My words exactly. A debt is not a liability only when it’s under someone else’s stewardship. Let me explain. If the bank lends you money and you in turn give someone else credit with that debt you hold then it’s a liability to you.
If the bank gives you a line of credit and the bank holds that money for you then it becomes a liability. If they were to lend you money and you put up collateral that is of someone else’s not tied to the debt then it is of the others responsibility to show the liability.
You can say then that it’s the third party's liability and the one using the funds raised debt to the third party.
So the piggy in the middle gets the capital without taking on the liability of the credit yet still is responsible for the debt to both the third party and the original lender.
So a dollar debt has now turned into two dollars of liability one for the original sum of the debt and then the collateral that was put up.
Why is it done this way you may want to ask your self. It’s done to reflect the tax component of the debt is payed down.
So is equity then a liability or often referred to as deferred tax’s. It is for this reason that there is the par value of the shares that is set so low.
Ask your self this. Can a third party borrow to finance the collateral pending on the performance of the holding companies stock?
I will leave it there for now to let everyone ponder the consequences of borrowing capital under this type of structure.
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