On a recent rainy night, more than 100 Berkeley Haas and Stanford GSB students convened in Chou Hall’s Spieker Forum for a first-of-its-kind Founder-Investor Mixer.
Haas MBA students Atusa Sadeghi and Alejandra (Ale) Vergara, along with Dogakan Toka, EWMBA 22 and co-president of the Berkeley Entrepreneurship Association (BEA), were behind the event. As co-presidents of the Haas Venture Capital Club, they decided it was time for students from the two programs to get to know each other in the tight-knit industry, where they’d inevitably run into each other post-graduation.
“I think collaboration is the key word here,” said Sadeghi, EWMBA 22, a former mechanical engineer who transitioned into venture capital over the last two years. “If we’re going to be in the same industry, let’s be united.”
A new fund
That shared vision for unity among investors and entrepreneurs is something Sadeghi and Vergara, full-time MBA 22, have emphasized since taking on their roles amid the Covid pandemic. Under their watch, they organized the event with Stanford, landing the support of sponsor First Republic Bank and Andrew Liou, a senior relationship manager at the bank, who “didn’t think twice before supporting the collaborative effort,” Vergara said. Membership in the student-run VC club, founded in 2018 by evening & weekend MBA students Chris Truglia and Scott Graham, has increased from about 100 to more than 500 students, split 50-50 between the evening & weekend and full-time MBA programs. Since its founding, collaboration and networking among students from both the programs has been critical to the club’s success, Truglia said.
The club hosts popular pitch nights, often partnering with other UC Berkeley clubs, and has built a database with answers to the most common questions students ask about the venture capital industry. This past fall, venture capital club leadership also helped spearhead the creation of Courtyard Ventures, a new venture fund led by Haas MBA students that provides an opportunity for Cal students and alumni to invest in early-stage Cal startups. The fund has recently begun deploying capital, after exceeding funding goals and closing its first two investments in early January, Sadeghi said.
While entrepreneurship is a well-established career path at Haas, Gupta said he’s seen a shift in student interest and effort in venture capital over the past three years, as the number of Bay Area VC funds has proliferated. “Now, these funds are coming to Haas to recruit for associate and principal roles,” said Gupta, who is also managing partner of his own pre-seed fund Blue Bear Ventures started at UC Berkeley. By next year, Gupta predicts Haas could double its number of full-time offers.
That growth would be significant. For each of the past two summers, about 15 to 20 full-time MBA students interned at venture capital firms, up from just a few in 2015, said William Rindfuss, executive director of strategic programs in the Haas Finance Group. While there’s a longer track record of students studying finance going into investment banking, a total of around 10 grads took full-time jobs in venture capital over the past two years. “We’ve had more students doing VC internships, and that will likely lead to more full-time VC job offers,” Rindfuss said.
The passion for investing
But increased hiring comes down to overcoming challenges endemic to the venture capital industry. VC funds can be insular, they don’t hire on a predictable schedule, and entry-level pay can be low compared to other finance jobs—with a big payoff delayed until you make partner, Gupta said.
“Venture is so ‘just in time’ and when people hire you you start immediately. It’s not like consulting where you get your offer and start next July,” said Jeff Diamond, MBA 22, a VC Club officer and a general partner at Courtyard Ventures. But Diamond, who came to Haas to switch from a career in the entertainment industry to early-stage investing, said he’s committed to a VC career. “It’s a lot of work but it’s rewarding,” he said. “It’s what I liked about working with artists, writers, and directors. You want to be the person who works with them. The idea of being with these companies for the long haul is what interests me.”
“The idea of being with these companies for the long haul is what interests me.” — Jeff Diamond, MBA 22
There’s clearly passion for investing in the Haas alumni network, which is expanding to include graduates like Sydney Thomas, MBA 16, a principal at seed-stage fund Precursor Ventures; Matthew Divack, MBA 19, an investor at Moment Ventures, and Champ Suthipongchai, MBA 15, who co-founded Creative Ventures, a tech VC firm investing in startups that address the impact of increasing labor shortages, rising healthcare costs, and the climate crisis.
Making alumni connections
An earlier success story in venture capital, Michael Berolzheimer, MBA 07, founded Bee Partners in 2008. An internship at pre-seed fund Bee Partners piqued Vergara’s interest last year, but she worried she lacked a technical background. Then Vergara met Kira Noodleman, MBA 17, a partner at Bee, through the Berkeley Female Founder and Funder’s summit last year. “Kira encouraged me to apply,” said Vergara, who landed the internship. That led to a full-time job offer with the fund when she graduates in May.
Looking for more investment experience, Sadeghi found her internship as a senior venture associate at Blue Bear Capital (separate from Gupta’s fund, Blue Bear Ventures). She first met Carolin Funk, a Blue Bear partner invited by the 2020 Haas Venture Capital Club to speak at the school. Interviews at Blue Bear led to an offer. She then learned that recent alum André Chabaneix, MBA 21, already worked at Blue Bear as a senior associate.
“André is just amazing,” Sadeghi said. “We have a lot in common in terms of our background and industry interest so we bonded pretty quickly. In our overlapping year at Haas we participated in the 2021 Venture Capital Investment Competition (VCIC) where we ended up representing Berkeley at the global finals together—and now we’re great friends and colleagues.”
While students continue their internship and career recruitment this spring, the VC Club already has many events planned, including club-sponsored workshops, student-alumni mixer events and more collaboration with peer MBA programs. Vergara and Sadhegi encouraged students “who are just interested in learning more about VC or are fully committed to this career path,” to check out the club.
“It’s been such a pleasure running the 2021 VC club year with Ale, and we can’t wait to welcome the 2022 leadership team to carry us forward,” Sadhegi said.
Fall 2021|By KATHLEEN PENDER| PHOTO: MARCEL SIEGLE
Embedded finance is a hot buzzword in business because its applications are limitless. It involves integrating financial services—such as payments, lending, or insurance—into non-financial apps, websites, and business processes to create a seamless user experience. It’s how your Uber driver gets paid.
Emmanuel Vallod joined GSR Ventures (gsrventures.com), a global investment firm, to seek opportunities in financial technology, especially embedded finance. The big question he’s seeking to solve: “If you put financial services into a commerce, media, or healthcare platform, can you facilitate business transactions, growth, and user satisfaction?” he says.
Vallod spearheaded GSR’s recent investment in jaris, a Burlingame, California- based company that embeds banking services into the software that small and medium-size businesses use to conduct retail transactions. It gives companies next-day access to loans based on those transactions and other information residing in the software.
He’s also looking for ways embedded finance could make U.S. healthcare more accessible and affordable for consumers. This could be finding cheaper ways to finance elective surgery, which is typically not covered by insurance, or the out-of-pocket costs in high-deductible health plans, which are used by about half the U.S. workforce. Perhaps the most promising application of embedded finance for consumers: finding an efficient way to shop for medical procedures based on price and patients’ feedback.
Vallod says his MFE combined with previous work at traditional firms such as BlackRock gave him a deep understanding of financial and capital markets. “That knowledge makes a critical difference in working with founders on building huge businesses,” he says.
Patty Juarez planned on being an accountant at a major firm, but her passion for helping minority entrepreneurs has resulted in a slightly different endpoint. As the highest- ranking Latina in Wells Fargo’s 268,000-person organization, she oversees diverse segments for commercial banking.
Juarez joined Wells Fargo right after graduating from Haas, initially in commercial banking. “I got to meet some Hispanic business owners, and then they would refer me to their brother and their cousin, to the point where I’d made a name for myself in that business community,” she says. Growing that portfolio over the years, rounding out her banking skills, and progressing up the management ladder led to what Juarez calls her “Shark Tank” moment in 2016.
“Ten years ago, a little over a quarter of businesses nationwide were owned by a minority, but that is rapidly changing,” she explains. “I thought, what if we had a really great strategy around growing women- and diverseowned companies? Wells Fargo could be part of their growth and success.” Juarez compiled a business case to present to the head of commercial banking, and the diverse segments group was born.
Juarez’s team now includes those who oversee outreach to women, Hispanic and Latino, Asian, Native American, and Black business owners across the nation, bringing specialized knowledge and cultural competency to relationship building. “I’m particularly proud of how long many of our diverse clients stay with us,” she says, mentioning that she still talks regularly with clients she first met in the ’90s. “It means we’ve built a rewarding relationship where clients are getting what they need.”
New research has found Black and Latino homeowners make significantly lower returns on buying a home than whites, on average. But surprisingly, it’s not because of differences in home prices or appreciation rates in their neighborhoods.
In fact, when it comes to regular home sales, minority sellers realize about the same returns on average as whites. The study found instead that almost all of the disparity is driven by higher rates of foreclosures and other distressed home sales among Blacks and Latinos, which wipes out a huge chunk of potential wealth and lowers average returns.
“Most of us think of home ownership as an excellent way to build wealth, so I think it’s natural for politicians and policymakers to believe that the best way to reduce the wealth gap is to promote home ownership among minorities,” said Berkeley Haas Assoc. Prof. Amir Kermani, study co-author. “What’s striking is that we found that equalizing rates of first-time home ownership would have almost no effect on the housing wealth gap, whereas helping people keep their homes would make a huge difference.”
In the United States, the median white household holds ten times the wealth of the median Black household. But although Black home ownership has increased from 23% in 1920 to 45% in 2021, the wealth gap has barely budged. Kermani was curious as to why decades of policies to increase homeownership hadn’t made more of a difference in closing the wealth gap.
He and Wong harnessed massive datasets linked together by the Fisher Center for Real Estate and Urban Economics, capturing 6 million home ownership spells from 1990 to 2017. The data includes Home Mortgage Disclosure Act records with self-reported race and ethnicity from loan applicants, real estate transaction records from data provider ATTOM; credit reports and loan-servicing data from Equifax-McDash; plus loan information from several other government and private sources. The study is the first to estimate the gap in returns on home ownership for Blacks and Latinos using data on individual transactions.
Across the housing market, discrimination has been well-documented, from redlining to unequal tax assessments to unfavorable loans and refinancing deals. And historically, minorities have often faced lower house price growth in their neighborhoods. That’s why Kermani was surprised to find that for regular home sales over the last two decades, average returns were very similar across racial groups—within neighborhoods with many minority homeowners and those that are primarily white. While some individual Black and Latino sellers sold their homes for much lower prices, gentrification pushed prices sky-high in other neighborhoods, bringing up the average.
Yet averaged across all types of sales annually, Black and Latino homeowners make 3.7 and 2.0 percentage points less than white homeowners, the researchers found. Compounded over ten years, that’s a 44% lower return for Blacks and 22% lower for Latinos. These disparities in returns on home investments exist across all income levels, even the richest one-third of minority homeowners. (The magnitude is greatest among lower-income and single-parent families.)
Averaged across all types of sales annually, Black and Latino homeowners make 3.7 and 2.0 percentage points less than white homeowners. Compounded over ten years, that’s a 44% lower return for Blacks and 22% lower for Latinos.
It’s among distressed sales where the chasm emerges. Distressed sales include foreclosures, where a borrower stops making payments on their mortgage and the lender sells the home to recover the balance, as well as short sales, where a lender forces the homeowner to sell for the outstanding mortgage balance.
Minority homeowners are 5% more likely to experience a distressed sale, and to live in neighborhoods where forced sales carry a steeper price discount, likely because there are fewer buyers, Kermani said. Distressed sales usually carry a price penalty, but even within distressed sales, Black and Latino homeowners make 3.8 and 2.7 percentage points lower returns than white homeowners, respectively.
“If we could equalize the rate of return on homeownership for Blacks and whites—without any increase in home ownership—we would reduce the Black/white housing wealth gap by about 40% at retirement,” said Kermani. “If we were able to equalize both home purchases and the rate of return on ownership, we’d reduce the gap by 50%.”
Less job security, fewer assets
So why are minorities so much more likely to lose their homes in forced sales? It’s not because they take on more debt to buy them, and although differences in income and overall wealth play a role, they’re not the primary driver, the study found. For Blacks in particular, the researchers found a huge gap in liquid assets—cash or its equivalent—that accelerates from age 50 on. They also found that Blacks and Latinos are much more likely to lose their jobs than whites, across all sectors, education levels, geographic locations, and income levels.
“That was what surprised me the most: Even Black households with income over a hundred thousand dollars are still about 5% more likely to experience a layoff,” Kermani said. “The combination of higher job instability and fewer liquid assets makes people very vulnerable to a temporary shock, and increases the chances of losing all the wealth they’ve accumulated in their house.”
The researchers found that controlling for liquid assets and income shocks explains one-third of the higher mortgage delinquency for Blacks, and nearly half the difference for Latinos. Kermani said he hopes to dig deeper into the causes of the layoff disparities in future research.
“What’s clear is that the main problem seems to be rooted in the labor market, and the main fix has to be creating more stable jobs and ways to build liquid assets,” he said. “But in the short term, one solution is more flexible mortgage contracts and more mortgage modifications.”
The researchers estimated that receiving a modification after three months of failing to make mortgage payments can reduce the likelihood of a foreclosure by 37 percentage points, and increase a homeowner’s average annual returns by nearly 9 percentage points.
Higher employment scores and starting salaries for the March 2021 graduates were key factors in this ranking.
Quantnet bases 55% of its ranking on employment outcomes, including employment rate at graduation (10%), employment rate three months after graduation (15%), average starting salary and sign-on bonus (20%), and an employer survey score (10%). Student selectivity accounts for 25% of the ranking, and a peer assessment score for 20% of the ranking.
Find a full report at Quantnet.com. In comparison, the Berkeley Haas MFE continues to rank #1 in TFE (The Financial Engineer) Times.
This month marks the 30th anniversary of the start of the Oakland Hills firestorm, which occurred on the hillsides of northern Oakland and southeastern Berkeley, California, over the weekend of October 19–20, 1991.
Thirty years ago, Professor Nancy Wallace and her husband scrambled into their car with their family cat and a few belongings and fled for their lives as the Oakland Hills Firestorm roared through their neighborhood. The heat from the fire, fueled by dry pine needles and the Diablo winds, was so intense that within an hour almost 800 buildings were in flames.
“By the time we drove out, we were already encircled by fire and couldn’t go down the hill, but there were zero police or fire trucks on the scene. At the top of our street, I wanted to go right and my husband wanted to go left, and unfortunately I won,” said Wallace, who was at the time a new assistant professor with a six-year-old son, who luckily had stayed over at a friend’s house. “That’s when a car came speeding out and said if you go one inch farther, you’re going to die. Tom had to turn around on the rooftop garage of a house engulfed in flames…There were people ahead of us on motorcycles who were on fire. That’s not something you ever want to see.”
They made it out, but 25 people died, about 150 were injured, and about 2,900 homes were burned in California’s third deadliest wildfire. Wallace, who went on to become one of the country’s foremost experts on mortgage markets, has been haunted by it ever since. “We were told this was a hundred-year event, but my street had burned three times before,” she said. “Lots of places in California have burnt multiple times. And yet we build back.”
As wildfires bordering developed areas in the Western U.S., Australia, and around the world grow increasingly frequent and intense, Wallace has been crisscrossing the country and globe, presenting to government, business, and academic groups about the massive financial risk fires pose to the housing, real estate, and insurance markets—and to investors and homeowners. She has developed a new framework to quantify and evaluate the risk not only of wildfires, but also floods and other extreme weather events.
“The markets aren’t priced for climate change, and the situation is dire,” said Wallace, the Lisle and Roslyn Payne Chair in Real Estate and Capital Markets, chair of the Berkeley Haas Real Estate Group, and co-chair of the Fisher Center for Real Estate and Urban Economics. “Given my experience, I had an incentive to figure that out. I just didn’t have the data.”
“The markets aren’t priced for climate change, and the situation is dire.” – Prof. Nancy Wallace
Her recent working paper, co-authored by Prof. Richard Stanton; Paulo Isser, PhD 13, MBA 98, director of the Haas Real Estate & Financial Markets Lab; and Carles Vergara-Alert, MFE 04, PhD 08, now of Spain’s IESE Business School, is based on a massive data crunching effort.
It combines digitized maps on wildfire boundaries, geospatial measures of wind speed, direction and temperatures and humidity; topographical features such as slope and elevation; and vegetative coverage for 1.5 kilometer-square-grids covering all California wildfires from 2000 to 2018. The researchers combined that with data on housing prices, mortgage defaults, household demographics and wealth, and other market indicators.
“This allows us to quantify the risks of loss and the vulnerabilities in the fire insurance and mortgage capital markets, given changing weather patterns,” Wallace said.
Fire insurance rates in California have been skyrocketing, and many companies are refusing to write new policies on homes in particularly risky areas, such as canyons. Meanwhile, hundreds of thousands of homeowners have been dropped by their insurance companies. Based on Wallace’s analysis, about 1 million California homes are in high or very high-risk areas, with another 2 million to 4.5 million in vulnerable wildland-urban interface zones.
“Without a better pricing model, all the insurance companies can do is cancel the policies,” Wallace says.
Even so, Wallace and her co-workers found that the incentives in the current system are to rebuild: Wildfires have acted as a sort of gentrifying force, with people building back larger and more expensive homes. Homes in fire zones increased in size and value five years after a wildfire, the researchers found.
Now, Wallace is on a campaign to reform the hazard insurance pricing market, advocating for a switch from deterministic pricing—based on maps of past incidents—to more sophisticated probabilistic pricing, based on the probabilities that fires will occur in hazard zones. She believes the technology she and her collaborators have developed can be applied to estimate climate-change risk on housing and mortgage markets elsewhere.
“We just can’t pretend it’s not real,” she said. “We have no choice but to face it.”
Rita Wiley, MBA 22, spent last summer interning at Piper Sandler’s San Francisco offices, taking in sweeping waterfront views from the 31st floor as she worked on healthcare investment deals with her team.
“On the first day, my managing director threw me into a live deal,” said Wiley, who spent a decade in project management with the U.S. Army before coming to Haas, where she was drawn to the work ethic and quick skill-building that investment banking demands. “I was given responsibility to run with projects.”
With that internship, Wiley joined a group of 14 Haas MBA students who worked as 2021 Summer Associate interns at Bay Area offices of investment banks. Now the top go-to business school for such hires, Haas typically nabs the largest—or over a 20%—share of the some-65 available IB Summer Associate slots each year. Internships, which are largely in either technology or healthcare investment banking, are critical because they lead to full-time positions at graduation with a very high return-offer rate relative to other industries.
“Haas produces world-class talent right here locally for the sought-after Bay Area offices, which focus largely on high-growth tech clients, and we perennially have the largest share of associates here at the global intersection of tech and finance,” said William Rindfuss, a member of the continuing professional faculty in finance who also manages financial services recruiting at Haas.
“Haas produces world-class talent right here locally for the sought-after Bay Area offices,” —William Rindfuss, who manages financial services recruiting at Haas.
Haas’ influence in investment banking grew for many reasons, including a strong finance faculty and curriculum, a Career Management Group (CMG) that’s well-connected to the top banks and supports students through the often intense recruiting process, and a powerful alumni network, Rindfuss said.
Importantly, those alumni show up for popular events like firm networking nights and the Investment Banking Speaker Series course, which recently featured Kate Claassen, MBA 07, head of West Coast Technology Investment Banking at Morgan Stanley, and will feature Nils Hellmer, MBA 15, an Executive Director at Goldman Sachs.
“Our alumni are so supportive and inspiring to the students,” said Rindfuss, a former J.P. Morgan banker, who has been at Haas since 2008. “You’ll find Haasies at all the top investment banks and we’re so grateful that they take the time to give back to the school and our students—while at the same time seeking new talent.”
Berkeley Haas’ investment banking network has grown over the decades, said Steve Etter, who teaches finance at Haas and is a founding partner at Greyrock Capital Group. Cal alumni helped build big investment banks of the 1970s and 1980s—banks like Montgomery Securities, Hambrecht & Quist, and Robertson Stephens, where alumni flocked. “Cal alumni helped build this West Coast community,” Etter said. “Then the Morgans and Goldmans started to build bigger West Coast presences. We now have senior (Cal) people across all the banks.”
Recruiting help from campus
Berkeley Haas MBA students coveting jobs in investment banking compete with students from top programs including Wharton, Booth, and Columbia. The jobs are in demand because investment banking pays very well, with a standard $175,000 salary, a typical $50,000+ signing bonus, and year-end performance-based bonuses—all very strong compared to the average MBA graduate compensation, said Abby Scott, assistant dean of MBA Career Management and Corporate Partnerships.
“But the jobs not only pay well, they offer recent MBA hires some pretty amazing opportunities,” Scott said. “New MBA associates often become part of live deal teams working with high-profile clients in tech, healthcare, and other high-growth sectors.”
“But the jobs not only pay well, they offer recent MBA hires some pretty amazing opportunities,” —Asst. Dean Abby Scott.
MBAs typically commit to investment banking quickly as they have to start preparing for internship recruiting early. “For investment banking you have to know early on if you want to do it because an IB internship is pretty much a requirement for a full time offer,” said Wiley, who was among 13 finance students chosen as 2020 Finance Fellows, receiving partial scholarships, priority registration for finance courses, and mentorship.
Andrew Elliott, MBA 22, said he was “95% committed” to investment banking when he arrived at Haas after working in strategy and business development at Boeing. Elliott worked for six months with Abby Franklin, an investment banking industry specialist with the Haas Career Management Group (CMG), to better understand both the career progression and work-hour demands.
He applied to multiple firms, a few on his own and most through CMG. CMG’s on-campus recruiting resources—that covered everything from resume design to networking events and interviews—helped Elliott land a summer internship at Citi, where he had already connected with his peer advisor, Ryan Alders, MBA 20, an associate in technology investment banking at Citi. “When I first saw CMG’s requirements I was a little scared because they seemed so specific, but in the end, the process protected me because I ended up with a solid job offer,” said Elliott, who will start a full-time job at Citi this spring, after graduating early.
Christine Jan, who also worked closely with CMG, said she spent hours talking to Haas alumni at different investment banks about everything from deals to the nuts and bolts of jobs to personal life management advice before landing an offer.
With Franklin’s guidance, Jan reached out to Shilpi Saran, MBA 13, a vice president in technology investment banking at Morgan Stanley. “Shilpi got me interested,” said Jan, who grew up in Taiwan and worked in wealth management at UBS in Hong Kong before coming to Haas. “It’s a process. We have alumni who are performing exceptionally well and they draw us in.”
During recruitment, Jan also met UC Berkeley alumnus Michael Grimes, head of Global Technology Investment Banking for Morgan Stanley, who also founded Berkeley’s M.E.T. program, an undergraduate dual-degree program in business and engineering, and Michael Bausback, MBA 19, an associate in global tech investment banking. Jan committed to a summer internship in tech investment banking with them that led to a full-time job offer. (Jan will join Adhithya Ravi and Alex Wong, both MBA 22, who are also heading to Morgan Stanley Bay Area investment banking offices).
“I loved (the internship),” she said. “It was a deep dive into investment banking. I got to realize what it was and connect the dots to what I’ve done before, connecting my work in Asia and here. It was a great, overwhelming, inspiring experience.”
The boutique path
While bigger firms like Morgan Stanley, J.P. Morgan, and Goldman Sachs draw Haas students each year, a smaller firm like Moelis or Evercore can be a better fit for other students—many who say culture, regardless of size, influences where they end up.
Rawool Sahu, MBA 22, who shifted from a career in corporate financial planning and analysis to investment banking through Haas, will join Moelis, a boutique investment bank, in its thriving San Francisco office next July. (Moelis’ founder and CEO Ken Moelis just announced that the firm had raised pay for first-year analysts because “business is booming” and deal flow is rising.)
Sahu said there are benefits to joining a smaller firm. “Moelis has a smaller office on the West Coast and you get more time with the senior bankers here. At banks on the East Coast, that’s harder.” In a smaller office, he said, work also feels more focused. “Managing directors communicate more directly about what they want, so we don’t waste time. It makes things more efficient.”
At Moelis, Sahu joins a group of Haas alumni, including Adam Burgess, an investment banking associate from the class of 2020, “who helped me to make inroads in the West Coast office,” Sahu said.
“You can do this”
With the 2023 MBA class now on campus, finance students are attending the Investment Banking Speaker Series—along with three networking events each week that connect them with bankers—and preparing for investment banking internship recruiting.
Ravi, who is co-president of the Haas Finance Club, said recruiting with investment banks was one of the most difficult experiences that he has gone through in his life, which is why he’s helping first-year students as one of three peer advisors.
This year, he said the Finance Club rolled out a new guide to everything a recruit will need to succeed, including a networking primer, study schedules, interview prep, and advice for findinga bank that’s a good internship fit. “I’m constantly reminding recruits to leverage those around them and support one another,” Ravi said. “Having a support group and people to prep with helped so much,” he said.
To prospective Haas investment banking students, Wiley offered encouragement. “I had an interest in finance on the personal side but never thought I would make a career out of it,” said Wiley, who accepted a job with Piper Sandler after graduation. “I’m a prime example that you can do this.”
Summer 2021|By Kathleen Pender| Illustration by Hannah Barczyk
Haas alumni ride the wave of fintech revolution
After growing up in India and emigrating to the U.S., Harsh Sinha, MBA 14 (shown left), learned firsthand about the oft-hidden fees involved in moving money globally. Traditionally, dollars sent overseas go through a network of correspondent banks in two or more countries, each marking up the exchange rate along the way. Remitting wages back home, booking a hotel room, paying a foreign supplier—all are subject to markups.
“I remember how expensive it was just to get Indian rupees converted to U.S. dollars for my tuition,” he says. “Banks were saying they had no fees, but the fees were hidden in the exchange rates—sometimes as high as 5% to 8% markups. It felt like a racket.”
Twelve years later, Sinha is helping eliminate the costly intermediary fees as chief technology officer at Wise, a London-based company started in 2010. Wise (previously Transferwise) has bank accounts in 80-plus countries. A person in the U.S. sending money to France, for example, would deposit dollars in Wise’s U.S. bank, and Wise’s French bank would deposit euros into the recipient’s account.
“The money never crosses borders,” says Sinha, who has helped grow the company from 40 to 550 engineers over the past five years, making it one of the world’s leading fintech firms. It went public in July, listing on the London Stock Exchange.
Instead of marking up the exchange rate, says Sinha, Wise charges a transparent fee that is five to eight times less than what banks charge, and the money generally reaches the recipient in one day or less—versus two to five days for bank transfers.
Wise is part of an explosion of companies using technology to offer financial products or services that are quicker, cheaper, or more accessible than what mainstream banks, brokerages, and insurance companies offer. And according to those in the know, we’ve thus far seen only the beginning of the fintech revolution.
Sinha is one of many Haas alumni at the forefront. Haas grads are playing leadership roles in determining how money moves at companies large and small—including some hatched at Berkeley—as well as at venture capital firms and big banks.
“Fintech applications are increasingly disrupting many aspects of everyday life: from how we pay for our coffee to how we trade stocks and apply for a mortgage,” says Professor Paul Gertler, the Li Ka Shing Professor of Economics and faculty director of the Institute for Business and Social Impact (IBSI). “If properly harnessed, fintech has the potential to do something even more revolutionary: provide access to millions of historically underserved people or those lacking access to the traditional financial system.”
The Dawn of Fintech
While the fintech era may have started when PayPal (then named Confinity) launched money transfers via email back in 1999, two things lit the flame: the 2007 introduction of the iPhone, which allowed for mobile financial transactions, and the 2008 financial crisis, which left many consumers distrustful of large banks and Wall Street firms. Over the past year, the COVID pandemic gave fintech firms another boost by forcing more commerce online. Suddenly, businesses of all kinds were clamoring for digital payment options.
Today, many fintechs have valuations that rival—or exceed—the nation’s largest financial institutions. Earlier this year, JPMorgan Chase CEO Jamie Dimon labeled fintechs an “enormous competitive threat” in a shareholder letter, contending that fintechs had an unfair advantage because they weren’t subject to the same regulations as banks. Others say regulators have given fintechs a wide berth in part because they’re reaching populations unserved or underserved by mainstream institutions.
Bill Rindfuss, executive director of strategic programs in the Haas Finance Group, says that in some ways, regulations are protecting banks. “Technology has kind of eaten some industries: Retail really stands out, and it’s rapidly encroaching on transportation,” he says. “But it seems like there’s more of a symbiotic relationship between technology and finance.” Only regulated banks can offer products insured by the Federal Deposit Insurance Corp., and as some banks have acquired fintechs, some fintechs have started, acquired, or partnered with regulated banks so they could offer insured deposit accounts or other services.
Making Payments Simple
One example of this interdependent relationship is online payments—highly regulated because of the often-sensitive credentials, like credit card numbers, required to conduct a purchase.
“Payments is an unbelievably massive market,” says Brian Dudley, BS 11 (shown right), a venture capitalist specializing in fintech at Adams Street Partners. Indeed, Boston Consulting Group predicts that global payments revenues could grow to $1.8 trillion by 2024—a 20% increase from 2019. It’s also incredibly complex to set up payments in multiple countries with different regulations and payment preferences, Dudley notes.
Stripe is one company facilitating those transactions for online businesses. Its core software product ensures that information is handled in a compliant manner while allowing companies to accept many payment types—such as debit, credit, ACH, and wire transfers—in many countries, with one integration.
Andrew Lee, MBA 15 (shown left), manages partnerships for Stripe, whose customers range from early stage startups to large public companies such as DoorDash and Lyft. It may surprise some people, but “we’re still in the early innings of the move to digital,” Lee says. “During COVID, brick-and-mortar retailers realized that they were underinvested in e-commerce.”
In fact, the continuing migration of financial services toward digital channels led to a near-record $21 billion raised by venture capital-backed fintech companies in the first quarter of 2021, according to PitchBook. Stripe itself raised $600 million in March, vaulting its valuation to $95 billion, the highest of any U.S. private company, according to CB Insights.
Knowing your customer
Stripe announced this year that it’s expanding to Indonesia, but Xendit was there first.
Co-founded at Haas by Moses Lo (shown right) and Vivek Ahuja, both MBA 15, and then-Berkeley computer science undergrads Juan Gonzalez, BA 13, and Bo Chen, BS 13, Xendit acts as a payment gateway for Indonesia, the Philippines, and Southeast Asia, accepting and sending payments, holding funds, and providing other financial services for global names like Samsung, Wish, and Wise as well as regional airlines, rural banks, and other businesses.
Lo, Xendit’s CEO, moved the company to Indonesia because he’s from there, it’s growing fast, and half the population is younger than 30. “It’s a mobile-first, tech-savvy country, but the infrastructure is super old,” Lo says. “We have the opportunity to build new digital infrastructure that will empower the next generation of businesses in Southeast Asia.” The Jakarta-based company has raised $88 million and employs about 350 staff.
We have the opportunity to build new digital infrastructure that will empower the next generation of businesses in Southeast Asia.
— Moses Lo, MBA 15
Lo says his understanding of Southeast Asian culture has contributed to Xendit’s success. “It’s all about relationships,” he says. “You need to understand the powers that be and how to get regulators to work with you.”
John Frerichs, MBA 11 (shown left), worked for another payment fintech—but from within the nation’s largest bank. He was part of the strategy team at JPMorgan Chase that led the purchase of WePay in 2017 and became WePay’s CFO. WePay has since been incorporated into other parts of JPMorgan, and Frerichs is now managing parts of it as head of merchant services for small and mid-size U.S. businesses.
He says fintech is changing the balance of power within financial institutions. “Historically, you have seen people with a finance or risk background steering the ship. Increasingly, you’ll see people in product or technology play a larger role because of their greater focus on the end user,” he says.
Banks ignoring customer experience is one of the reasons fintechs have made inroads into banking, says Frerichs. “Banks historically focused on managing risk, lowering prices, and offering rewards like credit card points—not how to make a financial service application work well,” he says.
But they haven’t yet moved to the next level, Frerichs adds: Using the payment data they collect to create truly personalized offers and financial services. “Google and Netflix have done this well,” Frerichs says.
Serving the unbanked
While payments have been a way for some fintechs to muscle in on areas dominated by the traditional global banking system, others are using payment technology to reach those left out of the system altogether.
The World Bank reports that 69% of adults worldwide had an account at a bank or with a mobile money provider in 2017, up from 51% in 2011, but that percentage is much lower in poorer countries. And access to financial services, it found, can reduce poverty and inequality.
Fai Lui, MBA 19 (shown right), serves in the fintech investment group with International Finance Corp. (IFC), a part of the World Bank that helps to finance private-sector projects in emerging markets.
In relatively poorer countries, says Lui, bank accounts are limited to the upper class. “Payment is often the entry point where investors and companies go first,” she says. A vendor selling vegetables on the street may not have a bank account, but they could use a mobile phone app to send and accept payments and pay bills. The app maker can then see the seller’s transactions and eventually use this data to provide loans, insurance, and other financial products.
I don’t think there is true democratization of financial markets without democratizing financial education.
— Haas Assoc. Prof. Panos Patatoukas
One of IFC’s most successful investments is bKash, an app allowing people in Bangladesh to send and receive money, pay bills, and more without a bank account. Fewer than 15% of Bangladeshis have traditional bank accounts but more than 68% have mobile phones, according to bKash, which in one decade has become the country’s largest mobile financial services provider. The Bangladesh Institute of Development Studies found in a 2018 household survey that using bKash has raised non-agricultural family income by 15.2% and total per capita income by 5.8%.
Haas researchers are also at the forefront of the inclusive finance movement. IBSI is poised to launch two complementary initiatives in this space: the Lab for Inclusive FinTech (LIFT), initially supported by Ripple Impact and Binance Charity Foundation, and the Wells Fargo Research Lab for Sustainable Financial Services and Innovation. The two initiatives bridge the gaps among research, industry partners, and policy makers to reimagine the design and reach of digital financial services worldwide. They combine rigorous field experiments and frontier research with fintech, big data, and AI to build an inclusive, socially responsible, and sustainable digital economy.
Making saving a game
Inclusive finance efforts aren’t limited to the developing world. When Pedro Moura, MBA 18 (shown left), came to California from Brazil at age 15, his family was undocumented for a time. His mom cleaned houses, and when her car broke down, she had to get a high-cost payday loan to fix it so she could work.
“It’s expensive to be poor in the U.S.,” says Moura, who became a U.S. resident in 2010. “If you don’t have a credit history, your options are pretty limited in terms of accessing emergency loans.”
Indeed, a Federal Reserve survey found that in July 2020, 30% of American adults could not cover a $400 emergency with cash or its equivalent.
While working on his MBA, Moura came to believe that lending alone was not enough to pull people into the financial mainstream. “At Haas, I wanted to meet people who would redesign banking services for underserved consumers,” he says.
Moura found a kindred spirit in Jessica Eting, MBA 18 (shown right). Her father, a Filipino immigrant, suffered an aneurysm when she was nine and fell into a coma when she was 11. He never recovered and died 14 years later. Her mom, working as a teacher’s aide, went on food stamps for a time. “The financial struggles I saw my mom go through shaped me,” Eting says.
For an applied innovation class, they created Flourish, which uses behavioral science and gamification to encourage people to save and build positive financial habits. The pair now licenses its digital rewards and engagement software to regional banks and credit unions, which then embed it into their own mobile apps to attract customers and make it fun to manage money wisely. At three years old, the company already has clients in Bolivia, Brazil, and the U.S.
Some fintechs aim to democratize finance another way—by simplifying trading. Anyone can download the Robinhood app, for example, and start trading stocks and cryptocurrency almost immediately, with $1 minimum and no commission. Robinhood, which went public in July, was started in 2013; by 2018, it had more users than E*Trade, which was founded some 30 years earlier.
Stripe’s Lee, who previously worked as Robinhood’s head of partnerships, says his generation and younger might not be able to access the stock market were it not for fintechs like Robinhood. He says commissions are an antiquated fee that made sense when trading wasn’t digitized but in recent years only served to line the pockets of brokerages and lock out less wealthy investors. “Even at $5 per trade, commissions could eliminate profits on a one-share stock purchase and sale,” he says.
Robinhood’s success forced most of its rivals to eliminate commissions, but so-called “democratized finance” has raised other issues. Associate Professor Panos Patatoukas, the L.H. Penney Chair in Accounting, argues that commission-free trading isn’t enough. “Access to trading is not equivalent to access to informed decision-making,” he says.
Patatoukas is working on a platform that he describes as “the interactive Bloomberg for everyday people,” referring to the Bloomberg terminals that professional investors use to get real-time market data and analytics. “I don’t think there is true democratization of financial markets without democratizing financial education,” he says.
The future, decentralized
Enabling customers to make informed financial decisions will only become more important with the rise of blockchain and cryptocurrency.
Haas Professor Christine Parlour, the Sylvan C. Coleman Chair in Finance and Accounting, even envisions a possible future where no institutions control the financial system, thanks to the decentralized nature of blockchain technology, which records and verifies encrypted blocks of data in such a way that no single entity controls it.
It’s the technology behind Bitcoin and other cryptocurrencies, but the potential applications are almost limitless. It could allow a new system known as decentralized finance or DeFi, Parlour says.
Under such a system, anyone theoretically could make loans or other financial products available to anyone else through a public decentralized network, cutting out the intermediaries—along with central banks and regulators—and vastly reducing costs.
“This is the biggest competitive threat to the existing big financial institutions that I’ve seen,” Parlour says. But it also poses unknown risks to the global financial system, and “that should keep regulators up at night.”
Indeed, regulators must walk that fine line between encouraging innovation and protecting individuals and the global financial system.But whether upstarts replace financial institutions or force them to become more nimble, customers should benefit as products continue to get cheaper, simpler, and more accessible.
When cryptominers come to town, local residents and small businesses pay a price in surging electricity rates.
That’s because “proof-of-work” cryptocurrencies, such as Bitcoin and Ethereum, demand brute computational power to solve the complex math problems required to verify transactions on a blockchain. Cryptomining server farms guzzle electricity by the megawatt.
A new Berkeley Haas working paper—the first to quantify the negative economic impacts of cryptomining on local communities—estimates that the power demands of mining operations in upstate New York push up annual electric bills by about $79 million for individuals and $165 million for small businesses.
“Small businesses operate on very thin margins, so I don’t think they’d be happy to pay for the energy that cryptominers are using,” says Asst. Prof. Matteo Benetton, who co-authored the paper with finance colleagues Assoc. Prof. Adair Morse and Giovanni Compiani, now at Chicago Booth.
Miners choose northern locales to keep servers cool and are lured by abundant, cheap power—sometimes with discounts. While those excess costs are slightly offset by tax revenue of about $40 million, the miners’ massive server farms employ just a handful of people, and profits aren’t local. “The real profits from bitcoin mining can be moved from upstate New York to Italy or Colombia or China in a second,” Benetton says.
Every four years, presidential elections roil the stock market amid uncertainty over who will hold power in Washington.
Yet for investors, the more important election milestone may be the midterms. New research by Berkeley Haas Prof. Emeritus Terry Marsh has documented significantly above-average returns in the six months following midterm elections over the past 145 years.
In fact, since 1872, average annualized equity market returns were over 15.4% in the months following midterms, compared with just under 3% in other months, Marsh and co-author Kam Fong Chan documented. They found the post-midterm months outperformed the post-presidential months in roughly two-thirds of the past 36 election cycles.
Marsh says he was puzzled at first about the significance of the midterms. He and Chan speculated that the cause is a decrease in uncertainty—a theory the researchers were able to back up by analyzing indices that measure economic uncertainty and partisan conflict monthly.
“When you’re dealing with the stock market you’re dealing with expectations,” says Marsh, CEO of risk-management firm Quantal International. “Midterm voters tend to penalize the president’s party to maintain checks and balances. Uncertainty about the political division in Washington—and what that means for economic policy—peaks in the months leading up to the midterm.”
Above: Six-month average returns in U.S. equity prices surrounding November for the different years of the election cycle (data period: 1871–2015).
Above: The researchers plotted returns for a range of portfolios from December to April in midterm years versus other years. They found that riskier investments (portfolios with higher beta, a measure of volatility relative to a benchmark) yield higher returns in midterm years. In other years, risk decreases returns.
The award was created by the Academic Senate’s Committee on Teaching to honor faculty, staff, and student instructors who embraced the challenges posed by the COVID-19 pandemic and engaged in or supported excellent teaching.
“These instructors and staff used innovative methods and worked beyond their traditional roles to ensure that students remained engaged and supported, and were challenged to do meaningful work under extraordinary circumstances,” wrote the award committee.
Stowsky has served as senior assistant dean for instruction for 14 years, and at Haas for 24 years. He played a critical role in overseeing the transition from live to remote classes.
“Working to match the engagement level of a live, physical classroom has involved hours of brainstorming, planning, workshop training, and investments in a host of new technologies,” wrote Stowsky, who is retiring at the end of the semester. “It has been fascinating, and challenging, to conceptualize, organize and operationalize this goal with the faculty, graduate student instructors, and technology teams at Haas.”
Remote learning innovations at Haas included the installation of four state-of-the-art virtual classrooms, technical upgrades to regular classrooms for virtual teaching, regularly scheduled faculty-student engagement sessions, improvements in production quality of digitized asynchronous content, a remote instruction workshop series for faculty, and tech training.
Goodson is a distinguished teaching fellow and continuing lecturer who has taught popular courses on mergers & acquisitions, private equity, and turnarounds to MBA students since 2004. After the pandemic forced all courses online, he invested “hundreds of hours repurposing content and delivery” to transform his courses.
“Our lofty goal was to deliver a ‘value proposition’ that was as good as or better than the in-person model,” he wrote of the experience. “Our team designed an online classroom experience that is optimized for student engagement; altered curricula to showcase students’ company’s pandemic strategies; published COVID MBA cases (including the first at Berkeley Haas); established rigorous and equitable inclusion; and created a feedback system to continuously improve the course.”
The result was courses where students were highly engaged and rated among the very best experiences they’d had with online learning.
Berkeley Haas professors Annette Vissing-Jørgensen and Stefano DellaVigna are among the six UC Berkeley faculty members elected to the American Academy of Arts and Sciences (AAAS) for 2021.
The organization, which was founded in 1780 to honor top scholars and leaders from every field who address issues of “importance to the nation and the world,” announced 252 new members today.
“We are honoring the excellence of these individuals, celebrating what they have achieved so far, and imagining what they will continue to accomplish,” said David Oxtoby, president of the American Academy, in the announcement. “The past year has been replete with evidence of how things can get worse; this is an opportunity to illuminate the importance of art, ideas, knowledge, and leadership that can make a better world.”
Annette Vissing-Jørgensen holds the Arno A. Rayner Chair in Finance and Management and serves as chair of the Finance Group. Her research focuses on empirical asset pricing, monetary policy, household finance and entrepreneurship, and spans both asset pricing and corporate finance.
Stefano DellaVigna is a professor of business administration at Berkeley Haas and is the Daniel Koshland Sr. Distinguished Professor of Economics in the Department of Economics. He is co-director of the Berkeley Initiative for Behavioral Economics and Finance, and his research interests include behavioral finance and economics, psyschology and economics, and applied microeconomics.
Spring 2021|By Kate Madden Yee| PHOTO: TERRY RIGGINS
Marina Gracias knows that staying curious—and being willing to take a risk—can translate into life-changing career moments. In 2005, when Providian Financial offered her a chance to head a new group that would handle sourcing and procurement, it meant that she’d be pivoting away from law practice and into the business world. But Gracias decided to go for it.
“It made a huge difference in my career,” she says. “I learned more about how to balance legal and business considerations, and that experience eventually led me to positions at Visa, Accenture, and now Varo.”
She joined Varo, a digital-only bank, in 2016 as its general counsel and corporate secretary and helped the company navigate the regulatory process to secure a national bank charter—quite a feat in the financial world. The government has given out only a handful of such charters since the 2008 financial crisis. Varo was the first consumer fintech recipient.
The charter allows Varo, which already provided checking and savings accounts with no monthly or overdraft fees, to offer a full range of banking services backed by the Federal Deposit Insurance Corp., including customer access to affordable credit and cash-flow management.
“Varo is a new breed of bank: all digital and mission driven. Its purpose is financial inclusion and opportunity for all,” says Gracias, who credits her Berkeley training with helping her thrive at the company.
“Berkeley showed me how powerful it can be to ask, ‘What’s the problem you’re really trying to solve?’” she says.
Startup Spotlight profiles startups founded by current Berkeley Haas students or recent alumni.
Lastbit Co-founders: Bernardo Magnani, MBA 20, and Prashanth Balasubramanian
Economist and former McKinsey consultant Bernardo Magnani, MBA 20, spends a lot of time thinking about the meaning of money and how it regulates societies and human behavior. That fascination—and a drive to shake up the international payment industry— led him to early bitcoin user Prashanth Balasubramanian, and fintech startup Lastbit. In this interview, he discusses how he fell into entrepreneurship at Haas and wound up making it into the prestigious Y Combinator accelerator.
What does your startup do (in about 20 words)?
Lastbit is building a payment platform to enable cheap and instant cross-border settlements leveraging the Bitcoin Lightning Network
How did you get started in entrepreneurship at Haas?
When I came to Haas, I didn’t really know I wanted to be an entrepreneur. I didn’t even take a single entrepreneurship-related course during my MBA program. Nevertheless, I was very clear about the fact that I wanted to work close to financial institutions and payments.
I came to business school sponsored by McKinsey, and despite the fact that my experience with the consulting firm was very positive, I was having doubts about whether it was the right platform for me to drive change.
During my summer internship, I worked for one of the biggest financial institutions in South America, looking for an alternative path. I had a beautiful experience, leading three teams and nine people in digital transformation initiatives. But again, I didn’t feel that was my path. I wanted to do more things, faster.
Following my intuition, I came back to Haas determined to explore entrepreneurship. I reached out to Santiago Pezzoni, Santiago Freyria, and Francesco Dipierro, co-founders of StEP, who are now dear friends. I had heard amazing things about the program and felt that joining a rising project at the heart of the business school was the best way to learn. Eventually, I became part of StEP’s leadership team and fell in love with entrepreneurship.
Where did you meet your co-founder Prashanth Balasubramanian?
After joining StEP, I knew I wanted to find an opportunity with a fintech startup. I first heard about Lastbit and Prashanth through SkyDeck. I read everything I could find online about Prashanth and his project. I immediately felt connected to his story, values, mission, and even his love for heavy metal music. I had to meet him.
Intending to meet him, I went to my first and last networking event of my MBA. He was not there. I was bummed. Eventually, I found him and we started working together almost immediately. I never looked back after that.
Today, I’m very proud of our partnership and feel that we complement each other perfectly. On paper, we have pretty much no overlap and very different backgrounds, but our drive, vision, and values are pretty much the same.
Where did the idea for Lastbit come from?
Prashanth decided to start Lastbit when he was studying for his Master’s in Computer Science at ETH Zurich. While in Switzerland, he faced a lot of challenges moving money from India to pay his tuition and eventually decided to use Bitcoin.
Despite its potential, Prashanth realized that Bitcoin was still very far from delivering on its promise of being a new viable monetary system. Transactions were too slow and expensive, and using Bitcoin for real-world transactions was close to impossible. He decided to leave his Master’s program to start Lastbit with the mission to take Bitcoin mainstream, leveraging the Lightning Network, a technology that makes sending as little as a dollar instantly across the globe economically viable.
Why did the idea appeal to you personally?
Growing up in Mexico I saw how broken financial services are and I’ve been trying to find a way to solve this. When I met Prashanth, I immediately understood what cryptocurrencies such as Bitcoin could mean for financial services. I’ve worked close to banks for around seven years and had never seen something nearly as exciting. I believe cryptocurrencies are the only credible promise to drive a paradigm shift in financial services.
What’s the Lightning Network and why is it so important?
The Lightning Network is a communication protocol built on top of Bitcoin that allows money to be sent between two parties instantly for very low fees without requiring a middleman to settle the transaction. The Lightning Network as a technology is meaningful for financial services because it’s arguably the fastest and most cost-effective way to settle transactions in the history of digital payments.
The Lightning Network as a technology is meaningful for financial services because it’s arguably the fastest and most cost-effective way to settle transactions in the history of digital payments.
Disrupting cross-border payment settlements with the Lightning Network could mean that sending and receiving money across the globe to anyone, anywhere, could be as simple and fast as paying your friends for lunch using Venmo or CashApp.
International payment settlements have seen no meaningful disruption in almost 50 years. Today, most global payments are still settled using the guidelines set by SWIFT, a protocol developed in the 1970s that isn’t up to par with the requirements of an economy that’s become more digital and global. SWIFT transactions can take five days or more and can cost $50 or more to settle, whereas Lightning transactions are instant and cost less than a penny each.
Getting into Y Combinator is exciting for any startup. What was the virtual experience like?
Quite frankly, one of the best experiences of my life. Honestly, I was a little skeptical about this batch being remote and I questioned how much value it would have for us. But for me, as a first-time founder, it was very transformative. It provided both unparalleled knowledge and access to one of the deepest networks in Silicon Valley.
Y Combinator marked a before and after for us. We just had our demo day (an event held twice a year when startups present to investors) and it’s been crazy. The interest we got is overwhelming. It feels like a dream come true.
What’s been the biggest challenge for Lastbit so far?
The biggest challenge has to be regulation. Cryptocurrencies have operated outside of the scope of traditional financial regulation for most of their history. Nevertheless, regulation has started to emerge globally.
We take regulation very seriously and are always looking to be one step ahead of what’s strictly required from us. Nevertheless, there is no real guarantee that regulation in the future will be favorable for businesses like ours. For example, some countries, including India, are attempting to ban cryptocurrencies.
All taken into consideration, I believe that regulation is a good thing and for us and being proactive about it can be a competitive advantage as it was for Coinbase.
What are your goals for the next six months?
Right now we are super focused on Europe, working on enabling cheaper and faster euro-to-euro merchant payments and remittances between Europe and Africa. Our goal for the next 12 to 18 months is to grow the business enough to raise a Series A round, which may require expanding our focus to other geographies, such as the USA.
The long term vision is to build a platform that connects all the major international payment corridors so that businesses across the globe can build payment solutions using our infrastructure. Think about Stripe, but for cross-border payments.
A team of five Master of Financial Engineering (MFE) students won the 2021 Morgan Stanley Applied Finance Project Prize for examining how California’s insurance industry “misprices” fire risk in California.
The winning team, announced March 12, includes Sanket Ahuja, Vaibhav Barnwal, Hao Guo, Anshul Lakhani, and Jerry Qinghui Yu, all MFE 21. They worked with Prof. Nancy Wallace, the Lisle and Roslyn Payne Chair in Real Estate Capital Markets, on the project.
The team examined how California’s insurance industry miscalculates fire risk and the relationship between complex weather patterns and the risk of property damage caused by wildfires in southern California.
They found that the risk to property was significant in regions with mountainous terrain, dry climate, and high vegetation and forecasted that these areas could expect annual property damage worth about $6 billion with tail damages—or damages reported after a claim is filed—of up to $10 billion.
The average transaction fee paid by retail investors to buy or sell corporate bonds fell 5% after regulators forced brokers to disclose these fees, according to new research co-authored by Berkeley Haas Asst. Prof. Omri Even-Tov.
The fee disclosure, which brokerage firms fought for about two decades, finally took effect for some corporate and municipal bond trades in 2018. This paper is the first academic research to examine its impact on trading costs for corporate bonds, and the findings highlight the need for regulators to provide better disclosures to retail investors, Even-Tov said.
“If their fees were fair before this, we shouldn’t have seen any effect, but we do find a reduction,” he said. “They were charging higher fees than they should have been.”
If their fees were fair before this, we shouldn’t have seen any effect, but we do find a reduction…They were charging higher fees than they should have been. —Asst. Prof. Omri Even-Tov
When companies sell bonds to investors, they are borrowing money. After they have been issued, these bonds are bought and sold “over the counter,” between broker-dealers who trade them with their clients. When a broker charges a client more than the prevailing market price, it’s known as a markup. The difference represents the broker’s profit and the client’s trading cost—akin to a commission.
Until recently, investors had no easy way to know how much they were paying their brokers because the markup was not disclosed; it was embedded in the bond’s price. For example, an investor might have seen that they paid $102.50 for the bond, but not that the firm had purchased it for only $100.
Knowledgeable investors could estimate the markup by looking up the bond’s trading history in a database known as Trace—short for Transaction Reporting and Compliance Engine. They could then negotiate with their broker for a lower markup.
“However, estimating markups imposes information processing costs on investors, potentially creating information asymmetry between unsophisticated investors and bond-market professionals,” wrote the authors, who include Christine Cuny of New York University’s Stern School of Business and Edward Watts from the Yale School of Management.
New disclosure rule
In 2016, the Financial Industry Regulatory Authority, Wall Street’s self-regulator, adopted a rule that required broker-dealers to disclose their markups when they buy corporate bonds and sell them to retail (non-institutional) investors the same day. Brokerage firms take little risk of losing money on same-day trades. The disclosure applied to such trades starting in May 2018.
These markups appear in the confirmation investors receive after they’ve made the trade. That’s too late to negotiate a lower commission, but it could lead customers who previously didn’t know how big these markups are “to reevaluate their brokerage relationship.” Even-Tov and his co-authors wanted to know whether this had led brokers to reduce markups on trades subject to the disclosure.
To test this hypothesis, they used Trace to examine retail-size trades—which they defined as trades of $100,000 or less—during the six months before and six months after the rule took effect. They calculated the markup as the total cost that investors would incur to buy and sell a bond.
On average, they found the markup on same-day retail trades declined by about 5% compared to trades not subject to the disclosure, or from about $431 to $409 on a $50,000 trade, Even-Tov said.
The reduction was larger than average for the smallest trades. “These trades are likely executed by unsophisticated investors who have a limited supply of information processing capacity,” the authors wrote. They also found that the reduction in markups was more pronounced for less-liquid bonds, such as high-yield, long-duration and smaller issues.
Lower costs for consumers
Consumer groups had argued that this long-overdue rule change would give retail investors more information to make better decisions and foster increased price competition. The securities industry had contended that the implementation costs would be significant and passed on to investors. The authors said the 5% savings they observed was after any costs passed to customers.
Markups are large “because frictions in the over-the-counter bond market enable market professionals to take advantage of uninformed investors,” the authors wrote.
“Our findings show that disclosure requirements function as a regulatory tool, and constrain financial professionals’ opportunistic behavior,” Even-Tov said.
The paper, entitled “From implicit to explicit: The impact of disclosure requirements on hidden transaction costs,” is forthcoming in the March edition of the Journal of Accounting Research. Read it online here.
Last year, when Berkeley Haas finance professor Terrance Odean was researching why users of the popular trading app Robinhood tended to “herd” into a small number of stocks, he never imagined a situation like what unfolded last week with GameStop.
“It was like a supernova of herding events,” he said.
Shares in the moribund video-game retailer soared more than 400% over three days when a mob of investors—many congregating on the Reddit chat room WallStreetBets—coordinated to buy the stock en masse. It fell 44% the next day as Robinhood and other brokerage firms temporarily curbed new purchases of GameStop. Although trading has been restored, the stock has been mostly down but remains volatile. Tens of billions of dollars of market value have been created and erased.
Odean had been examining how Robinhood’s easy-to-use technology drives investor behavior and share prices. The Menlo Park company, founded in 2013, has built an enormous following, especially among young investors. It was “the first brokerage to offer commission-free trading on a convenient, simple, and engaging mobile app,” Odean wrote in a working paper he co-authored with three other finance professors.
Making trading fun
The Robinhood app makes investing fun and—critics say—addictive. New members get a free share of stock after they scratch off the image of a lottery ticket, and when they reach certain milestones, digital confetti rains down on their screen. Robinhood users can begin trading as soon as they open an account.
“Half of Robinhood users are first-time investors, who are unlikely to have developed their own clear criteria for buying a stock,” the paper says. “The app prominently displays lists of stocks in an environment relatively free of complex information. For example … Robinhood only provides five charting indicators, while TD Ameritrade provides 489.”
The app focuses attention on Robinhood’s 100 “Most Popular stocks,” and a narrower “Top Mover” list that shows which 20 stocks, throughout the day, have the biggest positive or negative percentage changes.
Using Robintrack, a database of the most popular stocks among Robinhood users from May 2018 until August 2020, the researchers compared trading by its users to other retail investors. They also looked at trading in “attention-grabbing” stocks on three days when Robinhood system outages prevented its users from trading.
They concluded that the simplicity of Robinhood’s app, combined with its users’ inexperience, made them more likely to herd, or pile into a smaller set of stocks, than other retail investors.
Short sellers took note
They also looked at what happened to a stock’s price when it was subject to a herding event or “extreme herding” event, the latter being days when the number of Robinhood users who own a stock grew by 1,000 users and 50% from the previous day. These stocks posted abnormally large gains on the day of herding—averaging 14% for a regular herding event and 42% for an extreme herding event. The next day, however, returns turned “significantly negative” and were still down—5% and 9%, respectively—after 20 days.
“While some Robinhood users undoubtedly made money, in our analysis, a greater number of them lost money,” Odean said.
The team also documented a “marked increase in short selling for stocks involved in Robinhood herding events,” a sign that some investors have been exploiting these “predictably negative returns” by placing bets that Robinhood favorites will fall. The paper’s co-authors are Brad Barber of UC Davis, Chris Schwarz of UC Irvine and Xing Huang of Washington University in St. Louis.
We asked Odean about Robinhood, GameStop and lessons to be learned from recent events.
Q: Did you ever dream there would be a herding event like GameStop?
A: It would be lovely to say I saw it coming, but no. What we are seeing with Robinhood is herding similar to what’s been documented in other situations, but previously the magnitudes have been much lower. We saw herding in the 1970s and 1980s, when people on Monday would buy stocks mentioned Friday evening on Louis Rukeyser’s Wall Street Week, a public-television show. Now what you have is a lot more investors having their attention funneled into what is often a small set of illiquid stocks and buying at the same time.
What’s surprising about GameStop was the extent to which people were writing (primarily on the Reddit chatroom WallStreetBets) about how we will all consciously do the same thing at the same time and thus possibly affect market prices. That aspect of the GameStop fiasco is not in our paper.
Is what you just described illegal?
I’m not an attorney but my understanding is, if two hedge funds started sending emails to each other saying if we both buy these stocks in large numbers on Tuesday, that will drive the price through the roof—that would probably be illegal.
I’m not sure what will happen with GameStop, but it’s a lot harder to make a case against millions of people spending small amounts of money than against a small number of sophisticated investors doing this with a lot of money.
I’m not sure what will happen with GameStop, but it’s a lot harder to make a case against millions of people spending small amounts of money than against a small number of sophisticated investors doing this with a lot of money.
Has Robinhood made investing too simple?
It has changed people’s behavior by making it simple. Robinhood’s mission statement is to democratize investing for all. Jack Bogle (founder of Vanguard Group) did that years ago. You can buy a Vanguard index fund, pay $4 a year for every $10,000 you have invested and have a well diversified, long-term investment in the market and the U.S. economy. That’s democratization. What Robinhood has done is make it easy to trade.
How does Robinhood make money?
Hand over fist. They sell their customer’s orders to market makers. If you want to sell, the market makers buy from you, and vice versa. When market makers take the other side of a trade, they face asymmetric information risk—the risk that they are trading with someone who knows more than they do. Market makers seem to think that when they trade with someone from Robinhood, they are not taking that risk. They think, if I always take the opposite side of the trade from the side Robinhood is on, I will make so much money I can pay Robinhood.
This is called “payment for order flow,” and it’s not new. Other retail brokerage firms also do it.
(In December 2020, the Securities and Exchange Commission charged Robinhood with failing to properly disclose its payments for order flow to customers and failing to seek the best terms for their trades. Robinhood paid $65 million to settle the changes without admitting or denying guilt.)
Should regulators outlaw this practice?
It’s complicated. Without payment for order flow, there won’t be commission-free trading. My concern is that investors are only aware of costs that are direct and explicit. Most investors are aware of commissions, but not payment for order flow. If investors mistakenly believe that zero commissions means free trading, they are likely to trade more actively and more speculatively. I believe that we should get rid of payment for order flow, but one has to be careful about the unintended consequences of well-intended regulations.
What is the most important lesson to take away from this GameStop event?
Retail investors whose trades are highly correlated—through forums such as WallStreetBets or other means—have more market power than many people on Wall Street expected.
Retail investors whose trades are highly correlated—through forums such as WallStreetBets or other means—have more market power than many people on Wall Street expected.
Why did Robinhood temporarily halt new purchases in Gamestock, AMC and other stocks subject to extreme volatility?
Depository Trust and Clearing Corporation (the clearing house for Robinhood’s trades) required Robinhood to put up more capital to ensure that Robinhood would make good on the trades it placed for its clients. Brokerages are required to use their own money as collateral while they wait for trades to clear. Robinhood’s clearing house increased its capital requirement because of the surge in orders in GameStop and some other stocks and because these stocks became hugely volatile. Robinhood reopened trading after it raised $3.4 billion in additional capital.
Traders allegedly targeted companies like GameStop because a large percentage of their shares had been sold short by hedge funds and others. This means the short sellers borrowed GameStop shares and sold them, hoping to buy them back later at a lower price and pocket the difference. When GameStop shares skyrocketed, hedge funds suffered massive losses when they had to buy the shares at higher prices, which put even more upward pressure on GameStop shares. Some traders are portraying short sellers as the “bad guys” and Robinhood traders as “good guys.” Are there really any good guys and bad guys here?
Financial economists believe that short selling plays a useful role in markets by enabling investors with negative information or opinions about a stock to influence prices and thus keep prices from being set only by investors with optimistic views. Short sellers do, however, sometimes behave badly by promoting negative rumors about companies after they’ve established their short positions. I have not read that this was a major problem with GameStop. I would say that people who intentionally manipulate stock prices qualify as bad guys. And Jack Bogle—who tried to make investing less expensive and safer—was a good guy.