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First JP Morgan plunges $160mm into the game. Now this. Remember when Prosper clubs were small and cute? Now most loans are wholly made by Wall Street Banks.
So of course the derivatives are coming...
Wall Street's Thinking About Creating Derivatives on Peer-to-Peer Loans
Investment funds can't get enough
...
Investment funds can’t get enough of this business, which involves lending to people over the Internet and hoping they pay you back. Investors are snapping up the loans directly, while the banks are bundling them into securities, much as they did with subprime mortgages.
Now peer-to-peer lending and its Internet enablers like LendingClub Corp., the industry leader, are being pulled into the high-octane world of derivatives. While many hail Wall Street’s growing involvement, others warn investors could get carried away, as they did during the dot-com era and again during the mortgage mania. The new derivatives could help people hedge their risks, but they could also lure speculators into the market.
“It feels like the year 2000 again,” said Frank Rotman, a partner at QED Investors, an Alexandria, Virginia-based venture-capital firm that has invested in Prosper Marketplace Inc., Social Finance Inc. and 13 other P2P lending platforms. “Everyone is chasing ’it,’ but they don’t know what ’it’ is, and that is kind of scary.”
Lured by Yield
It’s easy to see why investors are so enthusiastic. In today’s low-interest-rate world, high-quality P2P loans yield about 7.6 percent. Two-year U.S. Treasuries, by comparison, were yielding a mere 0.6 percent on Friday.
But P2P’s rapid growth also raises questions about the potential risks, including whether the firms involved might lower their standards to stay competitive. During the mortgage boom, Wall Street’s securitization machine fueled questionable lending practices. Derivatives tied to the debt were blamed for spreading their risks around the globe, and then amplifying investors’ losses when the housing market crashed.
Now a firm led by Michael Edman, a veteran of Morgan Stanley, is creating derivatives that will give investors a new way to bet for -- or against -- peer-to-peer loan performance. Edman has ridden credit booms before: he was a figure in “The Big Short,” Michael Lewis’s best-seller about the buildup to the housing bubble of the 2000s.
“It’s a high-coupon asset that’s had very good returns for the short period of time it’s been around,” Edman said of P2P loans. “I don’t have reason to believe that’s going to change dramatically anytime soon, but there are bad loans out there.”
Satisfying Demand
Derivatives could help satisfy investors’ demand for P2P assets, while also helping others hedge risks on loans they’ve already bought. The instruments could also bring more investors swooping into the market simply to place speculative wagers.
Brendan Dickinson, principal at Canaan Partners, a $4.2 billion asset firm based in New York and Menlo Park, California, is counting on the former.
“If you could create a synthetic product that mimics all the features of a P2P loan and had the same risk and yield tradeoff, there would be a lot of demand to buy that paper,” said Dickinson, whose firm has invested in LendingClub and Orchard Platform and is looking to invest $5 million to $10 million in a firm trying to create derivatives on P2P loans. Other small firms are racing to create P2P derivatives before big banks try to muscle in.
...
The rest here at Bloomberg.
So much for the "peer" part of "peer-to-peer lending."
So of course the derivatives are coming...
Wall Street's Thinking About Creating Derivatives on Peer-to-Peer Loans
Investment funds can't get enough
...
Investment funds can’t get enough of this business, which involves lending to people over the Internet and hoping they pay you back. Investors are snapping up the loans directly, while the banks are bundling them into securities, much as they did with subprime mortgages.
Now peer-to-peer lending and its Internet enablers like LendingClub Corp., the industry leader, are being pulled into the high-octane world of derivatives. While many hail Wall Street’s growing involvement, others warn investors could get carried away, as they did during the dot-com era and again during the mortgage mania. The new derivatives could help people hedge their risks, but they could also lure speculators into the market.
“It feels like the year 2000 again,” said Frank Rotman, a partner at QED Investors, an Alexandria, Virginia-based venture-capital firm that has invested in Prosper Marketplace Inc., Social Finance Inc. and 13 other P2P lending platforms. “Everyone is chasing ’it,’ but they don’t know what ’it’ is, and that is kind of scary.”
Lured by Yield
It’s easy to see why investors are so enthusiastic. In today’s low-interest-rate world, high-quality P2P loans yield about 7.6 percent. Two-year U.S. Treasuries, by comparison, were yielding a mere 0.6 percent on Friday.
But P2P’s rapid growth also raises questions about the potential risks, including whether the firms involved might lower their standards to stay competitive. During the mortgage boom, Wall Street’s securitization machine fueled questionable lending practices. Derivatives tied to the debt were blamed for spreading their risks around the globe, and then amplifying investors’ losses when the housing market crashed.
Now a firm led by Michael Edman, a veteran of Morgan Stanley, is creating derivatives that will give investors a new way to bet for -- or against -- peer-to-peer loan performance. Edman has ridden credit booms before: he was a figure in “The Big Short,” Michael Lewis’s best-seller about the buildup to the housing bubble of the 2000s.
“It’s a high-coupon asset that’s had very good returns for the short period of time it’s been around,” Edman said of P2P loans. “I don’t have reason to believe that’s going to change dramatically anytime soon, but there are bad loans out there.”
Satisfying Demand
Derivatives could help satisfy investors’ demand for P2P assets, while also helping others hedge risks on loans they’ve already bought. The instruments could also bring more investors swooping into the market simply to place speculative wagers.
Brendan Dickinson, principal at Canaan Partners, a $4.2 billion asset firm based in New York and Menlo Park, California, is counting on the former.
“If you could create a synthetic product that mimics all the features of a P2P loan and had the same risk and yield tradeoff, there would be a lot of demand to buy that paper,” said Dickinson, whose firm has invested in LendingClub and Orchard Platform and is looking to invest $5 million to $10 million in a firm trying to create derivatives on P2P loans. Other small firms are racing to create P2P derivatives before big banks try to muscle in.
...
The rest here at Bloomberg.
So much for the "peer" part of "peer-to-peer lending."
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