Friday, February 8, 2013

Think Before You Lend

Do not lend to anyone stronger than yourself. If you do, resign yourself to loss -- Ecclesiasticus 8:13.

To wage war against England, Phillip IV of France became deeply indebted to the Knights Templar in 1307. To shed the debt, Phillip accused the knights of heresy, and ordered them burned at the stake.

To wage war against France, Edward III of England borrowed money from the banks of the Bardi and Peruzzi families. His defaults in 1343 and 1346 destroyed both banks, and that brought down a third bank. (Later, to borrow money, Edward had to leave his queen and children as security.)

In 15th century France, merchant and financier Jacques Coeur of Bourges was believed to be the richest man in the world. Charles VII and other powerful people were indebted to him. To rid themselves of this burden, Charles and his associates falsely accused Coeur of various crimes, including the murder of the king's mistress. Wrongly convicted, he was fined, and his property confiscated, mostly by the king.

The London bank of the Medici closed in 1472 because it could not recoup its loan to King Edward IV. (Pesky bunch, those Edwards.) The Medici family bank in Bruges lost money because Charles the Bold of Burgundy refused to repay. Other defaulted loans to the powerful caused this bank to be liquidated. As a bank manager of the time said, "No ever become embroiled with great lords without losing his feathers in the end."

We have today's version of this type of financing. The client lends money to a bank through a Guaranteed Investment Certificate (GIC). Its fixed-period allows the bank to arrange its affairs to its own schedule and needs.

On the other hand, a bank lends money by way of a call loan. The borrowed money must be returned immediately the bank demands it. Whether borrowing or lending, the bank is in control, not the client.

It gets worse. By way of financial legerdemain, the Government of Cyprus, in 2013, shifted the enormous debt of the nation's banks onto the shoulders of depositors. According to the Toronto Star, the Canadian version of this manoeuvre entails the government placing a bank's debt on not just stockholders, but on anyone who has made a loan such as a GIC, paid into a mutual fund, or even deposited money into a savings account.

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