5 surprising things you probably didn’t know about LendingClub

Surprising things about LendingClub

Investors were left licking their wounds as LendingClub dropped like a rock boulder last week. That’s when news got out that the firm’s CEO was leaving. The company explained away Renaud Laplanche’s departure with 2 reasons: 1) a mispricing/mislableing of a series of loans sold to Jeffries and 2) an undisclosed equity position in a fund buying LendingClub loans after LendingClub itself invested in said fund.

Last week, we described and summarized much of the fuss going on at LendingClub. As the public is internalizing the news, the media is left trying to really understand what happened.

Here are some surprising things about LendingClub that are worth noting:

lending club loan drones
via Crowdfund Insider

1) LendingClub was testing loan drones – seriously? The company was rumored to be testing a loan drone — an unmanned aerial vehicle. The idea was that a remote-controlled vehicle like this could deliver wads of cash to borrowers directly to their homes within minutes or hours after being approved for a loan. Seriously?! Well, the firm’s (now ex-) CEO displayed a panache for this type of spectacle when he helicoptered in cash on attendees using a similar device at the Lendit Conference last year.

2) Jim Chanos, who called Enron, was short the stock: Jim Chanos, who predicted energy trader Enron’s collapse, just happened to be short LendingClub stock when it cratered. When interviewed why he was betting against the company, Chanos famously said, “We had problems with the model.” With the stock down close to 50% in just the last 30 days, we’re left wondering whether Chanos has closed out his trade or if he continues to see further downside to the shares.

3) Did an investor rat LendingClub out to the Department of Justice? The firm received a DoJ grand jury subpoena on May 9th, according to the company’s earnings report, the same day that the company announced the resignation of its CEO. Sean Murray found this to be funny timing because essentially, in spite of the best explanations the company gave regarding Laplanche’s exit, there still doesn’t seem to be a smoking gun. He conjectures that the triggering of the legal interest in LendingClub could have come from an investor (in this case, Jeffries itself) that tipped off the Department of Justice.

4) What’s LendingClub going to do now, buy back shares? The leading marketplace lender has been through a lot. With its back up against the wall, Gillian Tan analyzes the firm’s best options. While there may be some suitors out there looking to acquire the leading player in marketplace lending, she doesn’t think that will happen just yet. Instead, expect the firm to put to use the $600+ million it has in the bank to buy back its shares at currently distressed prices.

Even if the company decides that going alone isn’t its optimal strategy, a buyback may make sense. “Such a move would further reduce the number of LendingClub shares on issue, meaning that if the board decided a sale was the best option for the company, potential suitors would be compelled into paying a higher premium for its equity, ” she wrote.

5) Lending Club’s sailboat racing program set records
Lending Club’s second boat (there are 2?!), a 105 foot trimaran named Lending Club 2, broke a world speed sailing record in 2015 when it sailed across the English Channel from Cowes to Dinar. It took Renaud Laplanche’s crew 5 hours and 15 minutes, traveling at an average speed of 26.36 knots, to complete the race, beating the previous record of 5 hours 23 minutes rather handily. The team apparently beat another record, traveling from Newport to Bermuda in 23 hours and 9 minutes. It’s possible Laplanche picked up his penchant for sailing when he sold his last company to Larry Ellison’s Oracle — famous for their racing exploits.

Perhaps if the company ran as tight a crew on shore as it does on the water, it would still be smooth sailing for the leading marketplace lender.

Image from LendingClub

What’s the fuss about LendingClub?

Well, it hasn’t been a pretty week for largest U.S. marketplace lender, LendingClub.

On Monday, news hit that the founder and CEO of the firm, Renaud Laplanche, is out, as are 3 other professionals at the firm. The news sent the already-hammered stock reeling.

LendingClub stock gets smacked
LendingClub stock gets smacked

And now, as Lending Club is turning to securitization as Plan B to allay waning demand for loans on its platform (as Prosper and other European competitors are doing), the firm’s investment banks, Jeffries and Goldman Sachs have both iced those deals.

What’s so bad?

But what exactly did Renaud Laplanche do that was SO bad? To be honest, Bloomberg’s Matt Levine doesn’t know.

Part of the question at hand is whether this is a company issue or something more particular to the company’s (now ex-) CEO. There seem to be mixed signals: on one hand, there’s been mislabelling of loans for resale to an individual investor (Jeffries) and a previous request by said investor to fix up disclosures made to borrowers on LendingClub’s marketplace. While important, it’s hard to believe that LC’s CEO would need to fall on his sword for this one.

On the other hand, there appears to be a more nefarious shell game going on: Laplanche hadn’t disclosed an ownership stake in an investment fund that was created to purchase LC loans. Worse, LC just invested in that fund. (John Mack, LC’s chairman and financial industry bigwig also happens to own a bigger stake of said fund, but that doesn’t appear to be at issue here other than the fact that Mack seems to attract bad loans).

The first problem seems like something more easily remediable, the latter less so.

Why is everyone making such a fuss about this?

Well, for a variety of reasons. People love to read about the disruptor getting disrupted but more than that, Laplanche (who, by the way, appeared as an early guest on the Tradestreaming Podcast in 2012) has been the face of the marketplace lending industry. He’s keynoted conferences and acted almost as an unelected spokesperson for marketplace lending. In a way, he’s played an integral part in where the industry is today. Nefarious behavior on his behalf could be seen as having knock-on effects to the industry at large.

Also, part of the appeal of marketplace lending (just ask early stage Lending Club investor, Dan Ciporin, who explained it nicely on the Tradestreaming Podcast) is that there’s no balance sheet risk. It’s a marketplace and according to the bull-case for the industry, marketplaces are better than balance-sheet lenders. They’re asset-light, charge brokerage-like fees for acting as match maker and own the customer experience at the end of the day.

If Laplanche had his own fund and was using that to create demand on his platform, well, what does that say about the efficacy of the marketplace model in general? What does it say about a company that prided itself on doing things differently — more transparently — than incumbent banks do it.

Lastly, with institutional sources of capital rapidly drying up, this incident can, indirectly, call into question whether there’s enough retail demand to support the growth of the industry. The answer is no. At least for now. Without retail demand, marketplace lending platforms were merely good harvesters of capital. When the deep pockets went away, they’re left with a business that isn’t scalable and repeatable. Without that, they can’t command tech premiums on their valuations.

Photo credit: marubozo via VisualHunt.com / CC BY