Filters” and find 23 additional filters that I haven’t considered yet. I check “Max Debt-to-Income Ratio,” “Home Ownership,” “Loan Purpose,” “Verified Income,” “Min Length of Employment” and “Credit Score.” That’s good enough for me. I hit “Update Results.” One hundred and sixty-four results. I skim the descriptions: credit card payoff, home improvement, wedding expenses, debt consolidation, small business... that last one looks interesting. He wants $9,000... let’s check out the important info: Loan Submitted: 4/27/12 12:18 PM Monthly Payment: $293.55 (36) Gross Income: $6,250/month Current Employer: DEPT OF HEALTH Home Ownership: OWN Location: Bronx, NY Length of Employment: 10+ years Debt-to-Income (DTI): 1.63% Credit Score Range: 714-749 Accounts Now Delinquent: 0 Earliest Credit Line: 10/2001 Delinquent Amount: $0.00 Open Credit Lines: 13 Delinquencies (last 2 yrs): 1 Total Credit Lines: 17 Months Since Last Delinquency: 10 Revolving Credit Balance: $2,431.00 Public Records on File: 0 Revolving Line Utilization: 9.70% Months Since Last Record: n/a Inquiries in Last 6 Months: 1. Under loan description, I discover that he wants to fund a home care project that enables home health aides to take care of sick people, with a concentration on HIV clients Since his employer is the Department of Health, that project makes sense. I like his reliable track record with respect to monthly payments, gross income, length of employment, debt-to-income and credit score range. A concern might be his credit lines, but if he’s replacing them with a better interest rate through Lending Club and it’s all going toward starting a small business, I find it acceptable. If I want to put my mind at ease, I could ask one of the 14 predetermined questions to pry a little further. Now that I’ve found the borrower I’d like to invest in, it’s time to fund his loan. I can invest as little as a $25 note, or if I really like this particular opportunity, I can invest in the remaining $8,975 on the loan. Once the loan originates, Lending Club does all the rest for me: track the loan, show statements of the borrower’s payments and, most interesting to me, send monthly checks with my interest income. If all goes as planned, I’ll earn north of 10% annual income after the loan. As of this writing, Lending Club has originated approximately $620 million in loans. It averages more than $1 million in loan originations per day. Investors with 800 or more notes have all experienced positive returns to date. Specifically, 93% had returns between 6% and 18%, with an average net annualized return of 9.64%. Defaults amount to less than 3%. Of course, there’s a catch: Lenders are taking all the risk because there is no collateral against the trades. But this can be appreciated in its context. First of all, the risk enables some exciting opportunities for those wanting to switch up their investing strategies. Both services have a secondary market platform in cooperation with Folio Investing, which offers portfolios of securities that you can buy, sell or customize in a single transaction. Through this secondary platform, investors may buy and sell Lending Club and/or Prosper notes anytime before they reach maturity, as opposed to waiting out a three- or five-year loan on their primary market. It provides an escape route for those who are looking for something more short term, and it also increases transparency. Second, each attempts to focus on highly creditworthy borrowers in order to reduce risk of default, declining approximately 90% of all the loan applications it receives. Third, each has a contract with a collection service willing to provide anything from automatic reminders to debt-collection plans to legal measures for delinquents, if need be. The business depends on a solid and proven track record, so these services are constantly tightening their credit policy, constituting a fixed-income asset class. For now, they’re a supplement, rather than a replacement, for our banking system. However, we like where this is going because it could eventually claim serious market share. According to the CEO in an interview: We’re focusing on personal loans today, and that’s only one part of the services you can get from a bank. We are not referring credit cards, debit cards, checking accounts, auto loans. But we do have plans for many of these products as long as [we fulfill] our mission of bringing responsible lending to prime and responsible borrowers, and then on the investor side present a risk/return equation that fits our investors’ appetite. Here is our advice, should you choose to experiment with these services: Always diversify into many different notes, and use filters as we demonstrated in our mock trial. These are the two golden rules. Lending Club recommends investing at least $20,000 across 800 notes for maximum diversification. We think that’s great advice. If you can, place your notes in an IRA or Roth IRA to increase tax efficiency. Lending Club does not send 1099s for most transactions, because of their small size. As far as the secondary market is concerned, there is a range of strategies to use. Vulture investing for the brave could reap immense gains if the timing is right. Never let the cash you earn sit idle. Reinvest in additional notes whenever you can. Regards, Addison Wiggin, for The Daily Reckoning Editor’s Note: With the financial and economic turmoil that seems almost ubiquitous these days, we often find ourselves turning to Addison’s invaluable insights when attempting to navigate our way through them. Thankfully, he’s just provided us with a useful template for what to do with at least one of the issues currently staring us in the face. His latest book, The Little Book of the Shrinking Dollar, provides detailed, actionable advice on how to protect yourself from an ever- declining US dollar. And it seems to be turning a few heads... Chuck Butler, President of EverBank World Markets, recently wrote in his Daily Pfennig newsletter, “I strongly recommend this book. And at [254] small pages, it’s a quick read. It’s all spelled out for you. Things I’ve talked about for years, and now it’s right here in a great book! Kudos to Addison Wiggin!” The Gloom, Boom and Doom Report’s Dr. Marc Faber had this to say: “The Little Book of the Shrinking Dollar is not an academic paper published by some ignorant economists. Not only does Addison convincingly and disturbingly argue that ‘every paper currency in the history of civilization has eventually lost its entire value,’ but he also offers ways to protect our wealth.” Long story short, this book is making waves. You owe it to yourself to read it. In fact, we think it’s so important, we’ll actually give you a copy... Free! Click here now to grab yours before it’s too late. Retirement Dream: Never Once Thinking about Money — Forget Empty Gov’t Promises If you’re in the right spot when the wealth curve goes “vertical”, you could quickly collect lasting wealth. Find out how to get in that right spot today. Just click here. ALSO THIS WEEK in The Daily Reckoning... Sell Paper, Buy Bricks By Eric Fry Laguna Beach, California “The world has much to fear,” James Grant declares in a recent issue of Grant’s Interest Rate Observer, “However, it seems to us, not the least of these perils are the alleged safe havens themselves.” Therefore, says Grant, “In general, this publication is bullish on things certified to be unsafe, bearish on things certified to be safe (assuming always that the respective prices are right).” Better Lucky Than Good By Severine Kirchner “The most exciting phrase to hear in science, the one that heralds new discoveries, is not ‘Eureka!’, but ‘That’s funny’,” author and chemistry professor, Isaac Asimov, once observed. Many important scientific concepts owe their discovery to pure chance...or even dumb luck. The award for the most famous accidental finding goes to Sir Alexander Fleming. No Consent Required: How the State Exploits Ignorance and Complacency By Joel Bowman Paris, France “Libertarianism: The radical notion that other people are not your property.” We don’t know who first said those words. But we’ve seen the bitty meme circulating the social media sites recently. Could people finally be catching on? Probably only the “radicals”... How to Fend Off Government Attacks On Your Wealth... If you’re concerned about the security of your wealth in the face of government incompetence, this report is a must read. In it, you’ll discover the safest way to earn 42% gains, year after year. This is not an hour-long video or a “talking head” piece. It’s just a simple, straight-forward look at how you can earn solid gains in uncertain times. Click here now to review it for yourself. The Weekly Endnote... And now, it’s over to a few readers for some thoughts, ideas and rumors... First up, Reckoner Ken G. writes... Hi Joel, I’ve seen the Fed described as a banking cartel, and we now know that the banksters own the country, so where’s the surprise? What we need to do is to make sure that we limit all elected officials to a single term. That might give them less opportunity to become corrupt. We just need to get the “party animals” on our page. DR: Good points, Ken. But why should we give these fraudsters any opportunities to ruin innocent lives while enriching themselves and their klepto buddies? Members of the mafia don’t suddenly behave because they’re kept on tight, one-term rotation. If anything, it might encourage them to get to the inevitable kneecapping part of proceedings even quicker. Ouch! Next, Reckoner Derek B. says... Bravo to Jennifer Fry on her analysis of the laws governing Certificates of Necessity. I believe that her mind should be attached to the Supreme Court; she has a logical, analytical intelligence, and she would certainly attract a fan base. DR: Agreed, Mr. B. We rather enjoyed that piece too. Though we might encourage her not to waste her beautiful brain on something like the Supreme Court... And finally, Reckoner Wayne A. writes in from the Land of the Long White Cloud... America may see itself as a world leader, but does the rest of the world see it that way? Their economic leadership has been undermined by mismanagement of their “free enterprise” economy. Government interference, crony capitalism, the printing of money and mounting debt will keep the economy limping along for years to come. [DR: Ok, ok...we have to interject here. “Mismanagement of their ‘free enterprise’ economy”? By definition, a free enterprise economy is not “managed,” per se, as much as it is guided by market signals, like price. The next sentence, about “government interference, crony capitalism,” etc., hits the nail on the head. It is precisely because of these things that the US has never, and may never, enjoy a “free economy.” As some funny rascal put it, “If I had a dollar for every time free market capitalism was blamed for a problem caused by the government, I’d be a fat filmmaker with a baseball cap.” Ok, please continue...] The killing of innocent people using drones, conducting illegal wars and torture of prisoners have eroded moral leadership. Will the emerging nations want to model themselves on America? They have many reasons not to. Hopefully America will be able to adjust to its diminishing world standing with grace and not like some aging punch drunk, former champion boxer, picking fights in bars. DR: Can’t argue with that. History seems to suggest that most empires with the military means to do so go out with a bang, rather than a whimper. We’ll see... --- As always, we welcome your thoughts. Email them to the address below and... ..enjoy your weekend. Cheers, Joel Bowman Managing Editor The Daily Reckoning ---------------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com When Governments Spend Wealth Instead of Building It A Valley in Peaks...and the Biggest Fraud in Economics Incompetent Economists Eurozone Leaders Surprise the Markets Currencies Wait for the EU Summit Gold Takes Two Steps Back The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. Cast of Characters: Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor Additional articles and commentary from The Daily Reckoning on: Twitter Facebook DR iPhone APP To end your Daily Reckoning e-mail subscription and associated external offers sent from Daily Reckoning, cancel your free subscription. If you are you having trouble receiving your Daily Reckoning subscription, you can ensure its arrival in your mailbox by whitelisting the Daily Reckoning. 2012 Agora Financial, LLC. This work is licensed under a Creative Commons Attribution 3.0 Unported License. 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