Why is the Exchequer called that?

Why, in the UK, do we call our Finance Minister by a different name: Chancellor of the Exchequer?

The Exchequer was a rectangular board, chequered like a chess board. It measured about 10 by 5 feet, and was used, from the 12th century, to count out payments to the Treasury. The department which collected in this way became known as the Exchequer.

So now you know!

Does the U.S. government owe too much money?

What's the balance sheet of the U.S. government like, and is it vulnerable?

As of April 2008, U.S. federal, or government, debt was around $9.5 trillion ($9,500,000,000,000).

Tax revenue is about $2.5 trillion, but government spending is about $3 trillion. This means the debt is growing by around $0.5 trillion every year.

Interest payments alone cost the government around $0.5 trillion per year.

On a per-resident basis, this means: Tax income of $8,200; spend of $9,800; a loss of $1,600; cumulative debt of $31,000.

This represents debt of 3.8 times income, and a deficit of 20% of income.

On a personal level, in the U.S. and UK, this has become relatively common. But it has also caused a recent collapse in the debt market.

On a public level, the U.S. government may suffer an equivalent collapse. For the moment, though, we are all looking the other way.

Who are Fannie Mae and Freddie Mac?

The press has been full of concern at the dramatic fall in share price of Fannie Mae and Freddie Mac.

Who are they?

Fannie Mae (created 1938) is the Federal National Mortgage Association
Freddie Mac (created 1970) is the Federal Home Loan Mortgage Corporation

Between them Fannie Mae and Freddie Mac own or guarantee over half of US mortgage debt -about $6 trillion, of a total U.S. debt of about $12 trillion. (A trillion is a million million.)

The problem at the moment? The U.S. public are defaulting on their mortgages, and in a falling property market repossessions are not covering the debt. This is causing cash flow problems for Fannie Mae and Freddie Mac. The share prices are falling because investors believe they might go bust.

The U.S. government created these two organisations. Their function is to buy mortgage debt from mortgage lenders, and then either hold it, or sell it on to other institutions. They act as a mortgage factoring company.

The advantage to mortgage lenders is that the cash released enables them to go and sell still more mortgages. The advantage to the US government is the stimulation of the economy by encouraging the promotion of borrowing. The advantage to the public is that it's easier to get a mortgage.

The big disadvantage? Creating one big mortgage market makes the whole thing very vulnerable when times get hard. Imagine if we decided to have one big river instead of lots of little rivers. If that one river got clogged, all our resource would be threatened.

Global giants are efficient and strong most of the time. Yet when their ankles are tied, having no way to spread their vulnerability, giants fall more easily.

Risk-weighted assets

'Risk weighted assets' means the assets in a bank's balance sheet, but adjusted for risk.

Banks have minimum capital requirements (mostly equity) that they have to hold in order to be safe. If you just required a bank to hold capital equal to a fixed proportion of the assets in its balance sheet, then it would take no account of the different risk levels of different assets in that balance sheet.

By weighting the assets by risk level, you can ensure that a bank which holds more risky loans is required to hold more capital to keep it safe.

Sweating your assets

What does it mean to 'sweat your assets'?

It means to work assets hard, or to maximise usage for minimum spend.

For instance, I may choose to get maximum usage out of a car by sharing it between all members of the family, and running a rota system so that it is used most of the time. Or a company might fail to replace or update buildings or equipment until it is absolutely necessary.

The effect is to maximise return or turnover for minimum spend. This results in higher asset turnover (sales/assets) and ROCE, but if done too much can eventually affect quality and company morale.

What's a joint venture?

On a course the other day we were asked to clarify what a joint venture is, whether or not it takes the form of a separate company.

Think of a joint venture as a project partnership, supported by a contract to protect each independent party's pooled capital and agreed return. Generally, each party has the right of veto over strategic decisions.

A joint venture doesn't have to be a separate legal entity, but a joint venture agreement will usually be a legal document.

Insolvency? Bankruptcy? Liquidation?

Have you ever wondered what the difference is between the above terms? I got asked this today by a curious delegate. (Curious as in inquisitive. I don't mean to imply the delegate is strange. Very sensible chap.)

Think of financial collapse in three stages:

1. Being unable to pay your debts as they fall due. You are now in a state of insolvency.

2. Being officially declared insolvent by the court, resulting in all assets being given over to a trustee, and you being relieved from all debts. You are now in a state of bankruptcy.

3. Having your assets sold and turned into ready cash, which is distributed to your creditors, with the balance coming to you, the owner, if you are lucky. You have now been liquidated.

I hope this helps, Michael.

Bears and bulls

Do you know what a 'bear market' is? We need to remind ourselves, as recent falls in stock markets have prompted commentators to use the phrase more often.

The term 'bear market' is used to describe a prolonged and significant fall in general share prices. 'Bears' are traders who expect share prices to fall. The opposite term, used for a prolonged rise in share prices, is a 'bull market'. There is no standard measure, but, to be prolonged, a fall might last two months or more. Some argue that the fall should be at least 20% from a recent high.

How do we monitor overall prices in a market? Analysts calculate an average result, called an 'index'. One popular such index is the FTSE 100 share index - a number used to track the market value of the top 100 listed UK companies. ('FTSE' stands for 'Financial Times Stock Exchange'.) The index began in 1984 at the starting value of 1000.

On Friday, the FTSE 100 share index had fallen 19.6% from its high in October 2007. This gets close to the 20% fall which, according to some, would mean we are in a 'bear market'.

Pringles aren't crisps - ask a judge

Buy a packet of Pringles. You know, they're the pleasant-shaped crisps that come in a pretty cardboard tube with a plastic top. Sit down in front of the telly. Enjoy the crunching sound as you eat them one by one, then two by two, then four by four... and finally tip the tube up to sweep the final crumbs into your mouth. That felt like eating crisps, didn't it? Think again!

A UK judge today declared that Pringles are not potato crisps. His reasoning? Potato crisps are made from potato; but, in contrast, Pringles only have 42% potato content, and are not therefore made from potato. The relevance? If they were crisps, then 17.5% VAT would be chargeable on every packet sold. As they are not crisps, but general foodstuffs, they are zero rated, and VAT need not be charged to the general public. At stake, therefore, are thousands and thousands of pounds.

Oh joy! A win against the VAT authorities! I so admire a judge prepared to set Pringles alongside fruit and veg as a staple foodstuff!