Direct lending is increasing.... Next disturbance could be in Financial Industry

So far banks have not been impacted by technological disruption unlike other industries but this is not going to be same. Some posts from FT on it.

Start-up threat to creaking banks

Start-ups aim at banks’ income streams

Banks need to adapt to new breed of rival

Great Wisdom from Brian Chesky who earned it from Airbnb

I did know much about the Airbnb until I came across the news that Airbnb topped Glassdoor' s list of the 50 best places to work in 2016, knocking Google from its perch.

While reading and goggling, I found out about a class in Standford that is an interview with Brain Cheskey, founder of Airbnb.







It is good read\inspiration\wisdom and here is the part that I loved most.


Reid Hoffman: Can you share more about the early days after you had launched, how did you hustle to keep the idea going?


Brian Chesky: We actually “launched” multiple times. If you launch and no one noticed — you can just launch again. We had press that wrote about us multiple times for launching.


The first time we launched was with 3 people with air beds and the design conference, we launched a second time and no one noticed, then we launched a 3rd time at SXSW. At the time there wasn’t any payment system in the product and you had to stay in an air bed — we actually made our hosts provide air beds, you couldn’t stay on a real bed.Someone asked to be able to book a real bed — why did it have to be an air bed? We reluctantly decided to list real beds and let guests book rooms without a conference.

In the summer of 2008 we completed the final version of Airbnb which let you book someone’s home — in 3 clicks. We took inspiration from Steve Jobs who created the iPod — designed to always be 3 clicks from a song. We designed Airbnb to be 3 clicks to get to a paid booking. Our initial site had a home page, search, reviews, and payments — most of the core components which are on the site today.

We were still in debt but we got 80 bookings during the DNC. The downside was, after the DNC we had no bookings, we were a year into the business, we were in debt, every investor said no, we launched 3 times, we had national press, and it was unclear if we were going to be around. We were at rock bottom.

In debt and desperate one midnight, we had the idea if the “air beds” in air bed and breakfast wasn’t working — maybe we can sell “breakfast” instead. We started thinking about president themed cereal and we convinced a producer to make cereal for us and since we couldn’t pay them he would get a portion of the sales.

We hand folded 1,000 boxes of cereal, numbered each one, and sold them at $40 a box — We sold $30,000 worth of cereal and this is how we funded the company and came up with the phrase “be a cereal entrepreneur”.

In November 2008 we were back to being broke and we did not feel successful or talented at this point. A bunch of people had recommended we should go to YCombinator. We said “but we already launched already?” and they responded “but you are dying, you should apply to YC.”

We met with Paul Graham and he thought the idea was terrible, he said “are people really staying on air beds? what’s wrong with them?”. We told him the cereal story and he told us “if you can convince people to buy cereal, you might be able to convince people to rent air beds.” He told us we were the cockroaches of startups, that we could survive anything — this was the best compliment we had ever gotten — we were cockroaches.

Reid Hoffman: But YCombinator didn’t make your numbers change — what did you do that changed the inflection of the company?
Paul Graham gave us a series of advice that changed our trajectory. 

Life is the enemy of a startup. Paul Graham always says that startups don’t die they just fade away.

The most important of this advice was that it was better to have 100 people who loved us vs. 1M people who liked us. All movements grow this way.

This is when we decided to do things that wouldn’t scale. Getting 100 people to love you is hard — getting people to like you is much easier than getting people to love you. During YC, we would commute from Mountain View to New York City (where most of their hosts were) and we would meet with every single host.
If you can get even 1 person to love you, then you can go person by person — the challenge is how to scale that. It’s much easier to scale something — 100 people love vs. getting 1M who like you to love you.

Reid Hoffman: That was a great warm-up story about the early days of Airbnb, let’s move on to the things Airbnb does which are unique. For example Airbnb is known for attention to design — and the 7 star design principal. Can you share more about this?

Brian Chesky: The paradigm with customers today is 5 stars. The problem with 5 stars is you have to be really bad to get 4 stars. Reaching 5 stars is just being nice enough — we wanted to build a product that you loved so much you would tell everyone. Travel has the potential to transform your whole life — I have met people on my own travels who changed my life.

Reid Hoffman: One of the interesting observations is in your thinking of 7 star service, it's not just about the website or mobile app — you are talking about the whole experience.

Brian Chesky: The product is what your customers are buying. In some cases your product can be the app but for us our customers are buying a house. More than that they are buying a host, the idea of belonging in a new city, the full experience.

Reid Hoffman: Airbnb is also known for applying design thinking to your culture and even your office, how do you apply that?

Brian Chesky: I consider myself a designer by trade. There is a quote from Steve Jobs I liked which is: “Design is not just what it looks like and feels like. Design is how it works.”

By using this, you can imagine everything being designed. You can design a product, a company, an organization, a building, anything you want. Once you realize everything can be designed — you don't need to use things straight out of the box — you can reinvent everything.


Reid Hoffman: Outside of being a role model and designing your office — what are other things you have done to design your culture? I’ve seen you spend more time than most entrepreneurs on culture.

Brian Chesky: I believe culture is a shared way of doing things.  There isn’t a bad culture or good culture, but there are weak cultures and strong cultures. I wanted to have a strong culture — a shared mission, a way things are done, beliefs we share.

Reid Hoffman: When you hit scale how do you instill culture?

Brian Chesky: I do as many culture activities as I did before — now I just have people do things on my behalf — leverage.

I used to do all of the interviews — now I hand picked all of the interviewers, I spent months with each interviewer, I built an inner circle of people who have trained interviewers, etc.

I used to meet with every single new employee one-on-one — now I do weekly orientation meetings, I have recorded many of these sessions for our international hires, etc.

I also write an email every single night to the whole company. This isn’t a tactical email but something more thought provoking. One of the things with scale is you need to continue to repeat things. Culture at scale is all about repetition — repeating over and over again the things that matter.

I have personally seen and know people who have scaled and people who can’t scale. The two traits I see in common with the people who scaled is:

Intelligence
Curiousness


If you think you know everything, you can’t scale. I am shameless about getting feedback and knowing I don’t know it all.

There is a quote from Pablo Picasso I like: “It took me four years to paint like Raphael, but a lifetime to paint like a child.”


Brian Chesky: The first stage of a startup is survival. Not dying is being able to work on it the next day.
The second stage of a startup is firefighting. There are all of these problems going on and you need to fix them all.
The third stage is now other people can see what you are doing and now other companies try to copy and destroy you. The big existential threats to Airbnb were both competitors and the government.


Brian Chesky: The problem with these challenges is they are a punch in the face while you are casually walking down the street. You have no idea where they are coming from. The Samwer brothers was the first punch and government was the second,


One benefit of being more successful is you have access to talk to more successful people. But even before being successful, you can read about the best people.

Another tip is most people will help you if you ask a question — we are here to share information and knowledge. I was shameless in asking Reid Hoffman questions — I was probably annoying but I didn’t care — I just wanted to learn.



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Good series to read on Market Liquidity

Introduction to a Series on Market Liquidity.

Bail In - Total loss-absorbing capital (TLAC)

In November 2014, Financial Stability Board proposed a minimum total loss absorbing capacity requirement ,TLAC,to make sure that world's 30 most systemically important banks (G-Sibs), BCBS defined these banks as Too big to fails, can be stabilised and shut down in orderly way with out taxpayer bailouts. The TLAC rule would require banks to issue ordinary shares, subordinated debt and other potentially loss-absorbing securities equivalent to as much as 15-20% of their assets weights for risks. 

Basel III rules require banks to meet a minimum total capital ratio of 10.5% by 2019 – though in some jurisdictions the minimum ratio is far higher. The proposed minimum TLAC requirements for G-Sibs unveiled at the G20 Brisbane summit in November 2014 is 16% to 20% of a group's consolidated risk-weighted assets. This proposal was under consultation until February 2, 2015, when the requirement was finalised.The TLAC rule is set to take effect in 2019 at the earliest.

This the concept of 'bail in' spearheaded during the Lehman's collapse. Wilson Ervin, now credit suisse's vice chairman, explains how his Lehman experience led to the creation of bail-in, and describes some of the innovations by the Swiss regulators.

Initially FSB excluded all structured notes/securities from the TALT requirement,  now structured notes are being considered to the extent that the repayment of the principal at maturity is unconditional and not contingent on any derivative-linked feature, reported by Bloomberg. 

COCO bonds raised by many banks can be considered as bail-in type securities. Regulators needs to increase the oversight on COCO bonds as risk profile of these bonds are complex as suggested by FT.

Swiss regulators pushed for 5% leverage ratio for TBTF banks

• As per Bloomberg, Swiss regulators will require that country's biggest banks to have capital of 5% of total assets - this will be in line with the rule for U.S. too-big-to-fail lenders, and significantly above the 3% minimum set by Basel.

• UBS and Credit Suisse have argued the Swiss financial system isn't comparable to the U.S. with its far deeper capital markets.

• Leverage ratios have gained favor among regulators as the most effective way to evaluate a bank’s robustness because the method doesn’t involve estimates of risks on their activities.

• Switzerland imposed some the world’s strictest too-big-to-fail requirements in 2011 after the government came to UBS’s rescue during the 2008 financial crisis. UBS and Credit Suisse have assets of 1.83 trillion francs combined, about three times the size of the Swiss gross domestic product, making the two banking behemoths a disproportionately bigger danger to their country’s economy if they fail than their peers elsewhere. Both are compliant with all Swiss capital rules.

Big Banks Agree to Settle Swaps Lawsuit, JP Morgan to pay most in $1.86bn settlement

JPMorgan Chase will pay almost a third of a $1.86B settlement to resolve accusations that a dozen big banks conspired to limit competition in the credit default swaps market, WSJ reports.

JPM reportedly will pay $595M, followed by Morgan Stanley  with $230M, Barclays at $175M, Goldman Sachs  at $164M, Credit Suisse at $160M and Deutsche Bank at $120M; BofA, BNP Paribas, UBS, Citigroup , Royal Bank of Scotland  and HSBC would pay less than $100M each.

The lawsuit brought by a group of investors accused the banks, the International Swaps and Derivatives Association and data provider Markit Group Ltd. of colluding to block competing providers, including exchanges, from entering the market for derivatives called credit-default swaps.The deal would avert a trial and end years of litigation by hedge funds, pension funds, university endowments, small banks and other investors, who sued as a group.

How Tom Hayes Rigged Libor, good story on how scam was unfolded

A fantastically written story on how Libor was manipulated and how the scam was unfolded.

[Bloomberg]

Cat bond, it is catastrophe bond.

Today I have come across a new investment product and it is catastrophe bond. These are  kind of insurance product and are among the very few securities that appear to have genuinely little correlation with broader financial markets.

The returns have also been strong. As measured by a Swiss Re index, the bonds have produced annualised returns of 8.4 per cent since 2002, handily outperforming the 6.3 per cent returned by US stocks. 
When these risky securities appeared, only specialist hedge funds or other asset managers with expert knowledge of disaster risk dared buy them, meaning the market was small compared with the reinsurance world at large. In the past couple of years it has swelled dramatically, however, with a record $4.75bn cat bonds issued in the first four months of 2014 alone. And mainstream investors have jumped in: last year about four-fifths of the bonds were bought by pension funds and other large institutional managers.Market of these bonds have been increasing until recently, Cat bonds Investors shows their limit.