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But lenders take a different risk. They don't share in the upside. I can borrow $100m against assets for next to nothing. You can't raise the same amount of eq
by charlesdm 7y ago
But lenders take a different risk. They don't share in the upside. I can borrow $100m against assets for next to nothing. You can't raise the same amount of equity for next to nothing -- equity investors are generally looking for much higher returns, for the risk they are taking.
- PaulDavisThe1st 7y agoThe interest rate is itself a reflection of the broader equity situation. The price of a loan right now is ... very low. It will go up and down, though I agree that it rarely matches expected equity returns. The thing is, lenders are free to decide on terms, and whether to issue a loan at all. Part of their actuarial calculation must include some rate of default, because otherwise there would now downside to lending anyone anything. We may end up in an unprecedented time thanks to the virus and our policy decisions about it, but that's all part of the risk lenders take, and they (are supposed to) factor that into the rates they offer. I will bad for them, I suppose, if there is mass scale defaulting, but I see no reason to preference them over anybody else who makes the choice to participate in a loan-driven venture.