This post was originally included as part of an ebook that I published alongside the launch of my book, Tradestream, entitled “Tradestreaming and the Future of Investing”. The content was so good I wanted everyone to have access to it :-) .
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What has the financial crisis taught us? What's changed in our risk management? Our models? Nothing. Nada. The government pumped millions into the same old banks and financial institutions, practicing the business the same old way, with the same people. Frankly, politics changed more in the last 4 years than the supposedly technologically-advanced financial industry. Obama rose to power using social networks, the power of
change and the power of the people but applied none of that to fixing the financial system. We need to use the advances in the internet, mobile, social networking and the rise of the real time web to fundamentally change the financial industry, creating more democratization, transparency, opportunity with improved risk management.
As peer to peer lending takes off, we can imagine a world where this model is extended to everything from mortgages to currency trading. Your local mortgage provider of the 1950s, who knew your employer, your neighbors and the intricacies of your local housing market so he understood the risks was replaced by abstract CDOs with zero risk-correlation to the facts of your housing markets. Those CDOs will be replaced by Facebook and your social network who will understand your risk profile better than anyone? Why can't corporations lend money directly off their balance sheets in real time instead of depositing them in banks, earning low interest and enabling the banks to give out risky loans at a higher rate? That is certainly inefficient and screaming for disintermediation.
As I write these lines, I am reading about yesterday's IPO of Financial Engines (Nasdaq FNGN), who uses technology and the internet to democratize the provision of financial advice to the "common man" and is up over 40% in its first day of trading. I read the FNGN article on Seeking Alpha who "gives a voice to 3000 contributors" who talk to any investor on the web about the stocks they own. Enough writing, I think I will go make a loan on Zopa, buy some Israel Shekels on eToro.com and tweet about it later.
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Michael Eisenberg is a partner at Benchmark Capital and has been a key figure in Internet and software investing in Israel since 1995. Prior to joining Benchmark, Michael was a partner at Israel Seed Partners for eight years. Michael joined Israel Seed in 1997 from Jerusalem Global, where he started and headed the firm’s successful investment banking group and partnership with Montgomery Securities.