As near as I can suss out, private credit + banks looks like this:
- Pete is a private credit guy. He lends $5 to Joe on a promise of high interest return.
- Brad is a banker. He lends $5 to Pete, based on the value of Pete’s loan to Joe.
- Pete lends the new $5 to Jim on a promise of high interest return.
- Joe and Jim get together and spend the $10 on cheap thrills and then go sleep it off, declaring bankruptcy.
- Pete and Brad are both shit out of luck, hilarity and bank runs ensue.
Maybe I’m missing something but this doesn’t seem like the most sophisticated piece of financial engineering ever.