Shadow Banking: Is the Serpent Back in the Garden?

Not five minutes ago I received an email titled: “Personal Loans Trusted Lenders Ready to Lend up to $35,000…”

This was the fifth or sixth email of this nature I have received just this morning.  Of course, most of these are spam, filled with malware or links to nefarious sites that will do great damage to my computing devices.  I hope it goes without saying you should always check the validity of any email address and do not click on anything even remotely suspicious.

Yet some of these, it turns out, are quite legitimate from basically legitimate lenders.  No, not banks.  But lenders of a different sort in an industry that has come to be known as “Shadow Banking.”

Recently, Lisa Brammer and I have been writing a lot about financial literacy and doing the right things to manage our finances and debt.  I think this one should go under the general heading of ‘buyer beware’ or ‘if it seems too good to be true it probably is’. 

Shadow Banking is not really new, and previously has had pronounced, and downright insidious effects on the economy.  Those of you who recall our last economic recession know that it was principally caused by the subprime mortgage crisis in 2007-2008.  In fact, our recession led to a worldwide recession from which we have only recently recovered.  Shadow Banking was a source of many of these so-called subprime loans.  Perhaps you thought that was the last we would have heard of this ‘serpent’ in the financial garden.  Think again. 

Shadow Banking has once again grown to be a huge source of competitive lending offering low rates and quick cash for everything from home mortgages to auto loans.

According to Wikipedia “The shadow banking system is a term for the collection of non-bank financial intermediaries that provide services similar to traditional commercial banks but outside normal banking regulations. (emphasis added)”

That last is an important caveat.

Wikipedia goes on to add “The phrase ‘shadow banking’ contains the pejorative connotation of back alley loan sharks. Many in the financial services industry find this phrase offensive and prefer the euphemism ‘market-based finance’.”

No less an authority than former US Federal Reserve Chair Ben Bernanke defined Shadow Banking further in November 2013:  “Shadow banking, as usually defined, comprises a diverse set of institutions and markets that, collectively, carry out traditional banking functions — but do so outside, or in ways only loosely linked to, the traditional system of regulated depository institutions. Examples of important components of the shadow banking system include securitization vehicles, asset-backed commercial paper [ABCP] conduits, money market funds, markets for repurchase agreements, investment banks, and mortgage companies.”

The long and short of it is while they may look like banks, act like banks, lend money like banks they are not banks.  While they have become subject to some level of regulation, they certainly don’t provide safeguards for your money as do traditional banks and the Federal Deposit Insurance Corporation (FDIC).

Yet the industry has once again become huge.  Like $52 trillion huge.

In an article posted on CNBC.com (“Shadow banking is now a $52 trillion industry, posing a big risk to the financial system” read the article here), reporter Jeff Cox says this is a 75% increase since the last financial crisis of 2007/2008. 

“Nonbank lending, an industry that played a central role in the financial crisis, has been expanding rapidly and is still posing risks should credit conditions deteriorate” writes Cox. “…these institutions helped fuel the crisis by providing lending to underqualified borrowers and by financing some of the exotic investment instruments that collapsed when subprime mortgages fell apart.”

Cox continues: “The U.S. still makes up the biggest part of the sector with 29% or $15 trillion in assets, though its share of the global pie has fallen. China has seen particularly strong growth, with its $8 trillion in assets good for 16% of the total share.”

Quoting no less an authority than J.P. Morgan Chase CEO Jamie Dimon (from his annual letter to investors) “The growth in non-bank mortgage lending, student lending, leveraged lending and some consumer lending is accelerating and needs to be assiduously monitored,”

Additionally DBRS, a bond rating agency, said: “The exposure of the global financial system to risk from shadow banking is growing…Weaknesses in these shadow banks arising from these activities could result in runs that could instigate or exacerbate financial market stress.”

To be fair, the industry says that they provide an important function to the economy by providing access to loans and other financial instruments that can help those who cannot qualify for traditional loans.  Perhaps so. 

Yet, according to Cox, “DBRS identified three specific risks that shadow banks pose under times of market stress: That they are ‘not structured’ to deal with periods of low liquidity and heavy withdrawals; a lack of experience in dealing with periods of weakening credit conditions, and a lack of earnings diversification that would hurt them when parts of the markets deteriorate.”

So, some word salad there, but the bottom line is that consumer debt has grown to historic proportions once again and any volatility in the economy could create a tipping point we can’t recover from very easily.  Shadow Banks are not equipped to handle sudden reversals in revenue inflows.  Perhaps making this even worse is the fact that this just does not apply to mortgages, the industry has expanded to student loans, auto loans and other consumer credit instruments so the impact could be even more widespread should conditions suddenly change. 

So, is the serpent back in the garden?  Perhaps; perhaps not. Yet the hissing is unmistakable.

A. Alliance Collection Agency, Inc. is a full service, licensed accounts receivable management and debt collection agency providing highly effective, customized one on one management and recovery solutions for our business partners.  Founded in northern Illinois in 2005, we have been proudly improving the bottom-line on behalf of our business partners in and around Chicagoland for over 14 years.

image provided by: wikimedia.org

Password Incorrect: Wait…What Just Happened Here?

I received that message again just the other day: Password Incorrect. 

I don’t know about you, but for a moment that message kind of locks me up.  Some passwords are easy to remember as I use them frequently.  Others, not so much.  Sometimes my mind is on auto-pilot and I mistakenly enter another password I frequently use and it does not work.  When that happens, and I cannot recall the right one (brain lock?), I usually fumble around a bit before I find the right one.

Remembering passwords has become even harder in the past few years as companies have implemented even more complex strategies to create ‘hack-proof’ security for customer accounts.  The use of special characters, numbers, upper case, lower case, no use of any prime number (kidding on this last one), and so on, make remembering them all virtually impossible. 

Experts caution us about how we save passwords. Yet, we are urged to change them frequently.  Well, those of you blessed with a much better memory than mine are probably doing just fine. However, in my case, I find myself concerned about saving the password in a bad place and then just waiting for that supreme hack that will rob us of all we own, our children and grandchildren, and our emotional security for generations to come.  Not a pretty picture.

That said, I came upon an article in CNET the other day that essentially tells us that the methodology we have been encouraged to use to create our passwords for maximum security are now basically, well, ineffective. 

Say that again?

Apparently setting up complex passwords comprised of random characters and symbols is not as effective as, say, setting up a password you make up with identifiable and simple characters.

Mind you, I am not talking about using ‘12345’ or ‘password,’ but much less complex and cumbersome than those we are challenged to create today.

Where did this opinion come from?  No less an authority than the so called “father of the modern password,” Bill Burr.

In an article titled “Father of passwords regrets the advice he gave,” CNET writer Chris Matyszczyk writes that Mr. Burr recently has had a change of heart as to what comprises an effective password.

In 2003 Burr recommended that passwords should be made up of an entirely random string of letters and symbols.  This was the best way known then to minimize the chance of a hacker guessing a password.

He has changed his opinion, however, and “It turned out that these are easier for hackers to crack than, say, weird words that you can actually remember. Like ‘gobbledegook.’ Or ‘nincompoop.’”  Please don’t use these, though, as they are only examples from Mr. Matyszczyk.

Why the change of heart?  According to Matyszczyk “Over the years, people seem to have used similar techniques to create their ‘random’ combinations, which made them actually less random.”

Well, then.

Matyszczyk says that we should not be too hard on Mr. Burr.  I agree.  When he wrote that opinion who would have guessed the level of constant hacking that goes on every day, and how successful so much of it is? Random strings of letters and numbers certainly seemed logical and safe.

What to do?

Certainly, do not use simple and easy to guess passwords.  Most sites and apps still require password content to conform to their standards.  We don’t have much choice if the password is required to be complex and as random as possible.

At A. Alliance we pride ourselves on the security of our systems and the protocols we use to protect our client’s data and secure access to our systems. We utilize multiple layers of security to ensure data integrity and do encourage our clients to change their passwords with some regularity and of course advise us when users change and new access credentials need to be created.  However, it is good to know that we can potentially create easier to remember personal passwords that are more secure than originally thought.  Password security, it would seem, does not always go hand in hand with complexity and inconvenience.

A. Alliance Collection Agency, Inc. is a full service, licensed accounts receivable management and debt collection agency providing highly effective, customized one on one management and recovery solutions for our business partners.  Founded innorthern Illinois in 2005, we have been proudly improving the bottom-line on behalf of our business partners in and around Chicagoland for over 14 years.

What’s Causing Record Household Debt in America? Financial Illiteracy?

Collectively, we as Americans owe a record amount of money—over 13.5 trillion dollars. Yikes!  If you’ve read any of our recent blogs you already know this. But what you might not know is that the recent report by The New York Fed (Mark talked about in last week’s blog) says that while the amount of debt is higher than before the great recession it’s not as risky this time around because things are different. Phew!

Debt in of itself isn’t a bad thing. It can be good when it allows us to buy a house, a car or a college degree we could not otherwise afford.  But it’s important to keep a good handle on our finances to not only understand what’s coming in versus what’s going out and the ability maintain a good balance of both. We also need to be able to understand basic financial concepts like risk diversification, inflation, interest and compounding interest.

Right now our economy is booming with unemployment at a fifty-year low and wages rising. You’d think we’d be having a field day getting our finances in order wouldn’t you? But according to a recent survey by Bankrate that’s not the case at all. We are actually marching in the opposite direction. (That’s why Mark and I keep writing about this topic!)

For example, this year’s report found only 44 percent of households surveyed have more money in emergency savings than the amount they owe in credit card debt. I can shine a brighter light on that 44 percent by telling you it is 14 points lower than last year’s 58 percent and the lowest percentage in Bankrate’s nine year history of conducting this survey. To make matters worse these numbers probably won’t be getting better soon because according to the same report only 43 percent of those surveyed said they were focusing on boosting their emergency savings this year, down from 53 percent last year. Uh Oh!

A couple of months ago I read an article in investmentnews.com called, “Financial Literacy: An Epic Fail in America.” The title pretty much says it all.  The article talks about a 23-year-old graduating senior at a Texas university who was starting his first post-graduation position when he had the rude realization that he had to begin paying back his $90,000 worth of loans and what that really meant in monthly payments—about half of his new monthly salary. This student made it through all those years of schooling plus four additional years of higher learning yet he had no idea what he had gotten himself into.

Sadly this is not an isolated event and many Americans (as well as many people world-wide) struggle with financial literacy. It begs the question: Are students learning enough about how to manage their money?

The Center for Financial Literacy at Champlain College doesn’t think so.  Established in 2010 the center was designed to promote and develop financial literacy skills in k-12 pupils as well as college students, teachers and other adults. In 2017 the center graded each of the states on a National Report Card on Financial Literacy. Sadly only five states received an “A”. 

Wisconsin, where I live, scored an “F” on that report.  That’s probably what prompted then-Governor Scott Walker to sign a bill requiring school districts to incorporate personal finance into k-12 instruction.

With these types of statistics trending like they are, it’s easy to see how many Americans—even in a good economy—are struggling to keep up with their debt. We need to educate ourselves and our youth on financial literacy now! If not, I don’t want to even think about what’s going to happen when our economy takes a tumble.

A. Alliance Collection Agency, Inc. is a full service, licensed accounts receivable management and debt collection agency providing highly effective, customized one on one management and recovery solutions for our business partners.  Founded in northern Illinois in 2005, we have been proudly improving the bottom-line on behalf of our business partners in and around Chicagoland for over 14 years.