The appointment of the Harvard Professor Emeritus and former World Bank VP, NEC Director and Treasury Secretary gives an instant credibility boost to an industry just emerging from its infancy and is a timely maneuver for a company working towards an IPO within the next two years.
The move is seen as a shrewd act by Lending Club. Dr. Tayyeb Shabbir, a Professor of Finance and Director of the Institute of Entrepreneurship and Global Logistics at the Cal State University Dominguez Hills, sees the appointment as a positive step.
“Even though at times Larry Summers has taken positions which have been controversial, there is little doubt about his extraordinary intellect and professional accomplishments. He is well-known and generally very well respected both inside the academe and the world of economic policy.”
By joining the Lending Club Board, Summers continues his recent involvement with tech firms. In 2011, Summers signed on as a special adviser with Marc Andreesen’s venture capital firm Andreesen Horowitz and also joined the Board of Square, the Jack Dorsey-led company developing a device allowing users to access their credit cards via their mobile phones. On the verge of launching Google Wallet, a concept directly at odds with the traditional banking system, Square needed someone well known in Washington, a figure expert in navigating the regulatory obstacles that are predictably erected when an establishment-entrenched industry with a powerful lobby such as banking perceives a threat from a foreign source that has the potential to invade their revenue territory. Think of it as the Galactic Empire creating a Death Star (with the newbies hoping it ends in a similar manner).
Who better to hire to destroy the Death Star than an architect of similar structures? Summers, no fan of government oversight, frequently fought pro-regulation policies during his employ in Washington. On July 30, 1998, Summers, then Deputy Secretary of the Treasury, testified before a congressional session dealing with possible regulation of the Over-the-counter derivatives market that “the parties to these kinds of contracts are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies.”
Summers went on to insist that the burden for providing justification for increased regulation should fall on proponents of the legislation and not on those who see no need for such action. The following year Summers advocated for the passing of the Gramm-Beach-Bliley Act, which proposed to remove the separation of commercial and investment banks.
Fast forward 10 years to Summers working to bail out the banks from a situation he helped create. Summers, quoting John Maynard Keynes said that when circumstances change he changes his opinion.
This opinion may have been influenced by the approximate $1 billion loss Harvard experienced as a result of Summers-approved interest rate swaps that went south during the recession. While the true reasons for the change in heart may be less Darth Vaderish and more pragmatic, one cannot question the vigor with which Summers has established himself in Silicon Valley specifically and in the world of alternative finance as a whole.
When charting such new territory, it pays to know someone familiar with the landscape and for Summers, this person was Facebook COO Sheryl Sandberg. Their relationship began at Harvard, where Summers advised Sandberg on her thesis. Summers hired Sandberg at both the World Bank and as his Chief of Staff at the Treasury Department. So while Summers began this era with a solid relationship with Sandberg (ex Google, Facebook), he has moved quickly and with the first two appointments adds Dorsey, Keith Rabois (Square, ex PayPal & LinkedIn), Vinod Khosla (Square, Sun Microsystems) and Andreesen to the list of Silicon Valley elite with whom he will have regular dealings.
Summers’ expertise will be initially used to guide Lending Club towards the anticipated IPO. Dr Shabbir feels that Summers status should play a key role.
“Given that a big part of the IPO process is to convince the underwriters and through them the investors to buy the shares of the newly formed public entity, the advice as well as the ‘marquee’ value of someone like Larry Summers as a member of the Board of Directors can be very helpful.”
Should this new relationship become something more long term, Lending Club can look to Summers for assistance with establishing itself in countries with varied political and economic climates. While at the Treasury Department, Summers was instrumental in crafting the United States agreement that allowed China to join the World Trade Organization. He also worked closely with the governments of Mexico and Russia and with others in Indonesia and Asia during economic crises in those nations. While not everyone in these nations will remember him favorably, Summers has shown before that he can adapt his stance to reflect a new reality. As the globalization of the world economy continues, Summers knowledge of international business practices will prove invaluable.
What impact will Summers appointment have on the growing divide between Lending Club and it’s nearest rival Prosper? Dr. Shabbir cautions that the novelty of the industry and the future effects institutional investors and potential regulations will have make this difficult to predict. He does see a strong likelihood that Lending Club will see some indirect advantages as a result of Summers appointment and a properly executed IPO due to their access to a larger pool of available capital post-IPO. It is just as likely that forces already present will have just as much if not more impact on this divide. “Even presently, since Lending Club is larger with a deeper secondary market for its loans, these factors may affect the relative growth rates of these two p2p institutions and thus may further widen the lead that Lending Club currently enjoys,” offers Dr. Shabbir.
And what a lead it is. Since Lending Club first passed Prosper in monthly loan totals in May of 2009, there has only been one month that its totals did not exceed Prosper’s by a ratio of at least three to one. The ratio cracked five to one this October, a peak that had not been reached in two years. This two-party discussion may soon be moot, as Prosper sits much closer to third place Zopa (total loans: US $16.3 million behind Prosper) than it does to first place Lending Club (US $707 million behind Lending Club).
Dr. Shabbir sees this appointment benefiting not just Lending Club, but the entire p2p industry.
“(Summers) affiliation with peer-to-peer lending will enhance the credibility of the new, emerging platform for financial intermediation.” Dr. Shabbir went further and offered another result this appointment specifically and the industry’s growing acceptance as a whole will have on Lending Club, Prosper, and the industry’s other players.
“The new credibility of the platform may also attract even more vibrant newcomers and the competition may become much keener.”