Hacker News Reader

Comment by charcircuit | Hacker News Reader

I'm not following your logic. $1 worth of debt is worth $1 no matter how risky it is. The risk is built into how much it is worth. Risky debt is high risk high reward. Since these funds are backing a stablecoin it doesn't make sense to go for high risk plays with that much money.

View on HN

I'm not very well versed in how selling debt works, but the way I assume it works is the following: Say someone still owes me $1M over the next 10 years, but I think that there's now only a 50% chance of the debt being repaid. It would make sense for me to try and sell that debt for at least $500k to get a guaranteed immediate return, right? And then that person could say that they hold $1M dollars, even though it's only worth half that much if they priced the risk into it. I may be misunderstanding things though.

Yes that's basically how it works. When a corporation holds a loan as an asset on their balance sheet, they're supposed to mark that asset to market reflecting the risk of default. But if marking to market isn't actually enforced by auditors or regulators then the company can pretend that the asset value is the same as face value. This can appear to work for years until there's a recession and a bunch of borrowers default.

Ah, that makes sense. I'm curious though, how would auditors ensure the asset is marked to reflect the risk? If one organization thinks the risk is substantually lower than another, what do they mark? Or is there generally enough arbitrage that this doesn't happen.

Well it depends on the asset. If it's regular corporate bonds that are being actively traded on an open market (liquid) then just use a recent market price. If there's no market then valuation becomes highly subjective. If the borrower has some kind of credit rating from a trusted rating agency then that can be used as proxy for default risk. Or if the borrower is publicly traded and releases audited financial statements then you can estimate based on those. But if you don't have any of that then pick a number and try to get the auditors to swallow it.

>And then that person could say that they hold $1M dollars

You don't own $1M dollars, you own debt which is an asset. Considering you just bought it for $500k it sounds like the market price for that debt is $500k.

Risky debt asks way fewer questions where the money is from you lend them.

Reply on news.ycombinator.com