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Richard Careaga's avatar

Nathan, in banking lingo, assets are debts, not capital. They are not a reserve from which to pay those debts all at once because they are lent out leveraged either in the form of loans, which may be very illiquid, or investments carrying some mix of credit, market, interest or basis risk. It was market risk that blew up MBS for the bonds that had mainly effective credit risk protection through subordination and other credit support structures.

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Richard Careaga's avatar

Oops. ... likewise that an institution like SVB offering higher rates on fixed term deposits only does so because rates in the capital markets are even higher.

Ah, but the yields. In the world of this century Before, the only assets with lower perceived returns were investment in plant and equipment and R&D. VC, like Big Pharma, are exceptional only because they have a strategy of high risk seeking the one big payoff.

Besides, the geniuses whose job it is to make the operating decisions on specific investments are creatures of moral hazard playing with other people’s money and taking compensation from the upside only or even from mere volume. It’s all a game, in the game theoretic sense.

I speak as the former lawyer who was, variously, the principal advisor to WMB’s mortgage backed securities and treasury operations.

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