Goodbye LendingClub, it was good (not) knowing you (NYSE:LC)

In case you are the kind of person who can’t distinguish sherry from amontillado, here’s what a garbage company looks like. It’s called LendingClub:

About four months ago, I made a post saying this on LendingClub:

This company is amazing – as a private company. Great concept, terrible stock. How this company was once valued at $10B – 1/7 of Goldman Sachs – is a mystery I’ll never understand

It’s hard for me to believe a relatively fresh company - valued at $15 at its IPO, quickly oversubscribed (people fought to get in!) and soon trading over $25 - is now basically considered worthless. Now, $1.4B is not technically worthless, but look at the graph above: every single element of it screams “stay away.”

To be fair, LendingClub is most likely undervalued right now. If I wanted to gamble - which I don’t - I’d probably buy soon just expecting some kind of bounce (it has to happen eventually, right?) or a buyout. Or perhaps Oprah will add in her magazine at some point like she did with Weight Watchers.

Looking at the list of the companies in that post, I recommended shorting these stocks:

1. ETSY, was at $7.32, now at $8.25 (called a miracle - give it time, people)
2. AppFolio, was at $12.83, now at $12.52
3. FitBit, was at $19.29, now at $14.01 (still about $10 too high)
4. Box, was at $10.50, now at $11.96
5. LendingClub, was at $8.86, now at $4.09

Overall, if you had shorted $10,000 of every stock, you’d be up $5,701.57 today, for a 11.4% return in four months. This all happened while the market moved up, by the way.

And it’s not like I spent an impossible amount of time finding those companies neither. Had I spent more time researching, I would have found even more crap companies to short, such as David’s “the fashion has passed and everyone sells overpriced loose tea these days” Tea or Go “Fuck you shareholders” Pro.

Why is it so easy to find shitty companies? Well, it’s simple: because there’s a lot of them.

I came to realize it recently, but very few people actually know how to manage a company. Most have a strategy of “let’s do an IPO and pray.” This tactic perfectly represents what LendingClub was thinking when it went public.

Again, technically, I guess LendingClub couldn’t care less about its stock price. They got the money from the IPO, they sold shares that were basically worthless to gullible idiots, so they couldn’t care less about the return. It’s not like you can cancel out and return your shares to get your money back, you know?

In practice, LendingClub must be pissed off: they are getting played by huge funds and stock manipulators and it makes them look like fools. No one likes failed IPOs, especially CEOs with (presumably) a lot of stock options that are now worthless.

LendingClub is finished. It’s done, it’s over, it’s gone. It’s like Valeant, except it won’t be coming back because it has nothing. The first time I used their platforms, I thought: “This is a terrible idea.” You lend money to perfect strangers who may or may not be lying about their income/jobs/occupations/material possessions AND you have to do it at rates lower than banks, what can possibly go wrong? I mean, if the guy doesn’t pay back, what can you do? Well, you can close your LendingClub account and never go to that website again.

Let’s say you have an extra $10,000 to invest, what would you do with it? Well, the last thing I would do with it is “invest” (word used loosely here) on LendingClub by lending it to perfect strangers at subpar rates.

You want to “invest”? Buy some stocks in high-quality stocks. You’ll earn 6%-8% per year and you won’t risk having  your money stolen by some guy somewhere.

I just don’t get what kind of idiot would lend on this website. It just sounds like a terrible idea in general. You know, there’s a reason banks charge 19.99% percent on credit cards, you know?

I tried to create an account on LendingClub to see what kind of “return” I could get. Here’s the first problem I ran into:

Why people are so casual about giving their SSN out, I have no idea. This can be used to open credit cards or obtain loans in your name, people. But I guess this is what society has come to today: people accept to be treated like numbers. We might as well start referring to each other using our SSN instead of our names, it would be more practical. How long until LendingClub is hacked and all that information comes out anyway?

In any event, after fifteen minutes of entering fake generated SSN, I finally gave up. It wasn’t worth the trouble to write this article up. Maybe that’s part of their plan: make it so hard to open an account no one can actually log on to criticize them.

I did take a look at their rates, which is the best I can do:

By doing so, I learned what an “origination fee” was. I had never heard of that before. This is another way LendingClub says “fuck you” to you. Basically, if you want to borrow $10,000, you don’t actually get the $10,000, you get $9,500. Make no mistake: you’re still on the hook for the full $10,000, but you only get $9,500 AND you have to pay interest on the whole $10,000.

What kind of idiot would accept something like that?

Not only do you have to go through all the trouble of signing up, possibly compromise your ID and get “approved” (and “matched” with donators lenders), you also get a big “f- you” right away: you don’t even get the full amount you borrowed. I can’t believe people that stupid.

Then, the “interest rate” themselves are almost as ridiculous. Here’s how I would rate them:

• A: Congratulations! You qualified as a top borrower! Unfortunately, you’re still going to pay 10% per year in interest. Just to remind that the fed rate is at 0.50%. You are supposedly an “extremely safe” borrower yet you pay the fee of someone who just came out of bankruptcy. Don’t be an idiot, take an appointment at a bank and you’ll pay half of this rate.
• B: This, I feel, is the category most people call into. You know, it’s like in school when you came home with a B. It’s not as good as an A, but you never were an A student anyway, and B is better than so many people. Yay! In all honesty, I think all the questions they ask are pretty much for the show and people automatically get grouped up in the “B” group. 13% interest rate per year is just ludicrous and stupid.
• C: Now you have to pay a 6% origination fee instead of a 5%. I’m not sure what good this extra percentage does to LendingClub, but let me tell you this: it pisses me off, it’s misleading and it’s a scam. You borrow $10,000, you only get $9,400. Bullshit.
• D: We’re only halfway down the list and already the rates hit 19.99% - the same as a credit card! What the fuck? I mean, what the fuck? In fact, it goes up to 23% with the “origination scam!” Who’s stupid enough to go through this? Might as well keep the debt on your credit card! Is this a joke or something?
• E: 26.40% per year? And there’s two letters left? Guys, you might have stopped that list at C because no one with a “E” is going to transfer his loans to you. I’ve never heard of any personal loan with a rate this high.
• F: Maybe LendingClub is a giant joke. Maybe it’s a social experiment to determine who doesn’t undersatnd anything about finance. 31% per year, really? I have a loan at 4% and I think that’s too high already. I feel this section only exists so people in the B and C categories feel they are getting a good deal. “Wow, I only pay 10% per year, amazing! The guys with an F pay an interest rate three times higher!”
• G: I thought there were laws against interest rates so high.

I just don’t get it. The lowest rate I got was 5.32% (don’t forget the origination fee), which is still WAY too high

I assume that in order to achieve an “A1” rating, you need to pretty much be the definition of “safe.” This almost always mean you have a car, a house or something you can use to get a rate lower than 5.32%. Or that you have a well-paying job and can probably get $7,600 in a month or two. So why bother dealing with that crap?

I looked at LendingClub’s reviews and I couldn’t find a single negative. Are you trying to tell me that, in the entire existence of the company, there hasn’t been a single person dissatisfied with your services? Some of  the reviews are pretty bizarre too:

You’re on LendingClub, not LendingTree, dumbass. Would you really loan money to this guy?

Then, there’s the part where you lend money:

Hold on a minute: you are doing loan refinancing at a rate of 28.18%? Really? Are you sure you’re saving money there? And remember you have to pay a 6% fee as well.

This above gives you the impression that you invest and earn 28.18% per year. LendingClub boasted about its low default rates, but this is really the kind of thing you can play on. “It’s not default, it’s a reorganization of post-consumer debts” or “it’s not default, it’s a temporary readjustment of elevated conditions.”

Of course, any money you “invest” in this farce can be lost as quickly as Volkswagen’s reputation on the international market. The website boasts “99.9%” positive returns, but this again is misleading because:

• a) it says nothing about the loss when the return is negative; what if you earn $1 99.9% of the time, but lost $10,000 the other 0.1% of the time?
• b) “positive” is a debatable word as it does not incorporate time; if you invest $1,000 today and I give you $1,000.01 in ten years, you have a “positive” return

Overall, this website is a massive scam elaborated to lure buyers into paying stupidly high rates and luring people into putting their money in high-risk assets for mediocre returns. If someone goes to LendingClub for debt consolidation at 28.18%, you can pretty much this guy tried everything but was turned down everywhere. He’s using LendingClub as a last resort and only a complete idiot would loan to him.

There is so much wrong with LendingClub I would write ten articles on every point. For what it’s worth, the stock is probably slightly undervalued right now, but the risk is so huge I wouldn’t touch it. Let me elaborate a bit on a few problems:

1. Identity theft. Enough said.
2. What if someone is dying of cancer and decides to pull a quick con on LendingClub? Fill a few forms online, wait a day or two and boom, you can easily get $10,000 (or more with good credit).
3. LendingClub gets people that the banks rejected. You are getting low-quality borrowers.
4. The website is at best sketchy. To call it a portfolio? Please. You are not investing into assets, you’re investing into people and how much you trust that they will repay you. This is like saying, “I loaned money to ten of my friends. I have a portfolio now!”
5. Although you can see returns from 5% to 25%, I’m pretty sure the average lending doesn’t get anything near that. I am fairly sure LendingClub takes a bite of this and, again, I have no idea what the default rates are. LendingClub says the default rates are around 5%, but I’m pretty sure it’s much higher than that.
6. LendingClub has zero risk in this story. It acts as if it’s on the same side as the lender, but not at all. Even if the borrower doesn’t pay a dollar back, LendingClub loses nothing.
7. You can lose 100% of your investment overnight. That, lendingclub forgets to say.
8. As a lender, you are at LendingClub’s mercy. They can change anything they want at any time and, guess what, you can’t do anything about it. Say they change their fee from 1% to 2%, for instance: well, too bad for you.
9. The stock performance does not exactly bode well for the future of the site and your money.
10. The returns you get are horrible and you do not get adequately compensated for the risk. A 7% yield (which LendingClub advertises in one of its videos) is way too low for the risk you take. Junk bonds pay 7.82% right now and those are from big companies, not a guy somewhere that you won’t even know the name of.
11. Any kind of financial crisis will wipe that portfolio of loans out. Just because the defaults were low before doesn’t mean they’ll be tomorrow. It’s not impossible to envision 50+% default rates. Again, your entire investment is at risk with LendingClub and there’s nothing you can do to get your money back if things go sour. At least with bonds, you can hope to get 40-80% of your money back if a company goes bankrupt.
12. Those are very high assets disguised as low-risk assets under the disguise of “diversification.” A bag of low-grade investments is still low-grade; I thought people learned that during the financial crisis. Again, if anything goes wrong in the economy, it wouldn’t be unusual for 50% of your portfolio to simply stop paying you.

This is only a small subset of the many, many problems with LendingClub. As a private company, it made sense as there are always gullible people. As a stock, it’s nonsense.

I don’t think LendingClub will ever recover from this. I don’t think it will go bankrupt, but I think it will remain a small, uninteresting, boring, irrelevant  company. It’s too late to short and I don’t think it’s going to come back. NYSE:LC is flawed at its core. Goodbye, do not pass go and do not invest into this.