[taeric]

I mean, if I'm allowed to just make up silly hypotheticals, I can easily justify anything.

Say I raise money for a friend to buy a house and they proceed to rent it out to meth dealers. The friend is the one on the hook for the loans, of course; but would I not be on the hook for at least a reputation hit such that I can't do that again? Or do we think folks can get away with that sort of poor judgement forever?

[WorldMaker]

In that sort of hypothetical the Mortgage bank is likely to take one look at your friend, see you with all the money for the down payment, and decide that you need to at least cosign the loan (if not be solely responsible). You would be on the hook for the reputation (and credit score) hit and certainly still paying off the rest of the loan or face foreclosure and possibly a criminal lawsuit for fraud.

Which yeah, leaves a lot of questions for why this is legal for an LBO. Where's the "credit score" hit on these PE firms doing LBOs? How is it that these investors are allowed to be their own mortgage bank, not require themselves to cosign the very loan they are providing the down payment equity for, and not be liable for damages such as bankruptcy of the entity they put on the hook for the loan?

[taeric]

Exactly, that is pretty much what I was aiming towards.

[Eisenstein]

If you give the friend the money as a gift, you have nothing to do with it, right? if you give it to him as a loan to inflate his assets and don't disclose that then you are committing a Federal crime.

[taeric]

I didn't give any money in that hypothetical. Rather, I convinced a lot of other people to give them the loan. That is, largely, exactly what fundraising is. You convince other people to give money to someone or something.

If people are regularly doing this at my request, and it is constantly going to someone that just burns the money, how are people still taking my requests?

[coderintherye]

That's soliciting, which is regulated at least for soliciting non-accredited investors.

[taeric]

Yes. That doesn't change my question, here. You can arrange to bootstrap another company. It could go bust in a way that you are not on the hook for any money, but you should be on the hook for the things you did. That is the entirety of my point.

The hypotheticals being pushed on this thread have a foregone conclusion that the arranging party is completely free of any hit.

[Eisenstein]

The hypotheticals seem to be in line with reality though. This business model works because the people who make money are the ones who are in control of whether to do it. Liquidating a large company in bankruptcy can get a lot of the money back for the investors while leaving a smoking ruin where it used to be generating economic value.

[taeric]

Are they, though? There are certainly some cases where it has happened, but I don't think it has been established that that is the norm.

Naive searching on the term shows that they common in PE, and they do have a worse default rate at 20% over 2% otherwise. Certainly something to look at more closely. And I would be nervous being party to one. That said, 80% success is still better than what some companies are looking at otherwise.