As was mentioned, things like this go on all the time in financial markets. So all details of pricing the collateral, custodial services, defaults etc can be solved here like it is there.
Where I see this breaking down is the “negative carry” is just too great.
If you buy a security that yields 5% and you use it as collateral to finance the purchase, of this financing rate is sufficiently low, you’re levered returns are higher. That’s the main reason why all institutional investors use leverage.
In the baseball card market, where cards don’t pay interest or a dividend or any cash flow of any kind, you’re buying for the sole purpose of capital appreciation. If you then layer on leverage at a very high rate, you’d better hope your cards appreciate dramatically and fast or you’d just be better off using cash.
At best, I see this as a method of achieving short term funding, but like others mentioned, of you have 50k in cads,, you can get much cheaper funding in other ways. At worst, it’s a way for auction houses to lure borrowers into cards they ordinarily couldn’t afford, knowing full well they’ll probably default on the loans, resulting in nice profit for auction house.
Lenders would have to do extreme due diligence before making these loans in order not to be predatory. All this resulting in no one using the program.
|