Author Topic: Viability of LC  (Read 4135 times)

P2PFact

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Viability of LC
« on: May 16, 2016, 11:38:16 PM »
Maybe I'm too cautious here. I think it's time to seriously discuss viability of LC. Yes they do have hundreds of millions of cash on hand. But if they need to start funding loans with their balance sheet due to legal obligation to Webank, how fast will they deplete the cash?

Boatguy

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Re: Viability of LC
« Reply #1 on: May 16, 2016, 11:59:23 PM »
Over reaction.  They aren't going to spend all their capital investing in loans that nobody else has bought.  Even if they did, they could securitize them and sell them off.

What we're actually seeing is an enormous opportunity.  It's quite common for founders to leave a company, usually much earlier than this.  The Facebook/Google examples of founders hanging around is the exception, not the rule.  People who can take a company through the startup phase are rarely the people who can manage the going concern and take it to the next level.  You'll note that Gates was not the CEO of Microsoft most of it's history, he hired a series of people.

LC has cash in the bank and an opportunity to establish LC 2.0.  I'm quite bullish.

bobeubanks

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Re: Viability of LC
« Reply #2 on: May 17, 2016, 12:28:27 AM »
You'll note that Gates was not the CEO of Microsoft most of it's history, he hired a series of people.

Huh? Gates was CEO until 2000 when Ballmer took over. And Ballmer came in pretty early in the history of MS. MS is just on CEO #3.

Fred93

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Re: Viability of LC
« Reply #3 on: May 17, 2016, 01:01:11 AM »
Maybe I'm too cautious here. I think it's time to seriously discuss viability of LC. Yes they do have hundreds of millions of cash on hand. But if they need to start funding loans with their balance sheet due to legal obligation to Webank, how fast will they deplete the cash?

I didn't see anyplace it said they were going to start funding loans with their balance sheet as an ongoing policy.

There are two things that are related to what you said
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As required by applicable regulations, the Company is required to purchase loans resulting from direct marketing efforts if such loans are not otherwise invested in by investors on the platform. During the first quarter of 2016, the Company did not purchase any such loans.

I think this means that regulators don't like the idea of people soliciting loans by sending postcards to people and then after they apply saying "Oops, we didn't have the money."  The way you control that is mostly by controlling the amount of such marketing that you do.  When demand dips, you slow down the post cards.  Doesn't sound like a big threat.

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Additionally, loans in the process of being facilitated and originated by the Company's issuing bank partner at March 31, 2016, were substantially funded in April 2016. As of the date of this report, no loans remained without investor commitments and the Company was not required to purchase any of these loans. However, in light of events following a review by a sub-committee of the board of directors that began in the second quarter of 2016, a number of investors that, in the aggregate, have contributed a significant amount of funding on the platform, have paused their investments in loans through the platform. As a result, the Company may need to use its own funds to purchase these loans in the coming months.

This is lawyer CYA language, and here's what I think it means.  After Madden & Midland, LC has WB keep the loans for a short time before handing them over to LC.  LC is obligated to take them at the end of this period.  LC has never before experienced a drop in demand, such as the one we're seeing now, so there could be some loans caught in this queue as the downturn occurs.  Its a theoretical possibility, but its finite, not ongoing.  Once you see the reduced demand, you adjust for it.  What's the threat here, a few days worth of loans?

So I don't see either of these things as an ongoing change in model.  I fully expect LC to get some degree of purchases by banks back up and running, and when that occurs, any loans that had to be funded by LC in the meantime will slide out that door into the hands of waiting banks.


fliphusker

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Re: Viability of LC
« Reply #4 on: May 17, 2016, 01:15:52 AM »
1500 loans currently on the fractional market, so no real backlog there. 
Is there anything set in stone that they take 50%+ loans and mark them as whole?  I am not familiar with how the whole loans section is set, along with selling to lets Goldman.  Are those notes that never hit the whole section and just mainlined to the big boys?
You say a drop in demand like this.  I have no doubt there has been a drop in demand, just nothing showing this yet, right?
Does the 10-Q make the big boys feel better now or continue their pause?  If one hops back on board, will others follow quickly?  Wonder if others have already hopped on board, would we know?  Sorry if these are total nub questions, just trying to wrap my head around things.

LonghornSF

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Re: Viability of LC
« Reply #5 on: May 17, 2016, 01:19:34 AM »
If they aren't completely shut off from both retail and institutional funding then they remain viable for quite some time. This is my base case. It would take LC several years to become insolvent.


However, comments such as the below show a lot of naivete:

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Over reaction.  They aren't going to spend all their capital investing in loans that nobody else has bought.  Even if they did, they could securitize them and sell them off.

They can't securitize anything right now. They've been cut off from that market until investors regain confidence in LC.

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What we're actually seeing is an enormous opportunity.  It's quite common for founders to leave a company, usually much earlier than this.

 ::) Most founders don't leave after being FIRED by the board and subject to grand jury investigation.

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LC has cash in the bank and an opportunity to establish LC 2.0.  I'm quite bullish.

LC's #1 objective right now is to survive and reestablish its funding base. Talk of them growing into "LC 2.0" is pure fantasy. They'll spend the rest of this year and possibly next year trying to regain investor confidence and break even.


Fred93

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Re: Viability of LC
« Reply #6 on: May 17, 2016, 01:35:08 AM »
Is there anything set in stone that they take 50%+ loans and mark them as whole?

No, during much of the past year they've had a much higher fraction going to whole than to fractional.

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I am not familiar with how the whole loans section is set, along with selling to lets Goldman.  Are those notes that never hit the whole section and just mainlined to the big boys?

I don't know that either.

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You say a drop in demand like this.  I have no doubt there has been a drop in demand, just nothing showing this yet, right?

Right.  If they report as they have been doing, we won't learn about April, May, June, until some time in August when they file the 2nd quarter report.  I'd like to see them report monthly sales, as department stores do.  Would help reduce the FUD I think.

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Does the 10-Q make the big boys feel better now or continue their pause?

I feel sure that the publication of the 10Q was an essential step.  I suspect there is much more that must occur.  If you were on some risk committee at some bank, you'd want lawyers to bless that the scandal could not infect you in any way, etc etc.  Such review takes information, communication and time.  Letting enough time elapse so that the scandal is not on the front page of the WSJ is probably a good idea too.

I'm thinkin' several weeks at least.  Its just been a few days. 

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If one hops back on board, will others follow quickly?

Dunno.  Its the question of the day.    I think skittishness is the expected behavior.   Some little banks may follow big banks to some degree.  Probably ramps slowly, don't you think?

The securitization guys have two levels of problem.  First their internal risk and compliance people need to get comfortable, and then their sales guys need to believe that their customers will come back.  They may have to "sell" this idea to major customers all over again.


rj2

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Re: Viability of LC
« Reply #7 on: May 17, 2016, 03:36:51 AM »
The whole thing gives me NO confidence that fractional investors are getting a good deal. If they are cooking stuff to make their numbers look good, that are probably also keeping the good loans for preferred clients and letting the fractional market pick up the leftovers.


Fred93

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Re: Viability of LC
« Reply #8 on: May 17, 2016, 03:42:12 AM »
If they are cooking stuff to make their numbers look good,

Where do you get this "cooking stuff to make their numbers look good"?  What number do you think was "cooked", and why do you think that?

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are probably also keeping the good loans for preferred clients and letting the fractional market pick up the leftovers.

What exactly are "the good loans" ?

Lovinglifestyle

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Re: Viability of LC
« Reply #9 on: May 17, 2016, 06:45:55 AM »
If they are cooking stuff to make their numbers look good,

Where do you get this "cooking stuff to make their numbers look good"?  What number do you think was "cooked", and why do you think that?

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are probably also keeping the good loans for preferred clients and letting the fractional market pick up the leftovers.

What exactly are "the good loans" ?

To me, "the good loans" are the ones that used to be in my filters and now they're not.  I'm willing to invest, but not in what I'm seeing.  Think it's the general economy and borrowers who already have too much debt. 

Boatguy

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Re: Viability of LC
« Reply #10 on: May 17, 2016, 12:33:12 PM »
You'll note that Gates was not the CEO of Microsoft most of it's history, he hired a series of people.

Huh? Gates was CEO until 2000 when Ballmer took over. And Ballmer came in pretty early in the history of MS. MS is just on CEO #3.
Yes, my bad.  I should have said "President".  The point is that Gates was not running the company, he wasn't making day to day decisions.  Jon Shirley ran it for him while Gates worked on "strategy".

Boatguy

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Re: Viability of LC
« Reply #11 on: May 17, 2016, 12:47:33 PM »
The whole thing gives me NO confidence that fractional investors are getting a good deal. If they are cooking stuff to make their numbers look good, that are probably also keeping the good loans for preferred clients and letting the fractional market pick up the leftovers.
You're implying that loans sold "whole" were priced differently than those sold fractionally.  There is some indirect truth in that evidenced by the Cirrix deal, they got a floor under their risk which retail did not.  Beyond that, I don't think there is any reason to think that the pricing or risk assessment was different for whole loans than fractional.

I think this story is pretty simple.  The market wanted fast growth and RL didn't know how to get it from retail investors so he turned to institutional investors.  He got sort of "hooked" on institutional money and then made some questionable and bad deals to sustain his growth while ignoring retail.  He quite stupidly ignored every investors first rule, diversify.  He relied on very few sources to supply his capital and when they slowed down, he had a big problem so he started to break the rules a bit.  It all caught up with him and he's gone.

LC is not going anywhere, but they've hopefully learned that retail investors are a much more diversified supply of lenders and if they design the product a little better, support retail investors and communicate with retail investors, they can grow, though not as quickly.

They need to:

a) Regain our trust
b) Tailor products to reach more retail investors
c) Figure out how to get more retail investors to shop "direct" rather than through the money "stores" at Fidelity, Vanguard, Schwab, ML, etc.  The expectation, and their mission is that they will do for lending what eBay and Amazon did for goods.