In one such case, both bankers and critics of public-private partnerships (PPPs) are happily united in dumping risks on unsuspecting taxpayers – precisely the citizens whose interests they profess to serve. How so?
Banks are unusual firms. They carry little equity relative to debt – often no more than five percent of total assets at best. Typical firms in other sectors would find such levels of equity positively dangerous. They often carry equity worth 50 percent of assets, many even more.
Bankers say equity is expensive and debt cheap. Hence low leverage – little equity as a share of assets – makes sense. If that were it, firms other than banks would be fairly dim-witted. They should also load up on debt and thus lower costs. So why don’t they?