Archive for the ‘Small Business Lending ---NOT!!!!!’ Category

Anonymous Banker : Bank of America and Chase commit to increase lending to Small Business through unsafe and unsound, deceptive and unfair credit card practices

Wednesday, December 16th, 2009

As you all know, I’ve been an ongoing supporter of the need for banks to step up to the plate and lend to Small Business.   Credit availability to the small business sector is a necessary component to our nation’s economic recovery. 

The History of the Small Business Credit Line

But I am also a banker, and as such, recognize the need for safety and soundness in lending.  I blasted the industry over the last decade when they foolishly disregarded prudent lending practices, leaving the door open for  business “liar loans”.  During that time, a business owner could obtain a small business revolving credit line for up to $100,000 by completing a one page application.  They didn’t have to provide any verification of personal income or business revenue.  They didn’t have to substantiate a profit or the ability to repay the debt.  The loan commitment was based almost entirely on the credit score of the individual owner/guarantor.  In that era, if you had a pulse and a credit score of 700, you could go into any big bank and get a loan for up to $100,000.   Well, okay, there was  one other criteria:  the loan amount was typically limited to 25% of the businesses STATED revenue.  Everyone knew that if you STATED that you had $400,000 in business revenue, you could qualify for a $100,000 business credit line.

Additionally, the banking industry abandoned all forms of public filings on these credit applications.  What does that mean?  Well, first, because the loan was “to the business entity”, the line of credit did not appear on the individual owner/guarantor’s  personal credit report.  The bank also didn’t file a UCC filing on the business assets – the cheapest and easiest way to let other lenders know that one bank already has a loan out to a potential  business borrower.  So the line of credit became invisible to other potential lenders.

The result of these imprudent lending practices was that the business owner could go from bank to bank and accumulate credit lines.  Banks had no way of knowing if that Small Business was applying for their first line of credit or their third, fourth or fifth  line of credit.

These Small Business loans were rarely, if ever,  sold through the securitization process.  That meant that the entire credit risk was held on the books of the bank.  When the economy began to crash and burn, so did the “liar loan” portfolios.  Inside the industry, bankers scrambled   to understand exactly how much exposure they had in this market. 

Throwing the baby out with the bathwater:  Banks withdraw from the Small Business Lending Market

In response to the economic crisis, the very first thing banks did was limit business revolving credit lines to Small Businesses to 15% of gross revenue.  And thankfully, banks finally began to apply some level of credit underwriting to loan requests up to $100,000, requiring borrowers to submit tax returns to support the information they provided on the application. 

At the same time, banks assumed that every loan they had on their books was a “liar loan”.  So they systematically cancelled these credit lines to small businesses across our nation,  stripping the businesses of working capital for salaries, inventory, rent and receivables.  These businesses received no prior notice.  The banks simply froze the credit line and sent the customer a letter, after the fact.  

The banks did make one small concession to their small business borrower.  They allowed them to apply to have their lines reinstated.   These requests for reinstatement were subject to the “new” credit criteria.  So in a year of often declining revenues, the banks applied their new guideline, limiting the borrowing to 15% of gross revenue.  Many viable businesses no longer qualified under the stricter criteria and still found themselves without a line of credit. 

At present, viable businesses have lost their access to working capital and  banks simply don’t want to grant business working capital lines and retain the risk.

Did bankers learn their lesson?  I think not!

You’d  think that the banks would have learned a lesson on the importance of income verification from this.  Unfortunately, they have not.  The banks are promising a new round of lending to Small Business, and they will meet this obligation through  Small Business Credit Cards. 

Want a credit card with a line up to $50,000?   Check out Bank of America or Chase Bank.  Here’s how their process works:

  1. You will be asked to STATE your  “household income”.  Tell them whatever you want.  They won’t even ask for a tax return.
  2. Business Revenue:  Banks don’t ask and they don’t care.  If they do ask, they won’t verify it.  So feel free to lie.
  3. Credit reporting?  Sure, the bank will pull your credit report to get your credit score.  But then, just like the old days, the line will disappear from the radar screen.  At Chase Bank, it appears that management encourages their business bankers to sell their Small Business Credit cards by advising the business owner of the benefits afforded to them when their new credit card is  NOT  reported on their personal credit report.  The invisible business loan all over again. Shame on them!
  4. If you have a good credit score and a personal card from Bank of America, give them a call.  Perhaps they will offer you the same deal they offered me. When I called customer service,  The BofA representative offered to convert my personal credit card to a business credit card because I was such a valued customer!  When I assured her that I didn’t own a business, she insisted that I didn’t need one to get a business credit card.  Perhaps our regulators would like to monitor the prevalence of this practice throughout the industry and prohibit the banks from circumventing the spirit and intent of the Credit Card Act.

The Question is….  WHY are banks doing this?   Greed!  (Of course)

Why would banks continue to lend without regard to any of the time-honored traditions of safety and soundness.  First, unlike  Revolving Small Business Credit lines,  banks DO sell-off  credit card exposure through securitization.   The bankers, together with Wall Street, devised a way to reap the profits  while, at the same time, absolving themselves of any losses.  Securitization rules, in their current form, empower and even encourage banks to violate all prudent lending practices.

Despite warnings released in the OCC’s Survey of Credit Underwriting Practices 2009, stating:

A key lesson learned from the financial market disruption is the need for bankers to apply sound, consistent underwriting standards regardless of whether a loan is originated with the intent to hold or sell. The OCC reminds bankers that underwriting standards should not be compromised by competitive pressures or the assumption that the loan will be sold to third parties.

banks continue to apply lower credit standards to forms of credit they will sell off in the market than they do to credit they will retain on their books.  Just compare the banks requirements for a $50,000 Business Credit Card to a $50,000 small business revolving line of credit.  The first fails to verify ANY financial information and is sold.  The second verifies financial information and the risk is held by the bank. 

Business Credit Cards are a profitable and huge market for big-banks.  Here are a few statistics from Creditcard.com:

  • In 2008, JPMorgan Chase was the largest issuer of small business credit cards with $34.5 billion in total card volume. Bank of America is second with $26.31 billion and Capital One is third with $20.7 billion. (Source: Nilson Report)
  • Credit cards are now the most common source of financing for America’s small-business owners. (Source: National Small Business Association survey, 2008)
  • 44 percent of small-business owners identified credit cards as a source of financing that their company had used in the previous 12 months —- more than any other source of financing, including business earnings. In 1993, only 16 percent of small-businesses owners identified credit cards as a source of funding they had used in the preceding 12 months. (Source: National Small Business Association survey, 2008)

Congress Empowers Bankers to be greedy and deceptive to Small Business

Our Congressional leaders failed to include Small Business Credit Cards in the new protective laws provided under the Credit Card Act of 2009.   Do our government leaders actually believe that it is okay for banks to practice deceptive and unfair lending against Small Businesses, but not consumers? 

Many of the provisions of this Act do not go into effect until 2010 (giving the banks plenty of time to jack up everyone’s credit card rates to almost 30%).   Buyer Beware!  Small Business owners need to know that Small Business Credit cards are not protected from deceptive and unfair credit card banking practices, such as:

  • Interest Rate Hikes – any time for any reason
  • Universal Default
  • How banks apply your payments - Lowest Interest Balances Paid First
  • Limits on over-limit fees

I suspect, that absent a change in regulation, the following disclosure from Chase Bank’s new INK  Small Business Credit Card will remain the same long after the provisions of the Credit Card Act go into effect. Perhaps the disclosure should be called “Chase Bank’s transparent disclosure of deceptive and unfair credit card practices, rather than:

Pricing and Terms –Rate, Fee and other Cost Information

  1. You authorize us to allocate your payments and credits in a way that is most favorable to or convenient for us. For example, you authorize us to apply your payments and credits to balances with lower APRs (such as promotional APRs) before balances with higher APRs.
  2. Claims and disputes are subject to arbitration.
  3. As described in the Business Card Agreement, we reserve the right to change the terms of your account (including the APRs) at any time, for any reason, in addition to APR increases that may occur for failure to comply with the terms of your account.  (emphasis in original)

Conclusion:

Our government leaders and our regulators failed to protect this country from unsafe and unsound lending practices, which brought our economy to the brink of collapse.  As they develop their new-found focus on Small Business lending,  they need to ensure that credit, in every form, adheres to the principles of safety and soundness and of honesty and integrity throughout our financial system.  These principles must be adhered to by BOTH the borrowers and the banks.  And sadly, perhaps neither can be trusted to simply “do the right thing”.

Yes, we certainly do need to make loans to the small business community.  I feel their pain.  But, America, as a world leader,  needs to set an example and do it right and do it NOW.  The securitization market isn’t going to magically improve because our tax dollars temporarily guarantee the risk to investors (TALF).  And without a strong securitization market, credit in this country will remain frozen.  Lending will only improve when we implement strict and meaningful regulations that govern the safety and soundness in our lending system for all forms of credit.  The ultimate investors in these loans must feel secure in the likelihood that these loans will be repaid.  It’s an issue of confidence.  Banks and Wall Street have a long way to go in winning back the trust of the public.  I don’t think they can get there on their own.  I think we need to bring them there  (and they’ll be kicking and screaming all the way). 

For your reading pleasure:

National Small Business Administration Survey 2008

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Anonymous Banker: The Worst is Yet to Come. An estimated $1 Trillion in New and Legacy CMBS TALF funds to bailout the financial industry

Sunday, December 6th, 2009

I’m a small business advocate.  Always have been, always will be.  It colors my thought process and separates me from our leaders who  believe that this nation’s economic recovery rests in the hands of big business, big banks and Wall Street.

Our leaders publicly  pronounce  the importance of small business.  They publicly sell many of their economic recovery plans under the guise of supporting small business.  The reality is that many of their plans, and in particular the New and Legacy CMBS TALF program, have absolutely nothing to do with supporting  small business recovery.  It is all about recapitalizing the banks at the expense of the taxpayers for generations to come.  It is all about profit distribution at the highest level of the food chain …. and I’m sorry to say, small business doesn’t fall in that category.  The $50 Billion and soon to be $1 Trillion dollar TALF program, including both new and legacy CMBS, is a prime example of  taxpayer sponsored programs touted to be in support of small business.  But it IS NOT!!!

The Rhetoric

In March 2009, the FRBNY explained why they were establishing the TALF program

The ABS markets historically have funded a substantial share of consumer credit and U.S. Small Business Administration (SBA)-guaranteed small business loans.  Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity.  The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads.

 In April 2009, Ben Bernanke wrote a letter to the Congressional Oversight Panel stating:

The Term Asset-Backed Securities Loan Facility (TALF) is a funding facility through which the Federal Reserve Bank of New York extends three-year loans collateralized by certain types of ABS that are, in turn, backed by loans to consumers and small businesses. The facility is designed to help market participants meet the credit needs of households and small businesses by supporting the issuance of those ABS.

Also in April 2009, Thomas Baxter, General Council to the FRBNY stated in a letter to the Special Inspector General for the Troubled Asset Relief Program that “We remain committed to advance the policy purpose of the TALF — to make credit more readily available to U.S. consumers and businesses, a critical cornerstone for the recovery of the U.S. economy.”

In October 2009, Sheila Bair, Chairman of the Federal Deposit Insurance Corporation stated:

The FDIC has been vocal in its support of bank lending to small businesses in a variety of industry forums and in the interagency statement on making loans to creditworthy borrowers that was issued last November. (2008)  I would like to emphasize that the FDIC wants banks to make prudent small business loans as they are an engine of growth in our economy and can help to create jobs at this critical juncture.

And as recently as October 2009, President Obama  gave a presentation    describing his commitment to Small Business and outlining his plans to improve lending to the Small Business Sector.

“Over the past decade and a half, America’s small businesses have created 65 percent of all new jobs in the country.  More than half of all Americans, working in the private sector, are either employed by a small business or own one.  These companies are the engine of job growth in America.  They fuel our prosperity and that’s why they have to be at the forefront of our recovery.”

The “Small Business Mantra” is heard from every level within our government.  But from where I sit, it is all just rhetoric.  And so I challenge them, in these writings, to put meaningful programs in place.  Most recently, I challenged the fact that TALF had not provided any financing for newly issued CMBS but had only been used to finance existing CMBS. 

At the time of that writing , I foolishly believed that  CMBS TALF funds would be used to encourage banks to lend to small businesses purchasing an existing piece of commercial property or building a new piece of commercial property or perhaps refinancing a current commercial mortgage into a lower rate.  I must have been in la-la land to even have imagined such a thing. 

The First New TALF CMBS Deal -  DDR 1 Depositor LLC Trust 2009

On November 27, 2009,  the Federal Reserve Bank of New York through the CMBS TALF program made the first $72 Million loan collateralized by a new CMBS securitization.    Here is how they are using our tax dollars (and its is not in support of small business!).   Developers Diversified Realty Corp  is a REIT that owns shopping malls across the United States.  As a group, these properties already   carried substantial loans. Goldman Sachs Mortgage Company is reported to have refinanced these 28 shopping malls  with a loan of $400 Million dollars. 

It was reported   that Developers Diversified Realty Corp.  used the proceeds of this  $400 million, five-year loan to pay down debt and reduce balances on revolving credit facilities.

The blended interest rate on the loan is 4.2 percent.

The company has repaid more than $270 million of mortgage debt with a weighted average duration of 1.2 years and an interest rate of 6.2 percent, the real estate investment trust said.

This $400 Million dollar package of  SHOPPING MALL loans  was then transferred into a securitization (Commercial Mortgage Backed Security)  called DDR I Depositor LLC Trust 2009.    The Federal Reserve Bank of New York then used this pool of shopping mall loans  as collateral to a $78 Million dollar loan to the Investment Bank within Goldman Sachs.  The lender, Goldman Sachs Mortage Company received the $400 Million dollars back from a combination of the loan proceeds from the Federal Reserve Bank of New York and the sale of the rest of the Commercial Mortgage Backed Security (CMBS) to other investors.    In reality, this transaction simply swapped old debt for new debt, and one set of investors for another set of investors …… with the Taxpayers having invested $78 Million dollars.  

Where exactly in this scenario do you see a benefit to small business?  There isn’t any.

What we need are innovative ideas and meaningful programs  in support of small business

I recently read an article entitled:  Learn the Five Secrets of Innovation in which Hal Gregersen told CNN, “What the innovators have in common is that they can put together ideas and information in unique combinations that nobody else has quite put together before.”

It is time for our government leaders to show some innovation in their thinking and in the programs they support.   Everyone, at all levels of government and within the financial industry,  recognizes that Commercial Real Estate  will create the next round of substantial losses for the banks and Wall Street Financial Companies that have been deemed too big to fail  and  for  other institutional investors and REITs.  We cannot allow the TALF program to become just another bailout for the $3 Trillion dollar Commercial Real Estate bubble that is about to implode.

In June 2009, William Dudly, the President and CEO of the FRBNY stated that:

“One of the origins of this crisis was the poor lending standards and lax risk controls that led to significant losses among many of the firms that dominate the financial industry. As the magnitude and widespread nature of these problems became evident in the early part of 2007, there was an abrupt loss of confidence and a sharp and sustained increase in risk aversion among investors. Liquidity in short-term funding markets seized up as concerns over the viability of many bank and non-bank financial institutions increased.

After all, in recent years, the CMBS market has satisfied about 40% of the credit needs of the commercial mortgage sector. If this market is closed, then the refinancing of maturing mortgages will be exceedingly difficult and this will exacerbate the drop in commercial real estate prices, loan defaults and the pressure on bank capital.

I am confident that we will continue to build on our initial success, reopening credit channels to consumers and businesses.”

Well, Mr. Dudley, I am a taxpayers and therefore, through TALF, an investor in these new and legacy CMBS.   I have absolutely no confidence in the program that has been laid out.  I believe that this economy will only recover through  ongoing support of credit programs to consumers and the Small Business Community.  We need programs  that adhere to the many guidelines set forth to ensure safety and soundness in lending.  This is my percolate-up theory of economics as compared to your current trickle-down theory.  

Try some these  ideas on for size.  I’m sure you have some highly paid thinkers in your group that can tweak these ideas into effective programs.

1.  If you are going to use the TALF program to REFINANCE malls, then tag on conditions that favor small business.  Require the owners of the property (the REIT’s for example) to pass some of  savings from the reduction in the loan’s interest rate on to their Small Business tenants.  These small business tenants should  qualify based on revenue size or store size  and perhaps would have to document a reduction in revenue to receive the rent reduction.  In the Developers Diversified refinace deal there was a 2% interest rate reduction on a $400 Million dollar loan which translates into a savings to the REIT of  $8 Million dollars a year.  Even if that savings was shared by half,  the  small business tenants of these 28 malls would benefit from a combined rent reduction of  $4 Million dollars a year.  

In this manner, everyone has a chance to recover.  I have interviewed countless small business owners that rent properties in malls and I’ve recommended that they ask their landlords to grant a rent concession. Big malls always answer the same:   No way!   And yet they often write into their lease agreements that the small business tenant has to pay an increase in rent if their sales exceed a certain dollar size (for example $1 Million).  If the REITs want to share in increased earnings during prosperous years, then they should also have to share the cost savings benefits we, the taxpayers, are affording to them through the CMBS TALF program. 

I have also noticed that many of the smaller strip mall operators are making these concessions.  Where are we on this?  Is our government only capable of designing programs that support  the big boys by allowing them to reap all the cost benefits, but at the expense of small business and the taxpayer? 

2.  I understand that one of the tax requirements of a REIT is that they must pass on 90% of their income to their investors.  This rule does not encourage REITs to reserve for a rainy day and set aside capital to weather future economic storms.  Our government regulating agencies, the IRS and the SEC for example, must  work in concert to prevent a recurrence of this financial crisis.  All parties with a vested interest in the transaction must be prepared to absorb their own losses without benefit of bailout through our tax dollars.  Requiring 90% profit distribution is simply setting us all up for failure. 

3.   Set aside a portion of the TALF dollars specifically to fund newly issued CMBS comprised of commercial real estate loans under $3 Million dollars currently held on the books of  community banks across America.    Let all the community banks participate in a securitization pool and lay off their best small business commercial real estate loans into that pool.   As a group, they will share in the losses.  But since the FRBNY is lending on a non-recourse basis, the losses are limited to the “haircut”, and each bank will know exactly how much future exposure they have to losses from their investment in this pool.  In this way, the community banks will be able to participate in the recapitalization currently only afforded to the big greedy banks and Wall Street firms.  This process should  reduce the number of community bank failures and make Sheila Bair a very happy woman indeed.

When the loans are taken off the balance sheet of the community banks through this mechanism, these banks will enjoy a financial benefit.  The value of this benefit must be passed on to the borrowers through a reduction in their interest rates or at the very least shared between the community bank lender and the small business borrower.   The lower rate will translate into lower default rates and the savings experienced by the small business owner could potentially mean more jobs and lower unemployment.  All good things for our economic recovery. 

4.  The big banks, those deemed too big to fail, are not meeting their fundamental obligation to lend during this economic crisis.  And yet, I see them raising capital and paying back the government TARP loans.  I’m glad to have the funds back in our coffers.  But these same big banks are also recapitalizing on the backs of the consumer and small business owners as evidenced by the spread on rates they are paying the depositors and the usurous rates they are charging their borrowers.  In particular, I speak of the systematic rate increases applied across the industry to credit card holders.  

These are the same banks that were saved from insolvency a year ago when our tax dollars bailed out  FANNIE MAE and FREDDIE MAC.    Afterall, the financial institutions carried and are still carrying billions, perhaps trillions,  in toxic loans disguised as government guaranteed MBS’s in their capital accounts.  Yet, these “too big to fail” financial institutions continue to pay increasing dividends to their shareholders instead of using these funds to recapitalize and prepare for the next round of losses.  And there will be a next round of losses  from the commercial real estate bubble that is about to burst. 

Our government leaders know who these banks are or they would not be making such a great effort to bail them out through the TALF program.  Our government leaders need to grow a set of balls and initiate legislation that curtails  dividend payments.  These financial companies and banks must accumulate additional capital through a dividend reduction program.   The reduction in dividend payments to shareholders should also help fund some meaningful modifications of the consumer mortgages they still hold on their books.  These same banks should not be allowed to finance mortgage servicing requirements through TALF.

TALF is not about Small Business

It’s time to examine the TALF program from a different perspective because the direction it is taking today is not working for me and my fellow taxpayers.  The FRBNY, to date,  has financed $53 Billion dollars worth of ABS and has committed  over $1 Trillion dollars in support through this program.  To date, over $22 Billion has been used to divest the big banks of toxic credit card assets (43%), toxic auto loans of over $10 Billion dollars (20%), toxic commercial real estate loans of over $7 Billion dollars (14%) and a mere $1.6 Billion dollars in SBA loans (3%).  

Additionally,  our government leaders have seen fit to extend the TALF program for newly issued (which simply means refinanced) CMBS to June 30, 2010 but have only extended TALF with respect to Small Business Loans to March 31, 2010.   This is reflective of their true lack of commitment to the small business sector.  While they all talk-the-talk, their programs clearly prove that they do not understand the tremendous  contribution the small business sector could make to our economic recovery.   

How can our leaders expect us to believe, based on these results, that TALF truly has,  as its mission statement, the goal to:  

Help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by auto loans, student loans, credit card loans, equipment loans, floorplan loans, insurance premium finance loans, loans guaranteed by the Small Business Administration, residential mortgage servicing advances or commercial mortgage loans.

TALF is a financial industry bailout program through and through.    As Mr. Dudley so eloquently stated:  “One of the origins of this crisis was the poor lending standards and lax risk controls that led to significant losses amoung many of the firms that dominate the financial industry.”   While the recapitalization of the banking and financial sector IS a vital component of this nation’s economic recovery, it is time that our leaders ensure that government programs, sponsored by our tax dollars,  provide equal benefit to the consumer and small business sector.  Without this, there is no hope of recovery.

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Anonymous Banker: TALF’s Legacy CMBS program is an abuse of our taxdollars

Saturday, November 7th, 2009

You know that feeling you get when you eat ice cream and it gives you that pain in the side of your head?  Try making sense out of the government program:  TALF – Legacy CMBS and you’ll get the same pain: brain-freeze.

I understand the need to jump-start the securitization markets.  That process is vital to ensuring that banks meet their fundamental obligation to support the credit needs of individuals and businesses, which in turn is vital to our economic recovery. 

However, the Legacy CMBS program has absolutely nothing to do with helping market participants meet the credit needs of households and small business.  I’ve looked at this program from several different angles.  I’ve spoken to folks “in the know” about the processes and procedures in the CMBS market.  I’ve learned a lot and I admit, I still don’t understand it all.  But of one thing I’m certain:  it ain’t helping to get the banks to lend to the small business community.

My question, and the basis for this writing, is to figure out how the Legacy CMBS program meets the fundamental goal of TALF.  It begs to be asked, and answered,  in light of the fact that there have been ZERO newly issued CMBS processed through the TALF, while there have been over $6 Billion in Legacy CMBS processed.   

Let’s start with the easy stuff:  The initial premise of WHY the TALF program was created in the words of the Federal Reserve

The Federal Reserve created the Term Asset-Backed Securities Loan Facility (TALF), to help market participants meet the credit needs of households and small businesses by supporting the issuance of asset-backed securities (ABS) collateralized by auto loans, student loans, credit card loans, equipment loans, floorplan loans, insurance premium finance loans, loans guaranteed by the Small Business Administration, residential mortgage servicing advances or commercial mortgage loans.

The premise makes sense.  Years ago, banks held loans on their books. They retained the credit risk and therefore were diligent in applying safe and sound lending practices to all the forms of credit described above.    As the need for more credit expanded through our society, the banking industry’s lending functions were limited by the amount of capital they carried.  The securitization process was born.  Banks made the loans, bundled them together and sold them off to Wall Street.  They got their money back (and a nice profit to boot) and began the process anew.  Credit flowed. 

Wall Street, in turn,  purchased these pools of loans (commercial mortgages, residential mortgages, credit cards, auto loans, SBA loans, student loans, etc),  divided them up into segments called tranches that had different ratings:  investment grade and non-investment grade.  Each of these tranches were converted into what the layperson might know as a bond issue, which is really the same as an “asset backed security”.  The bonds were then sold in large and small pieces to lots of different investors:  some individuals, mutual funds, banks, pension plans and other institutional investors. Through this step,  the funds returned back into the hands of the Wall Street firm,  who, in turn,  purchased more loans from the banks.  Credit flowed.

The tranches or classes, defined by CUSIP numbers,  are paid to the bond-holders in a particular order.  The highest rated classes are paid first, both from the monthly loan payments that the “original borrower” makes and from those loans that are perhaps refinanced and paid off in full.  Those tranches at the bottom of the list have the highest risk, since they are the last to be paid out.

Okay, I’ve over-simplified, but hopefully you’ve gotten the gist of things without the brain-freeze.

As the demand for new loans increased, banks started to make loans without any consideration to the rules governing safety and soundness in lending.     We all know where that led us:  right here in the middle of our nation’s economic collapse. 

As our economy deteriorates,  loan default rates by the original borrowers increases.    That, in turn, lowers the value of the bonds.  First problem:  many of these bonds are held in the capital accounts of banks, insurance companies and investment firms.  When the bond values decline, so does the financial industry’s capital.  The second problem is that as the bond market’s performance deteriorates, there are less investors willing to buy the bonds and the market dries up.  Basically, no one wants to buy this crap.  If there isn’t a buyer, then you can’t sell.  Bond prices plummet some more, and therefore financial industry’s core capital  plummets. 

Additionally, if no one will buy the bonds,  Wall Street stops buying the loans from the banks, and the banks stop making the loans.  Financing becomes virtually impossible to find and the credit market is frozen.

TALF… to the rescue.  We need to get the securitization market flowing.  Through the TALF program the government virtually guarantees payment to the bond holders.  Under TALF, Wall Street, conceptually,  will start to buy new loans and put out new bond issues through securitization.  The banks know they have a market in which to sell the loans they make, and so they begin to lend again.  If  only that was actually happening!!!   If there were newly issued CMBS being processed through TALF, then I’d see some hope in the success of this TALF scheme.   But alas, it’s not to be.

What value, then,  does the TALF Legacy CMBS program have in fostering lending activity?  Legacy CMBS’s represent  loans that were ALREADY made, ALREADY sold to Wall Street, ALREADY packaged up and divvied up and sold to individuals and institutional investors.  When the FRBNY takes a piece of an OLD securitization as collateral and makes a loan, using those bonds as collateral, NO NEW MONEY goes to the banks.  The bank already got that money  years ago.  No new money means no new lending.  The Legacy CMBS TALF program is one big act of smoke and mirrors. 

The CMBS TALF program is supposed to spur the lending functions of banks when the FRBNY finances the purchasing of NEW commercial loans.    Consider this fact:  To date  TALF financing  has not been used to purchase any NEW commercial mortgages.  Conversely, it has been used to purchase over  $6 Billion in Legacy CMBS

How, then, has Legacy CMBS TALF  helped promote lending?  Simply put…. It hasn’t!!!!  Which firms are utilizing the Legacy CMBS TALF program?  Sorry, says the FRBNY:  TALF rules say we don’t have to share that information with the public.  So much for the new age of transparency.   What, then, is the purpose of the Legacy CMBS program?  I have my own theory, which I’ll share with you here. 

For those of you who are willing to risk a little brain freeze, here is a great site to visit:  http://www.cmbs.com/securitization.aspx?dealsecuritizationid=292

It’s a perfect picture of one of these securitizations.  The loans were originated mostly by Bank of America and then to some extent by Barclays and Bear Sterns.    The securitization’s name is BACM 2005-3.  You’ll see here the list of all the properties that were financed, the interest rate charged, the maturity date of the loan, the type of property and where it’s located.  It’s an interesting conglomeration of loans which include $250 Million in financing to the Woolworth Building, $74+ million in financing to the Queens Atrium,  various hotels, Walgreens and CVS stores and  sundry other  multifamily, industrial, retail and office properties across the United States.

I thought it was fascinating to look at.  I came upon this report when I searched the TALF site for CUSIP numbers that were approved for collateral in a Legacy CMBS transaction:  namely CUSIP number 05947UR42.  I’m not singling this issue out for any reason.  They just happened to win my web-surfing lottery.

Here’s what I learned.  A Wall Street firm (perhaps a bank or their investment firm counterpart) will go out buy a bulk of bonds, that carry the same CUSIP number, from the market.  They need to put together a minimum of $10 Million in one bond issue to borrow against them from the FRBNY. 

In step one, the Wall Street firm comes up with funds to buy the bonds in the secondary bond market….. not a terribly difficult task for them.  Then, they take them to the FRBNY, pledge them as collateral, borrow money from the FRBNY and in doing so they get …… most of their money back (minus the haircut).  Now, if , or maybe more accurately when, that  bond portfolio, backed by commercial real estate,  fails to perform, the investment firm or bank counterparty simply turns their bonds over to the FRBNY in full payment of their loan.  Any future losses on those bonds from that portfolio will be funded by the taxpayers.  

What does the investment firm or bank counterparty do with the cash they received from the loan they got from the FRBNY.  They go out and buy MORE previously issued bonds.  Then they take those bonds, bring them to the FRBNY, pledge them as collateral, and once again, get most of their money back.  Each time they do this, they pass the risk of that Commercial Mortgage Backed Security (less the haircut) on to the taxpayer. 

Furthermore, they are now holding an investment which they can value on their books without having to mark-the-value to market, thanks to the TALF program and our taxpayer guarantee.  They have limited their losses and any depreciation in value of their bond holdings.

The Legacy TALF program only benefits the Wall Street firm that has the resources and means to buy up the bonds and bring them to the FRBNY’s window for a loan.  It isn’t helping the smaller community banks that are sinking under the pressure of ever higher default rates on commercial mortgages they hold.  And it isn’t getting the big banks to start lending again.  If the government wants to argue that shoring up the  capital positions of these few firms taking advantage of the Legacy CMBS TARP program is helping to stabilize these  financial firms, I’d buy that argument.  But then, they shouldn’t be promoting the program under TALF whose primary mission is :   to help market participants meet the credit needs of households and small businesses through new securitizations.

Legacy CMBS TALF is not doing THAT!!!   Churning previously issued commercial real estate bonds for a few savvy Wall Street financial companies does not promote lending to consumers and small business.  It provides absolutely no incentive to promote new lending functions  and it isn’t.  A better acronym might be:  SUC OFF which stands for “Shoring Up Capital by Overextending Federal Funding”.

By the end of the TALF program, which the government estimates will finance up to $2 Trillion dollars of Asset Backed Securities, these firms will have accumulated tens of billions of dollars in bonds guaranteed by our tax dollars which they will simply hold in their capital portfolios.   I’ve been called cynical.  Well so be it.  Until I see the CMBS program under TALF used to finance NEW commercial loans, I will continue to call it like I see it:  A government bailout in sheep’s clothing and an inappropriate use of our tax dollars.

Related Articles:

Looming Crisis:  CMBS Defaults Pit Banks Against Each Other in Senior, Junio Fights (Nov. 8, 2009)

Fed to Add Older CMBS to TALF Lending Program in July (Update3) – May 19, 2009 

Fed Announces Expansion of TALF to Legacy CMBS – May 26, 2009

TALF:  Introduction of Commercial Mortgage-Backed Securities (CMBS)  – June 16, 2009

 

 

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Anonymous Banker: Small Business takes it on the chin from our Congressional Leaders and Regulators

Tuesday, October 27th, 2009

I recently posted a blog saying that our Congressional leaders and regulators needed to redefine the term small business.   Over the next weeks, I’ll be following up with more blogs on that theme.  Here’s my first:

Our President, Treasury Secretary Geithner and our Congressional leaders have all, during the course of this economic crisis, blathered on about their commitment to small business.  For once, I’d like to see them put their laws and regulations where their mouths are.

Congress passed consumer credit card regulations designed to stop deceptive practices in credit card lending.  Yet Congress intentionally left  out all business credit cards that can be peddled to the 26 MILLION small business owners across the United States. One can only assume that this means that it’s still okay for the banks to be deceptive when issuing credit cards to these valued members of society that are the backbone to our economic recovery.   And banks certainly will…. I promise you that.

Let’s remember, that banks do not issue business credit cards without the support of personal guarantees of the small business owners, who I might add could also be referred to as ‘consumers’.   

Well, let me correct that.  Many banks do issue “Commercial Credit Cards”, which should not be confused with “Small Business Credit Cards”.  Commercial Credit Cards are reserved for corporations with revenue typically in excess of $2 Million dollars, and then, only if the entity isn’t privately owned and operated.  Commercial Credit cards are reserved for businesses like not-for-profit corporations, where personal guarantees would not be available since there is not direct private ownership.  But if a personal guarantee is available from the business owner, the banks take it. 

The banks themselves differentiate a “Commercial Credit Card” from a “Small Business Credit Card”, so WHY aren’t our Congressional leaders doing the same? 

Probably because they don’t really have any interest in protecting the small business owner and just like to hear themselves talk.

I dare Congress to prove me wrong and amend the new protective credit card laws to include Small Business credit cards.  Till then, I will continue to advise all my small business customers NOT to apply for any small business credit cards, but to apply instead for a consumer credit card and use that card only for business expenses.  It does not change the deductibility of the expenses.  And, at least then, the business owner will get the benefit of the new protective regulations when they go into effect next year.

On the question of direct personal liability vs. personal guarantee:  You can’t be half pregnant, my friend.

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Anonymous Banker: It’s time for our leaders to redefine the term “Small Business”

Thursday, October 22nd, 2009

I consider myself a small business banker. In that role, I’ve dealt with start-up companies with, initially, zero revenue to companies with revenue of $160 Million.  I’ve worked for relatively few banks over the last thirty+ years, and the “small business market” has been defined by the industry in various ways. 

Most banks define small business lending by the dollar size of the loan, regardless of the revenue size of the company.  Small Business loans  typically fall under the $3 Million dollar mark for term financing and $1 Million for working capital.    Once a company’s  borrowing needs exceed those limits, both the company and the bank are best served by reassigning that account to the bank’s middle-market group.  Above that is Corporate and Institutional Lending.

While it’s not a hard and fast rule, most Small Businesses  typically have working capital needs under $500,000.  Loans under $100,000 are the hardest to underwrite because there usually isn’t much in the way of collateral for the bank to wrap their arms around and often significantly less historical data on which to measure performance. 

 The SBA defines Small Business by industry type, and sets a revenue size and/or size by number of employees  that a company can be and yet still qualify as a small business for Federal Government programs.  If you review this chart, you will see clearly how they define Small Business and what your business size needs to be to qualify for SBA loans or government contracts.     

The US Senate Committee on Small Business and Entrepreneurship’s website says that

“America’s 27 million small businesses are the nation’s engine of growth, pumping almost a trillion dollars into the economy each year, creating two-thirds of all new jobs annually and making up more than half the U.S. workforce.  I invite you to explore this site and discover what we are doing to promote and protect our nation’s innovators and job creators.”

Today, President Obama gave a presentation describing his commitment to Small Business and outlining his plans to improve lending to the Small Business Sector.

“Over the past decade and a half, America’s small businesses have created 65 percent of all new jobs in the country.  More than half of all Americans, working in the private sector, are either employed by a small business or own one.  These companies are the engine of job growth in America.  They fuel our prosperity and that’s why they have to be at the forefront of our recovery.”

 Here, Here!!!!

Obama’s newest plan calls for increasing the size of SBA 7a and 504 loans to $5 Million.  It also calls for increasing the limits on micro-loans, although I noticed that he didn’t place any dollar value to that plan.  The plan will lower rates (the bank’s cost of funds) for small community banks and provide them with greater ability to access capital.  This last, presumably to be able to lend money in the communities in which they do business.

I won’t criticize the plan as more rhetoric, just yet.  However, in my book, the prior plans to stimulate small business lending, to be kind, were unsuccessful and I don’t hold out much hope for President Obama’s newest plan either. 

  1. The Financial Stability Plan reduced SBA fees and increased government guarantees to 90%.  It also said that the Treasury would buy $15 Billion dollars in SBA loans that were newly issued by the banks.  But the $15 Billion came from TARP money and they couldn’t find an intermediary to involve themselves in the transaction for fear that they would then be subject to the the government’s new restrictions on salaries and bonuses.
  2. The ARC program has been an unmitigated failure.  While it certainly would help many of the small “small businesses” weather this economic crisis, its hard to find a bank that is participating in the program.  Most of them are “big” banks who simply don’t want to allocate any of their resources to the administration required on these credits.  They can take, but they find it hard to give some back.
  3. The TALF program, designed to jumpstart the securitization market which is the engine behind bank lending, provided financing to buy credit card, auto loans, student loans, commercial real estate loans, equipment loans and yes, SBA loans off the balance sheets of the banks.  $21 Billion were credit cards, $10 Billion were auto loans and a mere $580 Million were SBA loans.

I believe that part of the problem lies in how Small Business is defined.  There are some interesting statistics out by the Small Business Administration, Office of Advocacy, based on data provided by the US Census Bureau.  and a chart depicting how small business is segmented into 25 class sizes, by number of employees.  This does not include the other 21 million non-employer firms. 

 The chart that breaks out the 25 class sizes is from 2006.  I’d love to see the SBA present some updated information.  Additionally, you need to examine it quite carefully, for in its very presentation, it is deceptive. 

 Here’s my summary, which excludes the 21 million non-employer firms and farm workers.

 5.3 million firms employ under 20 people each, and in total they employ 21 million people.   Annual payroll for this group was $726 Billion.

 406,464 firms employ between 20 and 49 people each, and in total they emply 12 million people.  Annual payroll for this group was $420 Billion.

 129,401 firms employ 50 to 99 people each, and in total they employ 9 million people. Annual Payroll for this group was $321 Billion.

 99,534 firms employ 100-999 people each, and in total they employ 24 million people.  This segment had annual payroll of $906 Billion.

 9097  firms employ over 1000 people and in total they employ  over 53 milion people with annual payroll of $2.4 Trillion dollars.  More than half of that is from companies that employ over 5,000 people. 

 From where I am sitting, our government needs to decide where this country and our economy will get the best bang for our buck.  It is the truly small business owner, the one that employ less than 20 people that will make a difference.  There are over FIVE MILLION of these firms across America.  If only one quarter of them are each able to employ one additional employee that would create 1.3 million new jobs.  These folks have an average salary of $34,000.  The heart of mainstream America.

Conversely,  the 9097 firms that employ over 1000 people would each need to hire an additional 142 people to have the same impact on employment across America.  And it is this size company that seems to be producing the greatest number of cross-the-board job losses so devastating to our economic recovery.

I’m not a statistician.  There are better people than me qualified to evaluate these numbers.  But when I hear President Obama  speak about increasing the size of SBA 7a and 504 loans from $2 Million to $5 Million, it makes me wonder exactly how HE defines Small Business and if there is any hope for economic recovery.

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Anonymous Banker: Banks are the primary barrier to Small Businesses Obtaining Government Contracts

Saturday, October 10th, 2009

Why is it that Small Businesses have such difficulty obtaining government contracts? 

According to the US Committee on Small Business and Entrepreneurship,  “Small businesses have trouble gaining access to contracts because of a maze of complicated laws and regulations that make it difficult for them to succeed,”  at least, according to Senator Landrieu. 

To understand the true reasoning behind this phenomena, Congress and President Obama need to look closer at the banking industy.  The general consensus among banks is that they do not want to lend against government receivables.  When asked why, the answer is that “it’s hard to collect from the government”.  Imagine that!  The very banks that are willing to be bailed out by the government and that are willing to sell their toxic assets through government programs, don’t believe that a receivable from a government agency is worth the paper its written on.

Don’t take my word for it.    Ask any underwriter.  Banks HATE to lend against government receivables.  It’s practically a mantra in the small business banking industry.  While the customer isn’t told this,  underwriters verbally cite the banks unwillingness to lend against government contracts and receivables as a primary reason for not approving the loan when they are challenged on the declination by business account officers.   Perhaps the government needs an oversite committee that requires banks to report how many loans they turn down to borrowers that have government contracts or are seeking financing for new government contracts.  This would be a worthwhile project for the Small Business Administration.

Additionally, the typical small business that can actually make it through the paperwork and obtain the contract, usually needs to borrow significantly more than they have historically borrowed in the past.  Winning the contract usually means that they will need to obtain additional working capital financing  in order to support the cash flow requirements to meet their new contractual obligation.  Banks don’t lend on the come.  These small business owners need to have established past revenue, profitability and debt service capabilities in order to obtain new lines or line increases they’ll need to service  these contracts.   And SBA guidelines hold them to similar standards and therefore they are not a solution to this problem.

If the business has done work for the government in the past and those receivables are aged over 60 days, the banks discount them completely. 

Then there is the general lending guideline prohibiting loans where there is a concentration of receivables.  If a small business wins a government contract, it is likely that that the contract will create a concentration in revenue stream and receivables (those from the government)  as compared to  the rest of the borrower’s customer base.  Banks can easily use this as an excuse not to make the loan.

Another likely reason to be declined is the new “debt service coverage” analysis that each working capital line is now stringently subjected to.  While we all know that working capital loans are repaid from asset conversion:  Inventory into Cash or Receivables into Cash;  the banks now take the working capital line and hold it to full debt service coverage ratios typically calculated using a three year amortization.  This normally can’t exceed  1.5;  and that’s only if the banks are being generous.    The average company that wins a government bid cannot pass this test…. which I might add is being imposed on the banks by the regulators.

These small business could go to non-conventional sources of funding like accounts receivable financing companies.  AR Funding is a good example.  And while the business owner will have a better chance of getting the financing through these funding companies, the cost of funds are significantly higher than conventional bank financing.  Profit margins on government contracts are typically low and so non-conventional sources for working capital can translate into losses on the jobs taken.  No business can be expected to fullfill government contracts at a loss or on margins so thin the risk of taking the job is not justified. 

Perhaps during this crisis, the government could provide an interest subsidy written into the value of the contract, so that more small businesses can effectively compete for their share of these contracts.  That’s a direction I wouldn’t mind seeing my tax dollars go.

I am always disappointed to read government press releases like this one.  Our Congressional leaders are letting the banks get away with their refusal to meet the financing needs of the small business community which is a fundamental obligation of our banking industry.  Small Business doesn’t have a chance in hell of fighting the system from the bottom up, on a case by case basis.  The only way this will change is if our Regulators and Congress stop all their rhetoric and become small business advocates.   It is time that they hold the banks accountable for putting up barriers that stop our government from meeting their statutory goals in small business contract programs. 

  September 22, 2009  WASHINGTON – United States Senate Committee on Small Business and Entrepreneurship Chair Mary Landrieu, D-La., today held a roundtable focusing on ways the federal government can increase contracts awarded to small businesses by improving government contracting programs. In 2008 small businesses received $93.3 billion in federal contracts, an increase of almost $10 billion from 2007. However, these contracts made up only 21.5 percent of contracting dollars. The government’s statutory goal is to spend 23 percent of contracting dollars on small businesses.

The roundtable, “Small Business Contracting: Ensuring Opportunities for America’s Small Businesses,” discussed the challenges small businesses face in obtaining government contracts, including: contracting under the American Recovery and Reinvestment Act, contract bundling, size standards, and a lack of protections for sub-contractors.

“Small businesses have trouble gaining access to contracts because of a maze of complicated laws and regulations that make it difficult for them to succeed,” Senator Landrieu said. “We can do better. President Obama has pledged to help expand small business contracting by increasing public knowledge of federal contracting opportunities and I will continue to do the same. We all know that there is still much work to be done.”

“Federal contracts provide vital economic benefits for small business – yet, regrettably, the Federal government consistently fails to meet its goals for small businesses in general and service-disabled veteran-owned, women-owned, and HUBZone firms in particular,” said Ranking Member Snowe. “This is simply unacceptable, and the testimony from today’s witnesses offered specific and realistic solutions for increasing small business participation in Federal contracting and for the government to not only achieve the statutory small business goals, but to exceed them.”

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Anonymous Banker: More bank bailout? Less Credit for Small Business?

Saturday, September 26th, 2009

FDIC press release dated September 24, addresses the sharp decline in the performance of   loan commitments of $20 Million or more.  These loan commitments are shared among US and Foreign bank organizations and non-banks such as securitization pools, hedge funds, insurance companies and pension funds.  For the layperson, a shared loan is one whose risk has been divided up among several institutions, each taking a smaller piece of the total loan commitment. 

I’ll let you read this yourself.  But here are some highlights:

  1. $2.9 TRILLION dollars in loans were reviewed.  Total borrowers:  5900
  2. There was a 72% increase in criticized loans, now  $642 Billion
  3. There was a 174% increase in classified loans:  $163 billion to $447 billion
  4. Special mention loans decreased from $210 billion to $195 billion
  5. Loans in non-accrual status soared from $22 billion to $172 billion
  6. Leveraged Finance Credits represented 40% of criticized loans:  $256 Billion
  7. Other Industy leaders?  Media and Telecom Industry: $112 Billion; Finance & Insurance:  $76 Billion; Real Estate & Construction:  $72 Billion
  8. FDIC Insured institutions have exposure to 24.2% of classified loans or $108 Billion, and 22.7% of non-accrual loans or $39 Billion.

This is not good news for bank capital requirements and therefore, not good news for small businesses that keep hoping and praying that the banks will start to improve  lending activities to their sector.  Simply put, if the banks are struggling with capital requirements, they simply will not loosen the purse strings anytime soon.

I’ve seen this several times in my career:  Corporate and investment banking runs amok and this results in Retail and Middle Market Banking taking the beating, right along with Retail and Middle Market banking customers.  Small and mid-size  businesses, along with consumers, will pay higher fees and higher rates, earn less in interest, and have less access to credit they depend on to run their businesses.  The banks will look to the small  business community to make up the losses created in their corporate and investment banking divisions.   30% interest rates on consumer and small business credit cards is a perfect example of this, especially when combined with banks PAYING interest on savings accounts at rates as low as .01% (Yes, that is one one-hundreth of 1%).

In the midst of these losses, Treasury Secretary Geithner proposed to the House Financial Services Committee that bank capital requirements be increased.  While I’m all for that proposal, and  I agree with most of his assessments, the immediate effect does not bode well for the small business community.  In the face of increased loan losses, Geithner’s proposal for higher capital requirements will  only increase the banking industry’s unwillingness to lend to the small business community. 

How then does Secretary Geithner expect to resolve this dilemma?  Well, that brings me to my favorite topic:  TALF.  Since April 7, 2009  the TALF program  laundered $46 Billion dollars in loans off of banks’ balance sheets and virtually guaranteed these loans with our tax dollars.  For the record, $21 Billion were credit cards loans, $10 Billion were auto loans, $4 Billion were Commercial Mortgages and a mere $580 MILLION were SBA loans.  As an aside, despite the new policy of transparency in these programs, I have been unable to obtain information which reveals which banks are selling these assets and participating in TALF.  This means I can’t tell which banks we are bailing out the most. I’ve been told by the FRBNY that this information is simply not available to the public.  Transparency, my tush!

Since the rules of the TALF program keep changing, it would not surprise me one bit if TALF morphed into allowing these Shared National Credits in on the deal.  First it was to be AAA rated loan portfolios, then they added sub-prime credit card and sub-prime auto loans and then they added commercial mortgages. Treasury Secretary Geithner indicated that he expected $1 TRILLION dollars in loans to be processed through TALF.   Perhaps the next change in TALF will allow the banks to divest themselves of  the $147 Billion plus dollars in toxic Shared National Credits, held by FDIC insured institutions.  

That move would certainly help improve the banks’ capital requirements.  But where would it leave the small business owner?   Without some form of strong government intervention, the banks will not move back into lending in the small business market anytime soon.  A move, I might add, that every government leader agrees is vital to our economic recovery.  Merely asking the banks to increase lending functions to the small business community, just isn’t working.    

I, for one, will hold Secretary Geithner to his closing remarks:  

“We must act to correct the regulatory problems that have left our financial system so fragile and prone to further trouble that Americans come to distrust it as a reliable repository for their savings and a stable source of the credit they need to conduct their lives and build their businesses.”

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Anonymous Banker Weighs in on the FDIC’s Advisory Committee on Community Banking

Thursday, September 24th, 2009

The Federal Deposit Insurance Corp. has a new advisory committee on community banking. Except for one professor, it is made up entirely of Presidents and CEOs of community banks. A small problem with this set-up is that there should be one or two regional or national bank representatives to give perspective to the discussions. But what strikes me even more, is that there are no people on the committee whose job it is to actually go out and meet business owners, kick the boxes, and feel their pain. There should be folks on the committee that mix and mingle with the businesses they serve, directly, and that actually perform the credit analysis.  The committee needs underwriters who can see and comment on where the industry is falling short in meeting the borrowing needs of the small business community. But there aren’t any.

There was an opportunity here that I don’t think the FDIC capitalized on (no pun intended!) as well as they could have. Instead, given the mix, the agenda for this committe will not be improving lending in the markets these community banks serve.  Rather, it will be on improving these banks’ balance sheets and positioning these banks to take advantage of some of the bailout opportunities and improve their share prices.

What should an FDIC advisory committee on community banking be dealing with?. How about the two-faced message regulators are sending to the banking industry, with one group yelling “lend, lend, lend” while the second group holds the banks’ working capital lines to an ever higher debt service coverage ratio and requires them to reserve for loan losses before the approval signature is dry on the offering sheet–thus making it very difficult indeed for them to “lend, lend, lend”. The lenders are getting their direction from the  very folks that are serving on this committee. Yet its very composition limits the type of dialogue so desperately needed within the group, and between the group and the regulators.   As it stands, I am not confident that this group will have any impact on the banking industry’s ability to meet its fundamental role as lender to the small business communities they serve.

I hope I am wrong. I always seem to hope I am wrong.

 

Cross-posted in Bizbox:  The Problem With the FDIC’s New Small Bank Committee

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Anonymous Banker Weighs in on the failure of the SBA ARC program

Wednesday, August 19th, 2009
I thought I would be inundated with (America’s Recovery Capital) ARC loan requests over the last few months.  But alas, even the small business owners across America know that the program is nothing more than rhetoric.
 
I finally put through one request that I thought should be approved.  The funding would have given this particular client some breathing room to make it through this depression.  Yes, you heard me right….. I dare to use the word depression.  Not surprisingly, the client was declined.  Why?  Well according to Small Business Administration guidelines, the business had to either show evidence of profitability or positive cash flow in one of the past two years.  Unfortunately,  this company had a loss of about $2500 in 2008.  Never mind that it has been in business for ten years, and has been current on all payments.  Or that it has personal credit scores of 685 and 745.  Or that it has received a 20% increase in revenue for 2009 due to some new local-government contracts, and indeed that its cash flow projections show a return to strong profitability in 2009 and 2010.  Apparently, a loss is a loss is a loss.  It only took the bank ten days to come back with a rejection. 
 
I was so outraged that I went back to the SBA site to check on the progress of the ARC program and the list of participating banks and number of loans made by each bank.  There has been a total of 1193 ARC loans made to date.  Let’s assume that each loan was for the maximum amount of $35,000.  That equates to almost $42 Million dollars in SBA support provided through the ARC program to America’s entire small business community.   Did you perhaps notice that I did not use the word billions.
 
The names of the banks that participated in this program were, for the most part, unknown to me.  Most of them were not any of the big banks that have received so much help from the government…. or more correctly, the taxpayers and citizens of this country.  Bank of America and Citibank were not listed as lenders.  Regions, Sun Trust, and Wells Fargo did appear on the list, along with JPMorgan Chase who has made no more than 2 ARC loans in the State of New Jersey and no more than 8 ARC loans in the State of New York -two of their largest markets.
 
It’s impossible  to tell how many ARC loans were made by each bank.   In President Obama’s new age of transparency (yes I’m being sarcastic), the SBA website did not see fit to break out the totals for each bank.  Instead SBA duplicitously inserted the total number of loans made in each state next to the name of the first bank listed. This, of course, leaves the reader guessing to what extent the other banks participated.  COME ON, Ms. Mills!!!  Your report makes it clear that you don’t want anyone to be able to do a simple tally and know unequivically the lack of support the banks, that took so much from us, are providing to the small business community.
 
The Recovery Act allocated a mere $255 Million dollars for ARC loans to the entire United States Small Business community.  Now it is falling short of even my lowest expectations. 
 
I expected that those paltry funds would be gobbled up in the first 60 days of the program.  But not more than 16% of the funds have been dispersed through the banks.   Is this because  the small business owner is not really suffering through this economic crisis?   No one could possibly believe that!  Or perhaps the banks, which we have bailed out, have once again refused to meet their fundamental role as lenders?  If the banks cannot find their way clear to make loans to small business owners, loans, mind you, that are 100% guaranteed by the government, then clearly they are not doing their job.
 
And if the applicants are not qualifying for loans under this program, then what does that say about the state of this nation’s economic recovery?  Wake up  and take notice.  The ARC plan has failed.  And the government’s transparent abandonment of the small business community in their economic recovery plan is quite clear to all of us.  If this is the best it can do, then this country is in big, big trouble.

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Anonymous Banker Asks: “Did our country’s leading banks lose their SBA lending rights”

Saturday, May 16th, 2009

In light of the devastatingly poor SBA lending results and the fact that the SBA has been dragging their feet in implementing the new lending programs dictated by the Economic Recovery Act, I started reading deep into the bowels of the SBA website and the Code of Federal Regulations that govern the criteria banks must meet in order to have SBA lending and SBA securitization status.

And after doing so, one has to wonder if ANY of our leading banks are qualified, under clearly defined government regulations,  to partipate in the SBA lending programs.

The SBA Website and  the Code on Federal Regulation  states that the banks have to meet these criteria:

1.  Operate in a safe and sound condition using commercially reasonable lending policies, procedures, and standards employed by prudent Lenders. 

That rule alone takes most of our banks off the SBA lending list.  They all violated the regulations on safety and soundness and in so doing created this nation’s economic crisis .

2.   Have continuing good character and reputation, and otherwise meet and maintain the ethical requirements of §120.140

Dictionary.com defines reputation as  the estimation in which a person or thing is held, especially by the community or the public generally.  How many of our nation’s leading banks would be considered by our general population to have a good reputation?   I can’t think of any, can you?

3.  Holding sufficient permanent capital to support SBA lending activities (for SBA Lenders with a Federal Financial Institution Regulator, meeting capital requirements for an adequately capitalized financial institution is considered sufficient permanent capital to support SBA lending activities)

Based on the recent stress test results and our governments demands that the following banks raise additional capital:  Bank of America, Wells Fargo, Citigroup, Regions, SunTrust, Fifth Third, PNC and KeyCorp; can one imagine that these banks have met the requirements to be adequately capitalized?  If they were, then why would we be demanding that they raise additional capital?  Does that mean that somehow, behind the scenes, these banks have been told that they don’t qualify as SBA lenders?  Is it any wonder that our Small Business Community can’t find any SBA lenders among the biggest banks that took our taxdollars in the bailout? 

Based on this information and what I see each day as a banker to the Small Business Community, it is my general opinion that our government leaders are completely and intentionally fooling us into believing that there is any support intended for the Small Business Community.  It simply is not so!

 

SBA Securitization Market

If my suspicions are correct, then I think it is incumbent upon the Small Business Administration to direct the small business owner accordingly and come clean with the general public.

The Code of Federal Regulations CFR 120.4 also defines the conditions that need to be met for a bank to securitize their SBA loans.  And this is where it gets really interesting.  Our leaders expound on the need to get the securitization markets flowing in order to stimulate lending and the future of our economic recovery.  This mission is the foundation on which the TALF program was built and at the core of the American Recovery and Reinvestment Act of 2009.  Yet, based on the criteria defined in CFR 120.4, it is unlikely that any of our lead banks will be able to securitize SBA loans.  If SBA loans cannot be securitized, then that would mean that the banks would have to hold them on their books, and we all know that isn’t going to happen.

Here are a few of the guidelines, but I recommend that you all read the code in its entirety:

1.  Securitization —A “securitization” is the pooling and sale of the unguaranteed portion of SBA guaranteed loans to a trust, special purpose vehicle, or other mechanism, and the issuance of securities backed by those loans to investors in either a private placement or public offering.

2.  A Lender may only securitize 7(a) loans that will be fully disbursed within 90 days of the securitization’s closing date.  If  the amount of a fully disbursed loan increases after a securitization settles, the Lender must retain the increased amount.

This part pretty much kills any chance of a small business obtaining an SBA working capital line under the 7(a) program. 

3.  Have satisfactory SBA performance, as determined by SBA in its discretion. The Lender’s Risk Rating, among other factors, will be considered in determining satisfactory SBA performance. Other factors may include, but are not limited to, on-site review/examination assessments, historical performance measures (like default rate, purchase rate and loss rate), loan volume to the extent that it impacts performance measures, and other performance related measurements and information (such as contribution toward SBA mission);

Which part of the SBA’s Guiding Principles  is our banking industy supporting as they systematically withdraw credit from small business, systematically increase business credit card rates to upwards of 25% and have generally refused to support the small business owner through any meaningful lending programs?

According to IRS.gov, in 2006 (the most updated numbers they had)  there were 22 million sole proprietor tax returns filed in 2006 and an additional 3.2 million S-corp returns filed for businesses with revenue under $1 million dollars.  These companies generated over 1.2 trillion dollars in revenue and paid salaries of over $200 Billion dollars and rent (supporting our nations commercial property owners) of over $70 Billion dollars.

If the Big Banks are not going to support this group through meaningful lending programs, then perhaps it is time for Ms. Mills and the SBA to focus on providing  the incentives and support required for the community banks to increase their lending initiatives to the local markets they serve so well.

Our regulators have failed us in the past and I’d like to know if  the SBA is  enforcing the regulations that are in place that dictate exactly what banks are allowed to participate in SBA lending and securitizations.  I think that in light of the new transparency rules supported by President Obama, we have a right to know if the lead banks are simply refusing to participate in SBA lending or if they have been justifiably banned from participating for non-compliance of our goverment regulations. 
 
If my suspicions are correct, then I think it is incumbent upon your office to direct the small business owner accordingly and come clean with the general public.
 

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Anonymous Banker Weighs In on the Slashing of Credit to our Small Business Community

Friday, May 8th, 2009
In response to a recent article over at Business Week, “Snipping Credit lines for Small Businesses”, which discusses how JPMorgan Chase and others are slashing small-business lending in an effort to shore up their balance sheets, I must, unfortunately, question the use of the word ‘snipping’–which, to me, sounds like a tiny trim. Au contraire. Dig deeper and you will find that banks are slashing tens of billions of dollars in credit to our nation’s small business owners.

Does the Obama administration care about small-business credit? It certainly says it does. A typical press release from the Treasury Department avows as much.

But is this for real? Or it this simply rhetoric? As a business banker, I sit in my office each day and deal with small business owners, which I define as those with annual revenue up to $10 million, but often less than $1 million. I see their worried faces as they come into the bank, letter in hand, wondering why their credit lines were frozen. These people need help, and so far as I can tell, they’re not getting it from the administration.

I took a random sampling of approximately 360 lines that received letters similar to the one described in the Business Week article. These 360 accounts represented $20 million in potential money loaned out, which actually owed just over $12 million. About seventy accounts had no balances outstanding and represented $4 million in potential credit. This particular bank (and I’m sorry I can’t identify it for our readers) froze all these lines to any further draws, with an intent to term them out. Based on this sampling, the average credit facility was just over $50,000.

At first glance, these numbers don’t appear devastating, especially when the new buzz words being bandied about are in the billions and trillions. But my sampling is just a drop in the bucket. Imagine that this is happening not to 360 businesses but to 36,000 businesses in one bank. That results in $2 billion in cancelled credit lines. Now imagine that each of the five largest banks (and I’m being gracious) have taken similar action, resulting in the systematic cancellation of 180,000 lines. That would mean that more than $20 billion of working capital has been taken away from the U.S. small business community. I personally believe that the results are much larger than even this.

I understand the need for all banks to recognize the quality or deterioration of loans they hold on their books and their need to effectively reserve for losses, particularly in these trying economic times. But it has been my experience that many of these borrowers never even missed a payment and have met their commitments as agreed.

And what about the prospect of converting credit lines to term loans? Business Week points out, “Business owners who accept the conversion to a term loan will likely see dramatically higher monthly payments.” Once again, a good point; and once again, a drastic understatement. Working capital lines of credit often have monthly payments equal to interest only. They may, in some cases, carry a minimum principal payment equal to 1% of the outstanding loan amount (it depends on the bank and their rules under the original loan agreement).

Take a $50,000 loan at a rate of Prime +2%. Under the interest-only scenario, the monthly payment would be $218.75. If a principal payment of 1% is required, the monthly payment would be $718.75. However, the same $50,000 loan termed out over five years (and with an increase in rate to between 7.5% and 10%) would now carry a monthly payment of just over $1000! So the end result of converting lines to term loans is that the banks have increased the monthly payments for the small business owner by at least 40% across the board while cancelling their access to future working capital.

Let me make this clear to President Obama. Not only are the banks not making business loans to small business owners, they are systematically withdrawing billions of dollars in credit lines from the small business market.

While our president is rallying our Congressional leaders in support of his positions on credit card reform–reform that is likely to exempt small business owners, by the way–he may want to share these observations from the front lines of the banking world so that our leaders can begin to understand and focus their efforts on protecting our nation’s small business community.

Cross Posted at BizBox

 

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