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What Bubble? Wall Street To Turn P2P Loans Into CDOs
So far this year, around $38 billion in auto loan-backed ABS issuance has hit the market, around a quarter of which is backed by subprime loans. Meanwhile, America’s $1.3 trillion pile of student debt is likewise being sliced, packaged, and sold even as real delinquency rates (i.e. the rate for students in repayment and stripping out those borrowers in IBR payment plans whose calculated payments are zero) are probably at least 40% if not far higher. All told, around $76 billion in ABS deals went off in Q1 and for 2015, the total should come in at around $200 billion. While that’s a far cry from the $750 billion or so that came to market in 2006, it’s still on par with last year, which saw the highest total since the crisis.
As far as the collateral pools backing the deals, there’s cause for concern. For instance, Moody’s recently warned that some $3 billion in student-loan backed paper was in danger of default, while Skopos Financial (to whom we introduced readers last week), brought a $150 deal to market backed by loans to borrowers whose FICO scores ranged from just 350 to 500. Now, it appears Wall Street is set to feed its securitization machine with a new kind of debt: peer-to-peer loans. You read that correctly. Soon enough, the pool of micro loans that are facilitated by sites like LendingClub will be used to create CDOs.
Via Bloomberg:
Barely a decade old, “P2P” has gone mainstream and is now being co-opted by some of the big financial players it was supposed to bypass.
Investment funds can’t get enough of this business, which involves lending to people over the Internet and hoping they pay you back. Investors are snapping up the loans directly, while the banks are bundling them into securities, much as they did with subprime mortgages.
Now peer-to-peer lending and its Internet enablers like LendingClub Corp., the industry leader, are being pulled into the high-octane world of derivatives. While many hail Wall Street’s growing involvement, others warn investors could get carried away, as they did during the dot-com era and again during the mortgage mania. The new derivatives could help people hedge their risks, but they could also lure speculators into the market.
“It feels like the year 2000 again,” said Frank Rotman, a partner at QED Investors, an Alexandria, Virginia-based venture-capital firm that has invested in Prosper Marketplace Inc., Social Finance Inc. and 13 other P2P lending platforms. “Everyone is chasing ’it,’ but they don’t know what ’it’ is, and that is kind of scary.”
Of course voracious demand is a direct product of central bank policies that have sent investors searching far and wide for yield and they’ve apparently become so desperate they’re now willing to gamble on the payment streams generated by loans made on peer-to-peer platforms.
It’s easy to see why investors are so enthusiastic. In today’s low-interest-rate world, high-quality P2P loans yield about 7.6 percent. Two-year U.S. Treasuries, by comparison, were yielding a mere 0.6 percent on Friday.
And the same dynamic that drove the housing market off a cliff (and that very soon will do the same for the subprime auto market) is at play with peer-to-peer loans.
But P2P’s rapid growth also raises questions about the potential risks, including whether the firms involved might lower their standards to stay competitive. During the mortgage boom, Wall Street’s securitization machine fueled questionable lending practices. Derivatives tied to the debt were blamed for spreading their risks around the globe, and then amplifying investors’ losses when the housing market crashed.
But don’t worry says Mike Edman (who readers will recall knows a thing or two about derivatives), everything will be fine as long as you embed a credit default swap thus allowing investors to bet against the loans by buying protection — this would ‘balance things out’.
Edman, who runs New York-based Synthetic Lending Marketplace, or SLMX, has some high-profile experience. In the early 2000s, he helped invent a kind of credit-default swap that enabled some Wall Street firms to bet against U.S. subprime mortgage bonds.
But Edman sees little resemblance between the boom-era mortgage market of and the current peer-to-peer market. He said his derivatives will help investors hedge their bets and also improve the pricing of the underlying loans.
Indeed, Edman said the ability to short the loans could curb some of the enthusiasm for this asset class before any of the debt sours.
This sets up a scenario wherein sophisticated investors could theoretically choose the credits they want to bet against and, with the help of Wall Street, structure a synthetic deal which would then be sold to clueless investors on the premise that a 5% yield is hard to come by these days (so the investor who structured the deal would be buying protection on the tranches while everyone else would be selling protection and picking up the CDS premium, while the bank plays the middle collecting hefty fees).
We wonder what role LendingClub and other peer-to-peer sites will end up playing in this process and whether the online component and relatively small amounts being lent have the potential to turn the whole thing into an underwriting standard nightmare once these tech startups realize they can get paid for providing securitizable assets.
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Finally, some good news for the Jews!
I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.jobs-review.com
You manually masturbate caged animals for artificial insemination?
Surely, you have heard, "j reuter" is the Bernank's ZeroHedge handle. I'm glad he's doing well for himself.
No J Reuter sells P2P backed securities online for Paribas.
Debt is voluntary control much cheaper than forced control. This shit is horrible on the order of waterboarding kitties with Jim Jomes Kool-aid..
Debt is the new heroin and pretty much a majority of the citizens are chronics..
Vote - Card is the only thing to stop this.
L
Jeebus that's some scarey shit!
The ultimate goal here is to shift all debt into the markets, so that when the whole shebang falls, well guess who get's left holding the bag?
(I guarantee you it's not gonna be the swindlers at the top)
P2P is nothing but "legalized" Vig Money.
Market opportunity: rent-a-thug...Uber meets private security. Dial 1-800-TONY
The pensions are going to get infected with this. I think in the end it will help Faux News ratings when Grandpa and Grandma go out caning in the coming riots at they get the sound cannon or the water cannon pepper spray.
In some of the countries they are pumping sewer into the riot spray trucks. People don't protest much when they are getting power washed in shit..
Who wants to work together to become too big to fail?
Clearly this will call for a former Lending Corp exec to come riding to the rescue on his white horse and be appointed Treasury head, ala Timmah Geithner.
They of course would be the only ones who know the complicated intricacies of these fine "financial instruments".
Quick alert the talking heads and put them on standby! ;-)
And they're taxable, to boot! TurboTax to the Rescue!
Where's Timmah when Mankind Needs Him?!?!?!?!?!?
There will never be a time in our lives that the Deep State does not see some new tax as absolutely necessary and vital to the survival of itself (marketed of course, in the form of roads & bridges or Garrreeeen! or stopping terrrrizm by spying on the villagers).
Its what they do and have always done, real Sheriff of Nottingham types. What we do in the present really is for our childrens own future with no marketing hype and they hate us for it.
Personally, I wouldn't have it any other way ;-)
Be sure to sell these CDOs to some small municipalities in Europe or maybe some pension funds.
I vote for the ECB. Just denominate them in Euros and you're good to go.
Fuck me, whoever you are doing this shit, you'll have Massive deals in the pipeline with that idea.
Heck, sell it to our clients, just don't tell them I'm the one doing the selling. /nudgenudge
A prophet for our times, and of our times:
Quotes from "Creature From Jekyll Island": http://www.truthcontrol.com/g-edward-griffin
"Plunder is the game. Fear is the plan."
Liberty is a demand. Tyranny is submission.
Yes indeed, Griffin has amazing work & he clearly understands the controls, systems, and agendas of the elite...
The purpose of the study was to analyze methods by which a government can perpetuate itself in power--ways to control it's citizens and prevent them from rebelling. The conclusion of the report was that, in the past, war has been the only reliable means to achieve that goal. Under world government, however, war technically would be impossible. So the main purpose of the study was to explore other methods for controlling populations and keeping them loyal to their leaders. It was concluded that a suitable substitute for war would require a new enemy which posed a frightful threat to survival. Neither the threat nor the enemy had to be real. They merely had to be believable.
-G. Edward Griffin / The Creature From Jekyll Island
Prescient and scary.
Any takers on how long it will be before they turn an actual physical steaming pile of shit into money?
You've got that all wrong mate, the plan is to turn money into a pile of shit...
http://armstrongeconomics.com/archives/30158
E.g. you will be working for a negative sum / gain
Armstrong's opinion on anything is wildly inflated, i.e. a steaming pile of shit trading well above its worth
And your opinion is worthless.info
It's been done:
http://www.bondbuyer.com/issues/122_86/yields-outweigh-the-risks-of-inve...
brought a $150 deal to market backed by loans to borrowers whose FICO scores ranged from just 350 to 500...
ho lee fuk
Sum Ting Wong
I was thing of buying some subprime auto CDOs, preferably on cars 10 years or older with a minimum of 84 month on said loans. Perhaps some student loan debt hopefully tied to students getting degrees in communications, and now I can round it out with P2P CDOs to finish of the trifecta.
I just wish there was a way to loan Italy and Spain money for ten years and get a return of 1.5%.
You're doing this whole thing wrong. Where's your 100-to-1 leverage?? My friend just reverse-repo'd his roof and is making over $7k a month working part time at the SEC supervising gold rehypothecation securities. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what he does.... www.sec.suckit.gov
/hattip
Wait . . . I've seen this movie before . . . the ending sucked, the cast are horrible; I want my money back, dammit.
this remake is totally different
the cast:
goldman sachs
hedge fund maggots
credit default swaps
norway (japan, california, whatever) teacher's pension fund (aka the victims)
oh wait, it is totally the same. never mind.
Most snuff flicks end the same.
What shit!
Anyone ever tried prosper to make some money, is it safe.
I actually gave it a try a couple of years ago. Took a tiny 2K and placed my bets on 20 loans. Some high rated some low rated. Range of interest between 6-10%. About half were repaid in full. One out right fraud that got refunded. The remainder paid for some time and then stopped. In the end after a year I walked away with my orginal 2K. The stats run by someone pretty good pretty much said that you could not make a profit. My advice stay away and don't bother unless you like betting.
For the borrowers the rates are high (18 to 24%) and the terms are short (18 months max).
There is a tiny market that they can serve, but their customers will either be in the construction biz or just pie-in-the-sky I have a great idea types. Risky.
My advice to investors and borrowers alike is as you say, stay away.
Isn't dealing in toxic "assets" forbidden?
Guess not.
The punchline is all of this is underwritten by 4 years of junior drinking and drugging before entering the JustOverBroke j-o-b market.
P2P leader Lending Club, who purportedly wanted to .... close the gap "from the gap that banks created" are now going to the same source and origin of the debacle that ended up with the 2008 debacle.....
lol.... indeed... look at the stock price of the lending club (LC) which went public in early Dec 2014..... something the market already knows....
now.... who is in the market these days.... insiders... ?
damned bastards
If they were honest, they'd change their name to Asset Harvestors.
Magnetaritos.
So when's this shit blow up? Or as a tidal wave ~ when u think this beast rolls in? 20 years or much earlier due to other economic issues?
Depends on how long it takes some innocent kid to point out that Emperor's schlong is hangin' out in plain view of anyone who cares to notice.
In other words, this might take a while.
Can't people just figure out how to make money by earning it.
Fuck.
Either you front run the Fed, or the Fed front runs you. YMMV
China pmi came in light a few moments ago. 48.9 vs flash of 49.2.
New orders 48.7
Lowest since last April ...
They had estimated 49.4 pmi
Meanwhile Collegetown, USA developers are busy using the same ole securitization mechanism to build massive quantities of student housing.
Every single financial problem on Earth will be rolled into these 'markets' before it's all said and done.
This is far from the original business plan of peer to peer loans. About a year and a half ago, some board chat was already taking place on when to get out of the Lending Club as they saw this happening with CDOs to the banks. What they were able to bid on to fund was changing too.
All the Lending Club is is software and some algorithms and you can bet they too are selling data, look at their stock they need money and all banks and companies go right to their own data to see if they can sell it.
It's different this time. What the fuck is next? Why the hell don't they CDO Credit Card debt with on;y a tranche for FICO < 200? That sucka could pay 7.9 %. And a default swap could net a leveraged 21.5%. C'mon money mongers - go fer it. Patooey.
I'm going to refi my auto loan so I can jump into the fray.
Fantastic...and at 8am tomorrow, Im calling every OTC sales desk on the Street to sell me some CDS on this shit..
Next bet will be against (or with) insurance companies to bet whether or not someone insured dies from their illness. The more access some poor soul gives one of these companies to their particulars, the more they can make, in gift cards of course.
These all get wrapped up in negative insurance payout CDO's. Grannie just became a CDO.
pretty soon there will be CDO's for used garden equipment on craigslist
Now imagine a platform without the flawed, centrally manipulated and controlled fiat currencies...Tools and platforms are in the making so you retards can get rid off banks in a few years.
I don't think the P2P lenders' role changes as questioned by the Tyler near the end of the post changes at all. They are the underwriter and servicer of the loans regardless of whatever else happens. LendingClub as the primary example cited takes an origination fee when underwriting the loan and then 1% of all principal and interest paid to the investors of the loans (I.e., something less than 1% of the total). There is also an industrial bank they are doing business with that takes a slice of the first payment which seems criminal given the investors are the ones fronting the cash. Otherwise their business model is based entirely on those two streams of revenue.
I don't see pressure on them to lower their underwriting standards as they don't really have a stake the way the banks underwriting the mortgages that were packaged into CDOs did since that is not their game. I think it is actually to their benefit to do a better job underwriting since they are the ones incurring the overhead associated with performing collections and default management activities if a loan goes bad. For them an A grade loan should look like a great revenue stream for 3 or 5 years. If they botch that analysis of the borrower they shoot themselves in the foot by overloading their collections and default management processes. We know how that turned out for the big banks / mortgage servicers.