To look at the results of Prosper's loan marketplace, though, is to see not a solution to the credit crisis, but a microcosm of it. Loans to unqualified borrowers; reliance on mathematical models that turn out to be a lot less useful than they seemed; failed hopes that high interest rates could make subprime loans profitable; sky high default rates--Prosper has it all. Prosper's Web site advertises returns of 6 percent to 14 percent for lenders. But the reality is that the lenders who loaned $188 million through Prosper have not earned anything like these returns. On the contrary, the majority of them have lost money, as they've watched their loans go bad at shockingly high rates.

Much like the loans made by banks during the mortgage boom, Prosper's loans have gone into default at rates much worse than predicted by historical credit data. In November, 2007, Larsen told the Associated Press that Prosper's default rate "hovered at around 2.7%." That, however, included many new loans that simply hadn't had time to go bad. Larsen refers to this obliquely in the AP story, noting that as more loans matured the rate would rise, but there's no hint of just how steep that rise would be. Prosper's data now shows that now shows that close to 36% of the loans made before Nov. 27, 2007--the date of the AP story--have ended in default, roughly thirteen times what a casual reader would have thought from Larsen's comments. That is close, coincidentally, to the total 39% (or roughly two in five) default for the Prosper loans that have reached the end of their three year term.

In other words, only by cutting out more than two-thirds of its loans, does Prosper manage to eke out the positive results for AA to E rated loans that prospective lenders see on Prosper.com. Or you can look at it another way and ask how many investors have actually gotten returns in the 6 percent or 14 percent range that would-be lender see blazed across the Prosper.com front page? Thanks again to Eric's Credit Community, we have a pretty good idea: Of investors with a portfolio of loans that are an average of at least two years old, folks who have lost money outnumber those who've earned 6 percent annual return by more than six to one.