Build Your Own CDO

Have you ever dreamed of building your very own CDO? Do you think you could master the fragile alchemy of blending Z-tranche crap with A-rated paper to outperform the market? Well now you can. And I'm going to lead the charge by putting together my own CDO and reporting its results to you on a quarterly basis. Here's how.

I've been researching Peer-to-Peer (P2P) lending for several months now. It is a growing market currently serviced by two major players, and I expect more to come online shortly. Individual borrowers log on and apply for a loan, and individual investors log on and fund those loans. At present, loans are written for up to $25,000 and for terms as long as five years. P2P lending completely bypasses the banks in favor of a free market solution, and I think it has the potential to be a grand slam for investors over the next decade.


THE PLAYERS

The biggest companies offering P2P lending today are Prosper and LendingClub. Prosper is the older and larger of the two, founded in 2006 and now boasting over one million members and over $210 million in loans funded. LendingClub isn't far behind. They were founded in 2007 and, while they don't publish membership numbers, they've completed over $180 million in funded loans. The two just happen to be headquartered a stone's throw away from each other in San Francisco.

The primary difference between the two is that Prosper uses an auction format for bidding up or down interest rates on requested loans, where LendingClub has set rate parameters based on a variety of factors like loan amount, FICO score, debt-to-income ratio, and several others. Both allow investors to fund a requested loan with as little as $25, so a $25,000 loan may be funded by as many as 1,000 different investors.

Both sites also offer a secondary market in the notes through Foliofn where funded notes are bought and sold. I can't say how liquid the notes are, because I haven't tried to sell any yet. I will say that I'll be buying some "junk bond"-type paper on the secondary market soon just to test out a high-yield portfolio.


MY CDO

I chose LendingClub over Prosper because they appear to have a platform better suited to sophisticated investors. That's not a slam on Prosper, it's just my impression. LendingClub chose to register with the SEC right away, but Prosper operated outside the regulators for awhile before registering (I'm not sure there's any requirement for them to register, but it certainly makes investors feel better). LendingClub also instituted stricter lending standards coming out of the gate, which Prosper has now emulated.

I was more comfortable with the LendingClub platform as well. It's very straightforward; you simply filter the available notes by interest rate, credit rating, term, purpose, or a variety of other factors that are important to you. I liked that I could lock in an interest rate when I found a loan I was comfortable funding, rather than seeing the rate fluctuate according to auction results.

So I joined LendingClub and built a portfolio of loans whose results I could report back to you. The CDO I built has a weighted average rate of return of 10.79% annually and this is how it breaks down:

  • A paper - 20%
  • B paper - 40%
  • C paper - 20%
  • D paper - n/a
  • E paper - 20%
  • F paper - n/a
  • G paper - n/a

80% of the portfolio is made up of loans to people consolidating debt (mostly high-interest credit cards) and the other 20% went to hard asset investment purchases (collectible automobiles for resale by guys with demonstrated expertise in that market). 60% of the portfolio is in 3-year notes, the other 40% in 5-year notes.

For the record, LendingClub only offers loans by those borrowers with FICO scores of 660 or better, debt-to-income ratios of 25% or less, at least three years of credit history with no current delinquencies or recent bankruptcies (7 years), and a variety of other fairly strict criteria.


WHY IT WON'T LAST

I have a feeling P2P lending is going to be great over the next 5-10 years, but I think the people who get in now are going to do the best. This is for two reasons.

First, as P2P lending becomes more the norm, more and more investors will seek the higher yields this type of investing can provide. If you have more dollars coming into the market, either the yields or the credit quality of the loans have to drop.

Second, as the dollar volume of P2P lending accelerates, the banks are going to get really cranky. Sites like Prosper and LendingClub have no capital requirements, because all their loans are fully funded by individual investors. They have no local branches or exorbitant staffing requirements. They're able to offer lower rates to borrowers than the banks and offer higher rates to investors than the banks can afford. At just under a half a billion dollars in lending, P2P lending is a minor irritation for the banks. But you'd better believe that when the volume gets over $10 billion or so, the banks are going to start leaning on their government puppets to shut it down.

I could be wrong about all this, and it certainly wouldn't be the first time. I might have my CDO crash and burn and never pay me a cent. But for the opportunity to stick it to the TBTF banks (who issue the vast majority of credit cards in the U.S.), you'd better believe I'm on board. I'll let you know how it works out.

If you have any questions (or think I'm a fool), hit me with them below.

 

I have recently been playing with lending club data (plan on doing some more over the holidays). It piqued by interest when a bunch of personal finance blogs I follow began managing loan portfolios. Many of these guys were beating the 10% avg return than lendingclub advertises. I remember one of the main points made by these guys is the importance of diversification.

Anyways, here is some data to play with: https://www.lendingclub.com/info/download-data.action

My main interest is to see if I can figure out what the optimal number of notes to hold to get a decent return:risk ratio on a HY (>10%) loan portfolio. Overall, I think its a great way to put some $ to work. Investing in loans would have netted you more money in the last 4 years than putting it in the market at the very least.

 

Another great post, Eddie. Interesting ideas, piques my interest. Any idea of loss ratios so far for either of the P2Ps??

A good friend will come and bail you out of jail...but a true friend will be sitting next to you saying, "Damn...that was fun!"
 

I'm not sure I understand how you've structured your CDO; can you elaborate on that? (I assume it's really more of an internal calc to make a point but I'd still like to know what you mean)

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 

@Patrick, I opened the account with $250 just to poke around and get a feel for everything. I bought 10 loans at $25 apiece. So 20% is 2 loans, 40% is 4 loans, etc... I'm still getting to know the various stages of the loan process (for example, loans are initially given 2 weeks to round up all the dough - some do it right away and other take the whole two weeks), then it goes through a review process, then the funds get disbursed. I just put the portfolio together this weekend and so far 3 of the 10 loans are completely finished (as in, I'm now waiting for my first payment in January), 3 more are funded and under review (probably disburse in the next 24 hours), 2 are still in funding (meaning they're not fully subscribed but have more time before expiration), and finally 2 expired without being fully subscribed, so I'm not sure what happens in that case but I'll report as soon as I know. One of them was a $12,500 loan request that got $11,950 funded, so I'm assuming they just go ahead with the $11,950 loan, but I'll let everyone know when I find out for sure.

Once I'm completely comfortable with the whole thing, I'll probably buy 100 new loans and 100 secondary market loans to see how it goes.

@baddebt88 Yeah, I think diversification is key to this type of investment. LendingClub hammers that pretty hard, and their loss ratios bear it out. The more loans you have, the more stable your return and the lower your risk.

@LetsGoSailing LendingClub actually offers a Portfolio function if you don't feel like picking out your loans individually. You just select from one of three annual yields (low, medium, and high ranging from about 6% to 16%) and they build a portfolio for you. When you do this, they actually give you the statistical rate of default on the portfolio. I didn't fool around with it much because I wanted to build my own, but I remember the default rate on the worst portfolio was still expected to be less than 2%, so the overall yield was around 14% if I remember correctly.

 

Eddie> How are you picking up your notes from the secondary market? What sort of screening idea etc?

It seems that the liquidity in the market is fairly decent. It also seems that fairly stable loans can be picked up at .2-.5% discounts which over the long term can definitely add some alpha to the portfolio.

One thing I am trying to find is data on distressed notes that trade in the secondary market. It would be interesting to see, how loans that trade at 30-40% discount eventually perform. Any idea where to find this raw data?

 

Eddie - thanks, just created an account.

I guess a question we should be asking ourselves is how correlated a portfolio built in a P2P network is with the rest of our investments in the market (assuming a net long position).

In other words, what equities and/or ETFs would a portfolio of personal loans track most closely or are there any other ways to play this micro-loan market trading through your traditional brokerage account?

 

I cannot preach enough on how important diversification is when managing a loan portfolio, had a tiny lending business back in college and it blew up on me when I got greedy on one.

Great thread Ed, will be looking into this for sure.

People like Coldplay and voted for the Nazis, you can't trust people Jeremy
 
Best Response

Very interesting, but a CDO would imply collateral. These loans do not appear to be collateralized at all. I am skeptical because (among other reasons):

  • 63% of loans are reportedly for borrowers to pay off credit card bills, and I regard people with credit card debt as some of worst at managing money

  • 87% of all loans ever made are still outstanding, so the system does not seam to be tested yet. I would be very interested to see the data in 5 years, when we can see how many of these loans actually do get paid off

  • The lack of verifiability of the borrower’s information, particularly in the “Loan Description” and “Questions and Answers” sections

  • Uncollateralized, and because these loans are generally small, sometimes held by a hundreds of lenders who cannot contact the borrower, and because the only institution available to chase after them is the website company, I have doubts of the collectability of delinquent loans

  • Diversification only mitigates some of the risk. Mortgage backed securities should have taught us that a pile of shit bundled up into a diversified package is just a package of shit

However, it is still a very interesting idea, and if the company can ensure transparency and can build a solid long-term track record, it could be a very useful tool for investors

Go East, Young Man
 

Yes, you are correct, these are not collateralized loans. I called it a CDO for lack of a better term.

All the points you bring up are good ones. I happen to think that the recession has caused a massive wave of deleveraging among consumers and it is now very popular to become debt free. I would normally agree that credit card balance carriers are a poor risk, but in this case I'm willing to take the chance. I think consumer sentiment has turned a corner to such a degree that for the next several years at least, people will look at credit card debt like the financial AIDS that it is and cut it at all costs. For that reason, I feel better lending money to people who are eliminating debt. Right or wrong, the bulk of my lending will be for that purpose.

Asia_i_Banker:
Diversification only mitigates some of the risk. Mortgage backed securities should have taught us that a pile of shit bundled up into a diversified package is just a package of shit.

Correct, and hilarious. There's no free ride. You still have to do your due diligence.

 

The "collateralized" in CDO refers to the debt itself which collateralized the obligation. IE in a CLO the collateral is the loans, in a CBO the collateral is the bonds. The loans and bonds themselves aren't necessarily "collateralized" and can be unsecured, subordinated, etc.

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 

Nice post, I passed the one year mark doing lending club last month. It is a great idea and thus far I have just under a 12% return. I have about $4k invested in about 150 notes. I want to see how well they perform come march, after the holiday bills are due and heating bills are back down to normal, and then I am going to ramp up my investment there.

Lending club is WAY better than Prosper. I tried prosper back in 2007, and the rates were way too low for people who were such high credit risks- It was the height of the credit boom, and Prosper may have changed some of their policies since then, but when I did it, you would see guys who could hardly get a credit card secure a loan for 10k at a 7% interest rate.

Some advice- read the applications from the potential applicants. I let lending club auto-pick a portfolio that is about 30% of the size of my total investment. I have had 3 notes verge on defaulting, 2 were from the auto portfolio, one from the portfolio I hand selected after reading applications. Some are just filled with grammar and spelling errors, which I immediately pass on.

I was dq'ed from participating in FolioN due to my position in my firm. I looked in there, and I think there is an opportunity to juice returns a few % points. Another way to juice your return is taking advantage of their matching promotions- it seems that the providers of capital are in greater demand than potential borrowers, and every other month or so they have a promotion where they will kick in 2% of whatever you put in over $1000 or some other threshold (you have to invest the money in notes within a certain period to get the bonus). 2% is more than I am getting in my bank account these days...

If you guys are interested, PM me, if I refer you, YOU get $100 free to invest and try the site out with (I get nothing from the deal)- though they might offer the same to new accounts on the site. Also, Lending Club is not available in some states- I had to lie and say I live in NY to join, and if I remember right, there are net worth and other requirements that you have to pass to join, though you can easily lie about those if you don't meet them.

If you guys have any other questions, let me know, I will answer them.

Edit: I am getting lots of referral requests, which is fine. A few things though- I need your email address to send you the referral. I didn't realize this earlier, as their older promotions just gave you $ for joining, but here you need to deposit $2500 to get the $100 and I am pretty sure you need to invest that $2500 in notes within 30 days. So its not completely strings free. Sorry if that wasn't clear, when I joined they gave me $25 or $50 free and clear, so long as I invested it in notes within the first 30 days or so.

 

Clever idea. I've been wondering how long it would take for the idea of securitization to hit LC's fixed rate note business. I'm not sure if CDOs or SIVs really fits the bill, but I would likely refer to this as SPNs - securitized promissory notes.

I've been investing for 1.5 years so far w/ a 15.5% NAR. Have a few blog posts documenting performance, but since I'm new here, don't want to post an active link. If anyone wants to check it out, just let me know.

__________________________ Attempting to be the chess player, not the chess piece @ Steadfast Finances
 
Matt_SF:
Clever idea. I've been wondering how long it would take for the idea of securitization to hit LC's fixed rate note business. I'm not sure if CDOs or SIVs really fits the bill, but I would likely refer to this as SPNs - securitized promissory notes.

I've been investing for 1.5 years so far w/ a 15.5% NAR. Have a few blog posts documenting performance, but since I'm new here, don't want to post an active link. If anyone wants to check it out, just let me know.

You have a pretty good thing going there man. Put a link to your writings in your signature so that we can stay updated with how you're doing. Congrats by the way, looks like things are going pretty well for ya

EDIT: Because I cannot spell

If I had asked people what they wanted, they would have said faster horses - Henry Ford
 
happypantsmcgee:
You have a pretty good thing going there man. Put a link to your writings in your signature so that we can stay updated with how you're doing. Congrats by the way, looks like things are going pretty well for ya

Thanks man. I tossed up a link per your request.

I do a quarterly update on the Lending Club portfolio, but this time around, I'll have 1 or 2 late payers showing up, but in the grand scheme of things, I suppose 1 or 2 problem notes out of 250+ (and counting) isn't that bad. I'm sure Chase and Citibank would love to have that low of a delinquent/default ratio on their unsecured credit lines.

I have a pseudo investment club where we discuss the weeks best notes if you want to join in. Free to all.

__________________________ Attempting to be the chess player, not the chess piece @ Steadfast Finances
 

Matt,

I appreciate your not wanting to SPAM the forum as a new user. If only more people were as courteous.

I checked out your documentation and not only is it legit, congratulations are in order. A 15%+ annual return with 0 defaults is pretty amazing, and I'll do the service of posting it because I think people will want to see it for themselves:

http://steadfastfinances.com/blog/2010/09/21/lending-club-update-earnin…

Welcome to WSO, by the way.

 

Truly interesting company there.

As stated before... whats the process when the loan defaults? (cant view their site at work) Im assuming this has to be tied into credit rating and the like therefore actually incurring consequences?

"Stay Hungry, Stay Foolish"
 
dmcd:
Truly interesting company there.

As stated before... whats the process when the loan defaults? (cant view their site at work) Im assuming this has to be tied into credit rating and the like therefore actually incurring consequences?

They detail this in their FAQ, but the summary is that they try to contact the borrower and work something out, and if that doesn't work, they go to collections just like other debt. I just had my first default, it will be interesting to see what gets recovered, if anything.

 

i have copied and pasted part of the prospectus of the lendingclub. i would only invest money you can afford to lose.

============================================================= Information supplied by borrower members may be inaccurate or intentionally false and should generally not be relied upon. Borrower members supply a variety of information that is included in the borrower member loan listings on our website and in the posting reports and sales reports we file with the SEC. We do not verify this information, and it may be inaccurate or incomplete. For example, we do not verify a borrower member’s stated home ownership status, job title, employer or tenure, unless otherwise indicated, and the information borrower members supply may be inaccurate or intentionally false. Borrower members may misrepresent their intentions for the use of loan proceeds which also may result in us not obtaining certain fees from borrower members. Unless we have specifically indicated otherwise in a loan listing, we do not verify a borrower member’s stated income. For example, unless otherwise indicated, we do not verify borrower member paystubs, IRS Forms W-2, federal or state income tax returns, bank and savings account balances, retirement account balances, letters from employers, home ownership or rental records, car ownership records or any records related to past bankruptcy and legal proceedings. Approximately 60% of listed loan applications are selected for income or employment verification. For the three-months ended June 30, 2010, approximately 61% of requested borrower members provided us with satisfactory responses to verify their income or employment; approximately 13% of requested borrower members withdrew their applications for loans, and approximately 26% of requested borrower members either failed to respond to our request in full or provided information that failed to verify their stated information, and we therefore removed those borrower members’ loan postings. The identity of borrower members is not revealed to investors, and investors also have no ability to obtain or verify borrower member information either before or after they purchase a Note. Potential investors may only communicate with borrower members through LendingClub website postings, and then only on an anonymous basis. While we may monitor website posting for appropriate content, we do not verify any information in the postings nor do we respond to requests from investor or borrower members in any posting and any response to the contrary should not be seen as accurate.

 

after reading that prospectus, it sort of seems like this is one of those companies that lives by the mantra "great idea in theory, horrible in practice"

Maybe im cynical but there doesnt seem to be a large deterent from scamming on here when you have no way to contact the lender afterwards and they only contact through email...

If they could figure out a way to verify their info and it changes the ballgame in my eyes.

"Stay Hungry, Stay Foolish"
 
dmcd:
after reading that prospectus, it sort of seems like this is one of those companies that lives by the mantra "great idea in theory, horrible in practice"

Maybe im cynical but there doesnt seem to be a large deterent from scamming on here when you have no way to contact the lender afterwards and they only contact through email...

If they could figure out a way to verify their info and it changes the ballgame in my eyes.

The prospectus does contain some ugly information because when both Lending Club and Prosper launched their credit standards were somewhat lax (particularly in the case of Prosper). In October, 2008 when Lending Club came out of their "quiet period" they tightened their standards, same with Prosper when they relaunched in July 2009. Loans for both companies in their 2.0 versions have performed much better with default rates down dramatically.

I have been investing in Lending Club now for 18 months and while I can't boast the returns of @Matt_SF, I have been very happy. I am getting slightly over 10.5%, invested in around 1,200 notes and with 11 defaults so far. I expect my 1% default rate will increase over time, but there is no better fixed income risk/reward investment in my opinion.

 
SLN-Peter:

I have been investing in Lending Club now for 18 months and while I can't boast the returns of @Matt_SF, I have been very happy. I am getting slightly over 10.5%, invested in around 1,200 notes and with 11 defaults so far. I expect my 1% default rate will increase over time, but there is no better fixed income risk/reward investment in my opinion.

Thanks for the mention there. I'm sure I'll get hit w/ the default bug sooner or later, and actually, I recently had one borrower file for Chapter 13 Bankruptcy protection. Per Ch13 regs, I'll probably get most or all of my principal back, but might end up being an interest free loan. Because I'm a max diversifier, the risk is pretty well spread out and won't hurt as bad, but being that I only have ~250 notes and a young portfolio, the odds suggest I'll take a few more hits as time progresses.

But still, a 1% default rate in your portfolio is very good. The higher yield notes, especially the 5 year notes, can yield 33%+ ROI if the borrower pays the monthly minimum over 5 years. So a few defaults here and there aren't a coffin nail if you minimize risk as much as possible.

__________________________ Attempting to be the chess player, not the chess piece @ Steadfast Finances
 

Glad you brought this up. I'm actually writing my senior thesis on peer to peer lending and online social lending. Basically, I'm comparing the different sites to see if borrowers are able to get similar funding from both markets.

The academic literature I've been reviewing is very interesting. One paper that I read that particularly got to me was called "Trust and Credit". The paper uses Prosper pictures to see if lenders are able to determine the trustworthiness of a borrower based on the picture alone.

Personally, I think P2P borrowing will become much more prominent in the future; eventually, I see banks moving to a model where they will make loans alongside their depositors. P2P lending is great for small borrowers because it significantly reduces transactions costs.

I'll post more on this later.

looking for that pick-me-up to power through an all-nighter?
 
IlliniProgrammer:
This sounds a lot like Prosper.com.

haha yea too bad he didn't mention prosper in his blog entry....

If I had asked people what they wanted, they would have said faster horses - Henry Ford
 

Eddie very interesting site and following on Asia banker´s comment as this is still in early testing stage with relative risk, one can easily built a similar for FDI investing. I will not go into details without your permission as I do not want to hijack the thread. Great idea mate.

 

Ok, one of the ten loans in my test CDO just got kicked back, so this proves there is some verification on the part of LendingClub. They don't tell you why (and I'd actually like to know because it looked decent enough to invest in) but now I need to find a replacement loan.

I'm open to suggestions for a replacement. The loan that got booted was B-rated. What do you think, go A-rated or buy some crap in the G's?

Quick Update: in addition to the 1 that just got kicked back, 6 are now through the funding process and have been issued, 1 has been funded but is still under review, and the remaining 2 are still in funding. Evidently, the two that weren't fully subscribed accepted the lesser amount and went with the loan.

 
Edmundo Braverman:
Ok, one of the ten loans in my test CDO just got kicked back, so this proves there is some verification on the part of LendingClub. They don't tell you why (and I'd actually like to know because it looked decent enough to invest in) but now I need to find a replacement loan.

I'm open to suggestions for a replacement. The loan that got booted was B-rated. What do you think, go A-rated or buy some crap in the G's?

Eddie, may as well go with a crap shoot G level loan. You don't have that much at stake and it might make things a bit more interesting...just a thought

If I had asked people what they wanted, they would have said faster horses - Henry Ford
 
Edmundo Braverman:
Ok, one of the ten loans in my test CDO just got kicked back, so this proves there is some verification on the part of LendingClub. They don't tell you why (and I'd actually like to know because it looked decent enough to invest in) but now I need to find a replacement loan.

I'm open to suggestions for a replacement. The loan that got booted was B-rated. What do you think, go A-rated or buy some crap in the G's?

Couple things can happen:

1) investor changes his/her mind and cancels the loan 2) LC does not approve the loan 3) loan doesn't fully fund and investor decides to relist

If you're open to suggestions, here's a note I invested in that is still open for funding.

https://www.lendingclub.com/browse/loanDetail.action?loan_id=619786

Gent works for Occidental Petroleum.

__________________________ Attempting to be the chess player, not the chess piece @ Steadfast Finances
 

What inefficiencies have you all seen in the Foliofn market, if you've tried it? Any good opportunities for arbitrage haha?

The lending seems pretty straight forward and I'm pretty interested in getting some solid returns. Even the A rated tranche is returning much better than the T-Bonds I have now. I understand that they assume more risk but with option 1 having a default rate of only .98%, A-1 should be much lower and still yields over 5%.

 

I was looking at this one, too:

https://www.lendingclub.com/browse/loanDetail.action?loan_id=615902&pre…

Pretty sketchy at a G-4, but the reported household income is $200k+ and debt to income looks pretty good. Plus it closes in less than 2 hours, so I should know something fairly quickly.

And it gives my CDO a little more balance.

UPDATE: I ended up going with this loan. Oddly, about $5,000 in funding came into it in the last hour, so I thought that was kinda strange. Nevertheless, it increased the weighted average rate of my CDO to 11.87% assuming these last 4 loans get issued.

Fingers crossed.

 

The G's look alright to me sometimes. I have a few G's and none have defaulted yet. I only have a few, but I look for a good story- IE high income, recent bankruptcy/foreclosure. There are a lot of otherwise good people out there who got caught in the real estate bubble and lost their houses and credit along with it.

Really though, I feel you shouldn't be stressing about any one note in particular. The whole key is putting a little money into as many loans as possible, not placing a five figure bet on "Joe from Arizona" not blowing the money on a motorcycle instead of paying down his credit cards. Occasionally I will put more into a loan than the $25 minimum if I really like the application.

They offer some nice reporting tools on the site, and they all assume that you have a large number of small, equal value loans.

One tip- loans will generally fill more in the last day, as they are viewed first on the note browsing page. Some of the better looking applications fill several days or even a week in advance, so be sure to dig a bit. Whether or not those perform better... only time will tell. The one note I have that defaulted was actually A rated, and everything on the app looked great- stable job, high income/debt ratio, etc. Nonetheless, she defaulted.

 

Just an FYI - this is far from a CDO. You have a loan portfolio - as stated on the website. A CDO would require you issuing notes(senior/sub/mezz) to fund your collateral purchases while trying to achieve above market returns. None of which you have done. You've built a loan portfolio, not a CDO in any capacity (or CLO in that matter)

LendingClub and Prosper are a great concept but lead way to predatory practices and are unsecured loans - if a default occurs - you're shit out of luck.

Only so much information can be verified - do your DD and diversify immensely.

Before you tout the P2P lending websites, you should find all the problems they have. They currently have a D rating by the Better Business bureau... might want to do some DD. A rated individuals can turn out to be shit.

Again - idea is good, but in practice its not that functional

"Free Market Capitalism is the best path to Prosperity!" - The Larry Kudlow Creed
 
CDOMonkey:

Before you tout the P2P lending websites, you should find all the problems they have. They currently have a D rating by the Better Business bureau... might want to do some DD. A rated individuals can turn out to be shit.

Again - idea is good, but in practice its not that functional

I hate to contradict anyone being the new guy, but this is statement is incorrect as it pertains to Lending Club.

If I'm reading the Better Business Bureau website correctly, Lending Club scores a BBB rating of "A-" as of today (2010-11-29). Likewise, I have no functionality complaints after 1.5 years.

Disclosure: I don't work for LC, they just make me money.

__________________________ Attempting to be the chess player, not the chess piece @ Steadfast Finances
 

@CDOMonkey - Yes, I'm aware it isn't a CDO, as I covered above. I agree that this type of lending can lend itself (no pun intended) to predatory practices and that unsecured loans are not the optimal lending model. I think everyone here is aware of the risks involved, and those who believe that the risk is worth the potential payout will proceed with a level of prudence appropriate to their individual situation.

A "D" rating with the Better Business Bureau is utterly meaningless. The BBB is a for-profit membership-funded organization that can be described in much the same way as you've described P2P lending - the idea is good, but in practice it's not that functional. The BBB is to the consumer community what the ratings agencies were to the MBS market.

 

It would be nice if credit default swaps were available on the site. Is there any way of profiting from betting against certain borrowers who you feel are paired with too low interest rates?

Go East, Young Man
 

@Asia_i_Banker - I'm not sure why you caught some monkey shit with your last comment, because I've been thinking the same thing for some time now. I even mentioned it to Matt_SF offline and he agreed but pointed out that, from a PR perspective, SWAPS=Herpes to the average Joe and that's probably why they're not offered on a network of average Joes.

I have to think it won't be long before we see them offered, though.

 
Edmundo Braverman:
@Asia_i_Banker - I'm not sure why you caught some monkey shit with your last comment, because I've been thinking the same thing for some time now. I even mentioned it to Matt_SF offline and he agreed but pointed out that, from a PR perspective, SWAPS=Herpes to the average Joe and that's probably why they're not offered on a network of average Joes.

I have to think it won't be long before we see them offered, though.

Hit the wrong button; doesn't look like I can reverse it or even it out though.

The issue with this is the issue with a lot of other small-scale lending (SBA loans, various forms of factoring and inventory lending, etc)-the loans themselves are too small to deploy a real amount of capital without needing a TON of people to execute.

The returns look good on paper but your risk is really somewhere between really bad junk bonds and microcap equities, so double-digits is only appropriate. Add to that the small scale of the loans and the lack of real liquidity or due diligence ability, and I think this is stuck in the "interesting idea that some individual investors will get into"

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 

Zopa doesn't seem to have the cherry-picking option which is an issue seeing as I don't particular want whatever model they're running to pick out my investments for me.

 
Edmundo Braverman:
Yes-Secure is a brand new player to the UK market:

http://www.yes-secure.com/homePage.do?action=initial

I don't know anything about them, although they do allow you to hand select loans. Let us know if they're legit.

So I signed up to Yes-Secure and it seems like they are still very fresh. There aren't many loans to pick from and no one seems to have a credit score above 600.

I am going to start with 100GBP and spread it between 10 B-D loans and see what happens. I don't think it is going to be that easy to find 10 decent loans yet.

 

Just signed up. This is pretty damn cool. And, at least on some level, probably a more fun way to learn about credit analysis then through reading a textbook.... maybe a bit more expensive though. I like the idea of making small business loans. Help the economy and yourself!

I wonder if there are any people running sort of non-official hedge funds with this....... you could manage a few million with a one man team

 
International Pymp:
Just signed up. This is pretty damn cool. And, at least on some level, probably a more fun way to learn about credit analysis then through reading a textbook.... maybe a bit more expensive though. I like the idea of making small business loans. Help the economy and yourself!

I wonder if there are any people running sort of non-official hedge funds with this....... you could manage a few million with a one man team

The problem in once you start lending over a certain amount (£25K) you need a license (at least in the UK).

 

yeah... but I was thinking like you are managing 10million (let's say you're taking a graduated fee depending on how much people invest with you which averages out to about 1%, so you're making 100k/year)... you could easily have 500 loans of 20k each or whatever...

you're not gonna be the next soros - but I could see some smart ski bum living in a place like aspen or vail doing that and being a ski instructor during peak season.

 

I could see a bunch of semi-retired type people doing this too... they'd "really be sticking it to those bankers!" lol

I need to download a book on CDO's / loan diversification and so on now and read it on my flight tomorrow... I know a pretty good amount about mez debt and structured equity investment in chinese real estate development enterprises, but aside from that - I'm pretty much clueless.

 

I started with Lending Club 3 yrs ago before they registered with the SEC. I'm from Pennsylvania and was able to directly invest in loans prior to registration but now I can only purchase through the secondary market, which I started doing recently.

I made some big mistakes when I started and hope I can help others from making the same mistakes. Currently my annualized return is just under 1% and I have had 20 out of the 68 loans default. I definitely did not diversify enough. My average loan amount on those 68 loans was almost $350. According to their site the most successful people on Lending Club are investing closer to $50 per loan. So the biggest lesson learned was keep the loan amounts SMALL. My other mistake was being greedy. 60% (by dollar amount) of my loans were to E,F, and G rated. My flaw in my logic was that since the borrowers had to have a credit score of at least 640 the risk was minimized. Well it wasn't. I also committed too much money in the beginning.

Conversely after 2 months of trading notes on the secondary market my 22 notes average $30 per loan and my breakdown is 25% - A rated, 51% - B, 3% - C and 21% - D. This gives me an expected return of 11.14% so I realize I am being a little too conservative at this point and will pick up lower rated notes in the next couple months.

My advice is to make regular reasonable monthly deposits, reinvest your profits and DIVERSIFY.

You should also consider opening your Lending Club account under a self-directed Roth IRA so all of your profits are tax-free. I believe they give the name of a company on one of their blogs.

Good luck to all!

 
someotherguy:
Ben Shalom Bernanke:
I noticed that there are a few states where investors can't open accounts yet. Anyone know if this will ever change?

There were lots of states missing when I first joined. Not flyover states either, I lied since NJ was missing and said I lived in NY using my old address.

I don't think I have an outside of state address I could use. Bummer.

 
BCbanker:
Be sure to consider fees. I know on the secondary market that Prosper takes 1% of your trade. Much higher than say public equities, but i guess FI always has costed more to trade.

"How does Lending Club make money?

We collect nominal fees from both borrowers and investors. If you are a borrower, you will pay a one-time processing fee that ranges from 2.25% to 4.50% of the loan amount, depending on your loan grade (A-G), which is based on your credit quality. The service charge for investors is one percent (1%) of each payment received from the borrowers, which reduces the investors’ net annualized returns by approximately 0.7%. For more information, visit our Rates & Fees page."

 

About Zopa vs Yes-secure for the UK. A little more research reveals that you can indeed hand-pick through listings on Zopa, so I'm going to start off on that and maybe then check out YS once I get used to it.

 

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