– 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.