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Brendan Ross  

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  • Peer-To-Peer Lending's Threat To Bank Earnings [View article]
    SteadfastValue - While your comment might be meant as flip, I spend a lot of time thinking about whether or not the growth of private debt, including online lending, is a bubble.

    I'll set aside whether or not you should participate in the LendingClub IPO when it happens, because that's not relevant to the larger issue here: is there a private credit bubble.

    One of the biggest differences between private credit today and the mortgage bubble is duration: the consumer loans are mostly 3 year with some 5 year. The business loans I buy in my fund are all 1 year or less.

    With those short durations, bubbles are less likely because we can do complete static pool analysis from beginning to end of a pool's life.

    When you do that analysis on cohorts of LendingClub loans (and anyone can download the data and go for it) you'll see that the underwriting is actually improving over time.

    I think it's important for all investors to consider whether or how they might be participating in a bubble. I'm just not sure what the characteristics of a bubble would look like in short duration loans, and in any event it doesn't seem like we're in one.

    Finally, I'd point out that we can clearly see that credit card debt revolves at 13%. The Fed includes this in the G.19 report, available online.

    To me the idea that a silicon valley powered company could perform underwriting reasonably well while operating more cheaply than a bank just seems kind of - I don't know - normal in 2013.

    Do you really think that banks have an intellectual monopoly on figuring out which consumers will pay back loans?
    Nov 23, 2013. 01:38 AM | 1 Like Like |Link to Comment
  • Peer-To-Peer Lending's Threat To Bank Earnings [View article]
    Bridge - it is only time-consuming if you buy loans one at a time. If you were to trust the underwriter more completely, you could easily own an index of all of LendingClub underwriting with little effort. This is the position that most large investors in these types of loans are taking.

    Credit card debt is $850 billion. That is pretty big. Participating in that market requires that you either buy bank stocks (earn dividend yields) or participate in wall street produced securitizations that earn you maybe 5 or 6%.

    You can construct a LendingClub or Prosper portfolio of what is basically credit card debt and earn 8-10% pretty easily.

    Granted a recession, with its concomitant increase in unemployment, will increase defaults, but bank stocks are hardly likely to fare as well during a recession as 2007 vintage LendingClub loans did in 2008/2009 (slightly positive - you can download the data and check for yourself).

    If you don't believe that credit card loans are a proxy for online lending, then go to LendingClub's website and click on the link in the bottom right to Browse More Listings. Look at the reasons people are borrowing: 80-85% are credit card debt consolidation.

    It's pretty clear that some consumers are showing a preference for 36 and 60 month amortizing loans instead of revolving balances, and this number is growing at 5+% per month (doubling every year).

    I will grant you that banks will respond by offering the same product, which will cannibalize their revolving products, but they'll have to respond with their own balance sheets and through their own cost structures, whereas online lenders with do so with lean cost structures and other people's balance sheets.

    I think this gets a lot bigger.
    Nov 23, 2013. 01:24 AM | Likes Like |Link to Comment
  • Peer-To-Peer Lending's Threat To Bank Earnings [View article]
    BigGuy - I just don't even know what you mean when you suggest that there are no regulations regarding peer to peer lending. One the borrower side, LendingClub and Prosper have to comply with every single rule and requirement for consumer loans, including Fair Credit Reporting Act, etc.

    On the lender side, both companies spend millions every year on SEC registration fees for the securities they sell.

    In addition, I have no idea what you mean by the idea that the "working poor" will transfer wealth to the "very wealthy" due to private equity firms.

    The only reason that the middle class cannot more easily participate in private debt right now is the SEC rules regarding who can participate in private placements. Believe me, private debt hedge funds would be happy to sell to non-accredited investors. This just isn't possible.

    At some point there will be mutual funds that invest in these types of loans, but the daily liquidity required to run a mutual fund means that a more robust secondary market for the loans must exist first.
    Nov 23, 2013. 01:12 AM | Likes Like |Link to Comment
  • Peer-To-Peer Lending's Threat To Bank Earnings [View article]
    Bridge - The numbers are very small today, but I don't think they will remain so.

    Historically, private debt has been done by banks that tackle three parts of the value chain: sourcing borrowers, underwriting loans (determining who is creditworthy), and lending from their own balance sheet.

    Online lenders and the hedge funds that partner with them are pulling apart this value chain, separating the sourcing/underwriting from the balance sheet.

    To me this feels like a pretty important change: underwriters can operate with enough transparency/integrity that others will provide the balance sheets.

    Given how good Silicon Valley is at doing things like sourcing borrowers (creative marketing) and underwriting (skilled use of data and rapid test/learn cycling) I don't see why the combination of internet startups + hedge funds can't take on banks in a whole variety of credit products, delivering higher returns with thin cost structures (at least compared to banks) to pension funds, family offices, RIAs, and the other large sources of wealth.
    Nov 23, 2013. 01:05 AM | Likes Like |Link to Comment
  • 20 Years of Lousy Returns for Equities: How Investors Can Profit [View article]
    You said it! One additional thought: if you use book-to-market to split the cap-weighted S&P 500, and then look at the value segment only, you can still get surprisingly decent returns with less volatility than a mid-cap or small-cap value strategy. I don't always use Large Cap Value in my portfolios, but it does deliver better than you might think.

    The most essential lesson is: avoid large cap growth stocks (i.e. low B-t-M) at all costs, as they so consistently underperform all other domestic asset classes.
    May 2, 2011. 12:37 PM | Likes Like |Link to Comment
  • 20 Years of Lousy Returns for Equities: How Investors Can Profit [View article]
    Thanks for the comment. Every author needs to create a hook that makes the piece worth reading, and the data I used is accurate. Stocks are a long term project, so I don't think the 20 year time frame is unfair. I address other time periods including the last 10 and the last 30 years towards the end of the article, in the paragraph entitled "A Word About Time Periods."

    If you have a good scenario modeling tool that includes the ability to rebalance portfolios, then try playing around with the % in fixed income. It's actually very easy to beat a 100% equities portfolio with some fixed income. Technically, 30% bonds is probably 5-10% over the line in terms of creating maximally efficient portfolios, but clients have to live with (and stick with) these allocations through downturns, and not dumping equities at the bottom is as important as any allocation decisions. Anyway - this cat can be skinned a lot of ways as we both know.
    May 1, 2011. 12:00 PM | 2 Likes Like |Link to Comment
  • 20 Years of Lousy Returns for Equities: How Investors Can Profit [View article]
    "This guy" happens to be me, and that bullet point is what we call a "joke" here on planet earth. The article has nothing to do with housing prices or the financial crisis. The readers of my blog didn't seem to have your trouble parsing that.
    May 1, 2011. 11:49 AM | 2 Likes Like |Link to Comment