A modest proposal

[peterbirks]

An interesting point made by David Smith in today's "Economic Outlook" in the Murdoch ST. Smith observed that there has been a wholesale loss of lending capacity (and a loss of wholesale lending capacity), and that the >i>message du jour if not month or year, is deleveraging.

I concluded, therefore, that one way in which I could help out the banks would be to let them deleverage my mortgage.

In the insurance business there's an apparently complex, but in reality quite simple, mechanism called commutation. This invariably involves long-tail business whereby a reinsurer offer to pay the insurer x million dollars now rather than an uncertain number of dollars between now and armageddon. Suppose the actuaries think that the amount likely to be owed over the next 30 years is $50m, but the reinsurer offers you a "certain" $25m today.

Now, although the principle is simple, the calculations on whether the insurer should take the "certain money now" are complex. They depend on assessments on future interest rate movements, inflation and, most importantly, counterparty risk -- the chance that reinsurer might not be around for the next 30 years.

This leads to the odd business situation wherein the company offering teh fixed amount tries to convince the counterparty that it is in a worse state than it actually is. "Take the money now, 'cos we might be broke tomorrow". The more the offerer can convince the recipient of the truth of this, the smaller "certain" amount the recipient is likely to accept, because of the "bird in the hand" argument.

So, I thought, I'll phone up Lloyds TSB and offer them an opportunity to deleverage their loan with me for a mere 90p in the £. I.E, I'll pay them £220,000 now for the £245,000 debt, no questions asked. Everyone wins. They get ready cash and deleverage. I clear my debt for 90% of the principle.

Of course, if I can convince them that the likely alternative is that I will default on the loan and they will end up with a flat that they can't sell, I might even get them to accept 80p in the £. On the other hand, unlike in the insurance world, I won't be able to reappear tomorrow in another guise, writing reinsurance again.

I eagerly await the lender's enthusiastic response.

Comments

[(Anonymous)]

"the likely alternative is that I will default on the loan and they will end up with a flat that they can't sell,"

That sounds unusually pessimistic for you.

Surely you believe the economy will turn around long before you have to repay your mortgage in full.

[peterbirks.livejournal.com]

You miss my point. It's in my interest (see the commutation argument) to convince the bank that, if they refuse the offer of 90% now, there is a chance that they will get less than 90% in the future. If I am "optimistic" then the bank would simply say "why should we take 90% now when we are sure of getting 100% tomorrow?"

PJ

[(Anonymous)]

But you miss your own point, that you expect inflation to wipe out the value of your debt. So why pay money that can be invested elsewhere when over the course of 10 years, or whatever, you believe that you will, in effect, pay nothing?

[peterbirks.livejournal.com]

Ah, yes. Well I do mention this (obliquely) in the original post. Christ, why do people expect Stephanomics every time I write something off the top of my head? Chris Dickson spotted it too, with "giggle". I can write boring posts if you want to, making staid businesslike points. But there's quite enough boring writers out there already doing that.

In fact, were this a "real" intention (to "commute" my debt), I would have to mention several other factors that would affect my decision, and my inflation expectations would be one of those factors (or, rather, my expectations on my return on investment compared with the interest rate that the lender will charge me on the loan). There's also the fact that my interest repayments are tax-deductible, which makes it marginally more in my interest not to repay the loan capital.

But, hell, that would have made for one fuck of a boring post (and would have taken me far more time than I had available to write -- even if boring posrts are your forté), rather than a light-hearted quickly penned point that, (as Keith S astutely observed), what you can get away with for millions, you can't get away with for thousands. There IS no concept of commutation or "money off for repaying cash now" in the retail sector. In fact, my mortgage penalizes me for excess early repayment. That was the rough thrust of my reductio ad absurdum argument

Lighten up, man, lighten up. My real views on inflation are well-known. So, to twist your last question around; did it not occur to you to ask why I would be writing the above, "when over the course of 10 years, or whtever, I believe that I will, in effect, pay nothing"?

Clearly there was another point to the post. D'oh, LDO.

I wonder what happened to that Irish guy a few posts back?

PJ

[real-aardvark.livejournal.com]

I'd give up on this humour thing, Birks. Either you're not very good at it, or the Web just isn't ready for you quite yet.

[peterbirks.livejournal.com]

Yep, my conclusion entirely.

PJ

[real-aardvark.livejournal.com]

The interesting thing ... at least, to me ... is that yer average eejit has no conception whatsoever of how much effort goes in to the precise phrase that either delivers the punchline, or sets it up. You are entirely wrong in stressing the time involved: it's the -- what's the secret of telling a good -- timing -- joke?

It is possible to be a crashing bore inside a tenth of a second. It takes genius to be memorably comic over ten or twenty minutes.

I'll take just the three paragraphs, please. In a brown paper parcel.

[jiggery-pokery.livejournal.com]

*giggles*

It's amusing to think that if you could offer - say - 99p in the £, cash (or banker's draft) in hand, it might even be in their interest to take it. You may yet be ahead of your time once again!

Proposal accepted

[(Anonymous)]

If it was Birks Industries looking to do the deal and the figure was £245m, hands would be shaken at 50%. As its only £245k the chances of a result are probably a lot slimmer
Keith S