US online lending model is unproven, Eisman of The Big Short fame says in Hong Kong

Steven Eisman, famous for successfully shorting the US subprime market before the onset of the 2008 financial crisis, has said the online lending business model used in the United States is unsustainable, and that losses from Canadian mortgages could widen.

Eisman, who is profiled in Michael Lewis’ The Big Short: Inside the Doomsday Machine, on which the 2015 Hollywood film The Big Short is based, also said he did not see any systemic risks on the horizon, and that credit quality related to consumer credit in the US “keeps getting better”. He was speaking on the sidelines of the CFA Institute’s annual conference in Hong Kong on Monday.

The one pocket of financial market anomaly in the US was online lending, where, he said, the underwriting of peer-to-peer credit was unproven, as selling a loan to investors such as hedge funds and other financial institutions was an unsustainable business model.

“The problem [with P2P lending] is that selling a loan [online] is not the same as selling a book. You buy a book on Amazon and that’s the end of the transaction. When you make a loan, that’s the beginning of a relationship. The question is how you manage that relationship,” said Eisman.

Specifically, unlike a bank, a P2P lender typically does not want to keep the loan on its own balance sheet. Hence, after extending a loan to a borrower, it sells the loan off to investors such as insurance companies and hedge funds, whom Eisman described as a “fickle audience”, as such sources of capital that invest in and hold these loans will disappear once they see any signs of the loan performance deteriorating.