Loan
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Banking basics
A recap of a few things you’d think financial professionals ought to know
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Borrowed money. Indebtedness. Even Specified Indebtedness. Relevant when considering cross default.
Relevant to Prime brokerage.
The ubiquity of financing
Much of what goes on in the trading markets, in one way or another, is — this is going to sound obvious but bear with me — financing. Margin loans, collateralisation rehypothecation, secuitsation and monetisation are obvious kinds, but the instruments that don’t seem to involve financing are often disguised financing arrangements. Swaps, options and futures – in these instruments one pays someone else — your swap dealer or futures broker — to finance physical assets for you. Bearing this in mind will help get a grip on how products need to work. This is a singular beauty of the fungible negotiable instument. It allows you to lend to another person, and — without interrupting that loan — to stop lending to them, or to participate the loan to someone else. And, at any moment, get the loan back if you need it. Take an ordinary loan: you pay a sum to a borrower against her promise to repay, with interest, at a fixed term in the future. In return you get an asset — it is a funny, theoretical kind of “asset”: an intangible promise, but you can record it on your balance sheet: it is worth something. Holding that promise is expensive, though. This ties up capital you could use for other things. You have locked in your return on that capital at the agreed interest rate. This is unlikely to thrill your shareholders, unless your leverage ratio is high — but even if it is, as long as that asset sits quietly on your balance sheet, it isn't doing anyone much good. The mantra of financialisation is that one should be able to take any asset and raise money against it — or convert it into money.
Let's say I see an opportunity to make a return better than 3%. If I can raise money against my loan, I can keep my 3% return and invest my capi