Lending Club, the “peer-to-peer” lending company who filed for an initial public offering today, might not be what one might assume, points out Bloomberg View’s Matt Levine.
Peer-to-peer lending offer a low risk model
You could logically assume that a peer-to-peer lending company would connect those who want to lend money with those who lend the money and take a fee for playing match maker. This is clearly the lowest risk model.
Not so, points out Levine:
“Lending Club ends up standing between you and me not just as an agent — setting up my loan to you — but as a principal. I lend money to Lending Club and can look only to Lending Club for repayment, while Lending Club lends the money to you in a separate-though-obviously-related transaction.”
What you get in a Lending Club investment is not a clean middle-man deal. Lending Club is literally in the middle of the deal. They are the lender and may have taken on a risk that might not be apparent at first blush, particularly given that peer-to-peer lending really isn’t what it sounds like.
The “peers” on either side might deserve additional scrutiny. Levine points out the “lender” end of the peer is typically an institutional investor and not an individual peer. (Reaching for yield in an artificially manipulated interest rate environment no doubt – and taking on additional risk in the process.)
Lending club’s leverage ratios comparison
After this Levine compares the leverage ratios of Lending Club with that of JPMorgan Chase & Co. (NYSE:JPM) and – hilariously – Lehman Brothers, who bid this world adieu during the over leveraged derivatives implosion of 2008.
“If Lending Club was a bank, it would look like a pretty risky bank!” Levin observes.
But Levin digs even deeper to make his point, noting that Lending Club, unlike banks, has an asset based that is largely built on unsecured notes and certificates. Compare this with a real bank, which is funded with senior short term debt obligations.
An interesting difference that Levine notes is that money a borrower doesn’t pay back to Lending Club is money Lending Club doesn’t pay back to note holders on an individual loan. In other words, the “depositor” (the peer lending the money) is aware going into the deal they bear the entire risk of loss on the loans in which they invest. Contrast this with a bank. A bank depositor is expected to receive their money returned even if the bank makes some bad mortgage loans, Levin notes.
Levin highlights how Lending Tree can do things other banks can’t – particularly perform various maneuvers with lending and offsetting certificates to “create” the loan. (Yet another hocus-pocus slight of hand to create money where non previously existed?)
While Levin doesn’t consider the big bank risk of unregulated derivatives, he does note a positive side for Lending Club.
“Lending Club is not a bank,” he says. “So it’s not subject to banking regulation, which means that it can do a core function of banking much more efficiently than an actual bank can.”