Archive for the ‘Lending Money’ Category

Service of Ducking a Request for a Loan

Thursday, May 16th, 2024

I’ve written here about the pitfalls of lending money since 2010. In “The do’s and don’ts of lending money,” on NPR, I was most interested to focus on the part of Andrew Limbong’s article where he addressed how to say “no.”

He also mentioned the usual—best to give the money as a gift as, in the first place, you shouldn’t lend money that you can’t afford to lose.

The pundits he spoke with warned not to co-sign a loan either.

I loved the anecdote he shared about Michelle Singletary who had asked her grandmother to co-sign a car loan. Singletary, a personal finance columnist for The Washington Post, was a fledgling journalist at the time. Grandmother said: “Let me get this straight. So the bank, which has way more money than I do, turned you down? Now you want to put my finances on the line?” Singletary said she took the bus and saved “until I could save up enough to get the loan.”

She added that if you co-sign, “it also means that the debt is on your credit profile. That could prevent you from getting a loan or make the loan you need more expensive.”

What if you can’t afford to give money to the person asking for a loan? Limbong wrote: Offer other ways to help, say our experts…. If someone is coming to you for money, it probably wasn’t their first option. They’re probably in a bad situation and don’t see any other way out. They’re vulnerable. And your turning them down is going to hurt.”

Instead of giving money one expert helped the family member draft spreadsheets and created an action plan for repaying debt. Other ideas ranged from pitching in with childcare so the person can work more shifts to “offering to bring them dinner.”

I’m not sure about the dinner idea. I’ve just asked you for $5,000 and you offer to bring me a meal? Hmmmm.

If the cause is serious a better idea might be to help establish and promote a plea on a crowdfunding platform such as GoFundMe.

There are countless examples of friendships broken once the dynamic between two people changes to lender and borrower. But refusing money ends up in the same place. I’ve had to turn people down because I couldn’t give them anywhere near the amount of money they wanted and further, I knew that this would not solve their problem and it would be only the first of many future requests as they showed no plan to address the cause of the financial leak.

What words would you choose to turn down a request for a loan? Are there people to whom you would lend money in a second?

Service of Thinking Twice: When NOT to be Generous

Monday, July 3rd, 2023

Image by Joshua Woroniecki from Pixabay

My nearest and dearest are breathtakingly generous, consistently giving to causes that sorely need support.

However, I think there are instances in which the faucet of human kindness should be turned off and sharing information for small immediate gain reconsidered.

Here are some examples.

You should think twice before giving…..

  • Your mobile phone number to a company so it can send you texts in exchange for a one-time minor discount–unless you don’t mind incessant text pings announcing a new product or sale.
  • Money to beggars. Charities recommend you should instead give money to them. [I know—this sounds self-serving, but it is the prudent thing to do.]
  • More money to someone who didn’t repay you for the last loan–unless you consider both a gift in which case say so.
  • Up your aisle or window seat in exchange for the middle one in a long flight because another passenger made a last-minute booking and nevertheless wants to sit where you are–next to a family member.

The New York Post covered this topic with a compelling example. The flight originated in Japan. The woman who wanted to switch her middle seat for a window seat so she could be next to her toddler was part of a tour wrote Brooke Kato. The passenger who wouldn’t budge said the mother should have asked another tour member or the tour operator or a flight attendant for a switch and yet she only approached her. I don’t blame her digging in her heels and wonder if I’d have the guts to ignore her request. But enduring a middle seat on a very long flight…..I think I’d find the strength.

What are more examples that suggest that people should zip shut wallets and keep mobile phone numbers to themselves or refuse to do what might seem to be the right thing? Is this line of thought counterintuitive if you are trying to address some of the world’s inequities?

Image by Niek Verlaan from Pixabay

Service of Lending Money

Thursday, June 2nd, 2022

Most people have lent money, if only to help someone complete a purchase who is a few cents short. I last touched on the topic in 2010 in “Service of Guilt II” where I wrote about how hard I found it to ask for money due me whether from a client or a personal acquaintance.

Philip Galanes’s answer to “Lender” in a recent “Social Qs” New York Times column made sense. “Lender” had loaned money to a friend for a three month period until a work bonus came through. It was to help pay medical expenses for the friend’s son. Long after three months she was still chasing the woman to get it back and ended up $2,000 short after years trying. She learned that the son was never sick and that the borrower had never worked at the company she’d claimed to. Lender wrote: “I’m not the kind of person who reports people to the police, but what else can I do?”

Galanes responded: “I think you should count yourself lucky to have recouped most of your loan and close the book on this ugly chapter. Your friend is no friend, but she didn’t steal the money. You lent it to her — without an agreement in writing, it seems, or verifying her false claims — and she hasn’t repaid you fully.”

We don’t know the amount of the original loan. It must have been substantial given how much was still due. I admire Lender for being so persistent. Asking is uncomfortable. Yet a lawyer’s fee to go after the culprit could be more than the $2,000 owed so for that reason I agree with Galanes: Drop it.

Shakespeare was no dope when he wrote in Hamlet: “Neither a borrower, nor a lender be; For loan oft loses both itself and friend.” Give the money if you can or step away is probably the best advice.

Have you lent money you never again saw? Is it easy for you to ask for your money back? When lending to a friend, have you asked him/her to sign an agreement spelling out the amount and a repayment schedule?

Service of Financial Rating Agencies

Thursday, October 6th, 2011

The Standard & Poor’s downgrade of US debt sent shivers down spines. Frank Paine [known previously on this blog as Zachary], a retired Federal Reserve Examiner and international commercial banking officer, describes the world of financial rating agencies. He covers where and how they started, how they are used to analyze other industries and governments and he shares his opinion of how useful their conclusions are. 

He wrote:

An old friend who knows my background, and who is himself a retired international banker, recently asked me: “As a credit guy, what is your take on S & P’s downgrade?” He continued, “My initial reaction was positive, but what does it mean if, in fairness, they have to downgrade everybody else except Switzerland?”

With a wonderful sense of irony, he followed this question with “Hope all is well.”  [He was referring to something else, but his choice of words and timing was wonderful!]

What a great question!  There are a lot of interesting angles to this issue.  To start with, I’m not even sure about Switzerland, but doesn’t that raise the question of what use the ratings are if every country is rated the same?  They are useless if we can’t use them to distinguish varying levels of credit risk.

My understanding is that the system for rating publicly issued securities came into being quite some decades ago in large measure as a function of insurance company regulation.  The public policy issue was the companies’ solvency for paying claims (liability companies) or benefits (life companies).  It was thought that citizens buying policies were not capable of understanding the level of risk in insurance company balance sheets, and therefore there should be a way of measuring and communicating that level of risk that would not require “buyers to beware.” A corollary to this notion was that insurance companies should not be risk takers.

Over the years, regulators (and others) found that these ratings could have other useful applications, such as, for example, measuring the degree of risk in commercial banks’ bond portfolios. And indeed, many “players” in the finance industry found that it was easier and cheaper to measure their risk by depending on the ratings.  Even commercial banks, once places that were expected to do their own credit analysis, found (lazily) that they could outsource their credit risk management.  Instead of duplicating the agencies’ analytical work, they could simply borrow it, saving their own analysis for business that was not publicly traded.  In recent years, the agencies have developed a system for rating securities that are not publicly traded.  I am not an expert on this, but I gather that they have developed statistically based models that they feel are acceptable proxies for the publicly traded situation.

But how does all this work when considering sovereign risks?  What statistical basis can one find for assessing the credit risk of sovereign states?  We know that they occasionally go into default, but do they go bankrupt?  Bankruptcy is a legal status, not a financial status.  To what court do you take a sovereign defaulter to get it to acknowledge bankruptcy?  None, of course…they don’t declare bankruptcy.  They default perhaps, or terms get adjusted, sometimes “haircuts” get applied, interest rates get reduced, and so forth, but they never declare bankruptcy.

Let’s take this a step further. With corporate business, there is a huge database of financial performance.  Using multiple discriminant analysis, one can even define the probability that specified factors will affect the probability of default and bankruptcy.  Can one duplicate this for sovereign states?  I would say “no,” because the database is simply not big enough.  And I think this is where the agencies slipped, basically because they put too much faith in their own models, and assumed that they could identify the factors leading to default, and then apply relevant probabilities.  The probabilities were highly flawed.

So, how should one consider sovereign risk?  Sovereign risks are inherently political, and so the ratings must reflect political analysis, something that financial analysts are notoriously not very good at.  Heaven knows that political factors are what determine whether or how a country will go into default-the present state of things in the EEU provides an excellent example.

I believe that it is an error to think that rating systems designed for the management of corporate risk can be applied to sovereign risk.  Sovereign risks should have their own, separate rating system, based on political factors rather than financial factors.  Whether this can in fact be achieved is questionable, but the attempt might be worth the effort.  It probably should be done by separate agencies, thus avoiding possible conflicts of interest.

So, to summarize, all is not well.  This field needs a lot of work.

If Frank Paine is correct–that a country’s financial strength and stability should be looked at by a rating agency specializing in the analysis of sovereign states, not in financial institutions and corporations–was  the S & P downgrade more of a public relations slap than an accurate analysis? Do you think that most people have an idea that the economy is in deep dish distress without confirmation by a rating agency? Do you fear that we are on the brink of panic? Will the Wall Street protesters have any affect in redressing our problems?

Service of Guilt II

Monday, August 23rd, 2010

The first “Service of Guilt” post in February focused on people who try to ping a remorse reaction as a sales tool.

Today, I address guilt from some other directions, starting with the anxiety and stress I feel when asking a borrower for my money back.

I was warned at my mother’s knee to never lend money unless I could afford to give it away which I clearly remembered and should have heeded. I’ve never seen a cent of serious money I’ve lent. I couldn’t afford to lose it and I truly thought I’d get it back.

When I called about it, I suffered beforehand, dreaded the moment and my stomach churned.

I envy senators, congress people–politicians of all stripes–sports figures and tycoons who are accused of serious crimes, some of which they have committed, and who can return to work and to microphones without shedding an ounce of sweat. They stare everyone in the eye as though what they are acused of is no biggie, and today is just another August summer day. Their public stance shrieks, “so what about it?”

Here I ask for what I am due, and I feel embarrassed and guilty.

While we’re on the subject, I also feel guilty when I don’t do something I know I should. I’m a subtenant in an office with people from many businesses. When one of us goes out to buy coffee, we generally ask others if they want us to get some for them.

A colleague and I joke as we exchange piles of nickels and dimes almost daily. One person in a business unrelated to mine has never reached for a penny. It’s not about the money as much as the attitude. While I feel guilty when I sail quietly by this person’s desk on my way out and return with a cup or more for myself and others, being taken  makes me angry at myself, which feels worse than the guilt that accompanies the omission, so I live through the angst. I bet I am the only one who notices.

Have you run into situations like this? Do you think that what I feel isn’t guilt, but something else?

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