Fred93 has just updated his blog, with a rambling explanation of the prosper quiet period
http://fred93blog.blogspot.com/2008/11/prospercom-quiet-period-my-ass.html
Hmm.. I missed this when it was posted, but, as usual, Fred has some interesting things to say here...
Lemme know if you think I was too hard on 'em.
I hope you won't think I'm being too hard on you, I realize you're just being folksy, but, in doing so, you've asked the wrong question. The better question is: "Am I right?" Here's my take on that:
Companies DO stop selling shoes, or refrigerators, or whatever, when the government is considering whether or not the shoes, or refrigerators, or whatever, are LEGAL for such company to sell. To do otherwise is ILLEGAL (and stupid, as we saw w/the "unquiet period"). Now there may not be a LAW against it, but there are certainly "Regulations with Consequences" which term is a "derivative" term
(if you will pardon the pun) of LAW, and which can go one of two ways. One of such ways requires
a complete retooling of the operation - you note that they did not invest in building a new assembly
line for shoes, refrigerators, etc, while SEC pending, but you forget they may have had to dismantle.
It's as if the EPA was deciding whether or not a specific type of car can be legally sold, and some smart
guy tries to start selling cars that have passed California emissions testing only in California and only
to Californians. "Well, Hello, Mr. Lincoln, are you going to test the Terminator?" - Abe goes "You Bet!"
Then, beep, SEC decides to exert authority over all the P2P lending models and calls them securities.
And, if you're Prosper.com, you realize that you DID bet - and the federal government has called you.
And you fold, and start into a plan of reconstruction that means you've got to match the competition.
(At the least, you're happy that you did not build an assembly line in the meantime that has to go...)
(Which I mention because of your mention that software development essentially stopped after the SEC.)
(Even though I think you just didn't see what was really going on, vis a vis a future institutional market.)
So, we're back to status quo antebellum, and, now, both companies sell the same fully regulated items.
The only difference is that Prosper lets you set the price of the items, and LendingClub sets its own.
Ok, that's not the only difference. I'll try to set Prosper=LendingClub and we'll see what emerges...
This is a small victory for Prosper, if, like you, someone wants to be able to set a price. However, it's also a victory for LC, if, like most lenders, someone isn't a credit analyst. But, wait, is there really a winner here?
If, on Prosper, you rely on "Prosper Ratings" then they - not you - are setting the prices. Potential edge is positive selection ability, gleaned from whatever selection bias you use, based upon the information provided per note, and taking into account the auction dynamics (which does introduce the both the opportunity to make more money and the opportunity to lose more money = "more freedom", what Prosper will market as... something?, which is actually "higher spread potential"). If you don't like it, don't buy it, by not bidding yourself into it. (A lot of people here buy the freedom argument, I believe, but, at the same time, they either aren't good credit analysts or aren't being given enough information to make a good decision - though I don't know what more information one can get about a stranger, aside from pulling from more bureaus or "verifying" other datapoints, , which is cost prohibitive and still probably won't keep greed and incompetence in check, which is why there are now going to be baby-bid-floors on Prosper to try to keep people from hurting themselves - again. You know who you are...)
If, on LendingClub, you rely on "LC Pricing", then they - not you - are setting the prices. Potential edge is positive selection ability, gleaned from whatever selection bias you use, based upon the information provided per note, and taking into account the LC pricing model (which reduces both the opportunity to make more money and the opportunity to lose more money = "less freedom", what LC will market as "steadier returns", which is actually "less spread potential"). If you don't like it, don't buy it, by not buying yourself into it. (A lot of people here do not seem to like the "lack of freedom". but, then again, a lot of the people here are bitter because they cut themselves on the pointy scissors, and need round ones, which, for the US market, I must admit, is perhaps a "smarter" way to do it.)
The operative word in both above explanation is "rely". To the extent that you "rely" on them, you're also dependent.
At a high level, this is really a simple AUCTION vs FIXED PRICE situation, where eBay may be analogically instructive: some items are for sale via auction and some items are for sale at a fixed price. The seller of each item provides a summary of information about the item which either entices the bidder to bid to a certain price or to buy at a certain price (in both situations, the bidder/buyer ALWAYS enjoys the ultimate freedom to move right along without partaking.)
Google may also be analogically instructive: Prosper lets you sort your search results by price, then compete - while LC lets you sort your search results by tranche, then compete. Naturally, you can do either, at both, if you're smart.
That guy a long time ago who said we were all "virtual loan officers" was not right - but he wasn't wrong, either.
On Prosper, you attempt to positively select AND price for risk via competing with others in a (per note) auction.
On LendingClub, you positively select AND price for risk via selecting amongst notes whose prices are already set.
IF all other factors are held constant (which they aren't, but this isn't exhaustive, so fuck it), THEN you just assume, for both Prosper and LendingClub, that YOU are the Credit Analyst and ignore their "pricing suggestions",much the same way that you would ignore some talking head on, say, CNBC, who says to buy XYZ at 123, and owns it.
(It doesn't matter who prices a note if it's within your investment range, based upon your read of what matters. To the extent that you believe the model, the credit score, etc, to the extent you "believe", you're dependent!)
(Naturally, you are now at the mercy of the quality, depth, and breadth of information provided to you per note.)
(And, as you detail in your post, you're exposed to operational risk of each platform, and so need transparency.)
(Prosper has advantage in that it can offer BOTH auction AND borrower-priced listings, but we'll ignore for now.)
(In fact, I'm practically ignoring the entire borrower side of the equation, but that's because of the audience.)
Let me say that again, more simply, in terms of "how much for which" versus "which":
On Prosper, you fight over how much you'll pay for particular slices of pie - and, on LC, you fight over which slices of pre-priced pie you want to buy. At the end of the day and either way - you pick what pie you buy and what you pay.
The SEC merely said: "Can't have it & eat it!" (Which ties back in nicely to what you wrote re: "securitization"...)
Now, am I still a holdout on whether Prosper 1.0 loans are securities? Yes. I think they're just simply "loans", but in order to offer a platform for the trading of those loans, in the US, you'd practically have to mount a rebellion...(The mere fact that you'd have to mount a rebellion in order to do it is not prima facie evidence that it is UNLAWFUL, which, I imagine, will be at least some part of the defense that Prosper mounts against any claims to the contrary...)
So, you can look at that and say Prosper "fought the good fight" or you can say it merely "learned the hard way" - but you can't fight the good fight without risking that you'll have to learn the hard way, unless you fight the good fight.(If you choose to fight, you have to not only make sure you win it, but that you'll somehow survive, even if you lose!)
And, you can also look at that and say LendingClub "surrendered to the SEC" or you can say it merely "was smart" - but you can't surrender to the SEC without risking that you'll have to be "dumbed down" - since you surrendered to the SEC. (If you avoid the fight, in the first place, you have to make sure you always continue to "hold your captors hostage".)
So, sometimes, "fighting the good fight" and "surrendering" can be very difficult to distinguish from one another, huh? Each strategy has its relative merits. I really don't have a favorite, beyond who pays me the most, so, I'm "neutral"! I suspect that you are in the same boat with me, and that most people here like to think that they are on the QE2, too.
It remains to be seen how the rest of this turns out... but, I do hear the Canadians are about to jump into the fray...and, with Zopa UK going home to shore up Empire, with minor excursion into Rome (with the usual outcome), it's welcome.
Oh, Canada!
Am I wrong?
-nonattender
