Courtesy of LendingClub

John Mack's history with bad loans doesn't repeat, but does rhyme.

You can take John Mack out of Wall Street’s juiciest loan scandals, but you can’t take Wall Street’s juiciest loan scandals out of John Mack.

The former chairman and CEO of Morgan Stanley ms has been tangled up in issues at LendingClub lc , the online lending company where he has sat on the board since 2012. The problem is starting to reek of the mortgage crisis, when banks made oodles by selling bad loans to hedge funds that were layering on leverage to bolster returns – just before the loan market dried up and banks were stuck with the bad loans themselves.

Mack, much like during the mortgage crisis, isn’t the architect of the problems. He just so happens to be hanging around when they happen.

The issue at hand centers on LendingClub’s relationship with Cirrix Capital, a fund that, according to a 2013 Washington Post article, uses loans from other banks to buy loans from Lending Club.

The circuitous relationship is complicated, but sounds something like this: Cirrix buys loans that LendingClub sells. To boost its returns, Cirrix borrows from other banks to buy some of these loans. This creates a virtuous cycle for Lending Club: the more money Cirrix borrows, the more loans it can buy, and the more fees LendingClub collects.

Lending Club CEO Renaud Laplanche failed to disclose a personal interest in Cirrix Capital, despite knowing that LendingClub was buying a 15% stake in the entity for $10 million. Laplanche resigned from the company on Monday, sending shares tumbling 35%, after an internal review revealed violations of the company’s business practices. Mack, who had a 10% limited-partnership stake in Cirrix as of Dec. 31, was unaware LendingClub was considering an investment in the firm and was not required to disclose his interest, according to Bloomberg.

But LendingClub’s stake in Cirrix could create conflicts since LendingClub benefits from selling loans and has an interest in ensuring that Cirrix continues to buy them.

The trouble comes if Cirrix buys too many of LendingClub’s loans, which is possible with Lending Club as a partial investor. “If 80% of [Cirrix’s] portfolio is in LendingClub, it is very dangerous,” says Aswath Damodaran, professor of finance at the Stern School of Business at New York University. “You become almost a quasi-bank, and you need to worry about all the things that banks do.”

This is how LendingClub’s business sounds eerily like the activity that caused several years of losses at Morgan Stanley when Mack was at the helm (he resigned in 2011). Like LendingClub, trading desks for a long time were just a conduit, matching up buyers and sellers of mortgage loans for a fee. The trouble arose when the trading business got entangled with the lending one, and brokers like Morgan Stanley became banks as well.

What’s more, once hedge funds start to layer on debt of concentrated loans, the problems worsened. Bear Stearns’ hedge funds that went belly-up in June 2007, for example, had borrowed money from Merrill Lynch. It’s a wonder, then, who Cirrix’s lenders might be.

“If you are a tech firm you want to be a tech firm. You want to grow without investing very much,” Damodaran says. “You can’t be a financial service business that is like Uber. It does require [capital] commitment that LendingClub doesn’t have the capacity or willingness to invest.”

Neither Mack nor Lending Tree responded to requests for comment.


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