Is The Marketplace Loan ABS Market Just Like The MBS Market A Decade Ago?

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.

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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 (NYSE: LC), Lendingtree Inc (NASDAQ: TREE) and On Deck Capital Inc (NYSE: ONDK) 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 transparency, it opens the door for abuse.

“Without innovative solutions to new problems, we risk reverting to 2008 decision-making,” Rahbar concluded. “Or, worse, we risk creating an investor pool bearish on investing in marketplace assets, which will kill liquidity and raise rates for the rest of us.”

Disclosure: The author holds no position I the stocks mentioned.