Peer-to-Peer Lending is heading towards derivatives

[mjvcaj]

http://www.bloomberg.com/news/artic...st-craze-meets-small-short-in-new-derivatives

Reminds me of the past 20 years...

“It feels like the year 2000 again,” said Frank Rotman, a partner at QED Investors, an Alexandria, Virginia-based venture-capital firm that has invested in Prosper Marketplace Inc., Social Finance Inc. and 13 other P2P lending platforms. “Everyone is chasing ’it,’ but they don’t know what ’it’ is, and that is kind of scary.”

“It’s a high-coupon asset that’s had very good returns for the short period of time it’s been around,” Edman said of P2P loans. “I don’t have reason to believe that’s going to change dramatically anytime soon, but there are bad loans out there.”

“If you could create a synthetic product that mimics all the features of a P2P loan and had the same risk and yield tradeoff, there would be a lot of demand to buy that paper,” said Dickinson, whose firm has invested in LendingClub and Orchard Platform and is looking to invest $5 million to $10 million in a firm trying to create derivatives on P2P loans. Other small firms are racing to create P2P derivatives before big banks try to muscle in."

 

[hoot1]

We all talk about the importance of small business in regard to such things as employment, but the problem of these businesses obtaining loans and investments continues to plague us.

One of the prime obstacles to loaning and investing in small local business is of course risk. Derivatives and bundling loans, as we learned during the mortgage crisis, can be a deceptive way to hide risk but doesn't remove risk. Then again, maybe lenders and investors learned something from the financial crisis and won't go to extremes with derivatives and bundling.

 

[mjvcaj]

We all talk about the importance of small business in regard to such things as employment, but the problem of these businesses obtaining loans and investments continues to plague us.

One of the prime obstacles to loaning and investing in small local business is of course risk. Derivatives and bundling loans, as we learned during the mortgage crisis, can be a deceptive way to hide risk but doesn't remove risk. Then again, maybe lenders and investors learned something from the financial crisis and won't go to extremes with derivatives and bundling.

Actually, it reduces risk, it doesn't just hide it. But, it does not remove risk. There is literally no such thing as "risk-free", despite what the CFA society tells you (US Treasuries are used as a "risk-free" benchmark in investment analysis and modeling).

I think small business financing has always been a problem. It isn't unique to today, but the amount of venture capital and growth equity money out there is quite extensive actually. Increased regulations as a result of Dodd-Frank essentially eliminated the appetite and ability for many banks to lend to small businesses.

I find the bundling of P2P loans a far more risky strategy than bundling of mortgages and other loans. In many cases, there are no assets securitized by the loan and recourse is much more limited. That being said, the P2P market size is significantly smaller than the mortgage or auto loan market.

 

[IU1]

http://www.bloomberg.com/news/artic...st-craze-meets-small-short-in-new-derivatives

Reminds me of the past 20 years...

“It feels like the year 2000 again,” said Frank Rotman, a partner at QED Investors, an Alexandria, Virginia-based venture-capital firm that has invested in Prosper Marketplace Inc., Social Finance Inc. and 13 other P2P lending platforms. “Everyone is chasing ’it,’ but they don’t know what ’it’ is, and that is kind of scary.”

“It’s a high-coupon asset that’s had very good returns for the short period of time it’s been around,” Edman said of P2P loans. “I don’t have reason to believe that’s going to change dramatically anytime soon, but there are bad loans out there.”

“If you could create a synthetic product that mimics all the features of a P2P loan and had the same risk and yield tradeoff, there would be a lot of demand to buy that paper,” said Dickinson, whose firm has invested in LendingClub and Orchard Platform and is looking to invest $5 million to $10 million in a firm trying to create derivatives on P2P loans. Other small firms are racing to create P2P derivatives before big banks try to muscle in."

This type of madness is everything that's wrong with Wall St. Gamblers and after 2008 should have been a wake up call to the world as to what is going on.

As long as tax payers aren't on the hook I'm fine with it but if it's part of another unraveling of our financial system that will need another taxpayer bailout, then this is squarely on Obama. He had an opportunity to slam the door shut on this and get our country back to production, savings, and then consumption which is the backbone of any strong economy.

From this article it doesn't look like much money is tied up in this scheme now but we all saw how quickly the snowball can roll.

 

[mjvcaj]

This type of madness is everything that's wrong with Wall St. Gamblers and after 2008 should have been a wake up call to the world as to what is going on.

As long as tax payers aren't on the hook I'm fine with it but if it's part of another unraveling of our financial system that will need another taxpayer bailout, then this is squarely on Obama. He had an opportunity to slam the door shut on this and get our country back to production, savings, and then consumption which is the backbone of any strong economy.

From this article it doesn't look like much money is tied up in this scheme now but we all saw how quickly the snowball can roll.

Why are you commenting if you don't even know what a derivative is?

 

[hoosier2112]

Increased regulations as a result of Dodd-Frank essentially eliminated the appetite and ability for many banks to lend to small businesses.

Wait, are you trying to tell me that there's a downside to passing a law with approximately 100,000 pages of regulations and interpretations thereof, whose sponsors were a "Friend of Angelo" and a guy who said that Freddie and Fannie were too restrictive in terms of who they gave loans to?

Who knew?

 

[mjvcaj]

Wait, are you trying to tell me that there's a downside to passing a law with approximately 100,000 pages of regulations and interpretations thereof, whose sponsors were a "Friend of Angelo" and a guy who said that Freddie and Fannie were too restrictive in terms of who they gave loans to?

Who knew?

Some people cannot seem to understand this still.

 

[toastedbread]

http://www.bloomberg.com/news/artic...st-craze-meets-small-short-in-new-derivatives

Reminds me of the past 20 years...

“It feels like the year 2000 again,” said Frank Rotman, a partner at QED Investors, an Alexandria, Virginia-based venture-capital firm that has invested in Prosper Marketplace Inc., Social Finance Inc. and 13 other P2P lending platforms. “Everyone is chasing ’it,’ but they don’t know what ’it’ is, and that is kind of scary.”

“It’s a high-coupon asset that’s had very good returns for the short period of time it’s been around,” Edman said of P2P loans. “I don’t have reason to believe that’s going to change dramatically anytime soon, but there are bad loans out there.”

“If you could create a synthetic product that mimics all the features of a P2P loan and had the same risk and yield tradeoff, there would be a lot of demand to buy that paper,” said Dickinson, whose firm has invested in LendingClub and Orchard Platform and is looking to invest $5 million to $10 million in a firm trying to create derivatives on P2P loans. Other small firms are racing to create P2P derivatives before big banks try to muscle in."

What do you think about lendingclub in general? I just found them recently and was planning to invest in some of the high risk notes. The returns seem very good. I was planning to purchase some on their trading platform when I found good deals. From some numbers I've seen, picking up loans that have already passed say 18/36 mths or 25/60 mths and maintain a superb YTM is a good play. This should cut down on the default rate as I've read. I presume I could receive a return of 10-15% with relative ease.

 

[mjvcaj]

What do you think about lendingclub in general? I just found them recently and was planning to invest in some of the high risk notes. The returns seem very good. I was planning to purchase some on their trading platform when I found good deals. From some numbers I've seen, picking up loans that have already passed say 18/36 mths or 25/60 mths and maintain a superb YTM is a good play. This should cut down on the default rate as I've read. I presume I could receive a return of 10-15% with relative ease.

I'm have limited experience and after opening an account two years ago, decided to forego the investment. I remain skeptical, particularly when holding notes longer than 48 months. If the economy experiences another downturn, there is little recourse on your end and most of the loans are not collateralized (perhaps some of the people looking to finance auto purchases or other hard assets are the exception). However, if you like fixed income this is certainly more appealing than US Treasuries or most institutional grade corporate debt.

I actually tend to be a bit more interested in crowdfunding. However, the deal structure is a major turnoff since I prefer voting shares.

 

[toastedbread]

I'm have limited experience and after opening an account two years ago, decided to forego the investment. I remain skeptical, particularly when holding notes longer than 48 months. If the economy experiences another downturn, there is little recourse on your end and most of the loans are not collateralized (perhaps some of the people looking to finance auto purchases or other hard assets are the exception). However, if you like fixed income this is certainly more appealing than US Treasuries or most institutional grade corporate debt.

I actually tend to be a bit more interested in crowdfunding. However, the deal structure is a major turnoff since I prefer voting shares.

Ok, but they also have a trading site now which provides some liquidity? Even if there was a downturn the collapse of these would not be immediate?

Also if I purchased notes on the trading platform with high yields and only 30-35/60 or 14/30 mths remaining that would eliminate your 48 month issue?

I also have read that the best notes to invest in with the lowest default rates are credit card refinance ones.

I'm thinking about putting 5-10k into this within the next couple of months, although I prefer to choose each note individually.

 

[toastedbread]

Btw, which crowdfunding site have you looked into? And how do you think that would compare to a return of 10-15% via lendingclub?

 

[mjvcaj]

Ok, but they also have a trading site now which provides some liquidity? Even if there was a downturn the collapse of these would not be immediate?

How much liquidity does it truly provide, particularly in a market downturn? It is largely unknown. My premise is that when investors look for risk-off trades, they are certainly not going to be seeking non-recourse investments that provide capped upside. It just isn't how behavior works in market changes. They will flock to sovereign debt and debt backed by hard assets.

Also if I purchased notes on the trading platform with high yields and only 30-35/60 or 14/30 mths remaining that would eliminate your 48 month issue?

If you are confident enough in the economy, then yes, shorter term maturity would eliminate exogenous risk.

I also have read that the best notes to invest in with the lowest default rates are credit card refinance ones.

Why do you suppose that is? I am curious about this.

I'm thinking about putting 5-10k into this within the next couple of months, although I prefer to choose each note individually.

I think you should give it a go considering you seem content with the risk/reward balance. Question for you would be, why invest in a single note instead of a pool of HY notes that provide similar returns but diversify risk? Do you believe that you will get enough knowledge regarding each individual debtor.

Btw, which crowdfunding site have you looked into? And how do you think that would compare to a return of 10-15% via lendingclub?

Much higher risk, much higher potential reward. Wefunder and a few others. I like Wefunder the best thus far. Again, don't particularly like the blanket structure applied to these investments (almost all are convertible preferred with no voting rights).

 

[twenty02]

Not sure why anyone would buy these notes with no collateral when you can get close to as good returns from hard money lending in the real estate investment world, that actually has a hard asset as collateral.

 

[mjvcaj]

Not sure why anyone would buy these notes with no collateral when you can get close to as good returns from hard money lending in the real estate investment world, that actually has a hard asset as collateral.

Agreed

 

[toastedbread]

Why do you suppose that is? I am curious about this.



I think you should give it a go considering you seem content with the risk/reward balance. Question for you would be, why invest in a single note instead of a pool of HY notes that provide similar returns but diversify risk? Do you believe that you will get enough knowledge regarding each individual debtor.



Much higher risk, much higher potential reward. Wefunder and a few others. I like Wefunder the best thus far. Again, don't particularly like the blanket structure applied to these investments (almost all are convertible preferred with no voting rights).

Sorry, I've been a bit busy. I think I may start an investment thread on here since this is now a topic forum.

Hmm, I would guess because they are not taking on existing debt, but just getting lower interest rates and more affordable payments for their current debit/ccs?

http://blog.lendingrobot.com/post/87123011616/predicting-the-number-of-payments-in-peer-lending

Well, I would buy a bunch of notes individually which would essentially become a pool on it's own.

Anyhow I decided against this because it's too much work.

twenty02 is referring to REITs or what?

With wefunder what kind of return might I be able to achieve? (I understand there is big risk) I see there are also wefunder investment funds?

Also, what do you think about BDCs?

TIA.

 

[twenty02]

No, not REITs. Hard money lenders provide direct loans to real estate investors, but take liens on the property., they are short term loans from maybe 3 months to 2 years. Often utilized by house flippers or other investors that need to close fast on a deal, or the property doesn't qualify for traditional financing.

 

[mjvcaj]

Hmm, I would guess because they are not taking on existing debt, but just getting lower interest rates and more affordable payments for their current debit/ccs?

Perhaps.

Anyhow I decided against this because it's too much work.

Investing is plenty of work, generally. I'm not sure you will find crowdfunding is any less and likely more.

With wefunder what kind of return might I be able to achieve? (I understand there is big risk) I see there are also wefunder investment funds?

I cannot comment on that because each investment is so unique. You have to remember, the difference between investing in equity (Wefunder or other crowdfunding) vs. debt (LendingClub) is that you are selecting companies for the upside potential vs. attempting to obtain repayment of your principal. The perspective is incredibly different, which is why you see very few people or organizations that are good at both.

Also, what do you think about BDCs?

Terrible investment, at least at the moment They are making leveraged loans at some spread above bank rates, but because of the influx of money that needs to be put to work, spreads have deteriorated significantly. IMO, a unitranche loan at an interest rate of 8% doesn't justify the risk these BDCs are taking. If anything, I would look into more diversified asset managers (e.g. Blackstone, KKR) that have funding arms, but also a multitude of various strategies.

 

[mjvcaj]

No, not REITs. Hard money lenders provide direct loans to real estate investors, but take liens on the property., they are short term loans from maybe 3 months to 2 years. Often utilized by house flippers or other investors that need to close fast on a deal, or the property doesn't qualify for traditional financing.

We are exploring a sale of a client that does this and has been crushing it lately.

 

[toastedbread]

Investing is plenty of work, generally. I'm not sure you will find crowdfunding is any less and likely more.

Surely. I mean investigating $25 lending corp notes individually isn't worth the return on them.

Also if/when interest rates rise that will kill lending corp returns?

 

[toastedbread]

How do you see

EUR/USD and USD/CAD(AUD) playing out over the next 2-3 years?

 

[mjvcaj]

Also if/when interest rates rise that will kill lending corp returns?

Potentially. Not sure about kill, but it would reduce the returns.

EUR/USD and USD/CAD(AUD) playing out over the next 2-3 years?

Not a forex expert. Don't see how anyone can be long the EUR or short the USD. I'll leave it at that.

CAD/AUD could rise if commodity prices rebound, but Australia is looking quite weak right now.

 

[toastedbread]

Potentially. Not sure about kill, but it would reduce the returns.



Not a forex expert. Don't see how anyone can be long the EUR or short the USD. I'll leave it at that.

CAD/AUD could rise if commodity prices rebound, but Australia is looking quite weak right now.

Ok and USD/CAD non-parity is tied to the fall of oil?

 

[mjvcaj]

Ok and USD/CAD non-parity is tied to the fall of oil?

Oil and other commodities. Similar to Aussie, Canada is a huge producer of commodities other than oil, such as metals (mining), forestry and nat gas.

 

[toastedbread]

Ok, I have a new plan of attack...

I want to get some Iran exposure before a deal is reached. I will do this via UAE. Ideally I would like to invest money directly in the Dubai Financial market. Though, I'm not sure how feasible this is. There is also the "UAE" ETF. Regardless, I would prefer options I guess so I have huge upside, though I can't find an option chain for ticker UAE. How would you approach this? If a deal is reached I think this will explode. I want the highest risk/highest reward scenario.

Edit: I see one broker there offers CFDs at least, but from reading that seems a bit too crazy for me. I just want some simple options where I just lose my principal in the worst case with no margin.

Edit: http://www.nasdaqdubai.com/marketdata/#/derivatives
I found this. Don't think these are liquid though. It appears I could invest in their stocks relatively easily though.

 

[mjvcaj]

O.

This preso from JPM may give you some thoughts...

https://www.jpmorganfunds.com/blobcontentheader/202/900/1158474868049_jp-littlebook.pdf

 

[mjvcaj]

Ok, I have a new plan of attack...

I want to get some Iran exposure before a deal is reached. I will do this via UAE. Ideally I would like to invest money directly in the Dubai Financial market. Though, I'm not sure how feasible this is. There is also the "UAE" ETF. Regardless, I would prefer options I guess so I have huge upside, though I can't find an option chain for ticker UAE. How would you approach this? If a deal is reached I think this will explode. I want the highest risk/highest reward scenario.

Edit: I see one broker there offers CFDs at least, but from reading that seems a bit too crazy for me. I just want some simple options where I just lose my principal in the worst case with no margin.

Edit: http://www.nasdaqdubai.com/marketdata/#/derivatives
I found this. Don't think these are liquid though. It appears I could invest in their stocks relatively easily though.

Does not sound like a good investment strategy. If your thesis is that a deal with Iran is going to happen, why are you going to invest in UAE instead of Iranian companies? I don't know, but I would assume there are some traded publicly on exchanges (check Asian markets, possibly some Euro). You don't want broad UAE exposure, you are simply looking for Iranian exposure.

 

[toastedbread]

Does not sound like a good investment strategy. If your thesis is that a deal with Iran is going to happen, why are you going to invest in UAE instead of Iranian companies? I don't know, but I would assume there are some traded publicly on exchanges (check Asian markets, possibly some Euro). You don't want broad UAE exposure, you are simply looking for Iranian exposure.

AFAIK there are no currently dual listed Iranian companies due to sanctions? And even if there were it would be illegal to invest in them? I found this http://en.wikipedia.org/wiki/Ghadir_Investment_Company
but I can't find any non-Iranian tickers for them.

There is the Tehran Stock Exchange which is quite small and obviously impossible/illegal to invest in.

My gf works for a commodities trader there and wrote me this "SWIFT sanctions were their #1 concern. Then it's oil, automobile, insurance, aeronautics, and petrochemicals. UAE, Turkey and China will benefit the most Also Russia."

UAE is a neighboring country, plus many Iranian companies have branches in the UAE + all of the banks work together. They will benefit the most.

http://businessweekme.com/Bloomberg/newsmid/190/newsid/610
http://www.arabianbusiness.com/focu...fting-of-us-led-sanctions-on-iran-590410.html

As for the UAE ETF.. it seems primarily composed of financials and the easiest route to go. I see Dubai Ports World is dual listed, but it's one of the only dual listed companies.

http://www.bloomberg.com/quote/DPW:DU

You can see the big jump from 4/1-4/8 on the preliminary agreement news.

 

[toastedbread]

Does not sound like a good investment strategy. If your thesis is that a deal with Iran is going to happen, why are you going to invest in UAE instead of Iranian companies? I don't know, but I would assume there are some traded publicly on exchanges (check Asian markets, possibly some Euro). You don't want broad UAE exposure, you are simply looking for Iranian exposure.

Have a look at this...
http://www.bloomberg.com/news/artic...y-s-next-round-has-stock-buyers-cash-as-prize

 

[mjvcaj]

What do you think about lendingclub in general? I just found them recently and was planning to invest in some of the high risk notes. The returns seem very good. I was planning to purchase some on their trading platform when I found good deals. From some numbers I've seen, picking up loans that have already passed say 18/36 mths or 25/60 mths and maintain a superb YTM is a good play. This should cut down on the default rate as I've read. I presume I could receive a return of 10-15% with relative ease.

Just to bump this with some news:

http://www.bloomberg.com/view/articles/2016-05-11/lendingclub-s-troubles-bring-back-bad-memories

There are two main ways to look at LendingClub's problems this week:

1. LendingClub got in trouble for being too much like a fintech -- a "financial technology" company -- and too little like a bank, focusing on algorithms and speed and coolness rather than the plodding legalistic work that is the actual business of finance.
2. LendingClub got in trouble for being too much like a bank and too little like a fintech, with mission creep, conflicts of interest and "a complicated network of middlemen" instead of a pure technology-driven neutral platform.

So! Yesterday I was kind of meh on this scandal: Selling Jefferies some loans that didn't meet its "non-credit and non-pricing" needs in a way described as "fairly minor" doesn't, in the abstract, sound allthat bad.

But forging loan application data to make a securitizer think that you met its standards for borrower disclosure, while not actually meeting those standards, is just the reddest of red flags. Jefferies was relying on the disclosure to borrowers being accurate, so that the loans would be enforceable, so that its notes would perform as expected, so that it could make representations about them to securitization buyers, so that those buyers could etc., etc., etc., etc. Loan securitization is a horrible Jenga tower of legalities that have to be perfectly balanced so that the whole thing can work as expected. If the borrower disclosure, at the very start of the process, is insufficient -- even if Jefferies was being overly conservative about the sufficiency of that disclosure -- then everything collapses. It isn't good. Jefferies and Goldman Sachs have stopped buying LendingClub loans and are reviewing their securitization plans.

 

[toastedbread]

Just to bump this with some news:

http://www.bloomberg.com/view/articles/2016-05-11/lendingclub-s-troubles-bring-back-bad-memories

There are two main ways to look at LendingClub's problems this week:

1. LendingClub got in trouble for being too much like a fintech -- a "financial technology" company -- and too little like a bank, focusing on algorithms and speed and coolness rather than the plodding legalistic work that is the actual business of finance.
2. LendingClub got in trouble for being too much like a bank and too little like a fintech, with mission creep, conflicts of interest and "a complicated network of middlemen" instead of a pure technology-driven neutral platform.

So! Yesterday I was kind of meh on this scandal: Selling Jefferies some loans that didn't meet its "non-credit and non-pricing" needs in a way described as "fairly minor" doesn't, in the abstract, sound allthat bad.

But forging loan application data to make a securitizer think that you met its standards for borrower disclosure, while not actually meeting those standards, is just the reddest of red flags. Jefferies was relying on the disclosure to borrowers being accurate, so that the loans would be enforceable, so that its notes would perform as expected, so that it could make representations about them to securitization buyers, so that those buyers could etc., etc., etc., etc. Loan securitization is a horrible Jenga tower of legalities that have to be perfectly balanced so that the whole thing can work as expected. If the borrower disclosure, at the very start of the process, is insufficient -- even if Jefferies was being overly conservative about the sufficiency of that disclosure -- then everything collapses. It isn't good. Jefferies and Goldman Sachs have stopped buying LendingClub loans and are reviewing their securitization plans.

Been reading about this. Stock price has completely crumbled. You think it's oversold at this point?

Obviously very high risk.

 

[mjvcaj]

Been reading about this. Stock price has completely crumbled. You think it's oversold at this point?

Obviously very high risk.

Doesn't look terribly under-priced. Tangible book value per share is only $2.50 and I don't like the current capital structure. That being said, it is more of a FinTech than a true financial stock.