Investment Memos

The Loan Everyone Knows

Imagine walking into a restaurant. You are handed a menu, you choose from it, and you eat what you ordered. The food is good, the service is attentive, and you leave satisfied. It was, as far as you can tell, a complete meal. Now imagine glancing across the room on your way out and noticing that the table by the window has been handed a different menu entirely. Different dishes, different prices, a different conversation with the waiter. You never knew the second menu existed. You were never told to ask for it. And yet there it was, on a table six feet away, the whole time.

Borrowing works the same way. Almost everyone has, at some point, walked into a bank to borrow money. You sit across from an adviser, or you fill in an online form, and the questions begin. What do you earn? How long have you been with your current employer? What are your monthly outgoings? Do you have any other debts? May we run a credit check?

The form is the same whether you are buying a car, consolidating a credit card, or applying for a mortgage. The product changes; the underwriting questions do not. After a few weeks, an answer comes back with a rate and a term attached. You sign. The money arrives. The purchase proceeds and the repayment schedule begins.

This is what most people understand borrowing to be. It is the only kind of borrowing they have ever encountered, the only kind their parents have ever encountered, and the only kind the high street bank in front of them is typically structured to provide. The experience is so universal that it has become the unspoken definition of what a loan is.

But is it the only kind? Ask yourself whether the menu you were handed — the one with salary multiples and affordability calculations and credit checks — is the only menu the restaurant prints. And ask yourself why the questions the bank asked were the questions they asked. They were about your income, your employer, your age, and the probability that you will keep earning. Notice what that tells you about what the bank is actually lending against.

What the Bank Is Actually Lending Against

The bank is not really interested in the car, or the kitchen extension, or the wedding you might be financing. It is interested in one thing: the present value of your future earnings.

The salary multiple on a mortgage is not a regulatory quirk. It is the underwriting model laid bare. A lender willing to advance four and a half times your annual income is making a calculation about how much of your future labour can plausibly be capitalised into a loan today, given your age, your profession, and the probability that you will continue to earn for the next twenty-five years. The car or the house is collateral in the legal sense — the lender can seize and sell it if you default — but the loan is not really secured against the asset. It is secured against you. Against your continued ability to wake up, go to work, and convert hours of your life into the cash flow that services the debt.

This is human capital lending. The term is not one you will see on any product page or comparison website, but it describes what is actually happening. The lender has discounted your future wages to a present value, taken a slice of that present value, and handed it to you as a lump sum. The asset you bought with it is incidental. You could spend the money on anything — and from the bank's perspective, the underwriting would be the same.

Notice what this means. The loan is not really collateralised by anything that exists today. It is collateralised by something that has not yet happened: the next twenty-five years of your working life. The bank is lending against a future you have not yet lived.

The Other Menu

Now consider how borrowing works for someone with financial assets — not a billionaire or even a millionaire necessarily, but anyone whose investment portfolio meaningfully exceeds their annual income. They do not walk into the high street bank. They do not fill in the same form. The questions they are asked are different, and so is the loan they are offered.

The conversation begins with the portfolio. What do you own? What is its market value? What are the cash flows? How is it structured? The lender — typically a private bank, a wealth manager, or a brokerage offering a securities-backed credit line — is not interested in the borrower's salary. They are interested in the assets that already exist on the balance sheet, and whether those assets can service the debt out of the income they produce.

This is financial capital lending. The borrower pledges a portfolio of equities, bonds, or other liquid securities, and the lender advances credit against a percentage of their value. The loan is serviced by the dividends, coupons, or interest the assets generate, and the principal is either repaid at maturity in a single bullet payment or amortised gradually from the same cash flows. The borrower's wages are irrelevant to the underwriting. In many cases, the borrower has no wages worth mentioning.

The same word — loan — describes both instruments, but the structure is fundamentally different. One is a claim on a future that has not yet happened. The other is a claim on a past that has already been secured. The first depends on the borrower continuing to perform; the second depends on the assets continuing to exist.

And here is the part that is rarely said out loud: most people have never been shown the second menu. Not because it is hidden, but because it is gated by the very thing it requires — capital. The high street bank does not offer it because its retail customers do not have the assets to collateralise it. The private bank does not advertise it because its clients already know to ask.

The Concentration Risk Hiding in Plain Sight

Return for a moment to the human capital loan. A twenty-five-year mortgage is, in structural terms, a long-duration liability funded by a single, undiversified, fragile asset: the borrower's labour income. There is no second income stream in the underwriting model. There is no diversification across employers. There is no hedge against the borrower's industry contracting, their skills becoming obsolete, or their health failing in the years before the loan matures.

The structural error that nearly collapsed the UK pension system in 2022 and that destroyed Silicon Valley Bank in 2023 was the same in both cases: long-duration assets funded by short-duration, fragile sources of cash. The duration mismatch was invisible until it wasn't — and when conditions turned, the correction revealed a structure that had been unsound the entire time.

The human capital loan is the same structural error expressed in personal form. The liability has a defined twenty-five-year duration. The asset funding it — the borrower's salary — has no contractual duration at all. It depends entirely on the continued cooperation of an employer, an industry, an economy, and a body that ages over the same twenty-five years. The borrower does not experience this as a duration mismatch. They experience it as monthly affordability. But the underlying fragility is identical to the one that institutional treasurers spend their careers trying to eliminate.

Financial capital lending inverts the structure. The cash flow servicing the debt is generated by a diversified pool of assets — shares across hundreds of companies, bonds across dozens of issuers, income streams uncorrelated with any single employer or industry — none of which depend on the borrower waking up tomorrow. The assets do the work. The borrower does not.

The Covenant You Did Not Read

Every loan agreement contains covenants — conditions the borrower must meet to keep the loan in good standing. In commercial lending, these are explicit: maintain a certain leverage ratio, hold a minimum cash balance, restrict further borrowing without lender consent. Breach a covenant and the lender can demand immediate repayment.

The human capital loan also contains a covenant. It is just not written down. The covenant is: keep your job. Keep earning. Keep the cash flow coming, every month, for the entire term of the loan. There is no clause that says this in the mortgage deed, but the consequence of breaching it is the same as breaching any other covenant. The recovery mechanism activates. If the loan carries a legal charge over an asset — a home, a car — that asset is repossessed. The borrower's credit file is damaged for years. The loss is realised at whatever price the forced sale produces, regardless of fundamental value.

The borrower rarely thinks of their employment as a loan covenant. They think of it as their life. But from the lender's perspective, the two are indistinguishable. The job is the collateral that matters. The house is just what gets seized when the collateral fails.

Financial capital lending, properly structured, has no equivalent covenant. A fixed-rate, bullet-repayment note secured against a diversified portfolio is not contingent on the borrower's labour at all. There is no margin call if the portfolio is unleveraged at the asset level. There is no forced sale if the cash flows from the assets cover the interest. The structural feature that allows an investor to provide liquidity in a crisis rather than consume it is the absence of forced obligations. Human capital lending creates exactly the kind of forced obligation that financial capital lending, done correctly, eliminates.

Why the Wealthy Borrow for Yachts

There is a question that genuinely puzzles most observers when they first encounter it. Why does a billionaire borrow money to buy a yacht? They could pay cash. They have the cash. The interest on the loan is money they would not otherwise spend. It looks, on the surface, like financial inefficiency by a person whose wealth presumably required some financial competence to accumulate.

Sit with the question, because the answer reveals the entire logic of the alternative menu.

The billionaire owns a portfolio of appreciating assets — equities, private holdings, real estate. Selling those assets to fund the yacht would crystallise capital gains tax on every pound of appreciation since acquisition. It would also remove the assets from the compounding engine, ending the future returns they would have generated. And it would likely require selling at whatever price the market offered on the day of the transaction, which may or may not be a favourable moment.

Borrowing against the portfolio sidesteps all three problems. The assets remain in place, continuing to compound. No tax event is triggered, because nothing has been sold. The interest on the loan is, in many cases, a fraction of the long-term return the portfolio is expected to generate. The borrower has effectively rented the cash they needed at, say, four percent while their assets continue to compound at eight. The yacht is paid for out of the spread.

Now compare the same yacht purchase financed by a high earner using human capital lending. Their labour income is taxed at the marginal rate on the way in. The post-tax income then services a loan that has no offsetting compounding, no tax shelter, and no asset growth running in parallel. The yacht costs them the full pre-tax equivalent of the loan plus interest, paid for entirely out of hours of their life converted into wages. The same vessel, the same berth, the same sea — and two completely different balance sheet outcomes.

The wealthy do not borrow for consumption because they cannot afford to pay. They borrow because borrowing against assets is mathematically superior to selling them, and because the menu they are offered makes the arithmetic possible. The middle-class equivalent is not available, not because of any prohibition, but because the assets required to collateralise it do not exist on the balance sheet.

The Question to Carry

None of this means that human capital lending is a mistake. For most people, at most stages of life, it is the only loan available — and used carefully, for the right purposes, on the right terms, it can be the bridge between having no capital and having enough capital to operate differently. A mortgage that allows a household to own the roof over its head, taken at a level the income can comfortably support, is not the structural error this memo is describing. The error is something more specific: treating human capital lending as the only kind of borrowing that exists, and remaining on it long after the financial assets have accumulated to make the alternative possible. The bridge is meant to be crossed.

Taleb's observation is that debt makes you fragile when it removes your flexibility. The fragility he describes is not in the borrowing itself but in the structure of the obligation. A loan that depends on your continued ability to perform is a loan that takes your optionality with it. A loan that services itself from assets you already own takes nothing — it leaves your time, your career, your choices intact, and lets the portfolio carry the weight. The same word, the same product category, the same legal instrument in many respects. Two entirely different relationships with freedom.

The question to carry is not whether you should borrow. It is whose future is repaying the loan you already have — yours, or your portfolio's? And if the answer is yours, the question that follows is when, and how, you intend to change it.