One of the consequences of the financial crisis was that people on Wall Street lost their way with words. Old silver-tongued masters of the universe were reduced to stuttering and stammering as they tried to explain how so much could go so wrong.
But time has passed, memories have faded, and the wheelers and dealers of the financial world are showing signs that they have regained their old alchemic abilities to twist and turn the English language to their advantage.
A case in point comes in the form of next week’s planned initial public offering of Lending Club. It is one of a new breed of company commonly known as “peer-to-peer” lenders, meaning they earn fees by operating online marketplaces where customers who want to borrow money are matched with people willing to provide it at a price.
Lending Club’s march to the New York Stock Exchange has created a stir because it highlights the growing impact of technology in finance. Computers are making it easier and less expensive to link borrowers directly with savers, threatening the role played by the traditional middlemen of the lending trade, otherwise known as bankers.
But for my money, the rise of the peer-to-peer concept also marks a moment in the literary history of Wall Street. Yet again, new reassuring terminology has been found to describe an old risky business — in this case, lending money to borrowers who one hasn’t met in person but who are willing to pay a relatively high interest for much-needed cash.
Previous milestones have included the transformation of scary “junk bonds” into “high-yield securities” — instruments now seen as so sensible that people are buying them with yields in the mid-single digits. Meanwhile, “leveraged buyout firms” — the “barbarians at the gate” in the 1980s — became “private equity houses” or, better, “financial sponsors”, a description that makes them sounds as supportive and nurturing as an Alcoholic Anonymous buddy.
“Peer-to-peer” points the reader in a similarly euphemistic, if not Panglossian, direction. Look up the noun “peer” on Google, the Lending Club of the reference world. You will find two definitions in the Oxford online dictionary: “a member of the nobility in Britain or Ireland, comprising the ranks of duke, marquess, earl, viscount and baron”; or “a person of the same age, status, or ability as another specified person”.
By this standard, peer-to-peer suggests the participants in online lending markets are either of elevated status or on an equal footing. The effect is only accentuated by the addition of the word “club”, as in Lending Club, conveying as it does images of soft chairs and mixed drinks served by kind old men in black bow ties. (When I close my eyes and try to imagine a peer extending credit to a peer in such a place, I see a member of a golfing foursome turning to his fellows for some tip money because he absent-mindedly left his wallet at home in his haste to dress for his day on the links.)
Real-world peer-to-peer lending, on the other hand, is remarkably peer-less. No noble pedigree is required. While it is possible some borrowers are the same age as their lenders, it is unlikely those seeking funds on the site have the same status or ability — at least in a financial sense — as those able to provide them.
Odds are that either nature or nurture has left the borrowing peers in relatively dire circumstances, as evidenced by the average interest rate of 14 per cent they paid for loans last quarter at Lending Club. At the same time, growing numbers of the lending peers are not people at all but institutional investors.
This paucity of peers, I would add, does not mean that the business model lacks merit. Arranging loans online is clearly a way to reduce costs. Passing on some of the savings to customers would be a great service. I am all for that.
What I’m suggesting is that less fanciful descriptions of this activity are possible — and indeed would be pretty much inevitable if left to the devices of less inspired observers than the ones found in our financial services community.
After reading the risk factor section of Lending Club’s registration statement with the Securities and Exchange Commission, I was struck by how little the investors in its loans actually know about their borrowing peers.
These investors lean on Lending Club to vet the supplicants. The club, in turn, says it “depends on credit, identification, employment and relevant information that we receive from third parties, including credit bureaus”. But the club makes clear that it doesn’t exactly knock itself out to confirm the information supplied by borrowers that it includes in its online loan listings.
“We often do not verify a borrower’s stated tenure, job title, home ownership status or intention for the loan proceeds,” it says. “Moreover, investors do not, and will not, have access to financial statements of borrowers or to other detailed information about borrowers.”
It takes a real poet of Wall Street to see what is essentially a stranger-to-stranger business and call it peer-to-peer. A a writer myself, I just wish I had that kind of imagination. Perhaps I would be earning more money if I did.
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