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Comment by rossdavidh | Hacker News Reader

"Any one customer may be unknowable, but cohorts of customers can be modelled and understood decently well."

Just substitute "mortgage" in this sentence, think back on events of the last decade, and you can see what is horribly wrong with this article.

Lots of debt, all given to tech startups, which will almost all go bust with the first recession. Let's see, what does that remind me of?

Of course, if you believe that the government would step in to take the downside, then you could just get the upside in the time between now and when the downturn comes.

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Yeah but unlike a mortgage (secured against one static asset i.e. a house), the article assumes most of this debt will be issued against the strength and quality of a company's various recurring revenue streams (even speculating that different components of this could be financed separately to try and account for the varied risk).

Just need to make sure you don't end up with financers/banks/rating agencies colluding to bundle multiple companies together and sell tranches of the debt (all with a phony A+ rating) to investors/funds...

The question I have is how you know the customers won't cancel their subscriptions when the recession hits, or because a competitor provides the same service for less, or has better service?

you can use CDS to insure performance of your high quality A+ "recurring revenue" bonds. It is pretty cheap for high quality A+ bonds.

>>Just need to make sure you don't end up with financers/banks/rating agencies colluding to bundle multiple companies together and sell tranches of the debt (all with a phony A+ rating) to investors/funds...

but that is exactly the point of the securitization and high skill in doing it which would allow to bring all those sweet pension fund money into play. "financers/banks/rating agencies colluding " - it like saying violin and piano players colluding in Metropolitan Opera performance.

No, that doesn't actually work, because decorrelated risks aren't. Did we learn nothing from 2008?

To push that point further, we had it easy in 2008 because governments used QE to push more money into the economy and prop up banks, but what if they can't grab that free lunch next time?

The article seems to advocate for exactly what you’re warning about:

Why not go straight to securitizing senior tranches of your recurring revenue, and moving it off your balance sheet?

... (one paragraph later) ...

On the other side, imagine how much investor interest you could get in a diverse basket of recurring revenue from, say, 10 different startups that’ve all raised from Tier 1 VCs. People talk about how great it would be to invest in a unicorn basket; this would probably be even better.

Except for the part about everyone colluding to get good risk ratings. If that collusion did happen, then yes, these would be the equivalent to MBS'. That can happen regardless of what is being securitized.

It still wouldn't get to the level of the housing crisis until those securities were packaged into much larger CDOs and refinanced based on the fraudulent risk ratings.

> Just need to make sure you don't end up with financers/banks/rating agencies colluding to bundle multiple companies together and sell tranches of the debt (all with a phony A+ rating) to investors/funds...

I imagine that's sarcastic, because that looks a lot like the description of a VC...

Close, but loans have a fixed return where vc money has much more opportunity making it potentially with the higher risk.

The largest difference should be that VCs are transparent about their risks. I don't think any investor expects not to lose nearly all their investment in the case of a bubble popping, what is different from people buying home loans.

But it was a description of VCs.

In a way houses were secured against the potential (recurring) rental yield they d make

The 2008 financial crisis was largely created by the perception that the government would take any downside. As long as we don’t have multiple generations of politicians campaigning on a platform of “every family deserves their own SaaS business” and buying up the debt, we’ll be fine.

For those who don't yet believe this, may I kindly recommend reading this (1999): https://www.nytimes.com/1999/09/30/business/fannie-mae-eases...

You don't need that many participants in a bubble for it to have systematic impact. You just need enough participants inconveniently placed throughout the economy who stop paying their bills to various people.

No, what made it systemic was the assumption of the government taking the downside risk on people getting mortgages that shouldn’t have.

Massive boring banks won’t get swept up like they did with MBS products otherwise.

> The 2008 financial crisis was largely created by the perception that the government would take any downside.

The government didn’t take the downside for each home loan borrower, but when it came to asset prices, they sure as hell stepped in to save all the equity owners. It just depends how much political power the bailout needers have. Just a few months ago, coal miners in West Virginia got a bailout of their pensions when others have been told to pound sand.

> Lots of debt, all given to tech startups, which will almost all go bust with the first recession. Let's see, what does that remind me of?

So will all of the equity. I'm against debt in general as a means of funding and financing because it dissasociates the interest of the debtor with the creditor. But having debt as an option functions as a great competitor to equity based funding, which means that it gives founders more leverage to get better deals in either system.

Note that people out there are parking money in negative interest rate bonds today: wouldn't that money be better served in low yield-AAA debt on tech companies that have the business model to back it?

The difference here is that most investors in these kinds of "securities" being issued by tech companies would demand more data than the investors in securitized mortgage assets did. In lieu of performance data, investors in MBS relied on ratings from ratings agencies that were dependent on the business of the banks that issued the securities. The failure of ratings agencies to accurately assess the risk in the securities is the reason the MBS vehicles grew in popularity (they all looked AAA!) and also why they exploded.

>substitute "mortgage" in this sentence, think back on events of the last decade, and you can see what is horribly wrong with this article.

Plenty of people properly modelled sub-prime mortgages, and made bets accordingly. Corporations are pretty good at modelling cash-flow, too.

I think you're conflating "an inability to do so" with "caring about the results".

Well mortgages actually can be modeled well if people are willing to look at the actual risk. MBS markets are still existent today and work just fine now that banks got bitten and are still paying attention.

I'm not sure it is possible, how does the model predict if there will be a recession in 2025, for example?

They can model individual risk pretty well I imagine. But can they model systemic risk?

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