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[Fred93]

Fred has updated his blog again.  The usual charts, plus comments on recent events at prosper.com, including the cash situation, the Nigel Morris investment, Catherine Muriel's departure, Nick Talwar's appearance as CRO, and the firing of Ernst & Young.

http://fred93blog.blogspot.com/2009/12/prospercom-112009-late-loan-stats.html

The meat:

[mothandrust]

Check out that sweet 7/06 curve peaking and then starting to decline.  Same with 9/06 and 10/06.

[christoofar215]

Now that we're at 44% default rates, it really IS looking like a Roulette play.


Basically, the only way to win is to put EVERYTHING on red and hope you win on one spin.


Then, if you DO win, you MUST walk away, because you won't win anything if you keep playing

[triad]

Fred (or anyone):

Is there a clearcut chart showing the post mortems by grade?

I would love to see a chart comparing a weighted average for each grade of loan over 3 years and the actual rates Prosper promoted at the time.  I did some crude numbers (15% pay 12 months; 15% pay 24 months; 15% pay 30 months and the rest full pay) and it looks like if your interest average is under 15% you are pretty much guaranteed to lose money.

Prosper promoted diversification, but it doesn't seem that it was ever possible for it prevent the average lender from losing money.  And if the average lender lost money, this is not an investment for the average person to be in.

Like many others, I have learned a lot from my experience on Prosper.  For a cheap initiation fee (I only did 6 loans, so losing $75 overall isn't a hardship for me), I learned that credit grade and home ownership do not predict who will pay and who won't on an unsecured loan.  (I had 2AAs, 1 A, 2 Bs, and 1E.  The E and an AA are the only ones left.)    I got the Will Rodgers lesson about return on vs return of investment hammered into me.  I now understand why credit card companies charge 30%-- it truly takes a lot of interest from the few people who do pay to pay off the ones that don't.

I'm going back to my tax-free munis that can raise taxes to pay the bill....

[christoofar215]

Credit card companies do make money on the people who pay in full (PIF) every month.   Just way, way, way less than the people who revolve.

Every time you swipe a plastic card the merchant gets back less than the price they're actually charging you for the item.   The difference is called "Interchange" which is a basket of fees the middlemen charge the storekeeper to be able to offer plastic as a payment method.


A lot of credit card companies like Capital One spend more on marketing (rewards and advertising) than they get back on Interchange.    They try to slash costs elsewhere to make up for it.



For instance, what major credit card companies have you dealt with lately that hasn't been hammering you to switch to paperless billing?   A paperless customer who PIFs every month and never calls customer service == a very cheap customer to keep around.

They're not hammering paperless billing because it's "green".   They do it because postage is expensive in large volumes, paper costs more than it did in the past, and those print & mail employees don't ever get any cheaper and in some shops they're union employees.

[Fred93]

Is there a clearcut chart showing the post mortems by grade?

Yes.  A fellow named rateladder produced such charts, and I showed one and talked about it in last month's blog.  http://fred93blog.blogspot.com/2009/10/prospercom-102009-late-loan-stats.html

[Fred93]

A lot of credit card companies like Capital One spend more on marketing (rewards and advertising) than they get back on Interchange.    They try to slash costs elsewhere to make up for it.

The wikipedia page for Capital One says that they are the 4th largest customer of the US Postal Service. 

I find this easy to believe.  A few years ago I noticed that I received more than one credit card advertisement per day in the mail.  I started opening them and reading them, and found that almost all of them were from Capital One.  Different color paper.  Different size envelopes.  Different looking material inside.  Different company names (Capital One has many names), but all owned by Capital One.  I received, over a long period of time, more than one letter per day from Capital One!  Just astonishing.  At that point I called them and asked them to stop.

[christoofar215]

A lot of credit card companies like Capital One spend more on marketing (rewards and advertising) than they get back on Interchange.    They try to slash costs elsewhere to make up for it.

The wikipedia page for Capital One says that they are the 4th largest customer of the US Postal Service.  

I find this easy to believe.  A few years ago I noticed that I received more than one credit card advertisement per day in the mail.  I started opening them and reading them, and found that almost all of them were from Capital One.  Different color paper.  Different size envelopes.  Different looking material inside.  Different company names (Capital One has many names), but all owned by Capital One.  I received, over a long period of time, more than one letter per day from Capital One!  Just astonishing.  At that point I called them and asked them to stop.

Remember how AOL used to send everyone in America about 10 floppy disks in the mail per day?

Back in the day when there was still a lot of Sneakernet going on I collected those disks.  I had over 3,000 of them.



When AOL first started doing it they would only send out the 720K low density diskettes but then their program finally grew bigger than that and they had to ship the 1.44MBs.

[triad]

Thanks Fred, that chart suggests my loans were somewhat worse than the average.  

But if I do a crude weighted average using his chart and Prosper's estimated interest rates, I still can't come near their ROIs.  I get 3% for diversified AAs, they claim 5-7%.

Of course under Prosper's new grading system, some of the AA are now Cs.  Trying to look stuff on eric is an eyeopener as it give the old scores.

[bankomatic]

The real gold in your blog is this:

As many of you know, Prosper is a startup, burning thru venture capital, and near the end of its cash. As a result, Prosper needs a substantial new injection of cash within the next 6 months, or else. It was therefore a welcome development when Prosper announced that on November 11 Nigel Morris, a co-founder of Capital One, had made an investment in Prosper. Examination of SEC filings shows us that this investment was only $1 million, a very small amount, and also that this investment was in the form of a bridge loan, at 15% interest, and came with a warrant kicker and a position on the board of directors. This investment is not the substantial investment we've been waiting for. Its just a bridge. Bridge to what we're not quite sure.

15% interest WITH a stock warrants and WITH a board member position? Talk about hugely unfavorable terms to any business. You would only accept such a term if you were completely desperate for money.

Does the appearance of Morris signal the beginning of a change of control?

Possibly, those terms are extremely unattractive.

[HollowOak]

The real gold in your blog is this:

As many of you know, Prosper is a startup, burning thru venture capital, and near the end of its cash. As a result, Prosper needs a substantial new injection of cash within the next 6 months, or else. It was therefore a welcome development when Prosper announced that on November 11 Nigel Morris, a co-founder of Capital One, had made an investment in Prosper. Examination of SEC filings shows us that this investment was only $1 million, a very small amount, and also that this investment was in the form of a bridge loan, at 15% interest, and came with a warrant kicker and a position on the board of directors. This investment is not the substantial investment we've been waiting for. Its just a bridge. Bridge to what we're not quite sure.

15% interest WITH a stock warrants and WITH a board member position? Talk about hugely unfavorable terms to any business. You would only accept such a term if you were completely desperate for money.

Does the appearance of Morris signal the beginning of a change of control?

Possibly, those terms are extremely unattractive.

A long time back I wrote about how (in my opinion) Prosper is testing this business model with OPM^*. I think we see that here again. Bear in mind that Mr. Larsen sold e-Loan for approx $300 million. If he was really desperate and believed in the business, now would be a good time to shore up his personal stake in the company with a capital infusion. But, using OPM, we can draw our own conclusions.  And if it is OPM, who cares how bad the terms are? Good gamblers know when to stop adding money to their stake when they are losing, good B-School graduates know how to test uncharted waters with OPM.

^*OPM, of course being Other People's Money

[Fred93]

Bear in mind that Mr. Larsen sold e-Loan for approx $300 million.

But the $300M from Popular didn't go to Larsen.  E-loan was already a public company at that time.  I looked up some of the history tonite.  

1997 Chris Larsen & Janina Pawlowski found E-loan.  
1998 E-loan gets venture capital.  
1999 Went public.  That's quick!  This was the peak of the internet bubble!
2005 Popular (parent of Banco Popular) bought the already-public company E-loan for $300M in cash.  
2007 E-loan laid-off 500 employees.  
2008, Popular announced that E-loan would no longer originate mortgages (its original purpose), but would continue to sell CDs.

After the venture capital, Larsen surely owned a minority position.  Maybe 10% to 30%?  I don't know how much the VCs took or how much was distributed to employees.  After the IPO he owned an even smaller fraction.  I have no idea when he sold his stock, or whether he held it until the buyout.  At one point soon after the IPO E-loan stock was worth over $1B, but then dropped big.  The documents re the IPO and Larsen's stock sales are public info, so one could research them thru SEC, but it would take a lot of digging.

Then he had to pay taxes.

The range of possibilities here is large.  Most internet entrepreneurs did NOT sell at the peak of their company stock price.  My guess: Maybe he got out with $20M to $100M or so, eh?

Still your point is valid.

PS: cute old article about the E-loan IPO: http://www.businessweek.com/1999/99_36/b3645001.htm

[yankeefan]

Larsen owned 5%, according to this last proxy statement

2005 Proxy

[havastat]

If he had had a larger stake before and sold part of it between the IPO and the buyout, there would be SEC documents for an insider sale.

[havastat]

I think all the evidence seems to be that Prosper is in a difficult cash position and needs an infusion badly. Which is in many ways unfortunate. it was a good concept. If they had solved their problems, I would have considered going back. I was going to wait a year or so to see how their post-SEC-approval notes performed. They may not have that time.