Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

The Most Dangerous Bank in America

BOFI Holding (NASDAQ: BOFI); the financial institution also known as Bank of Internet, has earned the dubious title of America’s most dangerous bank. The Motley Fool favorite appears to be pioneering new financial transactions reminiscent of those that led to the Great Financial Meltdown of 2008.

The most worrisome of these instruments are new subprime markets; that are being ably exposed by Seeking Alpha Contributor Aurelius. Several recent Aurelius posts have exposed BOFI’s involvement with all manner of questionable non-bank investments.

Aurelius’s articles show us that instead of being the future of banking, BOFI is headed towards a meltdown; that could bring down some other areas of the new economy. These writings should give all investors pause about open-sourced finance, peer to peer lending and other next generation solutions that are being touted as value investments.

Weapons of Financial Mass Destruction

Instead of cash cows, these solutions could be “weapons of financial mass destruction;” like the derivatives that triggered the mortgage crash of the last decade.


Some of the financial weapons of mass destruction that BOFI has been playing with include:

Fintech Payday Loans – These are high interest short term loans issued online to people with bad credit. Aurelius reported that BOFI has financed at least one pool of subprime loans issued by a company called Elevate Finance. That pool was worth around $49.5 million.

The term “fintech” refers to financial technology; which refers to efforts to use technology to get around banking and lending laws. An example of this would be a lender that used a website to offer loans with interest rates over limits set by law. The lender

Like the subprime mortgages of the 2000s, many of the Fintech loans lack basic documentation. Some of them might not be legal and many are being charged off. Elevate was connected to a company called Think Finance; which was accused of running what Pennsylvania’s Attorney General described as an “illegal payday loan scheme over the internet.”

Think Finance allegedly violated state lending laws by using “rent-a-tribes” and “rent-a-banks” for cover, The Huffington Post reported. A rent-a-tribe is a Native American nation that is not subject to state laws under treaties. A rent-a-bank is a financial institution that provides cover for illegal lending.

Elevate has apparently created pools of subprime consumer loans that BOFI has been financing. Aurelius describes these loan pools as “toxic.”


Toxic Small Business Loans – Aurelius also accused Bank of Internet of originating “hundreds of millions of dollars” worth of highly suspect loans to small businesses. Most of these were issued by the shaky online small-business lender On Deck Capital (NYSE: ONDK).

OnDeck is currently in pretty sorry shape according to ycharts. It reported a profit margin of -20.09%, a free cash flow of $13.73 million and a net income of -$8.503 million on March 31, 2016. Not surprisingly, OnDeck’s stock is on a fast drop to the junk pile; it was trading at $5.04 a share on June 3, 2016.

Partners like that seem to validate Aurelius’ concerns about BOFI. Aurelius thinks that Bank of Internet could be exposed to up to $300 million worth of loans from On Deck. OnDeck generated $83.92 million in cash from financing and $110.62 million in cash from operations during first quarter 2016.

Questionable Loan Pools – Aurelius thinks that Bank of Internet is exposed to around $1 billion from questionable loan pools.

This is dangerous because BOFI reported TTM revenues of just $306.75 million, a net income of $113.96 million and a free cash flow of just $29.83 million on March 31, 2016. If Aurelius is right, the questionable loan exposure is nearly 10 times the free cash flow; over three times the TTM revenue and nearly 70 times the free cash flow.

Aurelius accused BOFI of renting On Deck its federal bank charter in an effort to get around state lending laws. Under the arrangement BOFI; originates loans and sells them to On Deck, which resells the loans to investors. This arrangement will soon but Aurelius estimated the volume of BOFI’s On Deck production for 2015 at $231 million.

Obviously a big danger here is that there might be other loan pools that we are not aware of. These are simply the arrangements that Aurelius was able to identify.


Why BOFI is the Most Dangerous Bank in America

Perhaps the most frightening thing about Bank of Internet is this statement made by Aurelius:

“Having used government guaranteed deposits to, in my opinion, turn itself into a giant and highly levered junk bond fund, BOFI investors now have massive exposure (believed to represent roughly 150% of tangible equity) to opaque loan pools.”

These revelations show us that investors need to be concerned about Bank of Internet and other next generation financial institutions. Instead of being cutting-edge finance; these institutions are simply a scheme to repackage non-bank loans and other weapons of financial mass destruction as bank loans.

Like the financial weapons of mass destruction of the last decade. These instruments could trigger a financial meltdown, that could burst the ongoing tech and unicorn bubbles and trigger a bear market in stocks. One has to wonder when financial regulators will pull the plug on BOFI’s shenanigans.

Investors need to stay far away from BOFI; unless of course they are looking for a stock to short. It is about to be destroyed by the weapons of financial mass destruction, its executives are playing with.