Comment by uniclaude | Hacker News Reader

Comment by uniclaude | Hacker News Reader

Far from me the idea of criticizing a founder starting something to help other startups. That's amazing. However, the post is not really accurate! Are you sure that all these MBS pools have the same government backing as Treasuries? Ginnie Mae, Fannie Mae, and Freddie Mac are not equal. Are the additional risks (spread risk, liquidity mismatch, and risks related to the mortgage structure that even Regan discloses!) worth the tiny extra yield above money market funds? Startups have to deal with uncertainty all the time, that's the nature of business. Principal loss, and liquidity issues are not things you should have to deal with as a startup. However, providing options to startups is always great, and I think this is a great direction!

Again, I hope this doesn't come as negative, but I'm not sure this is making the risk clear. I am not sure I would suggest my portfolio companies to risk their treasuries unless I am sure they're fully understanding the risks associated. Do you intend to provide anything else?

These are good points.

On the government backing: it's a fair nuance to point out. In a technical sense, Ginnie Mae has the explicit full faith and credit guarantee while Fannie/Freddie are GSEs with an implicit one (and are under government conservatorship). But in practice, the distinction isn't really meaningful. In practice, the federal government has always guaranteed these loans (even in 2008, when they were under the most stress they've ever been, and there have been significant reforms as a result). There's no reason to think they'll ever stop. The scenario where the GSE guarantee fails is essentially the collapse of the US economy well beyond anything we saw in 2008 (in which case frankly we all have much bigger problems).

On the risks you mentioned: 1) Principal loss: given the guarantees re credit risk, and the fact that we use short-duration floating rate instruments to protect against price risk, this shouldn't really be a concern. 2) On spread risk: there can be slight variation in spread, mostly affecting yields; this is why we say "4.5-5%" yields given there's some variability in that range (but all far above money market). 3) On liquidity: agency MBS is the second most liquid fixed-income market in the world after Treasuries. In nearly all circumstances, liquidity is 1-2 business days. This product is really meant for long-term cash reserves; our idea is that companies should stop treating 6+ month cash the same as next month's payroll.

Ultimately we encourage founders to do their own research and understand what they're doing with their money. We wouldn't ask anyone to put short-term cash in a MBS portfolio (in the future we'll probably offer some other options too). But for long-term cash they're sitting on, the extra yield can be meaningful to the business: on $5M, it's an extra $50k-75k per year, or half a junior engineer's salary. Given the minimal risk, I think it's worthwhile for a lot of companies.

You should write more pieces like this and display them more prominently than an HN thread.

Your market is founders who have put money in an MMF and stopped thinking about it, not the people evaluating different optimization strategies day-to-day. So acknowledging the risks and saying "here's exactly when you should consider us" is exactly the kind of thing that helps overcome that uncertainty hurdle that results in choosing the simplest, safest option.

Founders should obviously do their own research, but that's asking the customer to proactively expend effort digging through future marketing copy to evaluate your product. They're not realistically going to do that as well as they should and the people who don't need to probably aren't your target market.

Yeah that's a great point. We do have some pieces up already (https://www.palus.finance/info/safety) but plan on adding way more.

Honestly this HN post has been really insightful in knowing what questions founders will want us to answer.

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