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Wealth Matters: Loans From a Bank Supported by the Family Tree

May 31, 2013 by Leave a Comment

But a subset of parents, many quite wealthy, is responding not with handouts but with loans that children apply for and that require approval by parents, relatives, or even people outside the family, as they would at a bank.

These families are working to support their children’s interests without robbing them of motivation, causing rifts among their siblings or even running afoul of the Internal Revenue Service, which may wonder whether these loans are really gifts.

“My advice is to start early and small and allow it to grow,” said Warner King Babcock, chairman and chief executive of AM Private Enterprises, a registered investment adviser in New Canaan, Conn.

Mr. Babcock, a chemist by training, knows whereof he speaks. When he was in his early 20s and working for his father’s engineering and construction materials company in Greenwich, Conn., he got an idea for a type of waterproofing that would work in extreme conditions. His father backed the idea financially, and Mr. Babcock patented and began selling the coating.

The company sold its high-performance coatings to clients like zoos and nuclear power plants. But seven years into the venture, Mr. Babcock told his father that he was leaving, even though the company was doing well.

Today, he chooses his words carefully so as not to offend his siblings.

“I felt early on that I had a lot of freedom and I was empowered to grow the firm,” he said. “As time went on, I felt that there was more involvement in the key decisions, and it got to a point where that caused friction. If there was an outside board that could have acted as a buffer, that would have helped.”

That experience informed his later work as an investment adviser to large, wealthy families.

Mr. Babcock is trying to share the benefits and perils of what is often called the family bank with a wider audience. In this, he is part of a small group of advisers that sees formal lending in a family as a way to invest in ideas from younger generations, provide financing when real banks may be hesitant and teach lessons about stewardship and responsibility.

Here’s some of what families of more modest means can learn.

HOW TO DO IT RIGHT Parents hardly need to be told that their children are having trouble supporting themselves after finishing school. But a recent report from Junior Achievement and the Allstate Foundation said that the number of high school students expecting to be financially dependent on their parents into their late 20s had more than doubled in the last two years, to 25 percent from 12 percent.

According to the report, parents have also resigned themselves to offering some level of financial assistance through those years. The parents cited the poor job market and economy, and changing societal norms.

This is where loans in a family may be a way of supporting a child’s idea without making it seem like a handout.

Whether a family is making a $10,000 or a $1 million loan, the most successful lay out criteria for lending. They could say that loans will be made for business ventures, investments or a mortgage on a house, but not for living expenses or travel. They could require everyone to submit a business plan.

“If you have a family bank set up where there is a system or a process for asking the family for loans, it cuts out all the issues of people asking for money and saying you like my sister better,” said Mindy Rosenthal, president of the Institute for Private Investors, an organization that recently hosted a seminar on the Web about family banks. “All the processes and procedures cut out all this family dynamics.”

From there, the loan should include language explaining that it must be repaid and what will happen if the endeavor fails.

Mr. Babcock said he knows of one family that requires collateral before making a loan. Others, he said, require periodic updates on the business and reserve the right to offer advice or renegotiate loan terms if the business is struggling. If the loan can’t be repaid, Mr. Babcock said a family that had documented it could write it off the way a bank would.

HOW IT GOES WRONG As with anything in a family, there are many ways that lending money to relatives can end badly.

Article source: http://www.nytimes.com/2013/06/01/your-money/a-building-and-loan-built-on-the-family-tree.html?partner=rss&emc=rss

Filed Under: Your Money Tagged With: , ,

DealBook: 3 Unorthodox Ways to Solve Europe’s Debt Crisis

December 11, 2012 by Leave a Comment

IN Europe, they don’t like to talk about Plan B’s.

As the European sovereign debt crisis enters its fourth year, the region’s policy makers are sticking with a familiar playbook. Their crisis response moves in fits and starts as compromises are struck between the most powerful countries in the euro zone. Then, aid is typically granted only if the recipients adopt policies that often lead to protracted economic pain.

Some fresh initiatives have recently occurred, like the European Central Bank’s commitment in September to stop government borrowing costs from rising too far. And Europe’s leaders talk about one day forming a fiscal and political union.

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For the most part, Europe has avoided radical solutions, and there are good reasons for the piecemeal approach. Adventurous policies could backfire badly. They could prompt even more economic pain, and open even wider rifts between the countries that make up the euro zone.

But a combination of fear and competing ideals may also be preventing Europe from thinking too far outside the box. Policy makers seem to bow to three sacrosanct objectives. First, no country can drop out of the euro zone. Second, everything must be done to avoid using write-downs to reduce government indebtedness. Third, any European country receiving aid must agree to tough terms, accepting austerity and a loss of national independence in the process.

“They still seem to be favoring the ad hoc measures, unfortunately,” said Raoul Ruparel, head of economic research at Open Europe, a research group that believes the European Union needs to be more transparent and accountable. “They are still short of some sort of big leap.”

EXPRESSING SOLIDARITY Anti-austerity advocates march in Athens.Yannis Behrakis/ReutersEXPRESSING SOLIDARITY Anti-austerity advocates march in Athens.

Yet Europe may eventually need to take more drastic action.

Most of the region’s economies show few signs of producing robust growth any time soon. This means unemployment in the euro zone — already at a record 11.7 percent — will remain high. If anything, the mistrust between Europe’s northern and southern countries is more intense than it was three years ago.

What follows are three plans that aren’t bound by the policy makers’ current orthodoxy. Right now, such ideas have little chance of being adopted by European leaders. But if the region doesn’t emerge from its slump, policy makers may need some bold solutions.

1. Tackling the Debt Problem

The first plan focuses on the crisis’s root cause, sovereign debt.

In the case of Greece, Europe’s leaders realized that the country’s debt could not be sustained. So Greek bonds have been written down and restructured.

European policy makers don’t want to do that for other countries, because it might prompt sell-offs in the region’s government bond markets and hurt the banks that hold sovereign debt.

As a result, potential candidates for a debt restructuring, like Portugal and Ireland, must try to bolster their economies while being weighed down with heavy debt burdens. The disadvantage of this approach is that private investors may simply stay away from these countries, weakening their economies indefinitely.

But one type of debt restructuring could be adapted to suit Europe’s situation. It is an approach championed by Lee C. Buchheit, a lawyer at Cleary Gottlieb Steen Hamilton, a New York law firm that has advised nations on debt restructurings. He acknowledges that big write-downs of sovereign debt could be too jarring and unpopular in Europe.

Instead, he says, a stressed country’s debt could be extended. For instance, under this plan, a 10-year government bond would not need to be paid back for, say, 30 years. And its interest rates could be substantially reduced, at the same time. Uruguay got this type of deal in 2003.

Stretching out the obligations would provide a long period in which troubled countries could right themselves, without the added stress of having to finance their debt. “Extending maturities long enough, at a sufficiently low coupon, is an alternative to inflicting a principal haircut on that debt stock.” Mr. Buchheit said.

Mr. Buchheit anticipates a potential hurdle to his plan. A large share of some countries’ debt is held by official lenders, like other governments. It is rare to amend the terms of official debt.

But Mr. Buchheit says there could be an advantage to applying the extension to official debt. It could increase the likelihood of private lenders returning to a country. “If the maturity date of all official sector debt was extended by 20 years, the market would know that it could lend for up to 19 years without fear of competing with official sector credits for payment,” Mr. Buchheit said.

If Europe got ambitious it could invite a wide range of countries to do debt extensions, including Italy, Belgium and Spain. The big economic obstacle is that the extended debt would initially have to be marked down, even if there were no actual haircuts to the debt’s principal.

This would hurt the holders of the government bonds and create financial instability. But that might soon be outweighed by the greater economic confidence created by the less oppressive debt load.

2. Printing Money

The second idea asserts that the European Central Bank should have more power to stimulate countries undergoing economic and financial stress.

In September, the region’s central bank did take a major step. The central bank’s president, Mario Draghi, said the bank would do “whatever it takes” to preserve the euro. To do that, it set up a new government bond-buying program, called outright monetary transactions. Just announcing the program helped drive up the prices of Italian and Spanish sovereign debt, making it easier for their governments to borrow,

But that effect may not last. Like other types of European aid, this program requires that the recipient nations agree to a strict set of conditions, which include economic and policies that are likely to create more austerity.

Such conditions present potential problems. They deter countries from taking the central bank’s support, which leaves a cloud of uncertainty hanging over their markets. And if a country’s government does agree to the conditions, the austerity can lead to more banking sector problems and even political instability.

Some analysts say the central bank should be unilaterally allowed to support unstressed countries without attaching strings to the program. “All the countries that might use this have already done austerity,” said Paul De Grauwe, a professor of European political economy at the London School of Economics.

Countries like Germany would object strongly to loosening the terms of any such program. But in reality such a step would merely make the central bank more like the Federal Reserve. For instance, the Fed hasn’t had to wait for Congress to pass certain bills before carrying out its own bond-buying programs.

3. Redrawing Boundaries

The third plan, from Hans-Olaf Henkel, a former German business leader, is the most radical in some ways. It would create two currency zones in Europe.

Northern countries like Germany and Holland would use one currency, while nations like Spain, Italy and France would belong to another. Once it traded, the southern euro would probably be worth less than the northern euro.

In such a situation, the southern countries would have undergone a currency devaluation. That could help correct some of the imbalances skewing Europe’s economy. Devaluations were the norm in the region before the euro, and often helped, says Mr. Henkel.

When a country’s currency falls in value, it increases the competitiveness of its economy. In particular, the country finds it easier to export. While the shot in the arm from a devaluation is temporary, it can create a useful window of time in which countries can institute necessary structural reforms.

Mr. Henkel says the plan could hold back the economies of northern euro countries, because their new currency would effectively be more expensive than the current euro. “It would hurt us,” he said. “But that would be our contribution to the competitiveness of the south.” The plan also envisions countries being able to move from one currency to the other.

Most European Union officials would vehemently oppose the two-currency approach. It would probably end their vision of a unified Europe.

But Mr. Henkel says Europe is already deeply divided. He said, “With this idea, we’d at least have a divide that is recognized.”

Article source: http://dealbook.nytimes.com/2012/12/11/3-unorthodox-ways-to-solve-europes-debt-crisis/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,

Chamber Competes to Be Heard in Fiscal Debate

November 29, 2012 by Leave a Comment

But Mr. Obama’s top advisers were not budging. There would be no deal on the federal budget deficit, they told chamber executives, without higher taxes, participants said. If there were doubts about the White House’s resolve, Mr. Obama met the chamber’s chief executive afterward for an unscheduled Oval Office chat about the showdown.

For the United States Chamber of Commerce, long the leading business voice in Washington, this month’s negotiations over the nation’s debt will be a key test of whether it can retain its influence and swagger in the capital even after a string of bruising political losses.

Many business leaders are looking to the chamber as a bulwark against the White House’s push for higher taxes, but it is unclear if the century-old association has the clout it once did. Other business groups seen as more open to tax increases have become players in the negotiations, exposing rifts in the private sector.

The Chamber of Commerce, in the biggest voter mobilization effort in its history, spent tens of millions of dollars in support of pro-business candidates, usually Republicans, in the Nov. 6 elections. But the results were disastrous: out of 48 House and Senate candidates that it spent money to try to either elect or defeat, the outcome went the chamber’s way only seven times, according to data from the Center for Responsive Politics, a Washington research group that tracks political spending.

If the chamber was an 800-pound gorilla before the elections, “now they’re a wounded 500-pound gorilla,” said Cyrus Mehri, a Washington lawyer for U.S. Chamber Watch, a union-backed group that is critical of the chamber’s political practices.

“But they’re still a major force to be reckoned with,” he added.

As the White House looks to work out a deal with Congress to avert hundreds of billions of dollars in automatic budget cuts at the end of the year, Mr. Obama and his top economic advisers have been meeting through the week with business leaders to push their plan for raising taxes on the wealthiest Americans.

Mr. Obama met Wednesday with chief executives from Goldman Sachs, Coca-Cola, Yahoo and other prominent firms, and he met a day earlier with small-business representatives.

The president’s advisers also met with officials from the Campaign to Fix the Debt, a centrist group that has become influential in pushing for a combination of tax increases and spending cuts. It is led by Erskine B. Bowles, a former Clinton administration official, and Alan K. Simpson, a former Republican senator from Wyoming.

When Mr. Obama met two weeks ago with a dozen corporate leaders but did not invite the Chamber of Commerce, it was widely seen as a snub of the group over its political attacks during the presidential campaign. But the chamber got its turn Monday.

Jack Lew, the White House chief of staff, and other senior economic advisers listened as chamber executives, including Thomas J. Donohue, the group’s president, and Bruce Josten, its top lobbyist, laid out their ideas for raising significant revenue without necessarily raising taxes by expanding energy development.

“They wrote it down, but where that goes, I don’t know,” Mr. Josten said in an interview.

But Mr. Josten said that the White House advisers stressed that any debt deal would have to include increased taxes at the highest brackets and that if an agreement could not be reached, they were willing to risk the automatic spending cuts — the so-called fiscal cliff option — at the end of the year.

“They reiterated that they want the higher rates, and they’ll go over the cliff if they need to,” Mr. Josten said.

Article source: http://www.nytimes.com/2012/11/30/business/chamber-competes-to-be-heard-in-fiscal-debate.html?partner=rss&emc=rss

Filed Under: Business News Tagged With: , ,

On Eve of European Union Summit Meeting, New Rifts on Euro Emerge

December 8, 2011 by Leave a Comment

French officials promised not to leave Brussels until a “powerful” deal was reached to save the euro. But senior German officials expressed more pessimism, saying that Berlin opposed a “quick fix” agreement. Instead, they insisted on full treaty changes and disagreed with the idea of combining two bailout funds, one temporary and one permanent, to create a larger pot of money to protect Italy and Spain.

Britain said that it would ask for special protections if there were any treaty changes, raising the possibility that changes would be limited to the 17 nations of the euro zone and those who want to join, and not to all 27 members of the European Union.

Still, Wednesday was a day of some posturing and public negotiating by national officials who demanded anonymity, with different nations staking out their positions before the meeting begins in earnest late Thursday afternoon.

“It’s internal politics,” said a senior European official. “This is macho-style, old politics.”

German officials sounded the toughest, seeing this summit meeting as a chance to achieve permanent changes to the way the euro is managed, an important goal for them. The Germans want firmer debt limits and sanctions for violators written into the treaty. They prefer a treaty of all countries in the European Union, even though the changes would apply only to countries in the euro zone.

But treaty changes can take two years and could involve a referendum in Ireland and other nations, so European Union officials, wanting to move quickly, have been exploring other options. In a paper that emerged on Wednesday, the president of the European Council and of the euro zone, Herman Van Rompuy, suggested a fast-track route to a “fiscal compact” that would avoid the problems and delays of a full treaty change.

The idea laid out by Mr. Van Rompuy, who organizes the European summit meetings, would avoid a full treaty change, which could involve a convention, referendums or parliamentary ratification, but it would still achieve much of what Germany wants.

This would mean amending a protocol of the treaty; leaders would simply have to consult with the European Central Bank and the European Parliament. Under this plan, also supported by the president of the European Commission, José Manuel Barroso, leaders could ensure that countries write into their own law an obligation “to reach and maintain a balanced budget over the economic cycle.” This could be complemented with pledges of “automatic reductions in expenditures, increases in taxes or a combination of both” if the rule was broken.

Britain insisted that such an amendment would still require at least parliamentary ratification, and a senior German official, briefing reporters, decried the quick fix as “a typical Brussels bag of tricks” and a “rotten compromise.”

More fundamental changes that would assure fully automatic sanctions against budget sinners, and give European institutions the power to overrule national budgets, would require full treaty change.

The German official said he was “more pessimistic than last week about reaching an overall deal,” adding, “A lot of the protagonists still have not understood how serious the situation is.” Berlin’s idea appeared to be to increase the pressure on partners to come to terms that Germany favored.

The American Treasury secretary, Timothy F. Geithner, was building the pressure in a softer way on Wednesday. He continued his public tour of meetings with German, French and Italian leaders to underscore how important reaching a deal this week was to the Obama administration. The administration says it believes that the euro zone crisis is dragging down the global and the American economy and could cause another full-fledged banking crisis.

But one senior European official said that an answer might be a “two-phase solution,” with a quick change to the protocol followed by work on treaty change.

European officials say that a less ambitious but faster strengthening of euro zone discipline will be more credible with investors and the European Central Bank than the promise to make larger reforms that could take two years to put into place.

As one French official said Wednesday, “The E.C.B. is not going to commit suicide” and oversee the destruction of the euro currency it is charged with keeping stable.

But Austria, like Germany, also tried to play down expectations for a “quick fix” solution to the euro crisis. The summit meeting “will not meet the goal of creating a comprehensive firewall for the euro zone for the next three to five years,” Austria’s chancellor, Werner Faymann, told lawmakers in Vienna, speaking of the effort to create a large “wall of money” in bailout funds to protect vulnerable euro zone states.

What was achievable, however, he said, was a “massive increase in voluntary coordination,” including measures to encourage greater budgetary discipline and to sanction countries running excessively high deficits.

The Americans have regularly counseled using ready bailout money as a firewall in the crisis. But it has not been easy for the Europeans, as they have tried to leverage a temporary, 440-billion-euro European Financial Stability Facility upward. One French-German idea is to move forward, to 2012, the establishment of the larger, permanent 500-billion-euro European Stability Mechanism. But Berlin is rejecting the idea of running the two in parallel.

The Europeans are also talking to the International Monetary Fund, where Washington has the largest voice, about helping to enlarge the firewall with money that the European central banks could loan to the fund.

An announcement is also expected late Thursday on how European banks would comply with the tougher capital requirements.

Steven Erlanger reported from Paris, and Stephen Castle from Brussels.

Article source: http://feeds.nytimes.com/click.phdo?i=afb5f26a57393c694c8b6259a02ab0f7

Filed Under: Economy News Tagged With: , ,