Treasury cannot be allowed to rob bank investors

For all its travails, Northern Rock in public ownership will, like a public limited company, have to publish audited accounts. Alistair Darling, chancellor of the exchequer, has said the mortgage lender will return to the private sector in due course. Suppose that, when the last set of accounts before its reprivatisation appears, these show that the loan from the state (originally from the Bank of England but now presumably to be assumed by the Treasury) is repaid in full at a market interest rate or above.

Suppose, in other words, that Northern Rock repays the loan on the same terms as billions of transactions on the sterling interbank market. The economic substance of the loan to Northern Rock would be difficult to distinguish from such loans, except that - at least in the early stages when it took the form of a lender-of-last-resort loan from the Bank of England - it was at a penalty rate (ie above market rates).

Should the proceeds from the reprivatisation of Northern Rock belong to the government or the original shareholders? That is the key question.

Mr Darling has made clear he does not intend to compensate shareholders at anywhere near the book value of the bank's capital, which was about £2bn (or £4 a share) in mid-2007 and must still be above £1.5bn. The plan - if the government's behaviour can be dignified with the word - seems to be that the shareholders are to get nothing.

The proceeds from the reprivatisation (presumably a few years from now) may be deemed to belong to the government. If so, would the government have robbed the shareholders of £1.5bn-£2bn? Mr Darling has no doubt been told by advisers that the government's approach is legally valid. But the shareholders can also recruit advisers to demonstrate that it is legally invalid and morally outrageous. Their central point will be that, in a nation proud of its respect for the rule of law, the government would have violated principles of private property.

Mr Darling and his advisers would no doubt say this is preposterous. They must think again. They ought, for example, to listen to the senior executives in the British banking industry who nine months ago took it for granted that the Bank of England was their bank, from which they could obtain cash in much the same way as commercial banks in other countries. Those executives have been dismayed that in recent weeks Spanish banks have been able to obtain finance easily from the European Central Bank (but actually from the Bank of Spain) on collateral that the Bank of England has questioned.

These Spanish banks have in many respects the same business model as Northern Rock; in autumn 2007 they faced the same difficulty in financing their assets. But they have not been punished by the Spanish authorities as Northern Rock has been punished by the UK authorities and the government. The Spanish government has not threatened to nationalise them, in spite of the huge advances they have received from the ECB.

The one correct point in the argument for nationalising Northern Rock was that the value of its assets, and hence its continued solvency, depended on the Bank of England loan. If Northern Rock had been forced last September to dispose of its assets as quickly as its depositors were withdrawing cash, those assets would have been sold at far less than their true value in normal circumstances and Northern Rock would have gone bust.

But central banks exist for the purpose of preventing runs or, at any rate, ensuring that runs are met by -lenderof-last-resort loans so the hurried liquidation of assets can be avoided. That is what is meant by the proposition, repeated in hundreds of textbooks, that "the central bank is lender of last resort to the banking system".

Western governments have deplored the Russian state's expropriation of privately owned oil companies. What the British government has done with Northern Rock - by falsely representing a business transaction at market rates or above as "state aid", encouraging a frenzy of hostile and largely silly press comment, cajoling the management and shareholders, and finally imposing a compulsory nationalisation without compensation - bears comparison with President Vladimir Putin's devices to steal assets in the former Soviet Union.

If Northern Rock does repay its loan from the state in full but its shareholders receive nothing, the British government's actions would amount to robbery under the law.



http://www.ft.com/

Balloon Loans For Car Purchases?

Balloon loans have become a familiar concept for those who have at least analyzed applying for a home mortgage loan. However, not everybody knows that there are also balloon loans for car purchases which can provide you advantageous terms and make your monthly payments affordable enough almost for everyone. Read on to discover the advantages and drawbacks of this car loan type.

Though almost everybody knows how balloon loans work, it is always smart to reexamine the concept so as to have the variables implied fresh to analyze how they work on car loans. Thus, we will give a short explanation on balloon loans and then, we´ll analyze how balloon loans can help you afford a car purchase and in which situations it is advisable to resort to car balloon loans.

Balloon Loans Explained

A balloon loan is a loan that has monthly payments that are not set up to repay the loan in full when the loan repayment program ends. Instead, when the loan schedule has ended, the borrower has to make a balloon payment which is larger than the rest of the payments and cancels the whole loan´s principal so until then, the loan isn´t fully paid off.

Balloon loans help keep the monthly payments low as they usually include interests only or maybe a small portion of the balance. Thus, when the final balloon payment is due, the balance of the loan usually equals the loan´s principal or is well close to it. This particularity makes balloon loans useful for certain situations or when the purpose is to eventually sell whatever has been bought with the loan´s money.

Consequences on Car Loans

Balloon loans are a good alternative when you can´t afford the monthly payments on a regular car loan. The affordability of balloon car loans´ monthly payments is excellent and lets almost anyone to obtain finance to purchase a car. However, the problem comes when you need to make that balloon payment at the end of the repayment program. If you can´t afford it, you´ll loose the vehicle and damage your credit.

Why do we say that car loans of the balloon type can be advantageous then? Because, if used correctly, the cost to you can equal almost nothing. If you are one of those who likes to change cars every now and then (i.e. every five years at most), balloon loans can be an excellent tool for you. By using balloon loans you can get a car, use it for five years owning it and paying monthly payments even lower than rent installments.

The idea is quite simple: You purchase a vehicle with a balloon car loan, you use your car for up to 75% of the loan´s repayment schedule and then you put it for sale. Hopefully, before the balloon payment is due, you´ll have completed the sale and canceled the loan in full. Then, you can take another balloon loan to purchase your new vehicle. It´s cheap and viable, the only problem is that you have to make sure that the car is sold before the balloon payment is due or else, you´ll have to obtain the money to cancel the loan or refinance it.


http://www.americanchronicle.com/articles/52569