What money says: the adventure of the dancing dollars
“You get all the nifty trips, Holmes, while I’m stuck here in
“Holmes,” said Watson, “while you were away at your wealthy benefactor’s secluded Lake Como villa, convening with world’s other great housing finance experts, I have been pondering your various expositions of the differences among debt (hard and soft) and equity (hard and soft), and it occurs to me that, as you have often spoken of the forensic tales told by the capital stack, so too is not only the credit decision different, so are the resulting business relationships formed. It is almost as if the money itself speaks to the two parties.”
“When money talks, people listen.”
“Well said, Watson.” Holmes looked up from the quarterly report of the Moriarty and Milverton urban redevelopment fund, in which he had invested a small sum. “Here I am, having placed capital with these two gentlemen, and I find that not only are my attitudes toward them changed, so too are theirs toward the system in which they now operate.” He shook his head. “Capital civilizes. Mycroft would chuckle at my naivete.”
“Then you agree?” asked Watson, betraying his eagerness to have his insight acknowledged. “Why, just the other day I was reading a mortgage deed that had been drawn up on a property. The number of representations and warranties the borrower is called upon to make! The pledges of future commitments! The threats and blandishments. It is enough to make one want never to borrow.”
“I would be in default already,” murmured Watson, reading the fine print.
“Very well then,” said Holmes, “let us consider, if money instruments could speak their subconscious, what might they say?”
“‘Subconscious?’ Watson asked.
Holmes waved his hand negligently. “A part of the brain to be discovered in a decade or so, and then to be used to justify the most outrageous behaviors imaginable. But now, to the purpose.”
“Consider debt. I lend you money, which you promise to repay, in regular installments. Everything about the transaction breathes distrust. In fact, while I personally am no romantic” — Watson broke out in a fit of coughing — “I rather imagine that the faces on bank notes, as they are being passed over by a loan officer, speak words like these.”
“You have violated the following four representations in your loan agreement.”
As Watson read, he felt himself grinning; he was smiling by the time he finished this.
“I quite take your point. It is a relationship premised upon mistrust. Few moments give a person more pleasure than the day he sends in that last payment, and can tear up the mortgage. Even the word ‘indenture’ reminds us of our fiscal servitude. But do not all capital relationships imply a similar dependency and superiority? “
Holmes waved an aquiline hand. “Equity, my dear chap, has a much more egalitarian approach.” He gestured, and glowing pixels floated before Watson’s eyes:
“No dividends this year, Mr. Holmes.”
“In so anthropomorphizing equity,” added Holmes, “I am focusing on forms such as common stock (in a shares context) or normal partnership ownership (in a real estate setting), where the return is truly subordinated to all creditors, and where there is no structured preferred return or guaranteed distribution. Hybrids such as convertible preferred equity or subordinated debt live in the open space between pure debt and pure equity, and deserve their own discussion.”
Watson realized that he would soon be in for another talking-to.
“The forms you have described so far are purely capital exchanges — transactions in which the both capital provider and capital consumer expect the latter to return money to the former. But we also have ongoing subsidy pledges.”
“Yes, we do, and their connotations are the most debilitating.”
Subsidy. “You can’t support yourself so I have to. I shall periodically dole out to you what I think you need. Should your fortunes improve, by means-testing I shall scale back my giving; alternatively, if things go badly for you, I may give you more — should I be so inclined. Along the way, I believe it only appropriate that you be grateful, and say thank you.”
“I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of the very freedom that I provide, and then questions the manner in which I provide it. I would rather you just said thank you, and went on your way.”
“I can see the challenges of subsidy-oriented programs, “Watson said. “Examples abound of the perverse incentives and dependency consequences of subsidy programs.”
“Please don’t change my income eligibility, Mr. Holmes.”
“One might even call it a culture of subsidy dependency, that can be broken only by forcible change. Yet is not such a dependency inherent in any gift or grant, such as those provided by foundations, worthy societies, and others. Allowing us your fancy, what does grant say?”
“I hesitate,” Holmes replied, “if only because some of
I’ve got what you want, and don’t I know it.
“Have you examined early Renaissance triptychs? The flattery reflected upon donors?”
We’re sober, Christian, and God-fearing
“Not all are such. After all, charity is our duty of faith, and many grant-makers offer funding without obligations of any kind, to liberate the recipient to pursue activities of social value beyond their economic proposition, such as that insurance fellow’s American program.”
The MacArthur Fellows Program awards unrestricted fellowships to talented individuals who have shown extraordinary originality and dedication in their creative pursuits and a marked capacity for self-direction. There are three criteria for selection of Fellows: (1) exceptional creativity, (2) promise for important future advances based on a track record of significant accomplishment, and (3) potential for the fellowship to facilitate subsequent creative work.
Holmes shrugged. “Doubtless many have not only the best of motives but also the best of consequences. Yet it takes great care to prevent the dependency dynamic from torquing relations, for ‘money is an effective winding-sheet.’
“Riches, if I may inflict another of my aphorisms upon you, may not make you friends but they greatly increase the class and variety of your enemies.”
“Curiously, there is entirely different way of examining essentially the same transaction, one more conducive to the amour propre of large corporations, and that is to call the grant an incentive.”
“In affordable housing, incentives abound. Both soft debt and particularly soft equity are incentives structured with particular purposes. In terms of the financial relationship, incentive and grant are identical.”
“Might one say,” Watson asked puckishly, “that an incentive is merely a grant to a person who has options?”
“One might indeed.”
“He who pays the fiddler calls the tune.”
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