[CreditGuy]

I'll dial it way back for those even dumber than FUNd!

Historically, LC was simply a marketplace for connecting borrowers with investors that were willing to put capital at risk. In the middle, they graded the loans to provide investors some level of insight into the potential credit risk. At the time of LC's IPO credit losses were something very low like only 250bps, which is likely due to first payment defaults/fraud/etc. that based on the master purchase agreement governing their loan sales (which they violated resulting in this mess) made those assets ineligible and thus were (likely) written off. In short, they held no real credit risk in terms of both duration and extension. Further, they never had to manage cost of funds for any significant horizon since all assets were held for sale. Where this gets interesting is that now they have to manage all sorts of risks they have heretofore never had experience with, nor do they necessarily have the infrastructure to effectively report on their portfolio performance. If there is a mild upside, LC sold their loans servicing retained, so they do have a collections department.

These problems are unique and quite challenging in that LC has never had to manage an ALLL or otherwise forecast credit losses beyond investor grading/HFS. They have never had to manage durational and extension risk beyond accounting for it in loan grade. The technical infrastructure to do so and the human capital required to do so effectively aren't easily acquired, nor are they fully ramped at the time of acquisition should the timing issue regarding acquiring these personnel not be an issue. Their reporting shows they run a portfolio of roughly $8.5B in outstandings with 5% charge offs and another 3% past due. The ALLL for a balance sheet portfolio that size would need to be around $550M assuming 50% of past dues charge off. This assumes they were remarkable efficient at managing their ALLL and forecasting losses despite having never managed an ALL before and recently getting dinged for under forecasting losses and suffering a downgrade. Big assumptions all. Last, beyond the carrying costs of the loans in terms of costs of funds, they now also have to fund the human capital needed to run their ALLL and portfolio management functions, which are new and not insignificant expenses.

Where there is a lot of downside is that LC reported today they have $860M cash and cash equivalents on hand per the 10-Q. Seeing as they were facilitating >$10B a year into their now shriveled and decrepit marketplace with little to no investor confidence, that represents about a month of originations or the cash requirement to fund their conservatively estimated ALLL with about $290M left over. They indicated publicly that they have liquidity to remain solvent and funding for up to 12 months using cash and available credit with lenders as well as their capacity to constrain originations volume, but given the math this seems optimistic. The penultimate part is interesting in that their creditors are possibly going to exercise a MAC (material adverse change) clause with regards to their current outstandings, which would be an act of default and freeze additional advances against any revolvers or multiple advance closed end facilities. The last part is interesting in that they have to make significantly fewer loans to stay above water, which both hampers their ability to capture market share as well as generate revenues from interest income to fund operations. This calls into question their ability to do all sorts of things, like invest in infrastructure, hiring, etc.. Last, they are forced into a Sophie's Choice of sorts with respect to funding their ALLL or originating volume. Sure, it is possible that some investor is going to take a chunk of equity in exchange for keeping them afloat, but that is almost certainly dilutive and definitely a step in the wrong direction. Also, if they choose to play on the trapeeze without a net and not fully fund their ALLL, we'd likely see further action from DOJ/SEC/Your Mom.

I'll stop here for now, because I've already laid out enough of a picture for those that want to continue to draw conclusions to do so. LC is poised to be the Enron of FinTech. A victim of their leader's hubris, the greed of management to be successful, and a web of complicated and conflicting interests and vehicles that cast doubt on management's commitment to shareholders over themselves and their actual desire for transparency.

[FUNd]

OK, most well thought out and well written response, ever.

I am picking up that LC is/was the Napster of loans. Basically connecting money with people taking little to no legal responsibility for the outcome of the transaction, but simply providing the platform.

Now Napster has to actually purchase or license all the music from the record labels and sell it to the consumer themselves, and that takes moving parts, aka people, which cost a lot of money. Napster collapses under the weight of these new responsibilities, paving the way for Apple and its successors to start doing it the right way by licensing and selling songs for $0.99 each. Am I close?

[Sean Cash]

OK, most well thought out and well written response, ever.

I am picking up that LC is/was the Napster of loans. Basically connecting money with people taking little to no legal responsibility for the outcome of the transaction, but simply providing the platform.

Now Napster has to actually purchase or license all the music from the record labels and sell it to the consumer themselves, and that takes moving parts, aka people, which cost a lot of money. Napster collapses under the weight of these new responsibilities, paving the way for Apple and its successors to start doing it the right way by licensing and selling songs for $0.99 each. Am I close?

The problem is that Lending Club was supposed to be the Apple of the industry...