Archive for April, 2009

Anonymous Banker weighs in on why the government should not allow the return of TARP funds, just yet!!!

Monday, April 20th, 2009

Let’s see if I understand this.  The banks and investment houses violate Federal Regulation H which governs safety and soundness in real estate lending.  Over a period of ten years, they issue trillions of dollars in sub-prime loans.  Then they sell these loans to Fannie  Mae and Freddie Mac, and in the process, make a huge profit and basically absolve themselves of all risk associated with these loans.  Then, because there is an implied guarantee by our government on these Mortgage Backed Securities, they buy them back from Fannie Mae and Freddie Mac to hold in their capital accounts.

 

When the entire thing starts to unravel, the government steps in and stands behind the implied guarantee bolstering the world’s confidence in our markets.  Had they not done this, every bank, even the best of them, would have been insolvent.

 

When more needs to be done, our government commits our tax dollars and those of our future generations to bolstering these financial companies by providing TARP money, in exchange for preferred shares in these companies.  These two moves, revitalize the financial markets and perhaps we should see some return on our investment in the future.

 

However, the government foolishly fails to put reasonable restrictions and implicit directions on how TARP funds can be used.  Some of the greedier companies fail to do their part by controlling reasonable costs such as executive compensation and dividend payments.  Our government steps in to protect our investment and changes the terms of the TARP contract, adding these restrictions.

 

The financial companies cry foul play.  Well surprise, you greedy bums.  Take a look at Federal Circuits, 4Cir. (November 02, 1992)  Docket number 91-2647, 91-2708 which can be found here:   http://vlex.com/vid/charter-thrift-supervision-own-37480633

 

Now pay special attention, my friends, to Section III – B.  If my interpretation is correct, a sovereign (that would be the US Government) can nullify a contract by change in legislation.  Basically that makes no government contract binding to any other parties.  The power lies in OUR hands.

 

Smacks similar to those wonderful contracts that banks put out to consumer and small business credit card holders in which, BANKS get to change the rules at any time.  I love old adages, like this one:  What goes around, comes around.

 

To our leaders, let’s let our bet ride for a little while longer and see if we can get a return on our investment.  Why let the financial industries have our money when they are failing and then take it back when their new-found profitability comes from our investment.

 

Can you ever imagine a scenario in which an investment banker makes a loan to a company in exchange for stock and  then simply allows that company to pay back the loan when the company starts to perform well, giving up all upside potential on their investment?  It’s laughable!!!!!

 

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Anonymous Banker weighs in on SBA and the Economic Recovery Act: Rhetoric or Redemption – Time will tell

Friday, April 10th, 2009

Is the new SBA lending program simply more bailout for banks or truly designed to help the stuggling small business owner? 

 

Well, really, who cares?  With all the billions being poured into the financial companies and auto industry, any plan that helps the small business owner is a good plan, in my book. 

 

I see three components in the Economic Recovery Act that should help revive lending to our nation’s small business community.  That is, IF the banks actually cooperate and finally start to meet their fundamental role of making loans.

 

The first program will make available $15 Billion dollars in SBA 7(a) loans and 504 loans backed by guarantees  to the banks of up to 90% .  Borrowers will not have to pay SBA lending fees which provides a meaningful cost savings in their quest to obtain working capital.  It is under this program that our Community Banks have an opportunity to shine and to show our Congressional leaders the vital role they play in supporting the business communities they serve.

 

The government originally rolled out the TALF program, designed to jump-start the securitization markets for Credit Card, Auto, Student….. and yes, tagged onto the end, Small Business Loans.  In an effort to increase credit availability and support economic activity, the Federal Reserve Bank of New York  agreed to lend money, on a non-recourse basis, to investors who purchase Asset Backed Securities from banks. Thusfar, regardless of the guarantees, the TALF program has not increased Small Business lending initiatives by the banks.  The reasons are obvious:  First, in this economic environment the investors don’t want even the small risk associated with SBA lending.  And secondly, because the confidence in these asset backed securities  has been completely eroded, no one really wants to buy them.  And finally, our leaders have not required the banks to start lending, but merely to file reports that will reflect how little they are doing.

 

So with TALF doomed to failure, at least as far as Small Business Lending is concerned, our leaders have gone back to the drawing board to sweeten the pot.

 

It’s TALF with a twist.  While this $15 Billion program provides the originating bank with a 90% guarantee, the government realized that they would not be able to budge the banks unless the banks had assurances that they could divest themselves of these loans after they made them.  With that in mind, our Treasury Department announced that it “will be a ready buyer of the loans in the secondary market.”  

 

And this is where the community banks and perhaps credit unions will play a vital role in getting these funds into the hands of the small business owner.  These banks will originate the SBA loans and sell them, ONE AT A TIME, to the broker/dealer.  The broker/dealer will gather these loans together, from the originating banks,  and sell them….. directly  to the government.

 

Since the announcement of this program, there’s been a big to-do about whether the broker-dealers will participate or whether the Federal Plan to Aid Small Businesses is Flawed.  It seems that since the $15 Billion dollars, used to fund this program, is coming from TARP funds, the broker-dealers that act as the intermediary between the originating banks and the Treasury may be subjecting themselves to TARP restrictions such as limits on Executive Compensation. 

 

Personally, I don’t believe that President Obama, our Congressional leaders or the folks in the Treasury Department intended this interpretation.  Perhaps the simplest way of looking at this is to see these broker-dealers as ‘contracted intermediaries’ by the Treasury Department.  The Treasury cannot be expected to purchase one loan at a time from the banks across our nation.  In order for the program to work, they must have a broker-dealer facilitate the purchasing, packaging and subsequent resale of these loans to the Treasury.  There you have it – and I am sure over the next few days, and with the encouragement of the SBA’s new Administrator, Karen Gordon Mills, this situation will be resolved to everyone’s satisfaction.  Perhaps this is an opportunity for Treasury to create a working partnership with a broker-dealer that didn’t put up barriers to the success of this plan.   

 

This is a plan that will work.   It’s smaller than I would have liked, but it should bring a sense of renewed confidence to our Small Business Community.  New money, new loans, community bank lending, and an opportunity to revitalize our economy one business at a time, create and save jobs and send a clear message that the small business owner’s significant contribution to our economic recovery is recognized and supported.

 

ARC Stabilization Loan

The second program, which has not been rolled out by the SBA yet – but coming soon, is the ARC Stabilization Loan (America’s Recovery Capital).   These loans are to be originated by pre-approved bank lenders (yes many of those same banks that have refused to make business loans over the last several months but had no trouble taking billions in bailout funds from the government).   The loans will be backed 100% by the SBA and will have a maximum loan size of thirty-five thousand dollars. 

 

The $255 million dollars in ARC funding translates into a significantly higher loan volume because it represents the guarantee and the interest subsidy provided by the program.  Borrowers will not have to start repayment for twelve months and full repayment is expected within five years.  Since the SBA will  subsidize the interest on these loans,  the ARC program will provide relief to the business owners as our nation makes its way through the beginnings of our economic recovery. 

 

Once again, I’m counting on Ms. Mills to move this program along to where it needs to be.  I’ve had several conversations with local SBA District Offices and would have liked to see the terms of this program more clearly defined.  The big question is this:  Will ARC merely provide “six months worth of interest payments on existing loans” to the small business owner?  Because if that is the case, then the vast majority of these loans will be for extremely small amounts that banks will be uninterested in processing and ultimately will not make very much difference for the small business owner. 

 

These first two programs, to be truly meaningful, should allow the banks to refinance some of the smaller working capital credit lines that are, today, being systematically pulled by the banks?  I understand that Chase, for example, recently froze working capital credit lines for tens of thousands of their business clients, the vast majority of these lines being under $100,000.  And they are not alone in this process.  I’m told that it is Chase’s intention to give these customers an opportunity to present updated financial information and to reinstate the credit lines for those businesses found to be credit worthy under the bank’s new credit criteria.  Refinancing these credit lines under newly created SBA loans funded by the ARC program or what I lovingly call the ‘TALF with a twist” program, would be an excellent alternative to leaving the viable small business owner without any form of credit.  Additionally, and under the right circumstances, one effective use of these funds would be to refinance credit card debt accumulated by our small business owners, many of whom are now subject to the interest rate increases upwards of 20% recently implemented by the banks.  Most of these borrowers would significantly benefit from the relief provided by SBA lines and particularly those that provide interest rate relief.   

 

Make no mistake about it.  The ARC program, if used as I describe above, would most certainly be, yet another, bailout for the banking industry.   But let’s put that aside for the moment.  My concern today is for the Small Business Community who is, once again being slammed by our financial industry leaders when they most need our help.  Let us hope that these programs will allow the small business owner to refinance their existing debt, significantly reduce their monthly payments and gain the temporary relief to their cash flow needed to weather this economic storm.  We need to help them keep their workers employed, pay their rent and remain in business. 

 

Don’t be fooled.  This is not a bailout program for the business that is out-of-business but hasn’t come to terms with that finality.  The ARC program states that the business has to be ‘viable’ and what that means is yet to be determined.  Borrowers should expect to provide financial information regarding sales/revenue and income.  So for those small business owners that over-extended through the business liar-loans,  businesses that ‘stated income’ that they now cannot support with tax returns:  I don’t think you will qualify.  And if you are one of the small business owners that like to make money, but don’t want to pay taxes:   You won’t qualify either.  If you can’t make it on your own, then the banks will be writing off your debt and taking the loss.  Shame on the banks and shame on you.  

 

I’d like to add one final observation.  When a bank cancels a business credit line, they do this without warning.  The line is simply frozen and no additional draws are allowed.  A letter is sent to the business owner requesting updated financial information, AFTER the credit line is revoked.   In a frenzy, the business owner faxes in their financials to a nameless, faceless person who evaluates their condition.  In my experience, I have seen the following reasons provided in the bank’s refusal to reinstate the lines of credit:  (a)  Decrease in revenue and/or profit (b) weaknesses in cash flow  (c)  debt to income too high. 

 

Well, no s_ _ t, Sherlock!   We ARE in a recession, and I dare not use the “D” word here.  Our country, and the world, is in the grips of an economic tsunami that the banks caused. This situation is rooted in the financial industries endless quest for greater profits and the absence of any safe and sound lending practices, further compounded by our Regulators refusal to halt the industry’s despicable practices over the last ten years.

 

We are now caught between a rock and a hard place.  These loans are the hardest to underwrite.  The smaller businesses that will benefit from ARC funds and from refinancing debt under the ‘TALF with a twist’ funds,  simply don’t have anything for the banks to wrap their greedy little arms around.  And it will be difficult to determine which company truly has a chance of weathering the storm and which, despite any refinance of debt, will be forced to close its doors.  Furthermore, simply terming out working capital lines will not provide the relief needed.  We need to slash their interest rates, continue the lines as revolving credit so that it can be used and re-used over the next three years, and then, after a time, term it out.  SBA already has the product matching this description.  Now the SBA has to give the banks specific criteria so they are comfortable  with the conversion.  There can’t be any second guessing or Monday morning quarterbacking on this process.  If President Obama, our Congressional leaders and our Regulators are truly committed to helping the small business owners across this great nation, then DO IT.  Jump in with both feet.  Yes, there will be losses.  But there will also be jobs saved and tax revenues generated and an increase in confidence so critical to our recovery.    

 

The third program, which is already in effect, is the expansion of the existing Micro-loan program.  These loans are granted by special non-profit community-based lenders  throughout the country (microlenders), and not typically by banks.  It provides for fifty million in new loans.  But don’t count on any special rates.  SBA website reports that micro-loan interest rates range from 8% to 13% , which is still better than the usurious rates many banks have started to apply to business credit cards and small revolving lines of credit.  Most microloans are directed at the very small and struggling business and yet, these are the loans that come with application fees in the $500 range.  I am unmoved by this program and so far, disappointed in the channels that are supposed to get these funds into the hands of the small business owner. 

 

For those business owners still interested in applying for a micro-loan, finding a lender might prove difficult.  You can start by visiting this website: http://www.sba.gov/localresources/district/az/index.html and selecting your local SBA office from the dropdown box.

 

Congratulations to Arizona, Los Angeles, San Diego and Santa Ana California,   Jacksonville Florida, Boston Mass, Nebraska, New Hampshire, NY-New York,  Oregon, Rhode Island, South Dakota, Houston-Texas, Utah, Virginia, Seattle-Washington and West Virginia.  If I left any out, I apologize.  But COME ON – SBA site developers.  The folks out here need help and only 17 of the 71 offices appear to provide any information on current SBA lenders and/or Microlenders in your area. 

 

And to our New York District Office, our thanks for your prompt reporting of loan volume in your area and the names of the banks that have continued to support our Small Business Community during these last five months.  Your site reports that for the SBA fiscal year which ended September 30, 2008 there was an AVERAGE of 290  7(a) loans made each month and over $33Million in 7 (a) loans made within your district each month.  However, from October 1, 2008 through February 28, 2009, in this same district, only an AVERAGE of 70  7(a) loans were made each month and only an average of about $14.5 Million in 7(a) loans were issued.  These figures support that over the last five months, SBA  7(a) loans decreased in number by 75% and in dollars of loans granted by 56%. 

 

SBA should require that every district office post up-to-date SBA lending results.  It’s important for the business owners in our country to understand which banks are supporting the needs of the small business community and the economic recovery of this nation, and which banks have snubbed their noses at our leaders’ endless pleas to apply the bailout funds to meaningful lending programs.   The New York District Report indicates that  JP Morgan Chase, who accepted $25 Billion in TARP funds,  dropped from the number one SBA lender to number  9, having made a total of 40 SBA loans totaling just over $2.8 Million.  Bank of America, who received $45 Billion in TARP funds, moved from the #2 spot to number 33.  BofA’s support of the small business owner was represented by 12 SBA loans totaling $410,000.  And Citbank, who previously held the number 5 ranking,  made a total of 3 SBA loans totaling  just over $1 million dollars.  This nation provided Citibank with $50 Billion dollars.  I leave it to the reader to draw their own conclusions from these numbers.

 

To America’s small business owners and to each and every individual, I offer the following advice:  Stop complaining and DO something.  Go establish a banking relationship with one of your local community banks and reward them with your bank accounts.  If possible, pick one of the banks on the top of the SBA participation list. Check out their bank rating here:  http://www.bankrate.com/rates/safe-sound/bank-ratings-search.aspx?t=cb. Find the best bank in your area and encourage all your friends and business associates to move their accounts.  Yes, it will be inconvenient to make a move.  But if we, the people, act together in unison, we can send a clear message to the financial industry that we will not stand by and let them tear of life out of this country with their greed and avarice, and then reward them by banking with them.  We will not do business with them, when they have failed us, and continue to fail us,  so miserably. 

 

And to President Obama and our Congressional leaders:  We thank you for your efforts and we look forward to a prompt and effective resolution to the release and implementation of your new SBA Recovery Plan.  Please hurry!!!

 

 

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