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If a financial institution operates like a bank but creates more risk than a bank, shouldn't it be regulated like a bank? Jack Ma said banks should ditch the "

If a financial institution operates like a bank but creates more risk than a bank, shouldn't it be regulated like a bank? Jack Ma said banks should ditch the "pawnshop" mindset and switch to a credit-based loan service, because his Ant's micro/small loan service is completely backed by credit rather than something risk-proof properties like a house. Ant not only acts like a bank, but also is the largest credit buerau in China. It provides loan based on the credit score it rates on its customers. This article also fails to mention the Basel Accords that Jack Ma criticized. After the 2008 financial crisis, Basel III includes regulations on "shadow banks" like Ant in addition to traditional banks. Is it possible for a bank that has only assets of 3B lends out 300B[1]? No, banks are prohibited due to regulations. But, Ant already did. They created an Asset-Backed Security (ABS) via a process called securitization. It is unprecedented that a financial institution with such big financial leverage and a large amount loan going unregulated. A pawnshop is at least backed by real properties like houses. What back the risk Ant create? Consumers' credit? If I still cannot make you understand, please google "2008 MBS ABS". You'd be surprised at the similarity of what Ant's been doing and what caused the financial crisis. I sincerely hope hacker news readers take a look into the underlying financial bubble rather than "Chinese government reaps tech innovator" to which this article tries to mislead you. [1] https://translate.google.com/translate?hl=en&sl=zh-CN&u=https://dy.163.com/article/FQHFENEB0519E14O.html&prev=search&pto=aue https://translate.google.com/translate?hl=en&sl=zh-CN&u=http...

wbc 6y ago
Where do you get the 3/300B numbers? Didn't see them from the article. If true, that would be an insane amount of leverage.
- Congeec 6y ago
  Sorry I don't have an English source but translation https://translate.google.com/translate?hl=en&sl=zh-CN&u=https://dy.163.com/article/FQHFENEB0519E14O.html&prev=search&pto=aue https://translate.google.com/translate?hl=en&sl=zh-CN&u=http...
blueblisters 6y ago
The real question people are asking is why now? Didn't the regulators have enough time to assess the irregularities earlier? A $30 billion IPO plan couldn't have been made public without the regulators giving at least some in-principle approval, and I'm sure Jack Ma knows how to navigate the bureaucracy/politics in China before he would make such plans public. I don't understand Chinese politics much but this just reeks of vendetta. >After the 2008 financial crisis, Basel III includes regulations on "shadow banks" like Ant in addition to traditional banks. Is it possible for a bank that has only assets of 3B lends out 300B? But, Ant already did. They created an Asset-Backed Security (ABS) via a process called securitization. It is unprecedented that a financial institution with such big financial leverage and a large amount loan going unregulated. If that's the case, why were they being allowed to continue as a privately-owned lender for so long?
- geodel 6y ago
  > The real question people are asking is why now? These why now questions unfortunately never have satisfactory answers. Too early: there is no scam/govt is stifling innovation, in the middle: not enough proof, late: why regulators were sleeping till now.
- Congeec 6y ago
  Maybe some people of power who get involved and want to reap benefits. Maybe the company found in 2013 is too new for the government to catch up. China does not have a long established financial industry like developed countries. State capitalism has just started four decades ago. Maybe Jack Ma knows regulations will come out soon and just made public opinions before regulation rules are revealed to the public. I do not have any source to back my guesses.
  - vagrantJin 6y ago
    > China does not have a long established financial industry like developed countries You can make a shady case for modern western idea of finance but China has had a strong finacial industry for centuries.
jessaustin 6y ago
If the situation is how you describe, the most important question would be: who is holding these securities? If it's just some random Chinese savers looking for higher interest, there is not necessarily a problem. Of course, a similar situation was a problem in the USA context in the previous decade, but that was due to the particular circumstances. Those who had extracted rents by pretending to "insure" MBSs had used a portion of those rents to pwn the USA political structure. When it was clear that MBSs were worthless, they chose to destroy our system of representative government rather than taking bankruptcy. That wouldn't be an option in China, and it certainly wouldn't be an option available to random small Chinese savers.
duxup 6y ago
Yeah I don't know the full Ma / Ant story. But that pawn shop comment, man if that's really related to the fact that pawn shops exist because something backs the loan ... and if Ant is really as big as folks say it is (I'm talking about my ignorance here, not anything deceptive) and it is could have a huge impact on Chinese banks.... that's a lot to worry about. I don't pretend to know China's motivations or etc, but I think there may be very real regulatory concerns.
paganel 6y ago
I also saw that 3B to 300B leverage mentioned in the FT and I was surprised that it didn’t get picked up by the non-economics-related media, they all insist on “Chinese government bad because it didn’t let China’s most successful entrepreneur do his thing”. We’re talking about a leverage ratio of 100, that’s a crazy figure, if I’m not mistaken Lehman’s leverage ratio when it folded was of “only” 30.
- cfcosta 6y ago
  I don't think it is a case of the CCP stopping all entrepreneurs, but a case of them choosing which companies succeed and which fails.
  - xster 6y ago
    Are you referring to something specific?
  - sudosysgen 6y ago
    This is pretty clearly the CCP intervening in the economy in order to stabilize it and avoid a financial crisis. I don't think this counts as picking winners and losers. I'm not sure that reclassifying something that is clearly a bank as a bank then enforcing the international agreements it would be bound too is picking winners and losers, it's just regulation. The issue is moreso that Ma seemed to somehow have captured the regulation to delay this, and only now, with the huge attention, was the regulation enforced.
- xster 6y ago
  According to https://youtu.be/HnCBbiCetSg?t=569 https://youtu.be/HnCBbiCetSg?t=569, the S-1 equivalent filing of the IPO showed Ant itself putting up 1.68% of its own money towards its lendings. That's way more leverage than the 8% mandated in Basel III.
  - hintymad 6y ago
    It's also worth mentioning that Ant securitized its loans, creating a CDO-like structure. Pretty risky stuff, per my limited knowledge on finance.
justicezyx 6y ago
Ant IPO debacle shows me that the rich and powerful, in the capitalism sense, are incredibly consistent in their thinking; even the one raised up in a communist totalitarian country. They simply cannot think from any other perspectives that can reveal their fundamental flaws. Unlike communism authoritarian, who at least can admit the effectiveness of capitalism in mobilizing the society in economy activity.
- sudosysgen 6y ago
  Ultimately, I think this is a case of the incentive structure and material reality of those people shaping their worldviews and actions. This shared environment lead them to a worldview where myopic self-interest is the only thing that matters. In other words, I think the shared material environment dominates culture and upbringing, and leads to transcultural trends here.
trhway 6y ago
>If I still cannot make you understand, please google "2008 MBS ABS". You'd be surprised at the similarity of what Ant's been doing and what caused the financial crisis. blaming financial crisis on ABS/MBS is wrong. Some ABS/MBS may be very risky and it is just fine. The Ant's ABS sound like very risky and it is just fine. An informed investor may as well choose to play with such a risk for a high premium. The true cause of 2008 was humongous amount of cheaply bought CDS because the underlying MBS were rated AAA which is several orders of magnitude higher then they should have been. It is like a somebody buying for $1 a $1M "life insurance" - basically betting - on a life of a 100 year old person. An insurer selling such insurance (ie. CDS) would quickly go bust like it happened in 2008.
chuckSu 6y ago
I like this take
maest 6y ago
> assets of 3B lends out 300B My understanding is that the loans don't go on Ant's books, they just sell them on. In that case, Ant's assets are irrelevant, since they're not the ones taking any risk and, thus, don't have to cover for the losses.
- thedudeabides5 6y ago
  Even if they are just “warehousing” the credit this would be false, as they need to hold some of those assets on balance sheet while they try to sell them. This balance sheet is indeed what regulators would require them to hold capital/reserves against. Further, what’s the documentation that they “just sell them on” end if they do, why wouldn’t their balance sheet shrink??
  - maest 6y ago
    It's not clear what the 300B figure actually is. The OP doesn't mention it and the GP's link isn't explicit. I can't find a clear source, but it looks to me that 300B is total loans issued, not what Ant currently has on their balance sheet. > Even if they are just “warehousing” the credit this would be false, as they need to hold some of those assets on balance sheet while they try to sell them. Yes, they would have to hold _some_ capital reserves, but that number should be based off of whatever they have on their balance sheet at any given time, not off of the total loans issued number.
    - thedudeabides5 6y ago
      https://www.applicoinc.com/blog/ant-financial-services-platform-largest-fintech-in-world/ https://www.applicoinc.com/blog/ant-financial-services-platf... Says they have a $250bn mutual fund. Sorry but even if it's a liability (in this case the deposit that ends up in the money market fund) that's technically...on balance sheet. You can pretend it's in a WMP, or a NCD or whatever alphabet soup you want, but if someone thinks of it as an "Ant deposit"...that's on balance sheet.

wbc 6y ago

Where do you get the 3/300B numbers? Didn't see them from the article. If true, that would be an insane amount of leverage.

Congeec 6y ago
Sorry I don't have an English source but translation https://translate.google.com/translate?hl=en&sl=zh-CN&u=https://dy.163.com/article/FQHFENEB0519E14O.html&prev=search&pto=aue https://translate.google.com/translate?hl=en&sl=zh-CN&u=http...

blueblisters 6y ago

The real question people are asking is why now? Didn't the regulators have enough time to assess the irregularities earlier? A $30 billion IPO plan couldn't have been made public without the regulators giving at least some in-principle approval, and I'm sure Jack Ma knows how to navigate the bureaucracy/politics in China before he would make such plans public. I don't understand Chinese politics much but this just reeks of vendetta. >After the 2008 financial crisis, Basel III includes regulations on "shadow banks" like Ant in addition to traditional banks. Is it possible for a bank that has only assets of 3B lends out 300B? But, Ant already did. They created an Asset-Backed Security (ABS) via a process called securitization. It is unprecedented that a financial institution with such big financial leverage and a large amount loan going unregulated. If that's the case, why were they being allowed to continue as a privately-owned lender for so long?

geodel 6y ago
> The real question people are asking is why now? These why now questions unfortunately never have satisfactory answers. Too early: there is no scam/govt is stifling innovation, in the middle: not enough proof, late: why regulators were sleeping till now.
Congeec 6y ago
Maybe some people of power who get involved and want to reap benefits. Maybe the company found in 2013 is too new for the government to catch up. China does not have a long established financial industry like developed countries. State capitalism has just started four decades ago. Maybe Jack Ma knows regulations will come out soon and just made public opinions before regulation rules are revealed to the public. I do not have any source to back my guesses.
- vagrantJin 6y ago
  > China does not have a long established financial industry like developed countries You can make a shady case for modern western idea of finance but China has had a strong finacial industry for centuries.

jessaustin 6y ago

If the situation is how you describe, the most important question would be: who is holding these securities? If it's just some random Chinese savers looking for higher interest, there is not necessarily a problem. Of course, a similar situation was a problem in the USA context in the previous decade, but that was due to the particular circumstances. Those who had extracted rents by pretending to "insure" MBSs had used a portion of those rents to pwn the USA political structure. When it was clear that MBSs were worthless, they chose to destroy our system of representative government rather than taking bankruptcy. That wouldn't be an option in China, and it certainly wouldn't be an option available to random small Chinese savers.

duxup 6y ago

Yeah I don't know the full Ma / Ant story. But that pawn shop comment, man if that's really related to the fact that pawn shops exist because something backs the loan ... and if Ant is really as big as folks say it is (I'm talking about my ignorance here, not anything deceptive) and it is could have a huge impact on Chinese banks.... that's a lot to worry about. I don't pretend to know China's motivations or etc, but I think there may be very real regulatory concerns.

paganel 6y ago

I also saw that 3B to 300B leverage mentioned in the FT and I was surprised that it didn’t get picked up by the non-economics-related media, they all insist on “Chinese government bad because it didn’t let China’s most successful entrepreneur do his thing”. We’re talking about a leverage ratio of 100, that’s a crazy figure, if I’m not mistaken Lehman’s leverage ratio when it folded was of “only” 30.

cfcosta 6y ago
I don't think it is a case of the CCP stopping all entrepreneurs, but a case of them choosing which companies succeed and which fails.
- xster 6y ago
  Are you referring to something specific?
- sudosysgen 6y ago
  This is pretty clearly the CCP intervening in the economy in order to stabilize it and avoid a financial crisis. I don't think this counts as picking winners and losers. I'm not sure that reclassifying something that is clearly a bank as a bank then enforcing the international agreements it would be bound too is picking winners and losers, it's just regulation. The issue is moreso that Ma seemed to somehow have captured the regulation to delay this, and only now, with the huge attention, was the regulation enforced.
xster 6y ago
According to https://youtu.be/HnCBbiCetSg?t=569 https://youtu.be/HnCBbiCetSg?t=569, the S-1 equivalent filing of the IPO showed Ant itself putting up 1.68% of its own money towards its lendings. That's way more leverage than the 8% mandated in Basel III.
- hintymad 6y ago
  It's also worth mentioning that Ant securitized its loans, creating a CDO-like structure. Pretty risky stuff, per my limited knowledge on finance.

justicezyx 6y ago

Ant IPO debacle shows me that the rich and powerful, in the capitalism sense, are incredibly consistent in their thinking; even the one raised up in a communist totalitarian country. They simply cannot think from any other perspectives that can reveal their fundamental flaws. Unlike communism authoritarian, who at least can admit the effectiveness of capitalism in mobilizing the society in economy activity.

sudosysgen 6y ago
Ultimately, I think this is a case of the incentive structure and material reality of those people shaping their worldviews and actions. This shared environment lead them to a worldview where myopic self-interest is the only thing that matters. In other words, I think the shared material environment dominates culture and upbringing, and leads to transcultural trends here.

trhway 6y ago

>If I still cannot make you understand, please google "2008 MBS ABS". You'd be surprised at the similarity of what Ant's been doing and what caused the financial crisis. blaming financial crisis on ABS/MBS is wrong. Some ABS/MBS may be very risky and it is just fine. The Ant's ABS sound like very risky and it is just fine. An informed investor may as well choose to play with such a risk for a high premium. The true cause of 2008 was humongous amount of cheaply bought CDS because the underlying MBS were rated AAA which is several orders of magnitude higher then they should have been. It is like a somebody buying for $1 a $1M "life insurance" - basically betting - on a life of a 100 year old person. An insurer selling such insurance (ie. CDS) would quickly go bust like it happened in 2008.

chuckSu 6y ago

I like this take

maest 6y ago

> assets of 3B lends out 300B My understanding is that the loans don't go on Ant's books, they just sell them on. In that case, Ant's assets are irrelevant, since they're not the ones taking any risk and, thus, don't have to cover for the losses.

thedudeabides5 6y ago
Even if they are just “warehousing” the credit this would be false, as they need to hold some of those assets on balance sheet while they try to sell them. This balance sheet is indeed what regulators would require them to hold capital/reserves against. Further, what’s the documentation that they “just sell them on” end if they do, why wouldn’t their balance sheet shrink??
- maest 6y ago
  It's not clear what the 300B figure actually is. The OP doesn't mention it and the GP's link isn't explicit. I can't find a clear source, but it looks to me that 300B is total loans issued, not what Ant currently has on their balance sheet. > Even if they are just “warehousing” the credit this would be false, as they need to hold some of those assets on balance sheet while they try to sell them. Yes, they would have to hold _some_ capital reserves, but that number should be based off of whatever they have on their balance sheet at any given time, not off of the total loans issued number.
  - thedudeabides5 6y ago
    https://www.applicoinc.com/blog/ant-financial-services-platform-largest-fintech-in-world/ https://www.applicoinc.com/blog/ant-financial-services-platf... Says they have a $250bn mutual fund. Sorry but even if it's a liability (in this case the deposit that ends up in the money market fund) that's technically...on balance sheet. You can pretend it's in a WMP, or a NCD or whatever alphabet soup you want, but if someone thinks of it as an "Ant deposit"...that's on balance sheet.