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I mentioned it already sometimes that Eurocent, a Mintos loan originator has to deal with serious liquidity issues. The loans are still being bought back, but without respecting the 60 days buyback rule. So there is money going back to investors pockets, but we do not know how much this will be in the end. I guess that not every cent will be returned, a damage will occur. If Mintos jumps in as savior? I have my doubts about that. This incident is important for the platform and us, I will lay out my arguments in the following post why this is the case.
What has happened?
Some months after Eurocent joined Mintos, some reports about payment issues have arisen and therefor the placement of new Eurocent loans on the platform has been suspended. Further the trading of existing loans on the secondary market was set out. According to a statement from Mintos the reason for the liquidity issues are due to a missing refinanceing of a bond. And exactly this circumstance was not foreseeable for Mintos (before Eurocent was granted access to the platform) when they fullfilled their due diligence on Eurocent. Seemingly at that point in time there was no reason for doubt that the bond will be refinanced. Even if that was the case, this really shows to us that the loan originators are not very well capitalized und some events can quickly lead to liquidity issues.
Why is this good for us and Mintos? 3 reasons:
1) The buyback guarantee is not sacrosanct:
Taking Eurocent as an example (I already said that repeatidly), we can see that the buyback guarantee is only worth as much as the loan originator is capable of payingt.
2) Diversification is important and appropriate even with buyback in play:
With Mintos we have likely the biggest choice of loan originators (in Europe at least), from whihch we can buy loans. Therefor we can distribute our money between a lot of originators and absorb some Eurocent style shock.
3) Mintos will have a (much) closer look:
Mintos already announced that measures have been taken that such an Eurocent occurence does not happen again. I find this a little bit special due to the fact, that they already told us that this event was unforeseeable. The question might be allowed how can they take measures for something that is not foreseeable? I admit, this rhetoric question is a bit mean, but justified. In this case they already now what went wrong and they can adapt. But they won’t be able to be prepared for any possibilty, but this leads to the point I try to make: It is always possible that something happens, with every investment there is risk. Finally this incident should help, that Mintos gets more secure to invest for us.
Why diversification is no cure-all
Diversification is a basic prinicple in finance. One distributes the risk and minimizes the default’s impact. Alltogether the risk to get hit by a default increases, but the impact decreases. Ok, let’s assume that we have spread our money over 100 loans and we can now sleep peacefully. As long as the economy flourishes everything is good. But if there is a recession looming, the image could become worse, although we diversified properly. Loans on Mintos are risky, as the borrowers tend to be more subprime, which will suffer the most from a recession, as they loose their jobs. If we now have a portfolio with those types of loans, diversification loses its benefit. The keyword here is correlation. If two investments behave similarly we speak of a positive correlation, which means that although we are diversified, this does not help us much, as behind these loans the type of borrower is the same.
Keep that in mind should we move towards a recession, as the whole p2p industry will suffer from that and the default figures will skyrocket. Of course this represents only my hypothesis and hopefully I will be proven wrong. What is sure is that there will be another recession down the road, maybe not tomorrow, but at any point in time there will be a recession.
What can we further do to minimise our risks?
We could try to assess financial figures of loan originators, if we have access to them. I guess only a fraction of the p2p investors would be able to do that. I think I would be able to run such an analysis, so why don’t I do it? It is really really time consuming and the results would not help much. Most loan originators are in no good financial shape, otherwise they wouldn’t borrow at p2p platforms. Most of them are young companies without any track record.
Conclusion – how do I proceed?
I go on as I used to: Diversification with the knowledge that the correlation will beat me up should we slider into a recession. I do hope to see that coming before it will happen. If am going to succeed with this strategy I do not know, at least I do know that there are risks out there. If someone became afraid due to what I have written or by the Eurocent incident, I have the following advice for you: Pull out all your p2p money. With interest rates of 12 percent or above we have to deal with complete defaults, we are in a high risk teritory with p2p. And some more pieces of advice: Try to listen to your common sense, be critical. Don’t believe everything what your banker, financial experts, bloggers (that includes me) and your friends at the pub are telling. Most of the time we only get to hear stories of sucesses, busts won’t be mentionned to much 😉 Or did a friend tell you about how he burnt some cash with dumb decisions? I guess not, and when I hear success stories around my friends I mostly think I am pretty dumb and the worst investor the earth has seen 😉 What I want to tell you by this: Most people have their own agenda, even if there aren’t any financial goals involved. Some people like to be seen as a “star”. Keep that in mind and try to build your own opinion. It is your money, and you suffer the losses yourself, no one else. Be critical, as well to what I write here. It is possible that I interpret somethings wrong or don’t see the big picture. I try to write my posts as objectively as I can and won’t recommend anything what I don’t like (even though I am using affiliate links).
Ok, that was longer then expected, hopfelly I did not bore you. If questions arise, please post them.