* Startup lender picks Mack for his bond business savvy
* LendingClub CEO plans to double business again in 2012
* Startup firm targets financial advisers for new investor money
By Lauren Tara LaCapra
April 12 Former Morgan Stanley Chief Executive John Mack has joined the board of LendingClub Corp as the peer-to-peer lending startup works to attract more investor money and expand its consumer loan offerings.
LendingClub Chief Executive Renaud Laplanche said he tapped Mack for the role because of his experience in the bond market, where LendingClub markets its pools of consumer loans, and in the wealth-management industry, where it is actively courting financial advisers to sell its products to clients.
"His ability to help us create and distribute fixed-income investment products to investors is very important to us," Laplanche said, "especially through financial advisers and large brokerage networks."
Mack has had a long history on Wall Street. He joined Morgan Stanley's bond department in 1972. He rose through the ranks to become president of the investment bank in 1993.
He maintained that role after Morgan Stanley merged with Dean Witter in 1997. But he left in 2001 after losing a power struggle with Phil Purcell for the CEO's spot. Over the next few years, Mack became co-CEO of Credit Suisse AG and later, the chairman of the hedge fund Pequot Capital Management.
When Purcell resigned from Morgan Stanley in 2005, Mack replaced him as CEO. Upon his return, Mack received a standing ovation on the trading floor. He oversaw the firm through the financial crisis of 2008, accepting a federal bailout as competitors failed and converting Morgan Stanley into a commercial bank.
In 2009, Mack engineered a deal to create Morgan Stanley Smith Barney, the largest U.S. brokerage firm. In January 2010, he stepped down as CEO and handed the reins to James Gorman. At the end of 2011, he retired as chairman. He retains an advisory role at Morgan Stanley, which runs Morgan Stanley Smith Barney in a joint venture with Citigroup Inc. Mack also serves as a senior adviser to private-equity firm KKR & Co LP
IT'S ALL ABOUT YIELD
In an interview, Mack said that targeting financial advisers will be a key strategy in expanding LendingClub's investor base, particularly as yields on other investment products like Treasury bonds and money-market funds remain historically low.
"If you can get a 5.5 percent or 6.5 percent return with the prime loans that they're making, I think that's a product that financial advisers would like to show to their clients," Mack said.
LendingClub is not a bank. But it is going after traditional bank customers who are fed up with high fees or years of weak investment returns.
Since its launch in May 2007, LendingClub has primarily attracted customers through its website and word of mouth. But over the past 18 months, the San Francisco-based company has become more aggressive, reaching out directly to consumers who are a good fit for its loan products, and to financial advisers who might want to offer its investment products to clients.
The company also launched two funds over the past year through its investment adviser subsidiary LC Advisors LLC, raising $100 million in assets.
Roughly 20 percent of LendingClub's funding now comes from asset managers and investment advisers, a figure that Laplanche, LendingClub's CEO, expects to grow further in the coming months. He is hoping that advisers on large brokerage platforms like Morgan Stanley Smith Barney or Bank of America Merrill Lynch will warm to the product as well.
"So far, we were too small and did not have enough of a track record to get on larger financial advisory platforms like Smith Barney or others, but I think now we've really turned a corner," Laplanche said. "We have five years of track record, more than half a billion dollars in loans. That really helped us convince more sophisticated investors to join the platform and it can also help us convince financial advisers to get more client assets to that asset class."
TARGETING NEW MARKETS
Here is how LendingClub works: Consumers who want to obtain loans at lower rates than banks are offering -- usually to pay down credit-card debt -- can log onto LendingClub's website and apply for a three- or five-year loan of up to $35,000. Rates range from 6 percent to 27.5 percent, depending on a borrower's credit profile.
On the flip side, investors who are looking for higher yields can open a LendingClub account to fund the loans.
Since the company's inception in May 2007, LendingClub notes have delivered net annual returns of 5.84 percent to 12.44 percent for investors, depending on the grade of the loan pool. In comparison, U.S. Treasury notes and certificates of deposit of the same duration return less than 1 percent.
As the middleman between borrower and lender, LendingClub receives a fee on each side of the deal.
LendingClub, which is not yet profitable, has originated more than $580 million worth of loans since its launch in May 2007, doubling its size every year.
Laplanche plans to expand LendingClub's cumulative loan originations to $1 billion by year-end, increasing loan activity from a current rate of $40 million a month to $80 million a month.
LendingClub now primarily targets consumers who need cheaper loans to pay down existing credit card debt. But it's planning to expand its product offering to include auto loans, home equity loans and other types of consumer debt, Laplanche said.
And while the company currently serves just prime and super-prime borrowers, eventually LendingClub will also seek opportunities to move into a growing pool of "unbanked" consumers. Those customers tend to have low credit scores and use payday lenders, pawn shops and check-cashing venues for loans and deposits rather than banks.
Roughly one in four U.S. households fit into that category as of 2009, according to government statistics. But bankers and analysts expect millions more to drop out of the traditional banking system in coming years as the industry imposes higher fees to recoup lost revenue from new regulations. JPMorgan Chase & Co CEO Jamie Dimon has estimated that his bank will lose about 5 percent of its poorest customers because of new fees.
Mack said he has actively sought out positions at tech-savvy financial services firms like LendingClub and Rev Worldwide Inc, a payment services company, where he is also a director, because he predicts that U.S. consumers who are leaving traditional banks will increasingly turn to a "virtual banking system." In that virtual world, payments and other transactions can be done electronically - either online or through a mobile device - while deposits and loans are made with the click of a button.
"If you go back and look at how technology has changed, five years ago, online shopping for men's and women's clothing was a tiny business," said Mack, who invested some of his personal wealth in LendingClub notes before joining the board. "Now, everyone goes online. That's on the retail side. But is there an avenue for a virtual banking system? With fees that banks are charging small investors going up, I think this has a real opportunity to serve a need."
Mack became acquainted with Laplanche through Mary Meeker, a partner at Kleiner Perkins Caufield & Byers. Meeker was a star technology analyst at Morgan Stanley during the dot-com boom of the late 1990s through early 2000.
He will be the fifth director on LendingClub's board, joining Laplanche and existing directors Jeff Crowe of Norwest Venture Partners, Daniel Ciporin of Canaan Partners and Rebecca Lynn of Morgenthaler Ventures.