Former Bear Stearns mortgage-backed securities (MBS) trader Perry Rahbar recently wrote about the danger of financial innovation without transparency. According to Rahbar, innovation without transparency was the true underlying cause of the Financial Crisis.
Rahbar argued that the MBS market itself wasn’t the problem. The fact that investors didn’t know exactly what they were buying was the real issue. When the MBS offerings got too complex for investors to understand, it opened the door for exploitative behavior.
Now, nearly a decade later, Rahbar is concerned that the same phenomenon may be occurring in the marketplace lending space. Online lenders like LendingClub Corp LC 0.45%, Lendingtree Inc TREE 8.95% and On Deck Capital Inc ONDK 0.2% have generated explosive growth in recent years. As the number of online loans has risen, the complexity of marketplace loan asset-backed securities (ABSs) has as well.
“With less regulation than banks and no consistent reporting practices across lenders, it’s extremely difficult for investors to figure out what they’re buying and how it’s performing,” Rahbar explained.
Much like MBSs, there is nothing inherently wrong with online-loan ABSs. However, if the market doesn’t maintain…
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