LendingClub CEO Resigns Following Loan Sales Review
wsj.com
wsj.com
Starting in January this year, however, loans started taking longer and longer to fund. Recently, I've seen them timing out. This means that in the marketplace, the balance shifted and borrowers outnumbered lenders. Another indication that Lending Club was experiencing a shortage of lenders: they began offering bonuses up to $2,000 for new accounts.
Finally, this earnings release indicates that loan originations, while still growing, has slowed considerably. That is the formal evidence confirming a significant slowdown in new lenders.
I suspect that there was a lot of pressure internally for sales personnel to bring in new capital through either retail of commercial lenders (they've served both markets for quite a while), and, someone or some group got too aggressive. Whether LaPlanche knew and ok'd the deal, or whether he was just 'person in charge' and has to take the fall, I don't know. But this will be a major wound. It's really sad that it is self-inflicted.
A microcosm of the global economy: we're awash with capital, hence no one is willing to pay much in the way of interest rates.
http://www.investopedia.com/terms/n/negative-interest-rate-p...
"A negative interest rate means the central bank and perhaps private banks will charge negative interest: instead of receiving money on deposits, depositors must pay regularly to keep their money with the bank. This is intended to incentivize banks to lend money more freely and businesses and individuals to invest, lend, and spend money rather than pay a fee to keep it safe."
> Starting in January this year, however, loans started taking longer and longer to fund. Recently, I've seen them timing out. This means that in the marketplace, the balance shifted and borrowers outnumbered lenders.
I'd really like to see some different terminology here. Everything you describe is perfectly compatible with there being one lender, or any other number.
It would be more precise to make the statement in terms of dollars rather than 'borrowers and lenders'. I don't know whether the average lender has invested more or less in Lending Club than the average borrower has borrowed.
In dollar terms, the total dollars being invested is less than the loans being offered, which is a shift as of January, 2016.
I did edit out 'investors', perhaps that was what you meant. Thanks.
It was funded by a single investor in less than two hours.
I've often thought about investing in the platform but I've always been skeptical of the ability to make consistent returns on it - it seems like a platform where unless you have significant capital invested, one or two defaults above what you expect and you could be wiped out.
I started with an experiment: $2,500 loaned $25 at a time to 100 borrowers. Lending Club forecasts the default rate based on their own credit rating. It went well and the actual return was about 1% higher than they forecast.
Anxious because you need the money, or just anxious because you don't know how it's going to go?
However, this is really new as a way for retail investors to earn a return, so they really should get comfortable with its structure before putting money in.
Credit cards were 28.99% and 24.99%, so even with the origination fee quite a bit of savings.
Of course, like a good 3rd world country, we have massive defaults about once a decade, so that wipes out most of the profits for the CC companies.
A startup called TuTasa is trying to build a South American LendingClub, but I don't think they're taking off yet:
One big difference is there's usually only one credit agency (it's Equifax here in Uruguay), and there's a lot more fraud going on than in the USA.
http://www.eltelegrafo.com/index.php?id=102900&seccion=local...
The interest rate immediately shot up to >25%, and I was told it wouldn't come down for more than a year.
You can buy and sell like a stock. Much less risky than LC and alternatives and almost 100% tax free if you buy muni bond funds from your state. Plus you can get out when you want and lock up any gains outside of dividends.
The reason I ask is because I can't seem to find any NJ municipal bonds that are providing a 5% yield. They all seem to be around 3%.
You would not get the state tax free benefit of a California bond if you live in New Jersey. But you would get the federal tax free portion.
I suggest that you confirm with your brokerage's fixed income team before proceeding.
Check http://www.cefconnect.com/closed-end-funds-screener and choose tax free.
I see a few in NJ over 5%: MUJ, MYJ, NXJ. NXJ is at a 10% discount. I've been basically doing those Nuveen & Blackrock equivalents in CA.
I usually go for discount to net asset value so I feel like it has room to appreciate so I can lock in a gain outside of the monthly dividends. And if they go down you can always scoop up more which will then have a higher annual dividend yield.
Investopedia has a somewhat hard, but accurate depiction of this risk.
http://www.investopedia.com/ask/answers/05/ltbondrisk.asp
In general, you should not be investing in Muni Bonds unless you clearly understand how much value the bond will gain or lose with changes in interest rates.
> I've been up 8-10% in value too on each as I buy quality ones at a discount to net asset value.
This could be partially correct, but it is more likely that the OP just doesn't understand what percent of change in bond value came from his/her ability to pick bonds and what change in bond value came from other factors like interest rate risk.
Investing is really hard and deceptively complex. The best advice is to diversify and index whenever possible. Buying some muni bonds as part of your portfolio should be fine, but they should be balanced with equity exposure, corp bond exposure etc. In every case, try to index to gain more diversification with less fees.
Nobody knows interest rate trajectory. The value doesn't drop as much as you would think. If interest rates rise and the bond price drops, the yield increases and you or others will buy more. There aren't a lot of safe options right now and people are nervous with the election and the market.
I agree on doing bond funds and diversification. I put a good chunk in muni bonds and cash. I max out a 401k but that's it for the market because I think it's highly overvalued and I don't like putting most of my money where I have no control. The rest goes into my own companies and real estate.
I would use this logic to also argue against investing in individual stocks.
> Nobody knows interest rate trajectory.
Agreed
> The value doesn't drop as much as you would think.
If the interest rate the market is willing to pay for a particular muni bond rises, that bond will be worth less and that difference is extremely easy to calculate.
> If interest rates rise and the bond price drops, the yield increases and you or others will buy more.
The fact that rate is rising means that investors are not giving as high of a value. The better way to think about this is that investors decide the Muni bond and other fixed income assets are worth less so they pay less so the yield rises. It is kind of opposite of how you are thinking about it.
> There aren't a lot of safe options right now and people are nervous with the election and the market.
Muni bonds are no more 'safe' than other investments.
> I agree on doing bond funds and diversification.
Bond funds can also be highly risky and have large durations which can also mean high interest rate risks.
> I put a good chunk in muni bonds and cash. I max out a 401k but that's it for the market because I think it's highly overvalued and I don't like putting most of my money where I have no control. The rest goes into my own companies and real estate.
It sounds like you are highly exposed to interest rate risk in your portfolio and you should work really hard to understand it more clearly.
I think you are thinking of individual bonds and I agree, but the fixed income muni bond funds are not as easy to calculate and don't fluctuate as much.
> The fact that rate is rising means that investors are not giving as high of a value. The better way to think about this is that investors decide the Muni bond and other fixed income assets are worth less so they pay less so the yield rises. It is kind of opposite of how you are thinking about it.
Not the opposite at all. If a bond fund is paying 30 cents per share each month and investors value the bond less causing a price drop, the yield goes up as I mentioned and becomes more attractive. The drop isn't as significant as you would think. The funds are diversified across various bonds with different maturities. If investors devalue a fund too much after an interest rate hike, I'll buy more at a higher yield.
> Muni bonds are no more 'safe' than other investments.
I don't agree here. Muni bonds are a debt obligation with a lower level of default compared to other bonds. If they weren't safer than other investments very few people would care about them. The stock market is just legalized gambling. The article is about LC and I've proposed an alternative. Do you not think muni bonds are safer than other bonds or LC?
> It sounds like you are highly exposed to interest rate risk in your portfolio and you should work really hard to understand it more clearly.
I'm not that exposed to interest rate risk. I have more in cash than muni bonds. I buy cash flow positive properties and have a fixed rate mortgage. Most of my money is in my companies and I have two successful ones (one in tech services and one highly profitable subscription model business). They're the only investments I trust.
> I suspect that there was a lot of pressure internally
> for sales personnel to bring in new capital through
> either retail of commercial lenders
It has to be difficult to both on-board the personnel at a high rate, and, keep them educated and mindful of the ethical aspects of their activities. Bad practices take a long time to recover, particularly with respect to market perception.
1. Banks who have lots of depositors, who are retail investors, but who do not wish to take any risk. They see their deposits as quasi-cash. So the bank takes the risk if a loan goes bad, which is why most of the loans are secured on property (mortgages). And why a smaller fraction will be invested in unsecured loans.
2. Pension funds, again investors with very little appetite for risk, who do not make investment decisions themselves, you just let your pension fund invest the money for you, and they are not in the business with taking big risks.
3. Insurance companies, who invest the proceeds from the premium paid on insurance contract until a claim is made. Again not in the business of taking massive risks.
4. Asset managers, which can manage investment from retails clients, but for who the majority of clients do not manage their portfolio actively and rely on asset managers to make the decisions for them.
All 4 are massive and constitute the backbone of the financial system. All 4 have in common that the ultimate investors (depositors, pension contributors, insuree and retail investors) do not make any investment decision themselves.
For p2p lending to make more than a tiny dent in this market, they need these investors to fundamentally change their behavior, to stop relying on someone else to analyse the risk, and to start actively doing their own due diligence, choose a p2p company, trust them with their money, and start reviewing credit profiles and underwrite the loans. Sure, there are some active retail investors who spend their days on online broker websites, who read lots of articles and research. But in term of volumes, not many. I just can't see where the money would come from for p2p lenders to make a difference.
I could be completely wrong about this.
How? Seems less efficient to me.
In any case, I thought one of the advantages (perhaps the biggest advantage) of borrowing through these companies is that they have less stringent standards than banks and credit cards.
Traditional credit card lending standards are adopted because the issuer is the lender, and directly bears the default risk. On a peer-to-peer service, the money being lent is Other People's Money, and Other People bear the default risk. The incentive, then, is to leave it to those Other People to set lending standards that will protect their money.
There are obviously alternatives such as debit cards and credit unions, but those will not come with the same benefits as the cards from national issuers.
I don't think being blacklisted from Prosper or LendingClub for IIB will serve as much of a deterrent.
I thought this as well, but on LendingClub.
Out of all of my notes that have defaulted, they all seem to share the same pattern:
They make about 4 perfectly on-time payments then never make another payment again.
I believe the loans were taken out by real people, but I feel like they were people who knew that they were ultimately going to file for bankruptcy anyway, so they figured they might as well grab some quick cash before doing so. This is just my guess. It just seems too odd that all of my defaulted notes look pretty much the same. Maybe the 4 on-time payments were done to avoid any claims of fraudulent intent?
My fear was that there was some Reddit thread or something which was instructing people on how to do this.
They could have done the same thing with a credit card, but with LendingClub, you end up with actual cash, and I bet it's easier to get a loan funded on LendingClub than it is to apply for a credit card of the same amount.
[EDIT]: To add, apparently, if someone obtains a loan immediately before filing for bankruptcy, the creditor can move to basically have the loan un-wipable if they can prove that the loan was taken after the person already knew they were going to file for bankruptcy. However, I doubt LendingClub goes through this trouble for each note, which could make the platform more attractive for this type of fraud.
The 4 on-time payments make it look like you tried to pay the loan back but just couldn't afford it.
If no payments were made at all, it would be easier to prove that there was intentional fraud. If such is proven, it may be impossible to wipe the loan during bankruptcy.
Ah! So we're back in the derivatives market. Buy up crap, package and obfuscate it, then sell it off as "high quality" crap to investors desperate for yield.
A derivative (e.g. a CDS) would be more like a side bet between two (possibly unrelated) parties based on the performance of those bonds.
A CDS would be a derivative on a derivative. It would allow you to get exposure to these bonds without worrying about being long or short a particular issue.
(They're not.)
> Buy up crap, package and obfuscate it, then sell it off as "high quality" crap to investors desperate for yield.
So where is the smart money going? Lendingclub and Prosper have had reasonable returns for me, and seem like a good way to diversify my investments a bit.
I do tend to think that the institutional investors/hedge funds are quite likely to "know more than you do" however, which could instead mean that this is an early signal & would be a foolish play.
What's your source for this claim?
The BAA Corporate index is 4.79%.
Are diversified bond funds not a thing now?
An article on the trend: http://qz.com/355848/wall-street-is-hogging-the-peer-to-peer...
It almost certainly was not a single wealthy individual.
From the original article:
"The investor that initially bought the LendingClub loans in question was Jefferies LLC, according to people familiar with the matter."
What I did notice that I was pretty bad at picking notes. Lots of handpicked ones flopped and a lot of random/automatic ones are still going.
Agree that handpicking is a waste of time. Let the autoinvest feature work for you.
You can look at LC investor returns on their website... https://www.lendingclub.com/info/statistics-performance.acti...
Not sure if that's worded the best way--still learning about how the accounting for this works.
In order to make out you need to satisfy the terms of Y seller's contract before they fold -- and balancing the incentives vs unknown risk of Z at unknown time, its probably not worth your time.
The exception to that is: You have enough capital to sign a contract so big it actually forces Z event, then have the political clout to make sure the court rules in your favor rather than the investors. All the while also buying insurance against Z event. Then you have something similar to Goldman Sachs' profitable moves during and after the Great Recession.
'Margin Call' is an excellent and thrilling film that dramatizes these concepts and shows how they can play out on the trading floor.
Will check out Margin Call.
What about outside of huge industry shifts like The Big Short portrayed? I'm most interested in how this plays out in the day-to-day when there isn't a huge industry-wide scandal at play.
iOS: https://itunes.apple.com/us/app/lendingclub-order/id10461141...
Android: https://play.google.com/store/apps/details?id=com.jamesys.le...
If someone's using HN primarily for this purpose, that's a different story. But seibelj's most recent comments include housing, transportation infrastructure, freenet, and software licensing. Sounds like a real community member to me. :)
Any change in those circumstances is an unknown.
This seems to be a bit of hyperbole; I disagree that the economic consensus is that the period of LC's existence has been an economic boom.
U.S. stock and housing prices indeed recovered from 2008 lows - real economic growth (jobs, industrial output, new home construction) has been tepid at best.
The Bay Area may have been flooded with new jobs and investment, but the rest of the country certainly has not been.
LC is responsible for grading the loans and calculating the risk of each borrower. However, it does not take any of the risk of the loans being traded on its platform. So there's a big concern that LC may not be very scrupulous about the borrowers it accepts.
It's a similar situation to the last financial crisis where companies were happily accepting risky mortgage applications, doing little or no checking, and then selling them on for a quick profit.
I haven't read this anywhere else other than your comment. Do you have any other evidence for this claim?
It isn't sad for retiring CEO Laplanche is it? I mean, it looks like they cooked the books, and now he's quitting before having to deal with the repercussion.
My guess is that he was forced out, but I'm not sure it matters if it was under his own will or not. Either way, it's definitely not sad for him or LendingClub.
We probably don't know enough yet to be clear what the real details for the departure are. It could be that all of this is due to poor oversight, and not malice.
I'm curious whether the initial discovery of this problem came from API users noticing the discrepancy, or from a more traditional route, like a whistleblower.
"The board also hired an outside expert firm to review all other loans facilitated in the first quarter of 2016 and the firm did not find changes to data in these or other Q1 loans."
From the quarterly report: http://ir.lendingclub.com/QuarterlyResults.aspx?iid=4213397
https://news.ycombinator.com/item?id=11659278
http://www.nytimes.com/2016/05/10/business/dealbook/lending-...
WSJ wants to have a paywall but doesn't want to lose inbound google news traffic so they allow incoming traffic from google (probably they have the theory that you'll come for one article, see ads for other articles you'd like to read, and sign up. Given how web-clueless most people are it's not a terrible theory). I think they also feel that being left out of "the conversation" in favor of AP or Buzzfeed is worse than losing a bit of revenue.
Probably a bit of referrer-fu would work too but I rarely find the wsj worth reading so couldn't be bothered to see what they check for.
https://addons.mozilla.org/en-US/firefox/addon/paywall-pass/
Basically just messes with the referer on an automatic basis for a few websites.