Wednesday, August 22, 2007

Ben Stein Editorial

The NY Times had an editorial by Ben "Bueller" Stein on the irrational behavior of lenders. Even though it was originally published in March, I think it's relevant for Prosper lenders.

But wait a minute. What is a junk bond if not a loan to a subprime borrower? Why do lenders think that those bonds are called “below investment grade?” It’s not just a formality or a quaint term. Over long periods, junk bonds really do default at rates far greater than investment-grade bonds. That’s why smart lenders used to demand very substantial premiums for making those loans.

Now, in a mania of adolescent “we know better than our stodgy parents” behavior, lenders lend to junk borrowers for not wildly more than they charge Exxon Mobil.

Or, to translate into Prosper terms: what do you mean I can't expect HR and NC loans to have the same default rates as AA? This is the new economy and Web 2.0 (TM). It's different this time.


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