Anyone familiar with Lending Club as an Investment

[Gone4Good]

Hopefully not a fine addition then to a nice gallery?

https://en.wikipedia.org/wiki/List_of_Ponzi_schemes#21st_century

Not sure it's a ponzi scheme (although I guess it could be).

At best, though, it is a good idea that is poorly executed. Matching up ordinary people who have too much money with other people that have too little is a great way to disintermediate financial services.

But having Lending Club stand in the middle of the transaction as the primary creditor is an assinine way of structuring this business. If LC goes under I strongly suspect that the majority of individual lenders using the portal are going to experience a really nasty surprise. They think they invested in a diversified portfolio of consumer loans. What they really did was lend money to an internet startup that then layered it's own default risk with the default risk of an unsecured consumer loan portfolio.

Toxic.

 

[eroscott]

Are you guys looking at the details or just reading the headlines I'm not concerned about this and need to see how it shakes out. Quarterly reporting was good and the loans and the money in the deal in question were a very tiny part of the financials ... did you folks not see that.

I've worked at companies that have CEO turn over for 'small' financial issues. A CEO is replaceable with others as well as other strong management. A strong board makes tough decisions and this will definitely strengthen its internal controls and compliances. That raises my confidence actually. I've seen this at other companies and it will mature a company quickly.

See the background of the board here: https://www.lendingclub.com/public/board-of-directors.action -- not their first rodeo.

With Laplanche's departure, President Scott Sanborn will be acting CEO, while Hans Morris will assume the newly created role of executive chairman. Morris, who has been a LendingClub director since 2013, also sits on the company's audit and risk committees.

"We are truly and very clearly saddened by his departure," Morris said of Laplanche Monday morning, adding later,
"This is not something the board will compromise on."
...
"Speaking for the whole board, we're confident in Scott [Sanborn] and [CFO] Carrie [Dolan]," Morris said on the company's earnings conference call Monday morning, where the executive reshuffling was also discussed.
The company said it would bolster internal controls after the sale of what it called $22 million in "near-prime" loans, and also revealed it would suspend providing the market guidance.

"This is a very isolated event," Dolan told an analyst on LendingClub's call. "We take this very seriously."

The board that ousted Lending Club's CEO is a who's who of Wall Street

Lending Club’s board features a who’s who of Wall Street, including John Mack, the former CEO and chairman of Morgan Stanley; Mary Meeker, a former Morgan Stanley managing director and research analyst and current partner at law firm Kleiner Perkins Caufield & Byers; Hans Morris, the former president of Visa who also spent 27 years at Citigroup; and Larry Summers, former Director of the National Economic Council for President Obama and Secretary of the Treasury for President Clinton, just to highlight a few of the names.
...
Morris said that the issue of the loan sale was discovered internally and it was “promptly escalated” to the audit committee. At the request of the board, Morris led a subcommittee with the assistance of an outside independent law firm.

 

[Another Reader]

The words "material weakness" appeared in the Bloomberg article. That's very serious in the auditor's world.

 

[Gone4Good]

Are you guys looking at the details or just reading the headlines I'm not concerned about this and need to see how it shakes out. Quarterly reporting was good and the loans and the money in the deal in question were a very tiny part of the financials ... did you folks not see that.

I did read and I did see.

I'm not making any forecasts regarding LC, but internal control issues for a financial firm are a really, really, really big deal. It's possible for financial companies to go bankrupt simply because the market believes they will. Confidence is everything.

In the case of LC, if lenders and borrowers think the platform is shaky or dodgy that's enough to cause it real operational problems.

Again, I'm not making any forecasts. But I did also see the stock chart since the IPO. It's down 80%.

Saying there's nothing to worry about here seems a bit optimistic. At the very least earning a 5% return (on the A loan tranches) doesn't seem nearly enough to cover the risk.

If I really thought the company was a survivor the equity is probably a way better risk / return opportunity than lending it money.

 

[ExFlyBoy5]

I did read and I did see.

I'm not making any forecasts regarding LC, but internal control issues for a financial firm are a really, really, really big deal. It's possible for financial companies to go bankrupt simply because the market believes they will. Confidence is everything.

In the case of LC, if lenders and borrowers think the platform is shaky or dodgy that's enough to cause it real operational problems.

Again, I'm not making any forecasts. But I did also see the stock chart since the IPO. It's down 80%.

Saying there's nothing to worry about here seems a bit optimistic. At the very least earning a 5% return (on the A loan tranches) doesn't seem nearly enough to cover the risk.

If I really thought the company was a survivor the equity is probably a way better risk / return opportunity than lending it money.

Shoot, looks like I need to get in now! It's *almost* at the bottom! It doesn't get much cheaper than that!






//sarcasm//

 

[RenoJay]

At one point in 2012 I had over $250k invested with Lending Club loans (not the stock of the company) and a personal rep who'd call and schmooze me occasionally. As I analyzed my returns I realized the actuals were far from the expectations my rep set. Sensing more cockroaches in the kitchen I stopped reinvesting my returned interest and principle and fortunately only have a minimal amount still stuck with this untrustworthy company.


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[DrRoy]

I have had $5000 in Prosper since 2013. I now go for lower end A grade only. Earlier went A, B, C but had more defaults at the lower end. All combined including defaults I have a 6.7% return. I would put in more but I wonder if defaults would climb in a recession.

 

[petershk]

I tried a few of those and got decent returns. But I found the fees and taxes are high enough to make the returns too risky.

I feel there is way too much similarity between creditors and thus a certain kind of financial bump in the road could drive massive defaults.

Because of the payout structure investments are very illiquid.

Finally it had a "gold rush" element where I saw lots of people getting excited about 8-11% risk free returns while helping people out etc... and I tend to get nervous when everyone is so excited so I stopped. After 2 years I'm still "getting out" so that makes me happy about my choice.

YMMV

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[eroscott]

Thought this was a good summer. Peter has been around a long time in P2P.

Title: More Thoughts on the Lending Club News Plus a Review of Their Q1 Results

Overview: Amid all the negative news Lending Club actually produces strong quarterly results but they will face challenges going forward.

Article: More Thoughts on the Lending Club News Plus a Review of Their Q1 Results - Lend Academy

I kept the hyperlinks are in the quotes as well.

What a day. Everyone is still trying to digest the big news from Lending Club this morning. More details are slowly coming to light but it is fair to say we do not have the full story and we will probably never know all the details. But we do know more than we did this morning. There are really three different pieces to the puzzle all of which contributed to the extremely negative sentiment.

First, we had the issue of the non disclosure of an investment from Lending Club CEO Renaud Laplanche. Bloomberg is reporting that one of the catalysts for Renaud’s resignation was his failure to disclose a personal investment in a company where Lending Club subsequently made an investment. This failure to disclose his investment along with Lending Club was a catalyst for his resignation according to Bloomberg. John Mack also made an investment but he has been cleared of any wrongdoing.

Second, we have the $22 million in loans that were reportedly sold to Jefferies that were against their express instructions. This one is a little confusing because the original press release from Lending Club stated that it was a non-credit and non-pricing issue. When you look at a loan the majority of the data pertains to credit or pricing. In reality this a moot point – the fact that it actually did go against the wishes of a major investor, whatever those wishes were, is the story here.

Third, we have the date change issue. This one is related to the previous issue. An internal investigation at Lending Club found that the loan application date was changed on $3 million of the aforementioned $22 million in loans. This seems to be have been the work of one or more senior executives within Lending Club who have since been let go. In some ways this last issue is the most damaging to Lending Club.

People today have been questioning the data integrity on all Lending Club loans – what else might have been changed? And if investors don’t trust the data in the loan history they will be very reticent to invest. Now, it should be pointed out that internal audits found no other problem with the data and you can be sure that many people will be combing over the new Q1 downloadable data that was made available today.
<snip>

 

[Another Reader]

Stock is down another 8 percent today after a 35 percent decline yesterday. That "material weakness" stuff is difficult to overcome.

Remember, the source of this article is really a cheerleader for the P2P businesses. You wouldn't expect these folks to tell you to get out.

 

[eroscott]

Stock is down another 8 percent today after a 35 percent decline yesterday. That "material weakness" stuff is difficult to overcome.

Remember, the source of this article is really a cheerleader for the P2P businesses. You wouldn't expect these folks to tell you to get out.

Peter absolutely is and is one of the co-founders of LendIt user conference. Wasn't hiding that since I pointed to his blog!!

I thought the 3 point summary was useful ... sorry for trying to be informative. My bad.

 

[Another Reader]

Not trying to be rude or flippant here. This appears to be a forest and trees situation to me. The founder of the company and several senior executives appear to have engaged in behavior that on the surface seems to involve fraud. That's the forest.

The guy that wrote the article has a website and blog whose success is tied to the P2P lending business. This series of events has seriously damaged that business. If these practices are pervasive, they could destroy the business entirely.

What he says is descriptive and correct. The rest of the article consists of responses to the news from others in the industry and a positive write up of Lending Club's first quarter results. Yeah, the forest is full of pests and could burn down, but hey, let's look at these pretty trees over here.

 

[Gone4Good]

Thoughts on Lending Club Loan Pricing

The typical way to evaluate loan pricing is to compare the yield it offers over and above treasury rates to other securities of similar credit quality. The typical BB rated security will have a higher spread over treasuries than the typical BBB rated one. B rated securities will yield more than BB's, and so on.

Right now the High Yield Index has a spread of 6.5% over treasuries

That breaks down by rating category as follows;
BB 4.1%
B 6.4%
CCC and below 15.7%

Lending Club doesn't have a credit rating but it's safe to assume if they did, they'd be a high yield investment (BB rated or below).

If we generously assume they're a BB credit, then loans to Lending Club should yield something around 5.5% (4.1% credit spread + 1.4% treasury yield). If we assume they're a B credit then loans to LC should yield closer to 8%.

Those yields are for unsecured loans directly to Lending Club. If you're also taking on the risk of a consumer credit portfolio, the credit spread of that portfolio needs to be added to the stand-alone yield for Lending Club.

In other words, loans through the Lending Club portal would price out this way:

Treasury Yield + Lending Club Credit Spread + Loan Portfolio Credit Spread

Right now 5-yr treasuries are yielding around 1.4%
Unsecured High Yield credit spreads range from 4% to 16%

Lending Club is currently making A Grade loans at 6.2% (net of their 1% fee).

If we assume LC is a mid-BB credit we get this . . .

1.4% + 4% + X = 6.2%

Solving for X we get 0.8% credit spread for the underlying Grade A loan portfolio.

If we assume Lending Club is more like a mid-B credit we get this . . .

1.4% + 6.4% + X = 6.2%

Solving for X we get (1.6%) credit spread for the underlying Grade A portfolio.

Now consider that the Grade A tranche has a historic loan loss of 1.4% (excluding LCs 1% fee).

So the spread I'm earning on the loan portfolio of 0.8% to (1.6%) doesn't even compensate me for the typical loan portfolio loses of 1.4%.

In other words, I'm not earning anything over and above Lending Club credit risk for accepting the loan portfolio default risk. In fact I'm earning less than I should if I lent to LC directly and didn't take any of the loan portfolio risk at all.

These numbers look better if you assume LC is a better credit. BBB credit spreads are currently about 2.1%. No rating agency would ever rate LC BBB, but one could dream.

I think folks would be better off sticking to High Yield bonds at these prices.

 

[petershk]

Gone: that's an awesome analysis

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[Another Reader]

A number of people on various forums have put their Lending Club loan portfolios up for sale in the secondary market. It will be interesting to see if they sell and if so for what price. In light of the haircut the equity has taken and the now widespread understanding that these loans are not secured by the underlying paper, I would guess sellers would have to accept a discount.

 

[Gone4Good]

A number of people on various forums have put their Lending Club loan portfolios up for sale in the secondary market. It will be interesting to see if they sell and if so for what price. In light of the haircut the equity has taken and the now widespread understanding that these loans are not secured by the underlying paper, I would guess sellers would have to accept a discount.

Like any bond with a fixed coupon, when yield's rise the price falls. You can't have a ~30% hit to your stock price without also having your credit spreads blow out too.

So yeah. If there were a liquid market for these loans, you'd expect their price to have fallen (yields rise). Illiquidity is another investing risk even though most of the time it gives you the illusion of price stability.

 

[eroscott]

A number of people on various forums have put their Lending Club loan portfolios up for sale in the secondary market. It will be interesting to see if they sell and if so for what price. In light of the haircut the equity has taken and the now widespread understanding that these loans are not secured by the underlying paper, I would guess sellers would have to accept a discount.

There really has not been any major changes on the secondary market. People are reporting they are not seeing loan notes being dumped (ie. current notes with decent FICOs ... mostly just the same 'bad' ones).
LOANS

2016-05-11 - 57,106
2016-05-10 - 56,078
2016-05-09 - 58,569
2016-05-08 - 64,917
2016-05-07 - 60,112
2016-05-06 - 53,056
2016-05-05 - 52,314
2016-05-04 - 53,992
2016-05-03 - 48,560
2016-05-02 - 47,196
2016-05-01 - 60,637
2016-04-30 - 59,909
2016-04-29 - 54,511
2016-04-28 - 55,225

 

[Onward]

Investor since 2007.

Annualized return of 12.38%.

That is all.

 

[petershk]

Investor since 2007.

Annualized return of 12.38%.

That is all.

Yeah I had similar returns when I was investing there.

Again my concern was the low liquidity and potential strong correlation between loans.

Even though an A and a D rating are very different my concern (which is more just a feeling ) is that something can happen that narrows the risk gap substantially... interest rates going up sharply, bubble in P2P lending, etc. Maybe paranoia.

In that situation it's going to be very hard to take the assets out because the loans are spread out across hundreds of people over a many year period. Since P2P is new-ish and hasn't had a crisis I don't know what will happen. It FEELS similar to CDOs except the general public can invest directly.

In order to get enough return for it to matter to my retirement I'd have to invest quite a bit, so I just stopped .

My general anxiety is that people see the highly marketed 12+% interest rate, the diversified risk and underestimate the potential for substantial downside. I wouldn't be OK with losing 50% of my P2P portfolio with no history of how that recovers but I am OK with losing 50% in the market because there's at least a decently long history of recovery as well as some institutional protection.

I'm also worried that there are very smart, very greedy institutions that are going to see that return and somehow milk the best stuff and "trick" the rest of us... somehow... again... paranoia.

What happens if the default rate on LC goes to 50% and LC goes bankrupt? I don't know.



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[Sunset]

Investor since 2007.

Annualized return of 12.38%.

That is all.

Good news, but would be nicer to hear more details if you are comfortable with it.
example: put in 5k in x types of loans, defaults were less/more than I thought.
Reinvested the earnings , or increased my investment after a year.

It gives us a feel for your tracking and interest.
Like RenoJay certainly had commitment with a 250K investment, wow.

 

[Fishingmn]

I put in $10k 2-3 years ago.

Since then I've reversed course for many of the same reasons Petershk mentions. I'm currently showing a 9.95% return but have been transferring money out on a regular basis. So far I've taken $10k back out and have $4k left invested. It will take another 3 years before the last of my 5 year loans matures.

My biggest concern is that the economy is going well now and defaults are still a regular issue (about 10% of my notes have defaulted - mostly C/D level). If the economy were to go down again I think that would go a lot higher and my returns could turn negative quickly.

 

[papadad111]

Perhaps this crisis has created a unique value opportunity to jump in as others run for the exits. That's what Buffett would do...

I'd be interested to put in $10-25K from my gambling account which is now sitting in cash... Into some high quality 5 year loans that I can get on the cheap via secondary market.

Even a 7% yield seems like a good yield in today's interest rate environment.

To get 5 years at 12%? 14%? Wow.

Who can advise how to sign up and get a look at secondary offerings ?

Never done the P2P lending thing, although I stayed at a holiday inn once..

 

[eroscott]

Perhaps this crisis has created a unique value opportunity to jump in as others run for the exits. That's what Buffett would do...

I'd be interested to put in $10-25K from my gambling account which is now sitting in cash... Into some high quality 5 year loans that I can get on the cheap via secondary market.

Even a 7% yield seems like a good yield in today's interest rate environment.

To get 5 years at 12%? 14%? Wow.

Who can advise how to sign up and get a look at secondary offerings ?

Never done the P2P lending thing, although I stayed at a holiday inn once..

If you can put it in a ROTH IRA that is best because otherwise you get 1099-OID which is taxed at "regular income" tax.

I changed some of my filters to only get the "better" quality notes and am still getting plenty. May be more available now and in the future if this has caused some to start pulling money.

 

[jazz4cash]

Yeah I had similar returns when I was investing there.

Again my concern was the low liquidity and potential strong correlation between loans.

Even though an A and a D rating are very different my concern (which is more just a feeling ) is that something can happen that narrows the risk gap substantially... interest rates going up sharply, bubble in P2P lending, etc. Maybe paranoia.

In that situation it's going to be very hard to take the assets out because the loans are spread out across hundreds of people over a many year period. Since P2P is new-ish and hasn't had a crisis I don't know what will happen. It FEELS similar to CDOs except the general public can invest directly.

In order to get enough return for it to matter to my retirement I'd have to invest quite a bit, so I just stopped .

My general anxiety is that people see the highly marketed 12+% interest rate, the diversified risk and underestimate the potential for substantial downside. I wouldn't be OK with losing 50% of my P2P portfolio with no history of how that recovers but I am OK with losing 50% in the market because there's at least a decently long history of recovery as well as some institutional protection.

I'm also worried that there are very smart, very greedy institutions that are going to see that return and somehow milk the best stuff and "trick" the rest of us... somehow... again... paranoia.

What happens if the default rate on LC goes to 50% and LC goes bankrupt? I don't know.



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That sounds more like a rational analysis than paranoia to me!


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[petershk]

That sounds more like a rational analysis than paranoia to me!


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I'm glad you think so.
My refined investment method is as follows
1) imagine worst case

2) do I have confidence that I think I know what might happen. If no... don't invest. If yes then...

3) can I live with that potential worst case to get the potential gain. If no don't invest if yes...

4) is the risk of the down side loss smaller than the risk of inflation etc eating it. If yes invest. If no. Don't.

Over simplified but basically the combination of being ignorant and avoiding innovation invalidates most of the investing universe.

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