“Tears come from the Heart, not the Brain”

Leonardo da Vinci

I’m sad.  Not angry, not frustrated, not panicked.  Just sad.  The industry that I love so much is in the midst of a minor meltdown, and everyone wants to know if it’s a storm in a teacup or an extinction event.  I’ve carefully articulated my perspective in recent posts, so if you want to know whether or not I think the next-gen lending companies are real or Memorex, feel free to read these pieces:

Thriving, Surviving or Dying

What Happens When The Cash Runs Out

Welcome Back My Friends

I Once Was Lost…

But what’s really going through my head after the events of the past few days is a bit more philosophical.  I think about life as a series of small moments that when strung together tell a story.  Most of these moments are unremarkable and forgotten as soon as the next moment arrives.  But occasionally a moment is memorable because it’s at the heart of a bigger story.  And when this moment involves “choice” it’s typically catalytic in defining who a person is and down what path they’re destined to walk.

Recent events remind me of my “moment” which took place on a rainy day almost two decades ago back when I was a young analyst at Capital One.  At the time, I was busy managing one of the company’s rapidly growing credit card P&Ls, but like most of my career at Capital One this wasn’t my only job.  Off the side of my desk I managed a team of analysts who were in charge of the loan loss forecasts for the company, and let me tell you, it wasn’t a job that I liked one bit.  When the books closed for the month, data came pouring in and my team had 48 hours to digest the new information, talk to the business lines about what we were seeing, and publish an integrated forecast that fed into the financial infrastructure of the company.  Needless to say, it was a thankless but important job that didn’t win me any friends.

For each of the previous four months our published forecast had under predicted losses by a small margin.  Every month we made a small tweak to the forecast to reflect the increases we were seeing, but the adjustments didn’t seem to be working.  I was taking a little heat from the finance organization because the misses were causing minor problems with the company’s ability to deliver against our broader financial obligations (to the street) but I was also being pressured by the business units to stay the course because the forecast influenced their profitability models and how much they could grow.  It’s an understatement to say that I was nervous leading up to the next forecasting cycle because I was pretty certain we were about to miss again.  The data came in and I was right.  Another small miss.

I sat down with my forecasting team (2 analysts plus me) and we decided to re-examine every assumption in each of the individual forecast models and rebuild the forecast from the ground up.  Something just wasn’t being picked up in the models and we had to fix it.  Being wrong month after month was frustrating to the entire organization, but more importantly we needed to get to the bottom of the problem and figure out what was going on so Management could steer the mother ship accordingly.  And it had to be done in 48 hours including a complete “State of the Union” memo that I personally wrote each and every month.

When I replay the moment in my mind it feels like something out of a movie.  The three of us were huddled around a computer that had our new models loaded and compiled.  I nervously looked at them and asked “are you ready?”  Slow nods all around.  I hit the enter key and we waited while the models ran.  The result — A flashing NEGATIVE $100MM.  Our jaws hit the floor.  NEGATIVE $100MM.

The implications hit me like a brick wall.  Adding another $100MM to our reserves would mean missing earnings for the first time in Capital One’s short life.  Sharing this information would obviously kick-off an internal review of our work that I would have to defend.  It would mean more late nights running and re-running our models and trying to find ways to explain what was happening to a suite of angry Executives.  It would make me the center of attention with the various P&L owners and likely the most hated person in the company.  And, if the forecast held up to everyone’s scrutiny, the downstream impact would taint the perfect record of the company that I so carefully helped build.

It wouldn’t have been difficult to tweak the numbers and punt the problem downstream.  It wouldn’t have been difficult to show another small miss and take my now-routine slap on the wrist by the finance department like I had the past few months.  It wouldn’t have been difficult to cover the whole thing up and find a way to hand the job off to someone else before the wheels came off the proverbial bus.  But this was my “moment” and I published the forecast.

Capital One survived but it wasn’t a fun time.  Management informed the Street that we were likely to miss earnings, the stock took a major hit, smaller product lines were shuttered completely, and lots of people across the entire company were fired or let-go as the business units were forced to reduce their costs.  And to this day, I might be the only one that remembers the choice that I had and the decision that I made.  It was my “moment”.

So, my response to what I think about the recent news and the implications on the industry is that I’m sad.  Not angry, not frustrated, not panicked.  Just sad.

Peace out.


  1. It appears many within the FinTech industry are concerned with the regulatory structure of banks without recognizing the benefits of running your lending/underwriting practices with the same level of rigor. For most of the marketplace lenders (remember when they used to call themselves P2P?), they carry none of the credit risk of their loans so there is not a strong incentive to have great standards or practices or even underwrite appropriately. Sound similar to FNMA during 2004-2007?

    I view a lot of the short-term changes as largely good for the industry in the long-term. With new standards (whether government-imposed or not), investors will be able to more reliably understand the credit performance and risk of their investments and consumers (especially small businesses) will be given the disparate impact and protected class protections that traditional lenders must maintain.


  2. Don’t be sad. The industry is still at an early stage in our evolution. With the right digital risk infrastructure, there is no reason this industry doesn’t soar to great heights. We simply need more industry level coordination, which with various trade associations, standards, regulatory interventions and other recent initiatives will prevail. Growing pains.


  3. As someone who has spent over 13 years in the financial services industry I share your sentiment of feeling “sad”. I believe in innovation in this space and I believe in finding unique ways to improve consumer health through new products and services. I am also “sad” because I want these new solutions to be better for consumers and investors. I want them to strengthen the industry. And I believe that marketplace lending can truly serve as a new asset category but it relies on trust by borrowers and lenders which means making the hard right decisions. If newer companies can’t overcome the pressure to address investor (private) or market (public) demands it will take longer for these innovative solutions and services to become mainstay in the financial services ecosystem.


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