When Should Money Come With Strings?

With the word "bailout" continuing to dominate the news these days, it's gotten me thinking about money and what should happen when it's moved around in a crisis. The U.S. government is in the midst of a painful stretch during which hundreds of billions, or more likely trillions, of dollars will be given to American companies in the automobile manufacturing and financial sectors, among others. After the Big 3 automakers arrived for their first meeting with Congress via their corporate jets late last year, we quickly saw the kind of backlash that can arise if someone asking for a handout is seen to be living lavishly while doing so. More recently, Wells Fargo was castigated in the press for going ahead with a "corporate retreat" that was reportedly going to cost big bucks, just weeks after receiving billions in bailout funds. Eventually, the resort trip was canceled, although not without rancor being expressed by the company's CEO, in the form of a full page newspaper ad taken out by WF. Now the leaders of the 8 big banks have been called to Washington in order to be grilled by Congress as to their utilization of the bailout funds, past and future. (Presumably they won't get their by private jets, if they have any brain cells still functioning in their heads.)

So, in situations like that, should the money always come with strings attached?

Vicki and I extended a fairly large personal loan to a friend of ours who was in dire financial straits, once upon a time. We insisted that it be interest-free, because we wanted to give him as much chance as possible to climb out of the hole, short of outright charity. But the only condition that we put on the loan was that he pay back at least 1% of the principle every month, which meant that he'd repay it in 8 1/3 years (or less). Despite some further travails in his life, he made good on the reimbursement, and we eventually got all of our money back. Along the way, though, I had occasion to wonder if we should have put more strings into the deal (and I still don't know the right answer... this is all just rumination).

For example, not long after lending the money, the friend happened to mention that he was still taking part in his twice-weekly poker games with "the guys." He went on to remark that although he would win the pot every once in a while, the more typical result was that he'd come home "about $50 down." I couldn't help doing the math in my head, and realizing that he was spending more on poker every month than he was on repaying Vicki and I for our kindness. Now, I didn't say anything about it at the time (or at any point since), but I still wonder if I should have. After all, we had agreed to the loan under the (apparently mistaken) assumption that the friend had already done everything that he could to get his finances in order, making sacrifices wherever possible. To my way of thinking - admittedly, as someone who doesn't gamble! - the inclusion of a $400/month indulgence, in the name of entertainment, seemed fairly excessive for a person who claimed to be in dire straits. Put another way: long before I'd ever ask any friend of mine for a loan, I'd have slashed every conceivable expense from my life that didn't come under the heading of "paying the bills." But should I really have had any say in how he spent his money, just because we'd lent him some of ours?

The older I get, the more I lean toward believing that money in situations like what the U.S. government is facing, or even what Vicki and I experienced, probably should have more strings attached. In each case, they're somewhat unconventional. I don't think that a bank, loaning someone money in order to start up a business, for example, should dictate how that business will be run. In that sort of scenario, of course, there's usually collateral involved, in which case the lender has some recourse to follow in order to reduce the damage in the case of a default. When there isn't collateral to fall back on, then maybe the alternative should be strings. I can see several advantages to that approach, over the "carte blanche" approach:

• the two parties involved can arrive at a better shared understanding of what's expected in exchange for the money
• the person receiving the money will be more likely to appreciate that the "bailout" isn't actually a "handout"
• the person offering the funds can feel more confident that the money will be used wisely

In the event that one or more of those strings aren't agreeable to the recipient, then it's probably better that the "deal" fall through before ever being consummated, isn't it? And since situations like this pre-suppose that the recipient is motivated to want the help, chances are better than average that they'll come around in the end.