– So today I’m reading a story about a finance company in New Zealand, Hanover Finance, that has suspended repayments on principle and interest to 16,500 investors owed $554 million. The story is here: ➡
– As to why they’ve done this, they explain:
“It’s a combination of the collapse of the financial markets and the whole system – the collapse of other substantial finance companies – which has affected our reinvestment rates pretty dramatically. And the inability of people with even good projects to refinance or sell to be able to repay us in a timely fashion.”
– Now, as to what going to happen, they say this:
The suspension of capital and interest repayments effective yesterday, along with a freeze on new investments, would enable the business to be “managed in a measured way as it works through a restructure plan to allow investors to be repaid over an agreed time period“.
– Mmmm. They cannot pay their bills because they haven’t been sufficiently dilligent at predicting and ameliorating their risks and now they cannot make their payments. And now that they’ve put their foot in it, they get to ‘tell‘ their creditors how it’s going to be. I.e., ‘We’ll suspend our payments to you and we’ll sort out which of you we can pay back and when.’
– I’ve read a number of stories like this with much the same text but I never connected the dots until today.
– If we, the small people, don’t judge our risks correctly and get over extended (like in a sub-prime mortgage crises), we don’t get to tell anyone how it’s going to be. Nope, we get told.
“Pay up or we’ll foreclose you and take away the collateral we forced you to put up.“
– Collateral? Mmmm, let me think about that. The ‘big’ guys loan us money in the hope of getting a good return on their investment in the form of the interest they’ll make. But, as a backup, they impose liens on our property so if we cannot pay, they can take away something of equal or greater value (typically) to what we owe them. That makes it pretty hard for them to lose on the deal because they either get their money back plus good interest or they get the property.
– Now, when one of us ‘small’ people invests in one of their financial firms like Hanover Finance, we’re doing it for the gains we hope to make. Essentially, we’re loaning them our money for their use and they hope, through wise investments, to grow the money sufficiently to be able to both pay us back with a profit to us and to make a profit themselves. It’s important to note here that they plan to accomplish all of this using our money to do it.
– But the finance company doesn’t have to put up any collateral to us to protect the money we loan them against any stupid decisions they might make. Nope, they just take our money, invest it, and hopefully make a profit. That’s how it’s suppose to work, anyway.
– However, if they invest our money badly, do we have any recourse? Not much. They’ll let you know, at their leisure, if they can pay you anything at all back at all on your investment which went bad under their control.
– Yeah. All of this serves well to remind us who are the ‘little‘ people and who are the ‘big‘ ones in the world of finance. And we just take all this for granted.
That’s not an entirely accurate depiction of the markets. If I “invest,” I do so–if I am aware at all of what I do–with the knowledge that I am not a creditor, that my investment is subject to the vicissitudes of the marketplace, and that if the company I have invested in goes belly-up, I am typically at the back of the repayment line. And, as a general rule, when I invest I am not putting my money in the balance sheet of the company; I am, however, lining the pockets of the brokers and traders of the underlying share. If you can structure your investment as an honest-to-goodness loan, then you have become a creditor and would have some recourse.
Yes, there is an element of bitterness in my piece. And yes, I am aware that I can choose how to “invest” my money; in a secured fashion or in an unsecured fashion. Indeed, my great aunt and her husband lived most of their adult lives as private “bankers” making loans to people who wanted to buy property. All of these loans were secured by liens on the properties involved.
I suppose all of this has to do with contracts as well? When I sign a contract for a credit card, the only collateral I offer is the presumption that I will pay back any money I may owe them. But, if I fail to pay, they can come after me on the strength of that contract. There is, for most “investors” like those who invested in Hanover Finance, no such contract – just an unsecured presumption of good faith.
Knowledge/information is power. And most folks have not thought through the consequences of these distinctions. It looks to me like many times those who have thought the logic through and understand it, use their knowledge against those who haven’t understood it to separate them from their money.
This begins to get at the deep distinctions between unconstrained Capitalism (that we have the right to profit from our fellows regardless of the consequences) and the core ideas of Socialism (that our governing organizations should be about creating and maintaining a decent quality of life for all of us).
Is it too much compassion to protect the less intelligent against the consequences of their lack of knowledge and intellect? We teach our children that bullying is bad on the playground. But when we grow up, in some of our societies, it becomes the ‘smart’ thing to do – to use our extra intelligence, knowledge, information and understanding against our fellow citizens to separate them from their money?
I know I am an over-the-top idealist. But when I see the credit card companies camped out on college campuses handing out credit cards to the students knowing full-well that many, if not most, of the recipients are going to crash and burn from not really getting how these cards work (in spite of supposedly being smart in that they are going to college), I find that I am disappointed in the predatory nature of some of my fellow human beings.
We are not created equal. And I believe that those of us gifted with more intelligence have some responsibility to use this extra capacity compassionately with respect to our fellows rather than as a bludgeon to increase the economic disparity between them and ourselves.