This is true in theory, but in practice the impact of any regular individual's actions on a company is probably going to be small and uncertain enough that it's difficult to make a healthy and reliable profit from. Even the very extreme example of murdering the United Healthcare CEO seems to have caused the stock to drop ~16.5% (assuming the drop is entirely due to the murder). That's like placing a bet with ~1/6 odds. You'd need to short a lot of stock to make that worth the risk of murdering someone (leaving aside any moral issues obviously). You could use leverage to juice those returns but that is expensive and risky, too. If you can afford to deploy enough leverage to make it worth it, you can probably find ways to make money that don't carry a risk of the death penalty.

I guess viewed in this way a bet on a prediction market is like a very cheap, highly leveraged bet on a specific outcome. So the incentives are much stronger as the potential reward for the risk taken is greater.

When they know exactly when something is going to happen, buying put options that are cheap because they're slightly out of the money seems like it would be pretty effective.

> I guess viewed in this way a bet on a prediction market is like a very cheap, highly leveraged bet on a specific outcome. So the incentives are much stronger as the potential reward for the risk taken is greater.

You seem to be trying to make this about leverage as if that's a thing that isn't available anywhere else.

Let's try another example. Some group breaks into the systems of some publicly traded company and gets access to everything. Now they're in a position to publicly disclose their trade secrets to competitors, publish internal documents that will cause scandals for the company, vaporize the primary and backup systems at the same time, etc. Anything that allows them to place a bet against the company gives them the incentive to do this; the disincentive is that the thing itself is illegal. Leverage gives them a larger incentive, but there are plenty of wages to place a leveraged bet in the stock market.

But you don't know exactly what would happen. You know what you will do, but not how it will affect the company's stock price. Maybe it will go down a little, maybe it will go down a lot. Maybe you kill the CEO on the same day as good news is published about the company, which offsets the drop. Or maybe the market just decides the guy wasn't that good a CEO anyway. So you bought a bunch of cheap puts with a strike price of 100, but the stock only drops to 101, and you lose everything. You can buy puts with a higher strike but they will be more expensive.

> Leverage gives them a larger incentive, but there are plenty of wages to place a leveraged bet in the stock market.

Yes, but they are expensive, is my point.

Generally, the disincentive outweighs the incentive. You can increase the incentive through leverage. But that also increases the costs, which increases the disincentive.

There may well be situations where the incentive outweighs the disincentive. But in the context of traditional financial markets I think those situations are likely very rare due to the risks and costs, whereas with a predictions market the risks and costs could be reduced, so it is more likely to happen.

You never know exactly what would happen. You know what you will do, but not if the CEO is going to catch the flu and not show up that day, or have better security than you were expecting, or have a great surgeon, or a spouse who is willing to keep them on life support until after your prediction market contract expires.

> Yes, but they are expensive, is my point.

Only they're not. There are many ways to bet all or nothing on something people generally expect to have a <1% chance of happening, so that you either lose $1000 or make $100,000. Under normal circumstances you could make that bet 100 times in a row and lose $100,000 and the counterparty is happy to take all your money, but if you're able to do something to change the outcome yourself then it's different, which is why it's the same.

I don't know if this was done here.

=====

I haven't read TFA, and this explanation comes up again and again, but I'd rather read broken English (or German), than the "enhanced" version.

Considering that LLM rewriting using non-specialized tools is more often than not far from preserving intent and meaning of any input, I'd say I think this applies even more for non-native speakers.

You wouldn't say "maybe the author is not a physician, so they might have used an LLM to fill in the Latin terms and medication doses" or "not a scientist, used ChatGPT to do the statistics using my notebook of empirical data" either.

Language has value and simple language or slightly wrong grammar is preferable to a verbose and glossy distortion of the input.

Sorry if this doesn't apply, since I didn't click the link.

And yeah I'm sure my comment is verbose and partially wrong in my English, but well.

:D

> water everywhere was not only a necessity but also a marker of status, a matter of discipline, and often an aesthetic pursuit. That’s why, when you look closely at the story of coffee in the Ottoman world, you don’t find only roasted seeds, copper cezves, and foaming cups—you also encounter an unexpectedly refined culture of water. Even today, as specialty coffee digs into water hardness, alkalinity, and pH, it’s tempting to think that some of our “scientific instincts” are, in a way, echoes of the same land. water everywhere was not only a necessity but also a marker of status, a matter of discipline, and often an aesthetic pursuit. That’s why, when you look closely at the story of coffee in the Ottoman world, you don’t find only roasted seeds, copper cezves, and foaming cups—you also encounter an unexpectedly refined culture of water. Even today, as specialty coffee digs into water hardness, alkalinity, and pH, it’s tempting to think that some of our “scientific instincts” are, in a way, echoes of the same land.

but yeah I still didn't read it all or the think about the source, the website is unknown to me though.

It was semi cama and we were told there would be a meal served as part of the ticket, only to be told on board that the meal wasn't available for whatever reason. After much complaining (not just me but all of the passengers) we eventually got them to let us stop for half an hour at a service station in the middle of nowhere to get some food.

It was over 13 years ago now, but I still have so many great memories of that trip.

I do remember that date however, we arrived the morning of 9/11. Yes, that one. Checked into hostel bleary-eyed with neck-ache. “Norte Americano?” “Si,” clerk points to TV above, a building in NYC is on fire, looks like a plane crash. I think, that’s really weird but can’t understand the discussion of what happened. I go straight to bed for several hours.

Later get up in the late afternoon for a walk around the falls from a distance. It’s beautiful. Come back about 6pm to catch Dubya making his speech with the other hostel guests in the living room. They also replay the video of the day over and over. The dread of what’s to come lingers in the air.

Textual change suggestion:

"Earlier European censuses had helpfully laid out the details necessary to systematically and efficiently round up undesirables on a scale yet unseen or imagined."

=>

"Earlier European censuses had helpfully laid out the details necessary to systematically and efficiently round up those that were labeled undesirables on a scale yet unseen or imagined."

Also, I think malicious compliance needs to be addressed somehow, the tech industry has been weaponizing this.

Edit: I edited it. Writing is hard. ;-)

You might like the Zulip group if you've read that far. Better to discuss rewrites there than at HN.

Re: malicious compliance

There's a mention linked from a Proton post in the Recent history page, yet could definitely use its own section. Thanks for your help.

It does not happen overnight. But what happens is after they take control of the clinic or company they change the sales model to boost reoccurring revenue, this then allows the clinic or target company to take loans out. Because they look good on paper. The company then pays VC back when then pays bank back.

This can be done in about 6mo to 1 year process with some companies. The initial out of pocket expense is small and paid back very quickly.

I also forgot. Sometimes they will take the newly owned company and merge it. During that process they extract more money and load more debt onto the remaining entities, again making the VC money.

In some cases they can even get huge tax benefits by loading the company with debt which offsets the tax bill of the final entity.

When these transactions are done, within the span of a day multiple companies are created and merged and absolved.

There is little to no risk for the VC

This is actually a case where using the correct terminology clarifies.

VCs don’t do LBOs. Private equity firms do. When their deals go bust they lose the equity they invested. That equity is the first layer to take a loss. When that happens, the lenders—whether they be banks or private credit firms—take over the company, often converting some of their previous debt into equity.

There is a lot of risk in LBOs. It’s why they have such a mixed record.

LBOs are also not a black and white classification, at least not the way they were in the Gordon Gecko 80's, with varying levels of target-borne debt financing specific to the deal. So while I agree "VCs don't do LBOs", PE does both LBOs and VC deals, with the PE firms doing their own style of fund and deals.

I found this book (though dated) to be a more academic analysis of PE: https://www.wiley.com/en-us/Private+Equity%3A+History%2C+Gov...

don't buy it; try your local library.

The public or private status of the manager has no relation to private equity being cloudy. Out of all of the delineations, PE is a pretty sharp one. VC is PE. Private credit is not. It’s private debt. Not equity.

This was the missing bit for me. Thanks for taking the time to explain!

Which is a long-winded way of saying the bag holders are anyone invested in the long-term success of the company: 1. employees, 2. customers, 3. owners (i.e. the next PE fund) when the music stops, i.e. what we saw when interest rates went up impacting debt financing, and (real or not) AI-eats-SaaS impacted valuations. I'll add 4. "the public" if the company is big enough, with various levels of goverment and employment, taxes, etc. lost but I think it's more the smaller organizations in aggregate that hurt at this level than any specific company.

Yes.

> the same regulations and constraints that led them not to lend to the underlying borrowers in the first place

No. Non-bank financial institutions (NBFIs a/k/a shadow banks) compete with banks. They also borrow from banks.

> When banks lend to private credit funds/firms, it tends to be through senior, secured loans which will be less risky than the underlying loans

Correct. Assuming 1.5x leverage and 60% recovery, you'd expect no more than half of portfolio losses to transmit to their lenders.

So, it's sort of like bundled mortgage securities, where you take some bad loans and mix them together to get a "less risky" loan, since the chance of them all defaulting at once is less than the chance of all but one defaulting.

Presumably, since banks (by definition, an intermediary) are involved, those are then recursively repackaged until they have an A+ rating, or some such nonsense, right? Also, I'm guessing there's no rule that says you can't intermingle these things across separate "independent" securities, even if the two securities end up containing fractions of the same underlying bad loans?

Clearly, like with housing, there's no chance of correlated defaults in a bucket of bad business loans that's structured this way!

In case you didn't quite catch the sarcasm, replace "housing loans" with "unregulated securities" and note that my description switches from describing the 2008 financial crisis to describing the Great Depression, or replace it with "bucket shops" (which would sell you buckets of intermingled stocks) and it would describe every US financial crisis of the 1800s.

Yes. This is mathematically sound.

> those are then recursively repackaged until they have an A+ rating, or some such nonsense, right?

AAA-rated CLOs performed with the credit one would expect from that rating.

The problem, in 2008, wasn't that the AAA-rated stuff was crap. It was that it was ambiguous and illiquid.

> I'm guessing there's no rule that says you can't intermingle these things across separate "independent" securities, even if the two securities end up containing fractions of the same underlying bad loans

Defining independence in financial assets like this is futile.

> there's no chance of correlated defaults in a bucket of bad business loans that's structured this way

Software companies being ravaged by AI fears.

> replace "housing loans" with "unregulated securities" and note that my description switches from describing the 2008 financial crisis to describing the Great Depression

It also describes a lot of successful finance that doesn't reach the mainstream because it's phenomenally boring.

Any mechanism involving “the bank invested (lent) my deposits to organizations that avoid SEC scrutiny, and used an instrument that spreads culpability for fraud across many unrelated and unwitting organizations” will eventually lead to investment bubbles and fraud.

If I knew (and chose to have) 5% of my savings in private debt funds, where the holdings were public and had reporting duties, that’d be fine.

Instead, that money is being lent behind closed doors. If the loans pay out, then the ultra wealthy make money. If they default, they’ll be bailed out to prevent contagion. (And they still make money, since the lent money went somewhere before the loan default.)

This has happened at least a dozen times in the US, including in living memory.

Also, my example is not sound. Here is a counter example with a basket of investments with different risk profiles: I hold A directly. I hold A’, which is a leveraged fund that only holds A. I also hold B which is a business whose only customer is A. I hold C, which has a contract with A and is securing the loan with future revenue from the contract. Finally, I hold D which is A’s primary customer and a majority shareholder of C.

Note that my example describes actual privately held companies that are probably the ones providing the private debt in the article.

It’s likely the term is a pejorative referring to the Liverpool setup you describe.

How is this inconsistent with what I said? I was just making the point that the reason for the rise of private credit is that banks are less willing / able to lend, particularly to riskier borrowers, as a result of post-2008 banking regulations. So private lenders have stepped in to fill that gap.

That may have been true once. It's rarely true now. Banks and shadow banks compete for the same borrowers.

Mostly, no, which is exactly why private credit has become so big in recent years: they are making the loans the banks can't or don't want to make, because the banks are subject to a bunch of additional regulations, which are designed to reduce the probability of banks going bust and having to be bailed out.

But it can be difficult to judge second order effects in finance. It's possible that a lot of private credit houses going bust would indirectly and perhaps unexpectedly hurt the broader economy. An obvious one being companies that are reliant on private credit going bust because their financing needs can no longer be met.

Also, with this administration in the US I wouldn't entirely rule out bailouts for some of the more politically connected private lenders.

Another obvious question to ask is who is providing the money that is being lent? Those are the people who now won't be paid back. The assumption is that these are people with predictable, long-term obligations who can lock up their cash for a long time: pensions, insurance companies, endowments, etc. Hopefully they are allocating a responsible amount of their portfolio to something as risky as private credit, but as the details are private, it can be really hard to know.

There has also been a big push over the past year to put private credit assets into retail 401k's (which, in theory, also should be okay with locking up funds for a long time, but in practice, maybe less so), most insidiously by having private credit assets held in target date funds (which are the default funds for many plans).

Many private credit funds also increase their leverage by borrowing from actual banks.

All of that should pose less systemic risk than if banks subject to bank runs were lending all of the money. But that has to be balanced by the fact that these are unregulated entities taking more risks than banks would. Long-term average default rates on high-yield bonds are around 4%, so 9.2% is high, but not in panic-inducing territory yet. Who knows what they will look like in the event of an actual recession.

Yes.

It surprises me that most people would read "private credit" to mean "retail credit" by default, but I also come to this loaded with jargon so I guess would defer to others on this. But to be clear, the title is not misleading to anyone who has any familiarity with the financial markets.

That said, I don't really see what is special about the quoted passage either. I have read many decisions and this seems pretty standard for a recounting of the basic facts.