Lending Club’s recent turmoil generated quite a bit of media coverage over the past week. Whether the tone of those articles is explanatory or accusative is beyond the point, each to his own opinion.

The surprising fact is that, almost 10 years after peer lending appeared in the US, the journalist of a major publication, the New York Times, could write such a massively inaccurate article. A few sections in particular, are almost comically off point:

## 1 – Lending Club shouldn’t hide its credit model

The journalist writes: “Here’s a hypothesis: Investors don’t have enough information about the company’s operations to keep them confident about its prospects. […] In contrast with traditional financial companies, Lending Club’s disclosures are thin.”.

In particular, she criticizes Lending Club for not disclosing the details of its credit model and using “proprietary algorithms that leverage behavioral data, transactional data and employment information”. In other words, for keeping its secret sauce a secret. I wonder if Mrs Morgenson has encountered many hedge funds that publicly disclose their proprietary algorithms, or software vendors who distribute in open source the very same application they sell? It also shows a gross ignorance of financial world regulations, which are built to allow preserving the secrecy of decision making while ensuring a transparency and fairness of the results (hence the many ‘compliance’ rules we all love to hate).

Writing that investors should stay away from Lending Club because it keeps its inner workings proprietary is tantamount to calling for a cessation of reading the New York Times until readers have full access to the journalists’ hard drives.

## 2 – Lending Club doesn’t disclose its past loan performances

Stepping up in the level of inaccuracies, the New York Times writes “Lacking, for example, is detailed data on Lending Club’s […] investors’ returns and loan performance.

Mrs Morgenson: if you can manage to make three consecutive clicks on a Web page, that could lead you from the Lending Club’s home page to their Statistics page to the download data page. From there, you will be able to download very detailed information about each single one of the 1,021,327 loans issued by Lending Club so far. The amount of information and transparency is not ‘adequate’, or even ‘good’. It’s astounding! Not only the level of detail, the granularity of information, but the simple fact that such a trove of information is made available to anybody.

Please point us towards a “traditional financial [company]” that gives, in the open, such details about its past performances.

She also criticizes Lending Club for splitting its charge-off rates graphs in two: “In its filings, the company does show two tables of charge-off rates on its loans, reflecting borrower defaults. One table spans three years, the other, five. Good luck figuring them out.”. Hmm… that makes me wonder why on earth would they do that. To obfuscate results as she insinuates or… maybe, just maybe… because Lending Club offers loans of three year and five year terms.

## 3 – You must be a big investor if you have a portfolio of 100 loans

Since she’s on a streak, this New York Times journalist continues with: “Lending Club provides scant details on borrower performance […]. A chart on the company’s website showing the “adjusted net annualized return” that its investor-lenders receive […] was limited to larger investors, those buying at least 100 of the company’s notes or bundled loans.

Sigh. So there’s this thing called peer lending, where borrowers come to an Internet-based marketplace, and they’re matched with lenders who invest only a fraction in each loan, so lenders can diversify small amounts in many different loans. On Lending Club, the smallest possible ‘slice’ of a loan is \$25. Which means, that “larger investors” are people who had to put a staggering \$25 x 100 = \\$2,500. Doesn’t seem so large, does it?

## Conclusion

To paraphrase the journalist’s own conclusion (“Don’t let enthusiasm for a purportedly innovative business model replace hard-nosed analysis of a company’s operations.”): Don’t let enthusiasm for a timely story replace hard-nosed journalism.