(Joe wrote:-) In Canada, as an example, this has often taken the
form
of a 'personal guarantee' exacted from the owner
of an incorporated
borrowing business. "Limited
liability', in this case, doesn't exist for
the
borrower.
---------------------------
-----------------
(Bill
responded:-) Do you think that it should? I am in favor of
revisiting the whole concept of limited liability.
The idea was
that it enhances the ability to sell
stock, which it certainly does.
But is the enhanced
ability to sell stock an essential element of the
system of free enterprise? It seems to me it is
merely further
protection for the bankers who end up
with the stock. In Europe
(particularly Germany) and
most countries (the United States has been an
exception since the 1930s) bankers may use ordinary
commercial bank
credit to purchase corporate stock.
Thereby debt is masqueraded as
equity.
-------------------------------------------------------
That's an interesting question, Bill. Especially when it's looked
at that way. Wouldn't it be rather difficult to carry on a business if
there were no 'limited liability', though? What about the situation
where one of the 'shareholders' gets in a financial jam personally, perhaps in
some other venture unconnected to a particular business he has an interest
in? Do his creditors then get to attach more than his interest in the
unconnected business? As they might in an unincorporated
'partnership' ?
---------------------------------------------------------
(Joe wrote:-) The business could fail, and he could still be on the
hook for the amount of the loan, plus the ever-
accumulating
interest.
---------------------------
-----------------
(Bill
replied:-) Personal guarantees are particularly necessary when
the assets
of the business are insufficient to secure
the loan. If the assets
were sufficient personal
guarantees would not be necessary. How
could it be
otherwise? A prudent banker would not extend a loan
to a small-incorporated proprietorship if the assets
of the business
plus the assets of the guarantor were
insufficient to secure the
loan. He would be crazy
to do so, and quite irresponsible, wouldn't
you say?
-------------------------------------------------------
I would indeed, Bill. But I have personally experienced the
demand for 'personal guarantees' when the existing plant and real
estate assets of my business were worth way more than the
amount of the loan. And that's by independent valuation, at the most
conservative of realizable values in the event of liquidation. As well
as the loan being guaranteed under the "Small Business Loans Act" by the
Government of Canada in the event of my default. From what I can
find out, many other small business people in Canada have
experienced exactly the same thing. This kind of 'prudence', especially
when the loan was at a variable interest rate that at one point in the early
1980's touched on 21%, seems just a trifle much. I do not object to the
banker making a profit. Nor do I condemn interest, as many others on
here have been prone to do. But I have to admit a certain sympathy
with their position when they make the argument the arrangements at present
can often seem 'usurious'.
-------------------------------------------------------
(Joe
wrote:-) For regardless of whether the purpose is productive
or not,
or whether the borrower makes a profit or
not, the banker is still going
to profit...Now this
is not to say that banks do not sometimes 'lose' on
their loans, and have to write them off.
(Bill replied:-) [I'm sure
you know you just contradicted
yourself.]
-----------------------------------------------------
Actually, I thought I'd cut that last sentence
out in the version of that post I sent. It was included in what I
first composed, (where I did realize, after reading it, that it did
contradict my previous sentence). I was going to go down a different path
with that, and honestly thought I'd deleted it. It doesn't show in the
version that went into my 'sent mail' folder , so how it managed to
appear is a mystery to me.
------------------------------------------------------------------------------------
But as a
small businessman whose dealt with banks it seems to
me
that they've got themselves pretty well
covered.
---------------------------
-----------------
(Bill
replied:-) There was a time (at any rate in Texas there was a
time -
perhaps there never was such a time in Canada)
when local banks were small
businesses. Then came
deregulation. Look, there is nothing
inherently
wrong with a system in which people reasonably expect
to
profit financially. (Agreed.) It is true that the bankers have
gotten themselves into a position where the
banking system is relatively
stable, as compared to
the early days of the Great Depression, when
thousands of them closed. There are photographs from
that era
that show bankers jumping from skyscrapers--
such was their
desperation. That particular crisis
affected the entire economy,
bankers and non-bankers
alike. There was misery for tens of
millions. And
the crisis spread to Europe and throughout the
world.
To make the entire economy relatively stable and
profitable (in the most general sense) for everyone
concerned is the
goal of the Social Credit financial
reforms.
(Again agreed. The Canadian banking system became very concentrated
very early on in our history. There is really nothing to compare with
the size and profusion of banks that have long predominated in the US.
The closest thing would be our Provincially regulated Credit Unions.
This is both a benefit and a curse. It's beneficial in that our
banks have been quite stable, and their depositor's money quite
secure. It's a curse in that the banker is far more attuned to overall
head-office bank policy than in making banking work for the benefit of his
community. It is, I believe, why your country has been a world leader in
innovativeness and small business success. And ours, unfortunately for
us, has not.)
Joe
-
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