Prosper just suspended lending in order to create a secondary market for loans. (Essentially an exchange where you can buy/sell loans without waiting for maturity). The details for the new market place are found in an old blog post here.

• “Prosper intends to charge all selling Lenders a nonrefundable resale listing fee of $0.25 per Note being listed for auction sale, or $0.50 per Note being listed for auction with an automatic sale feature.”
• “Prosper also intends to charge the selling Lender a resale transaction fee equal to 1.0% of the sale price, subject to a minimum fee of $0.50, which will be deducted from the sale proceeds at the time a Note is sold to a subsequent Lender.”

Long term I think this is a great move by Prosper. The only problem I see is the ridiculous fees Prosper is charging the lender to sell notes. We’ll see how this works out when it comes out, but for now lending on Prosper will be dead for a few months. (Just when rates started to get attractive too.)

Random market thoughts:

• Feels like we’re in a secular bear market.
• Has anyone checked out the 1929 crash? This is a mirror of it up to this point.
• Don’t panic. Markets tend to overshoot on the way up and the way down. (Today was not panic)
• Don’t gamble. If you have lost control in the casino you will lose control in the markets, it’s the same psychologically.

With the recent financial mess I couldn’t help but think about how true this quote is. Here we are on the brink of financial armageddon and we’re held hostage by the finance industry of this country. As a result, congress has to passed a 700 billion dollar bailout plan to get the credit markets rolling again.

Anyway I’m not into long blog posts so here are some random thoughts on this on going ‘crisis’.

1) Does Congress need to pass this bailout plan? Yes, the alternative is probably much worse.
2) Safe banks to put money in or too big too fail? HSBC, JPMorgan Chase, Wells Fargo, Bank of America, Citibank
3) The fact we’re in a recession is now a reality for Americans.
4) We’re halfway through the bear market if you assume the financial sector bottomed out in July this year. (So one more year?)
5) Will we get an election rally into November? Or Will earnings sink the market?

Today’s drop in the US equity market is going to confirm the idea of a recession in the minds of many Americans. Hopefully your sitting on a substantial pile of cash that you can invest with in the coming months and year. If the government and the Fed have their way we’ll get inflated out of this deflationary crisis and into yet another bubble.

What I found the most disturbing today was how wrong the market was on the bailout vote. A lot of very smart people (think Warren Buffett) were betting on the bailout being passed. With so many people caught on the wrong side of the trade, you have to think that if we don’t rally soon (this week) the market is going to ‘crash’ if earnings season is bad.

With so many conflicting thoughts on this matter, one thing is for certain. This is probably one of the best investing opportunities you will come upon in your lifetime.

Previous thoughts:

2007/11/01/equity-markets-something-just-doesnt-seem-right
2007/10/19/subprime-mortgages-cdos-explained
2007/09/07/recession-coming-in-2008
2007/08/15/10-correction-in-the-stock-market
2007/08/12/prosper-subprime-and-market-volatility

It’s always interesting how the odds are always stacked against the small investor.

Consider the following scenarios: (oversimplified, but it’s to make a point)

- Family buys a home speculating that the price would increase. They put 20% down on a 500k house and get the other 80% as a mortgage. (effectively they are buying the house on margin). If the price of the house goes up 20% they effectively made 100% on their initial investment of 20% down. If the price of the house goes down 20% they have effectively lost their initial investment. What if they can’t afford the mortgage? They go into foreclosure and the house is taken from them.

Now if your a big financial institution the rules should be the same right?

- Financial institution speculates the real estate market would boom. They use 40x leverage to bet on the housing boom. When the market is booming they are raking in the money. However when the market turns south and they can’t afford to pay up the government steps in to give them a helping hand. Uncle Sam is willing to go so far as to extend loans funded by taxpayer money to private corporations. When this doesn’t work the government outright intervenes or promises to step in with taxpayer money to bail them out. (Fannie, Freddie, Bear Stearns)

I am perfectly fine with people taking risks and reaping in the rewards. However there is a fundamental problem with our capitalist markets when rewards attained from risky bets are lining the pockets of a select few and losses from the bad bets are being shouldered by the taxpayer. Who in their right minds wouldn’t bet with other people’s money (OPM) when the risk/reward ratio is so skewed?

On my current trip to China I noticed that inflation is running rampant here, in fact it’s a lot worse here then in the US. Wages, food prices, etc. are all going up.

For instance, a bag of cement which was selling for 12RMB (about $1.75) last year is now selling for 36RMB currently. (The earthquake in May caused prices to sky rocket) Worker wages have been increasing at a 10% clip yearly yet it’s seems barely enough.

The government has been trying to dampen inflationary pressures by regulating the cost of energy which seems futile. A taxi driver in Beijing told me the government is currently subsidizing them over 1000RMB/month in gas rebates to prevent fare increases to customers. However he thinks this will soon end after the Olympics when subsidies cease and fare increases become inevitable.

I’m living in the US why would this matter? If the cost of production starts going up dramatically in China, then all the cheap ‘Made in China’ goods we’re used to are inevitably going to increase in price.

If you haven’t been keeping up oil spiked $10+ today and is looking to close above $138/barrel today. Kind of hard to miss this since I can’t find a news site that doesn’t have this on their front page as a headline.

So what are the supposed reasons for the spike?

1) ECB probably going to raise rates. (Lower dollar)
2) Unemployment rate spiked up. (Pressures Fed not to raise rates)
3) Israel minister says attack on Iran might be necessary. (P A N I C)

I remember how gas was $2.4x last August and I thought it was getting expensive.

Stumbled across this little gem from the Fed today. The map shows breakdown of mortgages by state, city and zip code. You can use it to check out how your area is doing.

The thought that came across my mind was to avoid lending to areas with the most problems. I compared the mortgage map to the prosper loan map. There is some correlation but as much as I thought, maybe someone out there will find this useful.

This is probably old news to most people, but if you haven’t been keeping up with the markets lately, Bear Stearns is being acquired by JP Morgan (with the help of the Fed). Under the deal JP Morgan is essentially risking $1 billion dollars while the Fed is putting up $29 billion dollars of tax payer money.

There has been a lot of controversy concerning this and whether it was necessary. The best arguments I have heard against the deal are neatly summarized in Hussman’s weekly market comment.

“The clear historical role of the Federal Reserve has been to manage the composition of Federal liabilities (by varying the mix of Treasury securities and monetary base - currency and bank reserves - held by the public). The recent transaction is a dangerous break from that role, in which unelected bureaucrats are committing public funds to facilitate private business transactions and selectively defend the holders of corporate securities. Only Congress has the Constitutional right, by the representative will of the people, to commit public funds. The Bear Stearns deal is a dangerous precedent and a dilution of Congressional prerogative.”

Some recent events if you haven’t been keeping up:

• Light Crude closed above $100 today.
• The market is pricing in a 50 basis point rate cut by the Fed in March which will drop money market rates to around 3%.
• Widespread pessimism in the housing market and subprime mortgages.

This actually looks like a better time to invest money into Prosper then 2007. Your going to get similar rates on loans compared to last year and you get some extra wiggle room since money market yields are around 2% lower then last year. My gut is telling me delinquency rates will also improve for loans vested in 2008 vs 2007.

I’m currently sitting at my computer and CNBC is interviewing Renauld Laplanche from LendingClub about peer to peer lending. They also mentioned Prosper and Zopa in a text blurb at the bottom of the screen. Prosper should get themselves an interview on CNBC. :)

In other news “AIG said it would need to alter the way it values credit default swaps involving collateralized debt obligations. CDOs are funds that contain slices of bonds, some of which are backed by mortgages.” (link)

I found this picture particularly interesting to sum up the current environment.