Big banks are excellent at creativity and innovation, some of it a legitimate component of the business that helps the economy, and creativity in other areas has proven to be less than beneficial to the economy and market security. This includes finding and exploiting regulatory cracks and arbitrage opportunities, as a recent Financial Times piece observed, applying a sense of historical reflexivity to the recent dominance of the peer-to-peer lending revolution by banks and Hedge Funds. Peer-to-Peer Lending Peer-to-Peer Lending With peer-to-peer lending, sharp-eyed readers might feel a sense of déjà vu “Sharp-eyed readers might feel a sense of déjà vu,” Gillian Tett, U.S. managing editor of the Financial Times observes today. While discussing Wall Street’s ascendancy to dominate several angles of a “peer-to-peer” lending process that was advertised as a method to disintermediate banks, Tett, in a piece titled “The sharing economy is now a playground for Wall Street,” observes what what algorithmic traders might otherwise call a confirmation pattern. A confirmation pattern is a re-occurring event that often ends with the same conclusion. For Tett, the combination of banks operating in regulatory cracks is something that will end in "tears." "History suggests that whenever innovation and regulatory arbitrage are combined in an era of ultra cheap money, it often ends in tears — somewhere. If nothing else, that also suggests that policymakers need to find ways to stop activity falling between the regulatory cracks; not least because financiers are endlessly creative at dancing in those gaps." Peer-to-peer lending operating in regulatory cracks as a business model While she did not specifically identify it, Tett was peeling back the onion on a highly evolved business model. "The idea of using innovations to dance around tough capital rules is hardly new: in the early years of the past decade, banks used structured investment vehicles and collateralised debt obligations in the same way,” she writes, noting a unique relative value strategy. “They also took advantage of cracks in regulatory structures to create products that policymakers could not easily monitor or control (it was unclear, for instance, who was supposed to oversee mortgage... More