P&L: Yahoo Security Breach Could Cost Shareholders $1 Billion

SoundCloud and at Bloomberg dot com. Yahoo shares were down more than six percent after Yahoo disclosed after hours on Wednesday that cyber thieves in two siphoned information from more than one billion Yahoo accounts, including users, email addresses, scrambled account passwords, and dates of birth. In other words, all the information that they could use to hack into other areas and steal people's information and uh and possibly more.

I want to bring in Shia Overday, my fellow cad Fly columnist here at Bloomberg, to give a sense of what, Yeah, who could have and should have done to prevent this from growing into such an extensive problem? Sara, Could Yahoo have done anything prevent this? Yeah? I mean the issue

is that some of this is ancient history, right. The two now cyber attacks that Yahoo is disclosed in the last few months affected more than a billion accounts and then the one day disclosed in September a separate cyber attack also from that affected more than five million accounts.

So in some sense this is a little bit old news, but it's very clear from the two hacks, this is a company that had a hard time, um, you know, securing information on its users, and in some by some accounts, they did things that bolstered its business that put its user information in jeopardy and ignored warnings from whose own security staff when they did things that that put the information at risk. This also has created or highlights the

creation of a market for the stolen data. I understand about the price tech about three hundred thousand dollars for a complete set of this data that includes personal information,

as you said, sell security numbers, passwords. Yeah. I mean this is the scary thing, obviously for all of us who live our lives online and have all this personal data online, is that you know, there's a criminal enterprise that makes money from selling stolen digital information to other cyber thieves who can use it to kind of delve

deeper into our digital and physical lives. Ransomware, for example, a recent I were just talking earlier this morning about an attack that occurred in the San Francisco public transit system at the end of November, where it was shut down because thieves managed to get or hackers rather managed to get into the electronic technology system. Yeah, I mean this is sort of a cost of doing business online, right, is that cyber attacks and the consequence of cyber attacks

have become sadly in place. So Verizon has previously had agreed to purchase uh Yahoo. Um, you wrote about how this cyber fail could cut one billion dollars from the price tag the Verizon was willing to pay for Yahoo. Why would Verizons still want Yahoo given how tainted its reputation has become. Yeah, that's a fair question. So just to clarify, Verizon is is agreed to buy Yahoo's core

internet businesses. The weird thing about Yahoo is that the majority of the company's market value is tied up in these stakes. It owns in two independent internet companies, Ali Baba of China and Yahoo Japan. So the core bits of Yahoo, the parts of the company that we all know, um, are the ones that Verizon has agreed to buy. Verizon's logic here to do the deal hasn't really changed basically, what they want to do is create um do two things.

One is to create a digital advertising company can be a real kind of counterweight to Google and Facebook, which right now dominate all of the advertising online more than half of all advertising digital advertising in the US. The dollars are collected by those two companies. So Verizon wants

to be a third player here. And Verizon also wants content including all you know, Yahoo Finance and Yahoo Email and other Yahoo websites that, while they're not as popular as they used to be, still have hundreds of millions of users every month. So they think the combination of your Verizon cell phones and UH programming digital programming owned by Yahoo and A O L and other Verizon assets can be a real attraction to their to their mobile business.

One share, just quickly, you afraid of being hacked? Do you put any personal information online? I have become super paranoid about hacking. Yes, I not to invite any thieves, but I am aware of clicking on any email. I try not to start accounts with companies that I don't trust online. Our row is basically a bunker. Yeah, firewalls everywhere where. The row of paranoia, the row of paranoia, that's a strange rink to it, but I guess it's

not going to be alone. Thank you very much. Shara over there a Bloomberg gadfly, a technology columnist giving us a lowdown on Yahoo. The US housing market took a little bit of a breather this last month. Housing starts in the United States housing Yes, new housing construction declining more than a forecast. And here to tell us more about the housing industry is the chief executive of Realty Shares nav off Wall. No, thanks very much for coming in.

Thanks for having me, Pim and Lisa tell people what is realty shares just before we get into details. Sure Realty Shares is an online market place for real estate investing in capital. We help individual high net worth investors deploy capital into private real estate investments across the US.

We've helped raise over three million dollars of capital um for these private deals and multifamily projects, single family projects, and on the other end of our marketplace are underserved borrowers and companies that are looking for more efficient ways to raise capital or more cost effective capital and can come to realty Shares and get financing in as little as ten days, so really much more efficient than a bank on the one hand, in a more direct way

to invest in real estate than a public on the other hand. So here the peer to peer lender that a lot of people think will take over the future of lending, and I imagine that you're among those hoping for that. I'm wondering from your perspective, have the applications that have been coming in has it shown a deterioration and consumer credit worthiness of late? We noticed in your you mentioned in your notes that the pace of foreclosures has ticked up a bit recently. Yeah, we've seen in

some markets the pace of foreclosure take up. There's been a tremendous amount home price appreciation UM over the last five six years since the Great Recession, and I think that's resulted in some consumers over leveraging themselves and markets like Arizona, even in Denver, So there has been an uptick in in UM foreclosures. But you're also seeing other

counterbalancing things and happening in the market. You're seeing the n h B, which is the home builder UM home Builder Index on on housing actually be much higher than it was you know too three years ago, and hit an all time high in September. So yeah, you are seeing some deterioration um. And you're also seeing a drop in just home buyer applications because of rising interests. Right, so there's all kinds of crazy stuff happen. Well, I

want to pick up on that really quickly. I mean, do you think that the recent rise in UH mortgage rates is going to substantially slow the market potentially put a whole invaluations. I think the rise in interest rates is definitely going to reduce the number of applications that folks are filing for refinances and new home purchases. We already saw a week over week decline of five and a half percent for refinance and three percent for new

new home purchases. UM. So definitely it's gonna it's gonna impact home buyer activity. But I think the bigger impact is home prices um and just supply. There's a lot of supply constraint out there for new home purchases. So despite rising in interest rates, I think those other factors are going to be a bigger impact on the on the home buying activity. Is that one of the reasons why you have raised money to do pre funded deals.

In other words, you're putting your own balance sheet to work. Yeah, well, we we really serve the non owner occupied borrowers. So we serve investment borrows. We serve folks that are buying real estate not to live in it, but to for an investment purpose. And that part of the market's very underserved by banks and private equity. So we're really focused

on that part of the market. But yes, a part portion of the deals we do we pre fund on our own balance sheet and then we'll then syndicate them out on the marketplace to high net worth investors that want to participate. We also have large institutions using the platform. Uh. You know, coming out of the Great Recession, generating yield has been very very differ coal. You have hedge funds looking to you know, return their investors mid team returns,

and they can't do that in the bond market. So we do have a wide variety of investors trying to access an underserved part of the real estate capital markets. It's pretty exciting um as as a fintech company right now. Um I know that some of the more the larger, more established fintech companies, peer to peer lenders have run into a little bit of a pause in in their growth trajectory. What have you experience when it comes to fundraising and sort of people's skepticism around peer to peer

or acceptance of it. There's a tremendous amount of skepticism, and I think that's healthy in any new industry. I was at a conference with you with the ubs UH the yesterday actually, and there was a half the room was very bullish on the market, and that was the you know, the maybe the younger population where you were

hanging out. But I like hanging around with the skeptics because they bring a tremendous amount of really good information because they've been there, they've done that, they've been in the market for a while, and you know, it's healthy to be skeptical of a new industry and technology. UM. So it's really good to listen to the folks that are skeptical and why they're skeptical. Obviously, I'm very bullish.

I wouldn't be running the company, um, but there's a very large amount of skepticism still in this industry, and we're just I think education is the best way to deal with it. What's the specific skepticism about Well, I think you know, people are thinking they equate this too. Oh, this is going to lead to the next great recession. It's like the savings and loan industry. So there's so many analogies that are being used to describe peer to peer lending. But I think the biggest thing that they

say is, you know, banks are they? They are they? They already have this established base of customers. That's going to be really hard for these lenders to compete for the largest spend item for like a lending club is acquiring customers right and banks already have these customers, and they could at any point in time enter the market

and take market share away from these companies. But what they don't realize is these tech companies are doing business in a much more cost effective way, so they can offer cheaper credit to otherwise capable borrowers with high ficos because they have lower opera any costs. So I think that's the answer I typically give is just there there is a place for these lenders, and I think the smart banks are finding a way to work with them rather than to say you're just going to go away

in three to five years. Fascinating stuff. Thank you so much for joining us. NAVAF Well, founder and chief executive officer of Realty Shares, which is based in San Francisco. Really really great, Thank you so much. This is a conversation I've been waiting to have. I want to bring in Constance Hunter, Chief Economistic KPMGH. I'm particularly interested in China.

The bond market's been selling off. The People's Bank of China has been pumping billions of dollars into the financial system in the past few days in order to bolster it as the currency continues to decline after the FED rate height. Constants, can you explain why the People's Bank of China I have found it necessary to pump so much money into the economy in the immediate aftermath of the Federate hike. Well, the China Chinese currency, the REM

and B is still largely pegged to the dollar. I mean, of course they'll say it's it's a basket of currencies, but the US dollar makes up a far larger portion of the basket than any other currency. It means about of the basket. So we're looking at a situation where their policy is basically pegged to the U S policy, and if the FED hikes rates um and they sterilize

that change, then they're basically experiencing a rate hike. And what they're saying is, we're not quite ready for a rate hike just yet, so we're going to increase money supply constance. I wonder if you could tell us what you believe that will have an effect on policy in China as much as it depends on exports still to

power its economy. Yeah so, um, I mean, insomuch as the Federate hike increase is the value of the dollar um, and that the rem and by has also been falling, that would actually help Chinese exports not just to the US, but really to to other countries as well. Um. Uh So, so we do see, we do see a somewhat neutral to positive impact from from the weaker rem and by. But but of course there's so many things happening right now within the global economy um, and of course within

the within within the political economy. So when you think about um some of the potential tax a lot changes here in the US as well as as trump suggestion that that he would slap tariffs on China if necessary if negotiations didn't yield better access for US companies, then we really have a lot more going on than just the currency situation. You know, constance the idea that China

is burning through its foreign currency reserves. We saw the data showing that they've sold a good proportion of their treasuries. Their treasury holdings are now down to the lowest since uh in more than six years, basically in order to fortify to to have money to fortify their financial system. Are we looking at a potentially risk your situation heading into and is the potential for some sort of disorderly unwind of of China's boom in the in the first

half of next year. So I think people have been worried about this for for years, really that the unruly, the hard landing versus the soft landing, the unruly unwind um and so um. That isn't to say that it couldn't happen next year, but this has been sort of a lingering worry if you were out there looking for things to be nervous about within the within the global economy.

One thing that I that I will say that that I've heard anecdotally is a really big pickup in um the amount of money that Chinese are really willing to try to get out of the country. So the way it works is there's a limit on how much each individual can can take out of the country, and so they're effectively or or what I would call money mules that the people hire uh to to take out their money and if if if it comes back to them in Hong Kong, then great. But people recognize if that's

risky and the money could get stolen. But but when I talk to wealthy Chinese, they are willing to take that risk because they want to continue to get money out of the country. And that is never really a very good sign that there is faith in the in the regime that's in power. So it's interesting to me that while Shijipang has has consolidated and increased his power, um you see this phenomenon from private citizens. Where is

much of that money going. Is it being invested in places like Australia and the United States or in real estate? In real estate it's been it's being it's being left in cash in some cases, but real estate is a very very popular investment and in Canada as well, in Canadian real estate. So going forward, what are you watching? What measures are you watching to figure out whether China is managing their slowdown well or poorly. Well, it's not

so it's not so easy. Um. So for example, if if I look at what I did, what I looked at in the run up to the to the US crisis and the UM and the bubble bursting here, we had a lot of great data that the FED collects, things like mortgage actually withdrawal statistics which really went through the roof UM in the run up to the crisis here, things like the rate of change of of leverage. So

we have some of that. We can see that the corporate um borrowing is still continuing at very significantly high rates. We can see that that remany loans are still increasing, so we we have some data, but there's also a lot of off balance sheet UM loans that are being created, which is more difficult to track. One of the things that I think is interesting with China if you look

at just something simple like their industrial production statistics. We used to see double digit industrial production statistics and and think that that was normal because China was playing catchup. And now we look at the annual the year a year industrial production, it's running in about six percent and it has been for the last six months. So Uh, this is this is definitely puts them in a different gear.

So whether or not they get that six point seven percent growth next year, it really depends upon how stable the economy is and and so things like industrial production are are interesting to look at. If we see that falling off, it's going to be a flag, a red flag that the the economy is slowing more than they intend constance. Uh, from the perspective of a US investor, what assets are most vulnerable to a China slowdown? M

That is an excellent question. And you mentioned something earlier which I think people worry about, but it perhaps is an over over or unfounded fear, and that is their US treasury holdings. So you you you noted a really important fact, which is that the treasury holdings are at

the lowest they've been in six years. So this idea that we're going to have a surge up and interest rates when China um withdraw us their support of US treasuries, that may have already happened, and that could be a big contributing factor to the rising eels we've seen since September and the hundred basis points we've seen since the election. Uh. But in terms of other assets. Obviously real estate is a big one. So if if the Chinese, if if you really have UM a crash in China's economy, what

happens then is that value gets destroyed. So if you have a bubble that's been fueled by debt, when that comes home to roost and the debt is no longer good, then there really is literally a destruction of cash, a destruction of values. There would be less money to invest in things like real estate and other assets. UM, those other other assets like art wine, UM I would see softness in those those markets as well. And then in terms of forecasting, UM, where the softness comes within the

equity market that that is across the board. I mean it would, it would. It would depend on individual stocks and how much Chinese investment there is in them. Thanks very much. Constance Hunter is the chief economist at a KPMG. This is one of the questions that I have been wondering. You know, President elect Donald Trump has taken to Twitter

with many different announcements of a variety of topics. UM. The ones having to do with business, though, particularly targeting companies such as boeing UM have had pretty substantial market effects. I want to bring in Rob Trick and Elly, senior legal editor for Bloomberg b n A, and with the potential consequences of that could be Rob, thank you so much for joining us. So is this something? Is President elect Trump's Twitter activity with respect to corporate America potential

I don't know, point of investigation for the SEC? He Uh, yeah, well thanks for having me first. I think, Um, there's politics involved to write because if the SEC, uh would investigate this, Um, you have to bear in mind that the SEC chairman is someone that Donald Trump would have appointed, and you know, so there is that to consider. But um,

there's there's really a lot here. Uh. Trump has said he's sold all his stocks, so maybe he's you know, there's nothing for him personally, but maybe you would look to what his if his you know, some of his inner circle are trading on what they know he's about to tweet. But I mean you can look at this

a lot of different ways. But from the SEC angle, Um, they are interested in you know, if someone has a duty to keep information confidential and not trade on it and they breached that duty, the SEC is interested in investigating that. Rob, If these tweets and these messages that have made public were not being made public by either

the president elect or a top government official. What would be the SEC stance on something that is moving markets If somebody tweets something or says something in public and it changes the value of a stock or or changes the direction of the market, what would the SEC say, Well, you would make an analogy to a company here for example.

So there are SEC regulations for public companies when they introduce new information about what's going on with their business that they kind of they have to make that information public and kind of presented in a fair way for for anyone to trade on it. And there are you know, there are procedures regulating that for companies, and you also have procedures regulating it for the government too, I mean FED releases, SEC Enforcement actions, Bureau of Labor statistics data.

They all have to be presented in a way that kind of everyone has access to it all at the same time. And so if you start having these market moving opinions behind closed doors but people know about it, um that that can be problematic too. Is there any precedent for this type of specific corporate UH discussions by a president elect or a standing president? I mean has there ever been a president that has specifically gone after

companies publicly about certain contracts and uh and policies and jobs. Uh, I mean is this is there anything? Is there any historical president whatsoever? Uh? Not recently. I mean you would have to go back to UM. You know, maybe like President Johnson would would would speak about you know, kind of more you know, industry more generally or something like that. But it's it's kind of unheard of in recent in

recent memory. And it's even if it if this were a common practice, you know a long time ago, you know, going after trusts or or something like that, you're dealing with a very different universe now, just with all this technology that allows you know, trading immediately and and this kind of market moving information and so UM. This is new in recent memory, and it is uncharted territory in the sense that there's just so many technological and financial

um consequences that can that can come from it. You know, it seems like in general, regulators right now want to take the least political action as possible. We're seeing this in a lot of different fronts. UM. That's at least my impression that you just sort of is a desire to sort of maintain common maintain a sense of an

orderly transition to the next presidential administration. Uh am, I correct in that sort of sense, or or are there signs that that people are embracing sort of a politicization, uh, politicalization of the regulatory posts. I think what you're what you're going to see is UM. Your intuition is right that UM regulatory. A lot of regulatory enforcers don't like to wade into political UM issues, and courts kind of

don't either, but we're seeing us. I would say one of the first maybe cracks in that that we're seeing is this week you had the you know, the Office of Government Essex coming out and saying that, well that there's this law called the Stock Act that prohibits UM federal employees from trading on political intelligence on information they get in the course of their duties. And this letter is out saying that from from the office saying that, you know, Trump needs to divest or put everything in

a blind trust and uh. And you know that that could foreshadow more of a regulatory appetite to examine these conflicts of interest. Rob Trick and Elly, thank you so much, senior Legal editor Bloomberg b n A and giving us more details about President elect Donald Trump and the future of the Securities and Exchange Commission. Thanks for listening to the Bloomberg an L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer.

I'm Pim Fox. I'm out there on Twitter at Pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.