Sunday, July 08, 2007
The insolvency-illiterate financial journalist
“Rank” may be thought an old-fashioned word. Other than something used in the military and at vice-regal dinners, and a thing more colloquially “pulled”, aren’t we all egalitarian, or a meritocracy at least?
Not in insolvency law – nor hence in investment decisions, or well-informed ones, at least.
Rank is fundamental to insolvency law, but unlike vice-regal dinners or the military (is colonel higher than corporal or vice versa, and who cares, anyway?), it is not a system of esoteric taxonomies and/or shoulder-pads. All one needs to know is that secured creditors rank above unsecured ones, and that secured creditors also have a ranking system within their own group. Generally one’s latter ranking, i.e. compared to other secured creditors, is based on being first in time. When different creditors/lenders have the same class of security over the same property, e.g. a mortgage, ranking is unambiguous and acute between them. Should the borrower go belly-up, the holder of the original, or “first” mortgage, first gets paid in full, or as much as possible. Should there be anything then left over, the second mortgagee then gets a bite, and so on, down to unsecured creditors. But even for the second-ranked, these are usually slim pickings – the essence of rank is that one’s situation is never affected by either weight of numbers below, or by the second-ranked becoming a bit too familiar and so attempting to elide the ranks near the top. Thus, a first mortgagee does not have to even consider the existence of a second mortgagee when it comes to the timing of a mortgagee sale. In practice, and in the case of a severe downturn, a second mortgagee is often no better off than an unsecured creditor.
AFR “Investor” editor Nicole Pedersen-McKinnon looks from her byline photo to be in her mid-20s. Whether because of an indulgent boomer-parented GenY upbringing (“every child gets a prize”), or because she is too young to remember recession, she has a seeming cognitive blind-spot when it comes to understanding rank in insolvency law. Hence her bizarre description, in a column in today’s Age, of what a second mortgage is:
“What all four companies [Westpoint, Fincorp et al] have in common is that they all invested in second mortgages – mortgages over other mortgages. In other words, mortgages than were not secured by property but by, well, pieces of paper”.
Oh dear. I’m sentencing you to 80s’ boot-camp, Nicole. A few years of feel-the-width shoulder-padded decadence, followed by an abrupt stop-the-music moment in which 20 people try to sit on the one chair left in the room. Only that it’s really no contest: the first-ranked of course gets the chair, and everyone one else has to pretend that they didn’t know the game was always going to end exactly as it did .
“Rank” may be thought an old-fashioned word. Other than something used in the military and at vice-regal dinners, and a thing more colloquially “pulled”, aren’t we all egalitarian, or a meritocracy at least?
Not in insolvency law – nor hence in investment decisions, or well-informed ones, at least.
Rank is fundamental to insolvency law, but unlike vice-regal dinners or the military (is colonel higher than corporal or vice versa, and who cares, anyway?), it is not a system of esoteric taxonomies and/or shoulder-pads. All one needs to know is that secured creditors rank above unsecured ones, and that secured creditors also have a ranking system within their own group. Generally one’s latter ranking, i.e. compared to other secured creditors, is based on being first in time. When different creditors/lenders have the same class of security over the same property, e.g. a mortgage, ranking is unambiguous and acute between them. Should the borrower go belly-up, the holder of the original, or “first” mortgage, first gets paid in full, or as much as possible. Should there be anything then left over, the second mortgagee then gets a bite, and so on, down to unsecured creditors. But even for the second-ranked, these are usually slim pickings – the essence of rank is that one’s situation is never affected by either weight of numbers below, or by the second-ranked becoming a bit too familiar and so attempting to elide the ranks near the top. Thus, a first mortgagee does not have to even consider the existence of a second mortgagee when it comes to the timing of a mortgagee sale. In practice, and in the case of a severe downturn, a second mortgagee is often no better off than an unsecured creditor.
AFR “Investor” editor Nicole Pedersen-McKinnon looks from her byline photo to be in her mid-20s. Whether because of an indulgent boomer-parented GenY upbringing (“every child gets a prize”), or because she is too young to remember recession, she has a seeming cognitive blind-spot when it comes to understanding rank in insolvency law. Hence her bizarre description, in a column in today’s Age, of what a second mortgage is:
“What all four companies [Westpoint, Fincorp et al] have in common is that they all invested in second mortgages – mortgages over other mortgages. In other words, mortgages than were not secured by property but by, well, pieces of paper”.
Oh dear. I’m sentencing you to 80s’ boot-camp, Nicole. A few years of feel-the-width shoulder-padded decadence, followed by an abrupt stop-the-music moment in which 20 people try to sit on the one chair left in the room. Only that it’s really no contest: the first-ranked of course gets the chair, and everyone one else has to pretend that they didn’t know the game was always going to end exactly as it did .
