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> But all of the things that make banks scary don't apply. A run on Lending Club is not possible; nobody can pull their money out of notes or certificates. And

> But all of the things that make banks scary don't apply. A run on Lending Club is not possible; nobody can pull their money out of notes or certificates. And if a lot of loans go bad, that will hurt the investors in those notes, but Lending Club as an entity won't be insolvent or even have any losses at all. This is true, but one should recognize that for Lending Club to sustain itself over time, it must be able to acquire borrowers and sell notes. There are a number of events that could put a dent in both supply and demand. On the demand side, if and when there is a recession, defaults will almost certainly rise and it's likely fewer investors (retail and institutional) will be eager to take on new credit risk. If and when interest rates rise, funding these loans may become a lot less appealing. One must also assume that at least some borrowers, particularly those who are heavily indebted, are themselves vulnerable to interest rate increases, so I wouldn't be surprised to see rising rates negatively affect the repayment performance of certain types of portfolios. > There's another point that's a flip side of this one, which is: Equity-funded banks are great at lending. Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks. Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks, because yield-chasing investors are currently willing to misprice risk. What happens when the music stops?

nullc 12y ago
> Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks, because yield-chasing investors are currently willing to misprice risk. What happens when the music stops? Very much this— I've been a lending club 'lender' for a number of years now, and for the last 9 months or so have had a very hard time obtaining practically any notes. People are hyper eagerly funding notes which my models suggest have very poor risk adjusted performance. (And, if anything, I'm concerned that my models are too conservative— since they're based on historic LC data and lending club has been reaching out to less and less credit worthy lendees). As a result I'm slowly reducing my amount in lending club as notes return funds and I'm unable to invest it effectively. It was neat in the beginning, but it's a pain to report taxes on, and the decreasing risk adjusted returns make it much less attractive than it used to be.
- nether 12y ago
  > It was neat in the beginning, but it's a pain to report taxes on, and the decreasing risk adjusted returns make it much less attractive than it used to be. The taxes are the biggest issue right now I think. There's no faculty in US tax code for reporting earnings on this kind of investment. If I heard right, I think some people lost all of their returns in 2012 due to written-off notes? I believe all of my returns (over the past four years) were taxed at my normal income rate. People have just been guessing at how to report their earnings in TurboTax. Haven't heard of any audits thus far... Also, as far as risk-adjusted returns go, it still beats equities, right?
  - gnopgnip 12y ago
    Could you just use a roth/traditional IRA and not have to worry about the taxes each year?
  - 7Figures2Commas 12y ago
    > There's no faculty in US tax code for reporting earnings on this kind of investment. That's not true. > Also, as far as risk-adjusted returns go, it still beats equities, right? The S&P 500 was around 1,140 at the beginning of January 2010. It's now above 2,000. If you had bought SPY in January 2010, you'd be sitting on a gain of around 75% not including dividends. SPY is highly liquid (more than 80 million shares trade hands on any given day) and optionable, so you can exit your position quickly if necessary and easily hedge your position if desired. Needless to say, comparing the S&P 500 to a pure debt instrument is like comparing apples to oranges, but if your goal is to maximize risk-adjusted returns, you have to compare asset classes. Obviously, this isn't 2010. The market today is a lot harder to navigate. On the whole, equities look expensive and with a shift in interest rate policy almost certainly coming, the debt markets are tricky. As Sam Zell recently said, "This is the first time I ever remember where having cash isn't such a terrible thing."

nullc 12y ago

> Lending Club is perfectly able to make loans, and apparently at cheaper rates than banks, because yield-chasing investors are currently willing to misprice risk. What happens when the music stops? Very much this— I've been a lending club 'lender' for a number of years now, and for the last 9 months or so have had a very hard time obtaining practically any notes. People are hyper eagerly funding notes which my models suggest have very poor risk adjusted performance. (And, if anything, I'm concerned that my models are too conservative— since they're based on historic LC data and lending club has been reaching out to less and less credit worthy lendees). As a result I'm slowly reducing my amount in lending club as notes return funds and I'm unable to invest it effectively. It was neat in the beginning, but it's a pain to report taxes on, and the decreasing risk adjusted returns make it much less attractive than it used to be.

nether 12y ago
> It was neat in the beginning, but it's a pain to report taxes on, and the decreasing risk adjusted returns make it much less attractive than it used to be. The taxes are the biggest issue right now I think. There's no faculty in US tax code for reporting earnings on this kind of investment. If I heard right, I think some people lost all of their returns in 2012 due to written-off notes? I believe all of my returns (over the past four years) were taxed at my normal income rate. People have just been guessing at how to report their earnings in TurboTax. Haven't heard of any audits thus far... Also, as far as risk-adjusted returns go, it still beats equities, right?
- gnopgnip 12y ago
  Could you just use a roth/traditional IRA and not have to worry about the taxes each year?
- 7Figures2Commas 12y ago
  > There's no faculty in US tax code for reporting earnings on this kind of investment. That's not true. > Also, as far as risk-adjusted returns go, it still beats equities, right? The S&P 500 was around 1,140 at the beginning of January 2010. It's now above 2,000. If you had bought SPY in January 2010, you'd be sitting on a gain of around 75% not including dividends. SPY is highly liquid (more than 80 million shares trade hands on any given day) and optionable, so you can exit your position quickly if necessary and easily hedge your position if desired. Needless to say, comparing the S&P 500 to a pure debt instrument is like comparing apples to oranges, but if your goal is to maximize risk-adjusted returns, you have to compare asset classes. Obviously, this isn't 2010. The market today is a lot harder to navigate. On the whole, equities look expensive and with a shift in interest rate policy almost certainly coming, the debt markets are tricky. As Sam Zell recently said, "This is the first time I ever remember where having cash isn't such a terrible thing."