Financial innovation is often just corruption by another name

(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at: lawrence@krubner.com

Sad:

In other words, LendingClub is an originator, funneling loans upstream to Wall Street firms. And in executives’ desire to grow amid demands from shareholders — LendingClub went public in 2014 — they began to exhibit the tendencies of the banks they sought to out-innovate.

First, Laplanche approached the board about investing in Cirrix Capital, an investment fund that actually bought a lot of LendingClub loans. If LendingClub invested in Cirrix, then Cirrix could invest more in LendingClub loans, a bizarrely circuitous bit of logic that nevertheless appealed to the board. They agreed to put $10 million in Cirrix. But Laplanche didn’t tell the board that he already held a large investment in Cirrix at the time. So LendingClub’s money wouldn’t just help out the company, but personally benefit Laplanche.

Amazingly, LendingClub board member John Mack, the former CEO of Morgan Stanley, was also invested in Cirrix. He wasn’t part of the risk committee that approved the Cirrix investment, so he hasn’t resigned. But the whole concept of a marketplace lender owning a stake in the fund buying marketplace loans is ripe for abuse. It could force that fund to swallow dodgier loans to increase market share, or give that fund better loans than competing investors.

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