Q: If Lending Club were to become subject to a bankruptcy or similar proceeding, who would service the member loans?

A: We have executed a backup and successor servicing agreement with Portfolio Financial Servicing Company (“PFSC”). Pursuant to this agreement, PFSC stands ready to service the member loans. Following five business days’ prior written notice from us or from the indenture trustee for the Notes, PFSC will begin servicing the member loans. If our agreement with PFSC were to be terminated, we would seek to replace PFSC with another backup servicer.

If Lending Club begins suffering a long, slow drown-out death, you can bet there will be a “borrower run,” where the many of those who owe money will renege on their debts. LC can implement punishments and issue warnings to people who skip payments, but some people will grab any sign that gives them reason to think they can stop paying. And just like a bank run, the dynamic becomes self-fulfilling: As more and more debtors forgo payments, the microfinance entity loses solvency, giving more reason for more debtors to forgo their payments. The Economics of Microfinance says this exact scenario has occurred in countries.

This would also mean that note owners would start selling off their notes on the marketplace. Supply, provided by creditors wanting to cut their loses or not deal with the unknown PFSC.

If LC shuts down overnight, and the third party assumes ownership of the debt, then the new third party would likely be cutting their losses on the debts and be willing to settle the debts for a mere fraction of their original value. The new third party would not likely be eager to repay the borrowers.

Also important is to not confuse being the owner of a LC note as being a shareholder. These notes are not securities; they are not SIPC insured. A note owner has no ownership stake.

From 2000 through November 2009, investors would have been far better off owning bonds, which posted gains ranging from 5.6% to more than 8% depending on the sector, according to Ibbotson. Gold was the best-performing asset, up 15% a year this decade after losing 3% each year during the 1990s.

This past decade looks even worse when the impact of inflation is considered.

Since the end of 1999, the Standard & Poor’s 500-stock index has lost an average of 3.3% a year on an inflation-adjusted basis, compared with a 1.8% average annual gain during the 1930s when deflation afflicted the economy, according to data compiled by Charles Jones, finance professor at North Carolina State University. His data use dividend estimates for 2009 and the consumer price index for the 12 months through November.

The 2000’s were bookended by the dot.com and subprime mortgage bubbles. That the decade of the 2000s performed worst among about 20 decades of American stock market records is a curious piece of trivia, but I am not too worried about consistent investing in stocks over the long run. The story continues:

To some degree these statistics are a quirk of the calendar, based on when the 10-year period starts and finishes.  The 10-year periods ending in 1937 and 1938 were worse than the most recent calendar decade because they capture the full effect of stocks hitting their peak in 1929 and the October crash of that year.

To get a visual idea of just how poor stocks performed over this 10-year period, I used the handy What If I’d Invested Tool over at Sharebuilder.

The first chart assumes a simple 1,000 investment in January 2000, with dividend reinvestment. You lose 8% of your principal, and even more after accounting for inflation.

Next, I assume a $500 investment each month. With this strategy, you gain 5.2%, though inflation, broker fees, and capital gains on dividends will eat into your gains. (the chart unfortunately does not stretch to show the major post-2009 stock market gains).

In short, I think the lesson of this factoid is

One, only by stretching your investing horizon can minimize the risk. Usually, 10 years is a long time. But sometimes it is not.

And two, simply changing stats and assumptions can have huge differences in data.

Slow, consistent investing is the way to go. Don’t invest everything at once.

This line amused me:

Students and college officials argue that the tax will drive students away and place an unfair burden on institutions that already contribute substantially to the city. They add that the measure comes at an especially difficult time for colleges, as endowment values have fallen and requests for financial aid have risen.

The city, I’m sure, would much prefer to collect the tuition receipts from the school, but presumably it cannot directly tax the nonprofit entities for tuition dollars. So instead, they charge the students a measly 1% tuition tax. 1% is nothing, especially when you remember that universities nationally, , have been increasing fees and tuition at a pace greater than inflation. The schools seem to want a monopoly on soaking students.

Part of the article mentions the city wants the students to pay for what they use. Not that I believe anybody at the city believes statement, but it’s a particularly transparently wrong statement. Students go to restaurants, to bars, they watch movies, rent apartments, go to games, and buy cheap furniture. Some even some stick around. Obviously, the reason wants to tax the students is because they don’t vote in local elections. Most probably aren’t even registered to vote. It reminds me of the taxes that levied on hotel visitors. The logic is that they visitors vote in elections, they live in another city, so it’s not taxing residents.

As somebody who only recently got out of graduate school, I would resent them taxing me more. But the truth is, I never voted once in the local election, and 1% is less than the tuition increase the school itself charged me during my second year of graduate school. I hate taxes as much as the next guy, but tuition is very inelastic (meaning increases in prices has a less than proportional effect on consumer response), and the economic loss to all involved would be very minimal. Have at it, Pittsburgh.

An eternal debate in the personal finance blogosphere is over the use credit cards. A few people are so anti-debt that they forgo using credit cards whenever possible. The logic, I suppose, being that their use is the first step along the slippery slope of credit and debt Armageddon. It makes some sense–people don’t feel as strong of a sense of financial loss when they use their plastic as they do when they use tangible cash or use a debit card that automatically deducts from their checking accounts.

I’ve never had a particular problem with credit cards. In my own brain, there’s no difference between spending on a credit card and on a debit. It’s equally painful either way. I pay off my card balance every month, and like the option of floating a small loan every month and earning a modest 1% discount on purchases. And I get small benefits, like doubling the warranty.

But one thing that is not mentioned enough in the personal finance blogosphere is how credit cards are designed to make you screw up. It’s not like cards have fair, easy-to-understand rules like a stop light. Green go, yellow warning, red stop. Nope, cards are systematically designed to catch you (at the risk of mixing metaphors here) to forget the dot the i’s and cross the t’s.

The cards are designed, to borrow the phrase from Nudge, for humans and not quants. Quants are the 100% rational people, the ones who always remember to do everything perfectly. They spend all day researching information, and for everything they sign, read (and understand!) the tiny-typed, obtuse terms and conditions. They are the people able to resist eating peanuts at a party because they know it’s against their diet.

To wit: Check out the report, Dodging Reform: As Some Credit Card Abuses Are Outlawed, New Ones Proliferate. For the most part, it’s true, if you are perfectly responsible with your card, and pay off the balance every month, you will avoid the fees. But again, they’re designed to trip you up. They’re funny products, credit cards, when you think about it. The bulk of the profits don’t come when people use the card “responsibly”; instead, the banks make their big profits when you use them “irresponsibly” and fall for the gotcha tricks.

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The above chart shows the difference in the advertised fees and the actual fees that credit card users pay. Since 2005, the Top 8 card issuers, who hold 86% of all balances started using tiered rate fees. The highest tier is typically $250 or above. They write: “Rather than making fees proportional to the violation, tiered late fees seem designed to appear low while in reality a high fee is assessed.”

This other chart shows the average and maximum interest rate increase from pick-a-rate pricing, where the issue will now use the maximum prime rate in the previous 90 days, rather than current rate.

And check out the nickels and dimes they make off of you by “trailing interest.” Say in last month, a user carries a balance. This month, they get the bill and pays off the balance. But next month, they discover they owe a couple bucks on interest. That’s because between the time the bill was printed and the time the bill was paid, a few cents of interest accumulated. Those nickels and dimes got bumped up to a couple bucks because of the minimum finance charge.

I remember that Google Onion News story back in August. Sure, you can avoid having your personal info being collected by Google—if you’re willing to move to some remote village somewhere. Just like enjoying perfect privacy and living in modern society are mutually exclusive, living without a modern necessity like a credit card is impossible.

Allowing the marketplace sort itself out is almost always preferable to government regulation, but credit card companies have discovered nickel and diming and playing gotcha games with customers is more profitable than winning over customers with service. Part of the reason, I think, is because of how difficult it is to change products. When you discover your Gatorade drink isn’t good, you can buy PowerAde. Or you can substitute for plain ordinary water. (If you’re addicted to wasting money on drinks, you can even buy bottled water). Not the case with credit cards. Once you’re locked into one service, changing takes a lot of work and hassle, and might even effect your credit score.

That’s a major reason the CARD Act is so necessary. The rules are blatantly unfair. The relationship between credit card user and issuer is asymmetrical—the issuer enjoys more time and expertise in gaining the upper hand in terms of tricks and information. True, as Mehta brags at the top of this post, the card issuers will always be a step or two ahead of the consumer and the government. But Creating rules (regulation, the same thing, can have dirty connotations) simply means the relationship between credit card issuer and user is fairer.

For now, the best way to defend yourself is to pay the bill on time and try your best not to screw up. When you do, you can probably negotiate away the first fee. But it’s very difficult to do to be perfect, particularly for us non-quant humans, and particularly when the game is rigged.

ING Direct, lacking branches that dot street corners, lacks the physical presence that signals permanence. Instead, they advertise. The billboards, I noticed, lacked the a webpage URL. I’m betting that’s because they aren’t trying to persuade people to open accounts (that’s what the online advertising is for). Instead, they’re attempting to supplement word of mouth and seal the deal for customers uncertain about opening a new account. The prospect of problems with people’s money is a hurdle too high, even in the face of the enticements of some extra money in the form of higher interest rates each month. The advertisements, I believe, serve to trim that hurdle.

Serpico tells the story of Frank Serpico, a plainclothes officer who refused to participate in this culture of graft and corruption. He instead became an NYPD whistleblower, and as a direct result of this, a pariah.By the last frame of the movie, he is deaf, stoically sitting against a railing as he awaits for a boat to take him to Europe. The movie portrays Serpico, played by Al Pacino, as an idealist who became a cop out of love for his New York and fellow New Yorkers, and for the rush of fighting crime. Throughout the movie, Al Pacino possesses empty, anxious gaze and frequently avoiding eye contact with his fellow policemen (at this time, they were all men). He is burdened in sprit by the omnipresent corruption around him, and by the anticlimax that is the end result of his lifelong goal.

Subtly, the movie suggests that Serpico is the type of person so purely independent of—or, depending on one’s semantic choice, isolated from—clique, group, as to be a bit of a loner. He is the Greenwich Village-living counterculture guy who worked as a cop; he was a cop who wore long hair, listened to opera and liked ballet, and hung out with drugged up dreamers. His obsession with being a straight cop cost him relationships both romantic and professional.

Most relevant to the money blog is also how the movie illustrates the luxuries of living without the constraint of money, and its branches/ tentacles of career, family and children, status, and debt. A couple scenes I found to be illustrative of this aspect of the movie:

One scene has him following, while still on duty, his plainclothes partner, Don, into an apartment. “I keep this place for socializing,” quips the partner. “Someday we’ll get a couple of broads, huh? Have a little party.” When the partner attempts to hand Serpico his cut of the money, Serpico waves him off. “Look, Don … if I was broke, if I had a family … I don’t know. But I’m not broke, and I don’t have a family. So why the fuck stick my neck out? You know what I mean?”

Don responds: “It’s already out, Frank, not taking the money.” People, generally, act rationally, and when they act irrationally, there’s a fundamental misplaced rationality to it. For Serpico to decline the kickback money was to expose himself as a troublemaker in the eyes of both his peers and supervisors; to become the “corrupt” deviant. Besides the career and financial incentives, the fact was that in these neighborhoods, the pimps and drug dealers officers accumulated more patronage power than the officers themselves–a textbook precondition to police corruption.

Obviously, self-interest wasn’t what trigged Serpico to wave off the money. Instead, it was being true to his self. In most circumstances, people are constrained by adulthood and responsibility, by children, family, debt, career, status. Not Serpico. He lacked a domestic life; had no debt; his career, status, and identity derived from working as a straight cop in the city of New York—not income levels and status within the NYPD.

Two other separate scenes gel in mind as one. Serpico attends a Greenwich Village party with the woman he was dating at the time. She wants to be an actress, she says. At the party he meets her friends: The poet who works for an advertising agency, the actress who works for a photographer, the novelist working for an insurance company. Upon learning that he is a cop, incidentally, the friends slink away. “How come all your friends are on their way to being somebody else?” he muses to her between meeting people.

Later on in the movie, they’re bathing together. She announces that unless he marries her, she will marry somebody else and leave for Texas in a few weeks (it is counterculture, you know). Serpico asks her about her intent to pursue her goals. “A girl has to get married some day,” she says. “You’re a long way from some day,” Serpico says. He never answers the question about marriage, and she is never seen nor heard from in the movie.

The scenes suggest that everybody has goals, hopes, and dreams we want to pursue. But money, life, and adulthood constrain the pursuit of the goal. She had to give up her dream at some point, as did the poet and novelist, as do most of us when we realize that we are merely tilting at windmills. But again, not Serpico. He was free: No money, career ambition, no ambition but to be honest cop, and no constrains. He possessed the iconoclastic personality that was attracted to being the outlier. For Serpico, that “some day” never came.

I paid $30 for this jpeg

The other week, I decided a nice, silly-fun Christmas gift to my girlfriend would be to buy a picture of us with a mall Santa. The idea came to me when I was at the mall and saw the price for a pair of 5×7 photos was $8, plus 50 cents tax. A lot, considering it’s a picture with some guy in some puffy red and white clothing, but life costs money, and what’s a Lincoln, three Washingtons, and a couple quarters in exchange for an image of a millisecond that will trigger nostalgia years from now?

So we get to the mall, and minimum package jumped to $17, including a $10 giftcard from Shutterfly. Bummer. But we were there, it’s fun to do it, and I figured why not? I decided to spend the extra Hamilton. Then I took a greater look at the packages. The next best package was for a a larger photo for $25 with a $10 giftcard from Shutterfly. The next one up was … $30 for a “high quality” photo on a CD and a $20 Shutterfly giftcard.

I’m not sure what this says about my personality, but I’ve always had a hard time spending money. I find the point of transaction subtly painful, actually. A lot of people have no problem the during the moment of swiping their credit cards, but later feel a horrible hangover after realizing they spent too much money. I’m the reverse. I always over-research my purchases, and more often that not, once that initial pain of spending subsides, I’m happy with what I get in return. More painful, and more lingering, is the pain of buying something that looks ugly, doesn’t work, or is a minimally wise purchase—then having to either look at the damn thing forever or know that I wasted money before getting a replacement.

So it was with the Santa photo: I was bummed to spend the extra money, but I decided to accept the financial hit. Memories, right? And since my wallet and brain were about to take a hit, and I figured it I might as well spend the extra money. The second Hamilton was painful, but not as painful as the first extra Hamilton. And I figured it would be nice to have a nice JPEG file and not worry about the low-quality scan. And maybe I can sell the $20 giftcard or even use it.

So I upgraded my purchase price to $30, all the way from $8.

Now that the money is spent, now that I have the photo in my email account forever (or until Google changes their Gmail terms of service or something weird happens like a jerk breaking into my account), and now that I have the printout of the photo on the wall, I’m glad I paid for it. But the truth is, had I known from the beginning that I would spend $30 plus tax plus gas money to reach the mall, I wouldn’t have done it.

That’s how behavioral economics works. The sellers understand the mind tricks to pull in consumers: Attract them with lower prices. Once there, they want to spend money on value. When it comes to memories and sentimentality, we people are not very rational. Yup, it worked on me.

My take/ review:

I used FNBO as my cash reserve account. But once I accumulated $1000 in my cash reserve, I moved my reserve to Dollar Savings Direct, which consistently offers a higher APY. FNBO Direct’s interest rate for their checking account is a full point higher than ING’s Electric Orange checking, but if you’re like me, you appreciate ING’s non-draconian overdraft fees. FNBO has those draconian fees. For that reason, I’m sticking with ING for checking. ING is also more flexible with sending friends money, and their interface much better slicker and more intuitive.
Grade: B-
Checking isn’t as flexible as ING; the interest rate is lower than Dollar Savings Direct.

Who is FNBO Direct?
FNBO stands for First National Bank of Omaha. The banking business has been around since 1865, with physical branches in Nebraska, and a handful in Iowa and Texas. FNBO’s then CEO told Bank Tech magazine that they opened the account “as an offensive strategy to compete with the big banks … [as along-term strategy to gain access to customers outside our footprint without investing in brick-and-mortar branches. We also wanted to position ourselves for future generations of customers will be completely online. These customers rely on the Internet for everything, including socializing, entertainment, shopping and financial services.”

FDIC Insured:
Yes. Certificate 5452.

Interface:
Plain white, nothing flashy. Loads quickly. Lists of withdrawals and deposits are clear and skimable. Not nearly as elegant as ING Direct. Monthly statements are cluttered and not as clear as I’d like. Lists of deductions are clear and skimable. The transfer funds options takes a few too many clicks, but nothing major.

How easy is it to withdraw money?:
Use a simple ACH withdrawal/ deposit, which takes the normal 2-3 business days. You can link up to three different accounts.

Where do you deposit your physical checks?:
FNBO Direct
PO Box 3707
Omaha, NE 68103-0707

Interest rate as of April 2009, notes:
No minimum deposit, no monthly fees. Consistently beating ING direct interest rates by half a point. BillPay, their version of a traditional checking account, pays 1.49 percent. Savings is 1.9%. Soft pull on your credit. Debit card is available. No paper to sign.

Fees:
Miscellaneous fees here for the BillPay account. $30 per overdraft, and $3 per day. $10 to replace your ATM card.

Other reviews:
Bargaineering liked it about a year ago, as did FiveCentNickel.

Just as anybody wouldn’t pay a dime (or, I suppose, a pound, since he’s British in London) for advice from a “line expert,” only a fool would pay for advice from a “stock expert.” Burton Malkiel, in a Random Walk Down Main Street, essentially makes the same argument for individual investors. Yes, some investors can beat the markets over the long term, but unless your name is Buffett, is likely ain’t you. Those outperforming the market for a few years will, as the rules of averages dictate, inevitably underperform after enjoying beating the market. Malkiel disagrees about the efficiency of markets (as, for what its worth, would I).

But Malkiel also recognizing that the stock market is fun and exciting, and he says provided that the bulk of your portfolio is indexed, enjoy it, but invest if not wisely, but unfoolishly.