******“In an upcoming interview, Greenspan said he was aware of “sub-prime” lending practices where homebuyers got very low initial rates only to see them later jacked up, causing severe payment shock. But he said he didn’t initially realize the harm they could do.

“While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late,” he said in a CBS “60 Minutes” interview to be broadcast Sunday. “I really didn’t get it until very late in 2005 and 2006,” Greenspan said.

A meltdown in the sub-prime mortgage market has rocked Wall Street. Foreclosures and late payments have soared and lenders have gone out of business. Nervous financial institutions tightened credit standards, making it harder for even more creditworthy borrowers to get financing. This has increased chances the economy might slide into a recession.

Greenspan, who ran the central bank for more than 18 years — the second-longest serving chairman in history — left in 2006. His successor, Ben Bernanke, has had to deal with a credit and financial crisis stemming from the sub-prime mortgage mess. ****** http://www.time.com/time/nation/article/0,8599,1661820,00.html

The article gives me a sort of sense of deja-vu (or premonition?), our local banks are competing against each other to dish out ever lower interest rates to attract homeowners to take up huge loans or to refinance their existing loans. There is no doubt that the prime intention and benefits are good, however I am also of the opinion that a prolong session like that will somehow lead to abuse.Scenario 1

A family wants to go for an overseas holiday trip but got not enough of cash, so they refinance their house to get the extra cash, and moreover even after getting the extra cash, the installment for the next 3 years is much lower than the old loan. What a great deal! To top up the already sweet deal, some banks even ‘throw in’ a 42” LCD Screen TV!!!!!

The above family is a loving family with responsible parents. A holiday trip is good way to have quality time. The financial impact is that the wealth of the family has actually deteriorated. A US Disneyland trip will easily cost RM30,000 to a family with 2 kids. To refinance a house at a lower rate is a great idea. To use the refinancing to get out a chunk of cash for luxury is something else.

A family wants to move into a bigger house and one of the criteria of lending is the repayment sum should not be more than 1/3 of the household income. The low interest rate regime has allowed families to own bigger house (more expensive house) than before with same take home pay.

This is again good for the family because the members can now enjoy better living environment and have better pride of being in the ‘right’ neighborhood. Interest rates is as temperamental as mother nature or rather as human nature….. During the 1997 financial crisis, interest rates can go up to more than 10%! Some countries with not so good central bank, which experience a ‘runaway’ inflation, their central bank might have to raise the interest rates to ‘mop-up’ the excess cash in the economy. The rationale is , if prices of goods are going up it may be due to people have too much money to spend that’s why they buy stuff. So if the bank Fixed Deposit rates is very high say 15%, people will be more compelled to save money than to spend, therefore lesser demand for goods, thus price will eventually stabilized. This is of course if the central bank is a smart one like ours. Sometimes prices go up not because of demand, it is because of scarcity of the product or because the underlying raw material costs has gone up. The crude oil price now as i am typing this blog is ;flirting with USD80 per barrel!. People in Myanmar are cursing like mad. Imagine all of a sudden our petrol price is being raised 5 times the current RM1.97 per litre to RM10.00 per litre what will happen? Then again kudos to our government for doing such a wonderful job of protecting our economy so much so that we the population do not know the real danger of cheap loans. Do you know what is modern slavery ?

Car lovers are having a field time now, because the interest offered is very low compared to 10 years ago. I remember 10 years ago when I bought my first new car Proton Wira, it cost me RM56,000, paid RM9,000 deposit (including RM2,000 for getting the car immediately), RM45,000 hire purchase loan with interest of 7.5% over 5 years. The monthly installments I was paying was RM1,032.00. Now, for the same installment of RM1,032.00, hire purchase interest of 3.25% for a repayment tenor of 9 years, I can get a loan of RM86,232! This means that with my RM9,000 deposit (RM86k+RM9k = RM95K) I can now get a new Mazda 3, or Nissan Sentra for a lesser amount, or Honda City for an even lesser amount. I am not saying Proton cars are no good, I am just saying people have more choice now than before.

The financial impact is we are actually renting the car rather than buying the car when we sign up for a long repayment period, say 9 years. The resale value of the car during the first half of the loan tenor will usually be less or equal the outstanding loan amount. So if we are thinking of trading in the vehicle for a new one, be prepared to get nothing from the trade in or fork out some money to repay the shortfall between the price of the old car and the outstanding loan. I traded in my Wira after the 6th year and got it for RM40,000. A loss of RM16,000 over 6 years. Compare to today’s situation, I will be lucky if I can get back half the price of the original purchase price of the car after 5 years! (why is it so? Watch out for my future blog on whether getting a short term hire purchase is better or a long term one)

We are not certain on how long the ‘low interest rate regime” is going to continue. Our economy may be some what different from the US, nevertheless it is worth to note the danger before we get too comfortable with the idea of buying stuff using loan, keeping up with the Jones, following the trial of mega consumerism

Key-man insurance is an insurance policy paid by the company (Company = Sdn Bhd ), to cover the company in the event of losing its key-man/men. The company is the proposer and beneficiary of the insurance plan. The company has insurable interest over the key-man because if it loses the key-man, the business will be significantly affected. The key-man can be any persons employed in the business and one who gives a significant contribution to the business. The key-man can be the managing director, the general manager or any staff with specialised skills, knowledge or business network.

The Business Buy-Sell Agreement is an arrangement between the shareholders of the company, whereby if a specified event is triggered such as death of a partner, the shares of the company which belongs to the demised partner will be transferred to the other surviving partners and a sum of money predetermined in the Business Buy-Sell Agreement will be paid to the family/beneficiaries as consideration for the shares. The sum of money mentioned is usually financed through an insurance paid out. The insurance was bought by the partners on each other’s lives. The specified events are usually those covered in the life insurance policy ie. death, disability or diagnosis of critical illnesses.

The toughest part of Business Buy-Sell Agreement is looking for a basis to value the company’s shares. Since these shares are not quoted in the Stocks Exchange, there is no ready market for the shares. Ultimately the most important factor is , the price must be acceptable by all the shareholders concerned.

Eight years ago, when I first did my research on the subject of Business Buy Sell Agreement, I was being informed that it is a good idea to use the company’s funds to purchase the insurance because it can be claimed as an expense for tax purposes. This will reduce the tax payable of the company. However, this is not such a great idea after all. Why ?

Section 67 of the Companies Act 1967 concerns dealing by a company in its own shares. Section 67(1) states that a company cannot give money to anyone to purchase the company’s own shares This means that, if the company that is the one paying for the premium, the insurance pay out should belong to the company. Effectively it is a key-man policy. The act of taking out money from the company for the purpose of buying the shares is an offence.

The only amount allowable for tax purposes is the insurance expense portion within the premium. The portion with savings/investment element will be added back and taxed as part of the profit of the company. How do we then to determine the portion within the life insurance premium that qualifies for tax deduction? It is indeed very difficult. Thus, a term policy may be considered as the most suitable type of plan for the purpose of key-man insurance, as its premium may be fully deductible for tax purposes.

Please refer to the IRD Public Ruling relating to the deductibility of Keyman insurance premium and the taxability of the proceeds from the Keyman insurance policy.  http://www.hasil.org.my/english/pdf/ruling(2)2003.pdf 

Under the Business Buy-Sell Agreement, the premiums are paid by the shareholders. Usually in the following methods :

The types of policies which are usually used for Business Buy-Sell Agreement are term and wholelife/Investment linked policies. If term policies are being used, there will not be any ‘cash value’ in the policies at the end of the pre-determined term cover period. If wholelife/investment linked policies are being used, then the shareholders can expect some cash/investment value when they surrender the policies in the future.

I hope I have manage to clear some confusion over the 2 different arrangements and their legal and tax pitfalls.

For reference only : Companies Act 1965

Section 67. Dealing by a company in its own shares, etc.