News

May 19th 2016, Daily News Digest

US

  • The industry’s reaction to Lending Club’s news.
  • Lending Club’s short statement on the DOJ subpoena.
  • How Wall Street led LendingClub into crisis.
  • What cutting an internship program at Lending Club tells us.
  • Why I am (also) keeping my money in Lending Club.
  • Why it is in regulator’s and the public’s interest to dismiss Madden vs Midland.
  • Great analysis of Lending Club’s 3 loan financing sources.
  • SEC: “cybersecurity is the highest risk, unicorn valuations and crowdfunding 1st day: 17 filings”.

UK

  • Zopa’s new innovation unit delivers 1st product: Zopa Car ReFi

United States

‘This is not the canary in the coal mine’: Here’s what the industry is saying about LendingClub’s crisis, (Business Insider), Rated: AAA

Whelan, who sits between institutional investors and platforms, says GLI has received “very few” calls from institutional investors “because it is seen as an internal process control failure rather than a failure of the industry or the sector.”

“My impression is the big guys are having daily calls with them, and what I hear is that LendingClub is actually doing a pretty good job of getting everyone comfortable there’s nothing to worry about.”

He says institutional funding will almost certainly dip, but he adds: “The most likely way that this plays out is things go back to normal relatively quickly for the sector, possibly within as little as 12 months.”

“Everyone has been so focused on the credit risk versus the available yield and [has been] taking it for granted almost that they were all completely honest. It has just kind of dawned on people that fraud risk at individual platforms is a key risk. I always thought platform fraud risk was the biggest issue for the sector.”

“There is the question of finding the right balance of funding sources to sustain the growth of those players and the change in terms of who is providing capital.”

A big question remains for many — why did it happen? “The one thing that puzzled me was, why on earth did these guys do this?” Leech says. “Look at the upside versus the downside.” “I wouldn’t be surprised if these guys were making these decisions on very little sleep at 2 in the morning,” Leech says.

“It’s not old finance in disguise, as some people have been saying, but it’s not Uber — it’s somewhere in between. Growing 60, 70% a year is still pretty impressive. You don’t need to grow 300% a year, especially when it means avoiding mistakes that could destroy your business.”

Lending Club Issues Statement on DOJ Subpoena, (PR Newswire), Rated: AAA

This is the entire statement: “We are not surprised to receive a Department of Justice subpoena in light of our public disclosures and the focus of the Department on financial services. The Company is fully cooperating and has engaged in a productive and orderly dialogue through counsel.  While the investigation is still in its early stages, the Company is pleased with the open and positive interactions that have occurred to date.” 

How Wall Street Led LendingClub Into Crisis, (Bloomberg), Rated: AAA

Mary Meeker was an early fan. Morgan Stanley’s diva of the dot-com years, Meeker decamped for Kleiner Perkins Caufield & Byers in 2010, placing her at the center of Silicon Valley’s venture capital scene.

As Mack would later tell CNN, he began experimenting with LendingClub loans personally after learning about the company from Meeker. He liked what he saw.

By 2012, with business taking off, Laplanche went looking for a Wall Street fixer to join the board. His company could benefit from traditional banks, and vice versa.

He scoped out candidates from several major firms, including Goldman Sachs Group Inc., according to people familiar with the matter. Mack — whom Laplanche would later tell American Banker was a “happy customer” of LendingClub — said yes. He also invested $2.5 million in the company.

Bank’s Clients

Laplanche was on cloud nine over Mack’s arrival, one person close to the matter said. A few months later, Meeker joined him on the board, and Kleiner invested $15 million. Next came Lawrence Summers, the former U.S. Treasury secretary. He had been referred by Dave Goldberg, then head of SurveyMonkey Inc. He’s the late husband of Sheryl Sandberg of Facebook Inc., which Morgan Stanley had taken public in 2012.

Before long, Mack was helping LendingClub access key sources of funding via the customers of Morgan Stanley’s wealth management division, efforts he described to Bloomberg in 2013. Morgan Stanley brokers offered clients a chance to invest in funds overseen by a LendingClub subsidiary, LC Advisors, which purchased LendingClub loans. The reciprocal relationship helped underpin demand for the loans, the person said.

Morgan Stanley’s private-banking clients probably account for less than 1 percent of all of LendingClub’s loans outstanding, the company said, while declining to give figures for LC Advisors.

Hiring Bankers

Wealthy individuals were just the start. With Mack on board, two Morgan Stanley employees with experience drumming up institutional investors signed on at LendingClub.

Jeff Bogan, a former investment banker, was hired to help prepare the company for its public stock offering. But his Wall Street pedigree soon landed him in a different role, dealing with big buyers of LendingClub loans. Within the company, he was perceived as a Mack ally, though it doesn’t appear they were close, according to two people familiar with their relationship. Also arriving from Morgan Stanley was Adelina Grozdanova, another investment banker.

By December 2014, Laplanche was ready to take LendingClub public. Morgan Stanley won top billing on the deal. It and other advisers shared about $50 million in fees, data compiled by Bloomberg show.

At the NYSE, Samberg suggested an opportunity to profit while powering LendingClub. He later introduced Mack to Andrew Hallowell, head of Arcadia Funds LLC, a Burlington, Massachusetts, manager of investment funds. The key would be a hedge fund-like partnership, Cirrix Capital, whose potential beneficiaries would include Mack and Laplanche, according to a person familiar with the matter.

If all went well, Cirrix would be lucrative for the inside investors. Mack and Laplanche are in a class of limited partners who, at the end of each quarter, collect a 4 percent annualized return before profits are shared with general partners, regulatory filings show. After that, they get 80 percent of remaining gains, according to a March 2016 filing. Other benefits available to limited partners included lower advisory fees. Hallowell didn’t respond to messages seeking comment.

People close to the situation said he omitted that detail in a written presentation while pushing the board’s risk committee this year to invest LendingClub’s own money in the fund.

Mack wasn’t involved in the risk committee’s decision to invest in Cirrix, according to people with knowledge of the situation. He hasn’t been accused of impropriety.

Bogan and Grozdanova resigned after the botched loan sale, according to one person. Neither has responded to messages seeking comment.

The question now is whether the turmoil at LendingClub will scare away money managers, hedge funds and banks that have been snapping up loans and supercharging the industry’s growth. Many rival loan platforms have been tending their own Wall Street alliances to ensure funds keep flowing.

On Deck Capital Inc., which focuses on small-business lending, is working with Goldman Sachs and JPMorgan Chase & Co. Avant Inc. has teamed up with Jefferies, JPMorgan and Credit Suisse Group AG.

Lending Club Is Cutting its Internship Program, (Fortune), Rated: AAA

Comment: cutting the summer internship program announces at least a hiring freeze if not a likely layoff. It would be indeed expected to protect the company’s cash by reducing expenses. It will, in addition, be expected that having lots of interns in the office during a restructuring will be more a hindrance than a help.

At least one person who was to intern this summer is unhappy thanks to the decision to cut the program. The individual took to Reddit on Monday to express outrage. “Just received a call from LendingClub stating that they are canceling their summer internship program,” the person wrote. “I have already made living arrangements for this summer in SF. I know many interns are coming from the east coast and have already made travel plans and living arrangements.”

 

Why I am Keeping My Money in Lending Club, (Lend Academy), Rated: AAA

Emotions are running high right now. After more bad news from Lending Club on Monday afternoon, it is understandable that some investors are getting nervous. And not just the investors in Lending Club equity but also investors in Lending Club loans.

I have had several emails and comments in the last couple of days from investors asking me if they should take their money out of Lending Club. That is, either cease investing (and reinvesting) in Lending Club notes, or sell them outright on the secondary market via Folio. While I can’t recommend any course of action for others I am happy to tell you what I am going to do with my Lending Club investments: stay the course.

Between all the Lending Club accounts that my wife and I own, including my portion of the Lend Academy P2P Fund that has about 1/3 of its invested capital in Lending Club notes, the total is well over $250,000. That is not an insignificant percentage of our liquid assets. And I am not changing anything – I continue to reinvest my principal and interest in new loans.

Why?

I am very confident that Lending Club loans will continue to perform well despite the governance issues that cropped up and came to light over the past two weeks.

Renaud Laplanche’s departure is sad and unfortunate, to say the least. But the likelihood that more departures will occur, that perhaps a large reduction-in-force is in the works, that banks will cease buying Lending Club paper, that origination volumes will go down, that profitability of the company itself may plummet, that Lending Club may participate partially by investing in loans using its own balance sheet, and that “experts” and pundits like Jim Cramer will cry sell! sell! – nothing in this narrative shakes my confidence in the underlying business model of Lending Club, nor the ability and willingness of my fellow Americans to pay their debts in a responsible fashion to the best of their ability.

Possible Outcomes for Lending Club

  1. Originations are reduced sharply – This will in part be due to a pullback from banks, which currently comprise a material percentage of buyers on the LC platform (34% as reported in Q1). To position itself for contraction rather than growth, LC conducts a large reduction-in-force (layoffs), management changes, and raises additional cash on its corporate balance sheets to weather the storm. The company works its way through the crisis. And what becomes of my invested capital in LC notes in this scenario? It is safely generating income throughout the turmoil.
  2. Lending Club is taken private – This could be done by a private equity firm and the new owners may conduct many of the above changes, and weather the storm in a more private fashion. The company returns to profitability, and goes public again at some distant point – let’s say five years out from today. Under this scenario, a more comprehensive change in management is likely. What of my invested capital? Safely generating income.
  3. Lending Club is acquired by a strategic investor. In this scenario, while I would certainly expect my current investments to be serviced by the new strategic buyer, I would have to find a new place to reinvest my principal & interest.
  4. Lending Club is unable to right-size its operations, unable to attract a buyer. I know this is a concern for many people so more on this below.

In the first four scenarios, which I consider to be the most likely possibilities for Lending Club’s future, my family’s money is taken care of and my capital is unaffected.

But let’s consider the case of a Lending Club bankruptcy even though I believe it is unlikely. One reason I believe it is unlikely is taking a look at Lending Club’s balance sheet. They have plenty of cash and very little debt outside the loans themselves so it is difficult to surmise what could trigger a bankruptcy.

If you are concerned about a bankruptcy I suggest you read the Lending Club prospectus closely. There are 25 pages of Risk Factors that include discussion of bankruptcy.

Attorneys I have spoken with have said while borrower money will likely still flow in there is no guarantee that this money will continue to flow to investors. It says as much in the prospectus.

Lending Club has a powerful franchise even after all these problems. They have well over one million borrowers, most of whom have high opinions of the company. They have an efficient system in place to obtain these borrowers and now they are not focused on growth I think we will see customer acquisition costs come way down as they cut the least profitable marketing programs.

The LendingClub Distraction, (Wall Street Journal), Rated: AAA

Comment: poorly chosen title for a great article.

Last year, a three-judge panel of the Second Circuit Court of Appeals in Manhattan ruled that many marketplace loans are subject to state usury laws. Then the Second Circuit held that many forms of consumer lending, including marketplace lending, are subject to these caps.

While lending to borrowers with top credit scores was unaffected, we show that the decision effectively cut off the supply of marketplace credit for borrowers with FICO scores below 650. Lenders unable to charge an interest rate that compensates them for borrowers’ risk, we show, will simply exit the market.

Some have hailed the court’s decision as a victory for consumer protection. But it’s hard to see how any of this is good for consumers. After all, borrowers who cannot gain access to marketplace credit will likely choose instead higher-cost sources like credit cards with interest rates as high as 30%, making it harder to repay their debts. And because marketplace lending is subject to price caps but another lending is not, the decision is essentially a protectionist measure, giving banks a monopoly over lending to higher-risk borrowers. Competition for these borrowers’ business—not regulation that gives existing players monopoly power—is what these borrowers need.

Forgotten in last week’s rush to indict the marketplace-lending business model is the fact that it offers a critical source of competition in credit markets that badly need some.

The Supreme Court is now considering an appeal of the Second Circuit’s decision, and the court has asked the Obama administration to weigh in. The administration should swiftly urge the court to review the Second Circuit’s judgment. Meanwhile, lawmakers who claim to have consumer interests at heart should resist the urge to join the marketplace critics’ bandwagon. Consumers are often best protected by competition.

The three channels on the Lending Club platform, (Daily Fintech), Rated: AAA

Lending Club’s channels of distribution:

The original P2P business

  • The pure P2P channel in 2015, issued $1.57billion Notes. The growth through this channel has been x1.5 year-on-year over the past two years (2013-2015). Flat growth of the fractional loan platform business.

The 20th century asset management business

  • The asset management business of LC Advisors offers the possibility to lend through ownership of a fund. Both qualified individuals and institutional investors can hold loans through this channel.Lending club’s managed Funds:
    • Conservative Consumer Credit Fund (CCF)
    • Broad-Based Consumer Credit Fund (BBF)
    • High yield Consumer Credit Fund (HYF)
  • This channel was opened in 2011 and the CCF fund invested only in the two top quality grade notes (i.e. less risky credit spectrum) and the BBF is a diversified fund investing in all loan grades, and HYF picks the more risky credits for those seeking higher yields. The required minimum is $500k and therefore, only qualified investors can invest in these private placements. Most of the subscriptions have come through third party marketers, like Morgan Stanley internationally and Oppenheimer in the US.

The Whole loan platform

  • Banks and other institutional investors want to own loans as assets on their balance sheet or want to serve their customer base with loans. Lending Club offers the Whole Loan platform which allows a bank to actually own the loan on their balance sheet. Lending Club simultaneously has a servicing agreement with the bank (so earns all the servicing fees). Such purchase agreement programs can be customized. Regulations require that the investor bank has access to the underlying borrower information but won’t contact directly the borrower or use that information in ways that violate privacy laws. This is exactly the part that the disclosure dispute with Jeffries came about (LC wasn’t disclosing appropriately to the borrowers on the LC platform the fine details of the whole loan purchase agreements that gave access to the bank investor to their info).The whole loan platform is the channel that was “hit” last November when Santander withdrew from the consumer loan market. Santander had to offload $1billion of Lending Club consumer loans that they were holding on their books through this channel. The interruption of their whole loan purchase agreements was due to regulatory pressure with regards to capital requirements and nothing to do with any frictions between LC and Santander.lending club distribution channels

Lending Club’s Stock Price is Not a Leading Indicator for Fintech, (Finovate), Rated: A

Renaud Laplanche’s small team presented at our very first Finovate in 2007. And until a few months ago, they were our most successful startup alum, at least measured by company valuation (Credit Karma gets the nod for now).

I agree with Peter Renton’s post today, Lending Club must overcome some serious challenges in the short-term. But to say that that the marketplace lending model is broken (paywall warning), or to jump to a conclusion that there is a fundamental flaw in the entire fintech industry is just so much hyperbole.

What does this mean for the future of P2P lending? Well, it’s bad for LC short term. But for other players, the situation is mixed. Less volume going through the LC platform means more loan demand for other players. But it’s a two-sided market, and clearly some institutional money is pulling back, so it may be harder to fund loans. That means rates go up, which will spike lender returns, bringing more capital back into the system. Money always flows to the best risk-adjusted return. So marketplace lending survives.

Returns from angel investing in Hip Pocket or UBS’s recent investment in SigFig, have no correlation with the stock market return of a single public marketplace lender.

SEC warns cyber security is the biggest threat to financial system, (The Register), Rated:AAA

Speaking at the Financial Regulation Summit in Washington DC, White warned the industry that their policies and procedures were not up to scratch and without them they faced the same fate as the Bangladeshi bank that recently lost $81m through a cyber attack.

Last month she visited Silicon Valley and was openly critical of the billion-dollar valuations of many startup companies.

The sheer number of so-called “unicorns” was “a topic of concern,” she noted, adding: “Beyond the hype and the headlines, our collective challenge is to look past the eye-popping valuations and carefully examine the implications of this trend for investors, including employees of these companies, who are typically paid, in part, in stock and options.”

White’s warning also comes as the SEC put in place new federal crowdfunding rules which will make it easier for small businesses to raise capital. On Monday – the first day that the rules came into effect – the SEC received 17 applications for “Form C offerings” and the next day another 10.

3 ways technology drives online lending, (Information Age), Rated: A

Financial technology cuts costs.

Online lenders are data-driven.

Online lenders move faster.

 

United Kingdom

 

Zopa launches car loan refinancing product, (Finextra), Rated: AAA

The pioneering fintech firm Zopa has today launched a new service for millions of UK drivers to help re-finance their cars and enabling them to switch and save for a better deal: Zopa Car ReFi.

Similar to refinancing a mortgage, Zopa Car ReFi will allow consumers to pay off more expensive car finance deals with a better value, more flexible agreement. In line with Zopa’s values of simplicity, fairness, and transparency, users will be able to get a free instant personalized savings estimate based on their car and financial situation that doesn’t impact their credit score.

Built in-house by a recently established innovation unit, the product taps into Zopa’s credit risk algorithms and combines it with in-depth vehicle information to show the consumer how much they could save. If they like the look of the quote, it’s easy to complete the process online.

P2P lending: Why the Lending Club fiasco won’t send us all back to the dark ages, (City A.M.)

P2P platforms have used technology to bring better, faster finance to consumers and businesses across the world. By cutting out the middleman, they’ve enabled investors to tap into new asset classes that were previously inaccessible to them.

Here in the UK, P2P is shaking up an oligopolistic market controlled by a handful of banks. Consumers and businesses have been given a wealth of new, competitive sources of funding – this must be a good thing.

Here in Britain, most platforms talk consistently about having a diverse funding base, mixing more retail, high-net-worth capital with institutional funding.

 

Author: George Popescu

George Popescu

About the author

George Popescu

Serial entrepreneur.

George sold and exited his most successful company, Boston Technologies (BT) group, in 2014. BT was a technology, market maker, high-frequency trading and inter-broker broker-dealer in the FX Spot, precious metals and CFDs space company. George was the Founder and CEO and he boot-strapped from $0 to a $20+ million in revenue without any equity investment. BT has been #1 fastest growing company in Boston in 2011 according to the Boston Business Journal and the only company being in top 10 fastest in 2012-13 as it was #5 in 2012. BT has been on the Inc. 500/5000 list of fastest growing companies in the US for 4 years in a row ( #143, #373, #897 and #1270). After the company sale in July 2014 until February 2015 George was Head-of-Strategy for Currency Mountain ( www.currencymountain.com ), a USD 100 million+ holding company focused on retail and medium institutional currencies, precious metals, stocks, fixed income and commodities businesses.

• Over the last 10 years, George founded 10 companies in online lending, craft beer brewery, exotic sports car rental space, hedge funds, peer-reviewed scientific journal ( Journal of Cellular and Molecular medicine…) and more. George advised 30+ early stage start-ups in different fields. George was also a mentor at MIT’s Venture Mentoring Services and Techstar Fintech in NY.

• Previously George obtained 3 Master's Degrees: a Master's of Science from MIT working on 3D printing, a Master’s in Electrical Engineering and Computer Science from Supelec, France and a Master's in Nanosciences from Paris XI University. Previously he worked as a visiting scientist at MIT in Bio-engineering for 2 years. George had 3 undergrad majors: Maths, Physics and Chemistry. His scientific career led to about 10 publications and patents.

• On the business side, Boston Business Journal has named me in the top 40 under 40 in 2012 in recognition of his business achievements.

• George is originally from Romania and grew up in Paris, France.

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