In Which I Unpack a Finance-Based Atonement Parable (or Mammas Don’t Let Your Babies Grow Up to Work on Wall Street)

Understanding the Atonement is tough.[fn1] To try to understand it, theologians have come up with theories to describe the whys and hows of the Atonement, and stories to illustrate how the Atonement works.

We’ve got a handful of favorite illustrative stories in Mormonism, including bicycles and lickings. I was recently reading chapter 12 of the Gospel Principles manual, and I came across an Atonement story that I haven’t seen in a while: a parable of a debtor and a creditor. What follows are my thoughts as I reread it:[fn2] 

Note that what follows is reflective of my thought process, not any objective theological reaction to the underlying parable. And read my caveats in footnote 2.

First, that loan is structured in a really strange way. There doesn’t appear to have been a payment plan; rather, it looks like the full amount of the loan came due at some later date. I mean, there are (or, at least, prior to the financial crisis there used to be) interest-only loans, where the borrower only pays interest through the life of the loan, and then the full principal amount is due at the end. But a borrower would make regular (probably monthly) payments of interest throughout the term of the loan.

There are loans that don’t require borrowers to pay any interest during the life of the loans. They’re called (at least in my world) “original issue discount” bonds. The way they work is, the borrower gives the lender a note for $100, due in one year. The lender, then, gives the borrower $95.24. The $4.76 difference between the face about of the note and the amount the borrower gets represents the interest paid to the lender. But on original issue discount, a borrower wouldn’t make any payments during the life of the loan. So the loan described in the parable probably isn’t an original issue discount loan.

Then, of course, is the fact that there is no reason an economically rational lender would send a debtor to prison rather than renegotiating the terms of the loan.[fn3] I mean, if the lender sends the debtor to prison,[fn4] the debtor isn’t going to repay the debt. The lender will end up with nothing. If, however, the lender extends the term, reduces the interest, and/or reduces the principal, the lender won’t have to write off the investment. She may not be repaid in full—and that may not be pleasant—but she will recoup at least a portion of her investment.[fn5]

Of course, the financial crisis taught us that lenders aren’t always economically rational. Plenty of banks should have reduced the principal amount of borrowers defaulted mortgages, but for a long time, banks resisted.[fn6]

Moreover, the ultimate solution—having a third party pay off the loan—may not be cost-free to the borrower. Under the federal income tax, to the extent a lender forgives a loan, the borrower has taxable income. For example, say Andy borrowed $100 from Betty. Andy falls on hard times and is having trouble making payments, so Betty agrees to forgive the loan. Suddenly, Andy has $100 of taxable income.

And it’s the same whether Betty unilaterally forgives that amount or whether Carl comes in and makes a $100 payment to Betty on Andy’s behalf.

Of course, in the parable, it appears that the mediator takes over the loan. There aren’t nearly enough details,[fn7] but presumably the debtor will owe the mediator something. If the debtor owes the mediator $100 (but the mediator has extended the term of the loan, or reduced the interest rate), there will be no tax consequences to the borrower.

If, however, the mediator has reduced the principal amount—that is, if Andy now owes Carl only $80, rather than $100—Andy has $20 of taxable income. That is, his taxable income increases by the same amount as his debt decreases.

Such were my thoughts as I read chapter 12.

And that, ladies and gentlemen, is why you shouldn’t let your children grow up to work on Wall Street.[fn8]

—

[fn1] Brilliant insight, no?

[fn2] A couple important caveats: I don’t mean in this post to say anything substantive about the Atonement, about why it is necessary, or how it works. Lots of really smart people have tried, and have failed. Heck, the bicycles, lickings, and debtors of Mormonism all contradict each other in terms both of need and of function.

Second, I don’t mean this as a criticism of Pres. Packer, either religiously or secularly. The parable breaks down, of course, as any will, and I’m entirely sure he didn’t mean it to be the last word in understanding the Atonement.

On the secular side, the parable’s understanding of debt is odd. But keep in mind that Pres. Packer’s educational and professional background was in education, not in finance, and he delivered this parable in 1977, years before the financialization of the U.S. economy. So the fact that his understanding of lending sounds like it comes out of a combination of the New Testament and Dickens makes a lot of sense.

[fn3] Or selling the bad loan, for pennies on the dollar, to a collection agency or other distressed debt investor.

[fn4] Which, for the record, you don’t go to prison for defaulting on debt in the U.S.  Well, usually not, and not for long.

[fn5] I guess what I’m saying is, lenders aren’t generally motivated by justice or by mercy. They’re motivated by profit.

[fn6] Felix Salmon explains the economics here. He posits that part of the reason banks resisted renegotiating the terms of defaulting mortgages was because they didn’t want to admit they’d made idiotic loans, and part was an in terrorem effort to keep other homeowners from defaulting.

[fn7] I mean, wouldn’t it be awesome if Pres. Packer had told us the term, the interest rate, the security (if any), and the terms of the transfer? I’m seriously drooling just thinking about it.

[fn8] Though, technically, I worked in Midtown, not Wall Street, along with lots of other Wall Street investment bankers and attorneys. Also, for your pleasure, I present Waylon Jennings and Willie Nelson singing “Mammas Don’t Let Your Babies Grow Up to Be Cowboys.”