Why Steve Eisman is Bearish on LC Stock
Are you wondering why LendingClub Corp (NYSE:LC) fell 3.7% on Monday? Maybe it’s because LC stock roused the ire of Steve Eisman, one of the brilliant investors featured in Michael Lewis’s book The Big Short. With that in mind, it’s surprising that LendingClub stock only fell 3.7%.
Lewis’s incisive non-fiction book told the story of several traders who bet against the U.S. housing market in 2007. They believed that the bubble was about to burst, and they were right. The entire financial industry came crashing down, but they walked away with hundreds of millions of dollars. Eisman and others got filthy rich overnight.
Since then, Eisman has kept a low profile, but every so often he resurfaces to pop another bubble. That’s why LC stock investors should be worried about his most recent speech. On Sunday, he talked about how “Silicon Valley is clueless” when it comes to finance. Eisman specifically talked about investments in marketplace lenders like LendingClub stock.
“If you buy a book on Amazon, that’s the end of the relationship,” said Eisman. He added that, whereas, if you make a mortgage, “that’s the beginning of the transaction.” Eisman argues that there are only two business models: “The first is to originate the loan and hold it, which means you’re a bank. That’s a low margin business. The second is to originate a loan and sell it, and who are they going to sell it to? You [Wall Street]. And you are fickle.” (Source: “Eisman Assails ‘Clueless’ Silicon Valley Over Online Lending,” Bloomberg, September 19, 2016.)
Eisman was basically saying that companies like LendingClub have over-promised. The company claims that better technology will shorten approval times, reduce transaction costs, and increase the number of people who can afford loans. Using data and new methods of calculating borrowers’ risks, companies like LendingClub want to replace the old guard of finance.
Now, Steve Eisman isn’t someone you normally expect to defend the traditional banking powers. After all, he made a fortune betting against them. He even says they “blew up planet earth.” But he doesn’t think they are going to be affected by the rise of LC stock.
Eisman says marketplace lenders will hit a growth ceiling; they won’t be able to scale beyond a certain point. He also argues that LendingClub’s loans have never been tested by a recession, so we don’t really know what the negative side effects could be. In other words, he’s siding with the devil he knows. Considering that LendingClub stock is already down 55% from a year ago, his concerns could eventually prove to be valid.