Library of Mistakes EP 35: Lending To The Borrower From Hell (with Mauricio Drelichman)
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Mar 6, 2025 Mauricio Drelichman, co-author of 'Lending to the Borrower from Hell,' delves into the intriguing financial history of King Philip II of Spain. He reveals how Renaissance bankers innovated lending practices despite dealing with a defaulting monarch. The conversation highlights the impact of Spain's silver trade on economics and military spending, and discusses how historical lending practices inform modern finance. Drelichman also explores the complex relationship between government debt and political power, shedding light on defaults' theological justifications.
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Profitable Defaults
- People lent money to King Philip II of Spain despite his four defaults because it was profitable.
- The detailed database reveals that lenders averaged a net return of 11.6%, exceeding the risk-free rate.
High Returns Despite Defaults
- Lending to King Philip II yielded high returns, averaging 20.3% annually or 13.1% above long-term debt.
- About 9% covered losses, leaving a net return of 11.6% for bankers, 4% above the risk-free rate.
Diverse Lending Approaches
- Lenders to Philip II, primarily from Genoa and Germany, used different approaches.
- Genoese bankers operated like modern bond funds, offsetting credit risk through an innovative debt structure.