We’ve created a need in our society for “immediate gratification”. So it comes as no surprise that the general public is screaming for an immediate fix to an economic crisis that finally erupted after over ten years of abuse. This is NOT a problem that is going to go away over night. It is going to be a long, painful process. It can’t be fixed by reactive solutions, like pouring billions of dollars into a broken system. There needs to be a well thought out, methodical process that has a high level of forward thinking worked into the solutions. I often imagine the top six sigma gurus gathered together in the building where they house the space shuttle, diligently working out the process, with post-it notes covering the walls from ceiling to floor. Personally, I think they would do a better job than our current congressional leaders who don’t seem to understand the systemic issues that, still today, are not being addressed.
Every day I work with small business owners that are buried in debt. They are sitting on a pile of loans that have absolutely no chance of being repaid in the face of declining revenues and profits. Lines of credit granted without any exit strategy. SBA loans that were made as interest only lines of credit, only to be converted to seven year term loans at the precise moment that profits are tanking.
The downward spiral goes like this: Companies, large and small, are burdened with debt. Revenue declines, and they have to cut expenses to make enough money to meet their fixed obligations such as rent and loan payments. They have to cut somewhere, so many start with slashing benefits such as health insurance. When that isn’t enough, they reduce payroll, by laying off some of their workers. When they’ve reduced expenses they have control over, and realize that they are still can’t meet their loan payments, they attempt to re-negotiate the loans and their rent. When that fails, they close and file bankruptcy. The loans get discharged, and the commercial real estate remains vacant. Their employees join the ranks of the unemployed and unemployable. Loans that were sold to investors, default. The securities that hold these loans plummet in value. Retirement plans no longer provide income needed for retirement. Commercial real estate loans go into default resulting in more write-offs for the banking industry. Etc, Etc, Etc.
There is no point in talking here about the stupidity that went into the lending processes that banks incorporated to bring us here. It serves no purpose, the damage is already done. But congress would do well to address this for all loans that are made going forward, particularly those that will be securitized.
Modification is the name of the game. And it has to start happening today. Everyone, and I mean everyone….. is going to have to make concessions, and be willing to bide some time through a slow but meaningful recovery. Debt needs to be repaid. There is just too much of it for the taxpayers to absorb. In every game there are winners and there are losers. The question is not if there will be losers, but how much they will lose.
The businesses need some breathing room in order to remain in business. Just like the homeowners need some breathing room in order to remain in their home. Some form of payment is better than no form of payment. When are we finally going to realize this?
- SBA has to force the banks to extend the repayment terms. They should include some level of monthly principal payment and interest. How much principal? Any amount is better than no amount. Slow and steady reduction of debt is better than immediate write offs. Loans need to be modified so the companies can stay in business.
- The liar loans, those loans that the banks made to businesses for up to $100,000, on stated income, are usually converted to three year term loans. They need to be ten year term loans. Banks should be reducing interest rates, not increasing interest rates, allowing for higher application of principal paydown instead of interest maintenance..
- Commercial real estate owners need to engage their banks and their tenants in a comprehensive evaluation of income requirements and tenant cash flow. Each needs to make that concession that works for the whole.
- The investors may not get paid for awhile. And they may not have any return on their investments. They may, in the end, see a portion of their principal investment returned. But again, some is better than none.
- Banks are not going to recapitalize over-night. The regulators need to recognize this and encourage the banks in their role of modifier. If the loan has to be written off, time will tell us that as well. But forcing the banks to write-off debt that has any reasonable chance of being repaid under a modified process will doom our economy to failure. The regulators failed us by not imposing penalties on banks when they applied unsafe and unsound lending practices. And they are simply making matters worse by imposing capital requirements that they surely know the banks cannot meet anytime in the near future.
Suspend all dividend payments to bank shareholders, cap interest rates on all forms of loans starting with credit cards, extend terms of repayment so that there is some level of principal reduction made each month, provide for no-penalty skip payments, and I’m sure there are other plans that will help as well.
Time heals all wounds. But it is the passing of time that has a truly meaningful effect. We will recover, but it will require our society as a whole to shed their need for immediate gratification. That is the one thing that is not going to be part of our recovery process.