It's the agency that causes the issue. And a little bit of financial engineering.
Say you have a friend who often can't pay back his debts. But he can pay 80% of them.
You have another friend who wants to lend to safe debtors. Why not get that safe tranche, the bottom 80%? He needs to show he's safe so he can take more risk. He loves going out to dinner with you.
Another guy wants to take some risk. You give him the 20%, but you also let him into some other deals that you have, so that he doesn't always lose. In fact, it turns out this guy isn't paid on the returns, he's paid on assets managed. And he's not even going to be around that long, he'll be onto the next role long before the bond is up. And they're in a bag of other stuff anyway.
Turns out you're not even the guy lending the money. You work on a transaction basis. Your next job might be as one of the friends. Or on the PE side.
So you and your buddies keep skimming a bit of the money off each year, well mixed with other stuff that you are managing.
Say you have a friend who often can't pay back his debts. But he can pay 80% of them.
You have another friend who wants to lend to safe debtors. Why not get that safe tranche, the bottom 80%? He needs to show he's safe so he can take more risk. He loves going out to dinner with you.
Another guy wants to take some risk. You give him the 20%, but you also let him into some other deals that you have, so that he doesn't always lose. In fact, it turns out this guy isn't paid on the returns, he's paid on assets managed. And he's not even going to be around that long, he'll be onto the next role long before the bond is up. And they're in a bag of other stuff anyway.
Turns out you're not even the guy lending the money. You work on a transaction basis. Your next job might be as one of the friends. Or on the PE side.
So you and your buddies keep skimming a bit of the money off each year, well mixed with other stuff that you are managing.
Well smeared poop.