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Lending Club’s shares collapsed when its founder and CEO Renaud Laplanche was forced to resign in the wake of revelations that loan documents had been falsified. The firm suspended its planned securitization of debt, threatening the ability of competing online lenders to package and sell their own loans to investors. The disclosure of a stake purchase of 11.7% of Lending Club by an Asian investment firm in the last week of May helped to arrest the fall in its shares, however.
The near-simultaneous award of a triple-A rating from Moody’s for a securitization of student loans by SoFi was hailed in some quarters as a potentially more significant sign of maturing by the marketplace lending sector. It marked the first triple-A rating for a deal by a marketplace lender and an apparent breakthrough for SoFi, a San Francisco-based firm that started as an online facilitator of peer-to-peer student lending and now aims to disrupt bank lending in other areas such as mortgage provision and personal loans.
But the structure that earned the triple-A rating could also be interpreted as an indication that marketplace lending is starting to depend on potentially problematic financial engineering, such as overcollateralization of debt pools to maximize ratings, of the type that contributed to the credit crisis of 2008 by masking deterioration in lending standards.
The public statements of Mike Cagney, founder and CEO of SoFi, certainly do not inspire confidence in a sector that should be combining basic financial prudence with its infatuation with the supposedly transformational powers of new technology.
Some of his remarks seem designed to attract marketing attention with grandiose claims about the goals of SoFi. In a year when Donald Trump has exploited free media publicity to become a realistic contender for the US presidency, this has an undeniable logic.
Cagney is certainly hyperbolic enough to inspire comparison with Trump. He repeatedly refers to himself in media interviews as the meteor that will kill off the dinosaurs of old-fashioned banking. This metaphor has obvious flaws if pursued too far. Is the goal the financial equivalent of fiery global cataclysm? How did the dinosaur disruption work out for the meteor?
It is a vivid image, nevertheless. It can also be viewed in a context of social media boasting that suits Cagney’s public persona. Much of his online posturing is comical rather than alarming. In his Twitter feed he defines himself as: “SoFi Founder and CEO, macro trader, kayak fisherman, wine enthusiast and cyclist.”
His Twitter posts also feature fine examples of the modern art form of the humblebrag. On March 12 he shared a picture of a wine bottle and wrote: “My ’71 Petrus was good, but not getting better with age. My ’90 Dunn beat it out – at 1/10 the price."
The subtext is that Cagney is a fellow who can afford the best French wine, such as Petrus, but prefers to seek out value in more reasonably-priced bottles from California, including Dunn.
An online search for 1971 Petrus shows that it is listed for around $1,500 to $2,000 a bottle, while Dunn 1990 can be obtained for around $150. That seems like encouraging corroboration of Cagney’s online assertion, as the Dunn is indeed roughly 1/10 the price of the Petrus.
Other aspects of Cagney’s online persona are not quite as convincing. His employment summary on website LinkedIn includes details of his start in finance with Wells Fargo. Cagney describes how he was hired as an analyst to write derivatives code then “soon started and managed the financial products group, responsible for structured product development, derivative trading and proprietary trading”.
He continues: “I managed a $25 million daily VaR, and our proprietary trading consistently produced high double to triple digit returns on risk capital”.
That seems like an extraordinarily high daily value at risk (VaR) number for a trading desk in a bank that was not active in investment banking when Cagney was an employee between 1994 and 2000.
Wells Fargo is a commercial banking giant and has had a growing presence in investment banking since it bought Wachovia in 2008. It still only reported a group-wide daily VaR number of $19 million for 2015 and did not exceed $25 million in any quarter last year, however.
Consistent high double to triple digit returns would also have marked unusually impressive performance for Cagney’s stint as a proprietary trader.
Wells Fargo declined to provide comment on Cagney’s period as an employee, but senior officials familiar with the financial products group at the time do not recall either its risk limits or returns matching the levels he claims.
Euromoney contacted SoFi to ask for details of these trading exploits, but did not receive a reply to queries and the firm said Cagney was unavailable for comment.
Talking up aspects of a previous job – if that is what occurred – might seem relatively harmless. But a pattern of hyperbole is not a desirable quality in someone who is trying to convince investors to buy securities based on a new approach to lending that dispenses with traditional credit scoring.
SoFi also seems intent on testing the boundaries of potential conflicts of interest in packaging securities based on its loans. It has set up a hedge fund, SoFi Credit Opportunities Fund, designed to invest in its own loans. This is another first for the developing marketplace lending industry, and not an encouraging one. Once again, SoFi declined to provide any details of the fund. It has reportedly appointed an independent trustee to manage the obvious potential conflict of interest around which SoFi loans will be sold to the SoFi hedge fund, but has not made the name of this arbiter public.
Some of the gimmicks that SoFi uses to promote what it bills as ‘membership’ of its ‘amazing community’ – or taking out online loans via computer or phone – may prove to be effective. Singles events and supplies of free drinks at music festivals are certainly going to attract some potential borrowers in the target younger demographic.
But SoFi’s combination of new approaches to measurement of creditworthiness and opaque financing techniques to support loan growth could also prove to be toxic.
In one of his typically blustery comments to a technology conference in February, Cagney summed up his business approach.
“We’re willing to take risks and we’re willing to be wrong. Our thesis is, you should always have a level of discomfort,” he said.
Investors and regulators can’t say they weren’t warned.
