Archive for September, 2009

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 Takes On Congress and the Banks

Wednesday, September 16th, 2009

It’s been almost one year since I wrote to the New York Times’s Joe Nocera and predicted that the Worst Is Yet To Come, and specifically pointed to the economic risks posed by the credit card industry. I’m saddened to say how accurate that prediction was. The banks did, in fact, come back to the Federal Reserve with their hats in their hands, and the Fed duly assumed their exposure from sub-prime credit card debt, disburdening the banks on behalf of the taxpayer. This program, among others, is considered by many to be the government intervention that saved the economy.

In truth, without the bailout of Fannie Mae and Freddie Mac, and without the TARP funds handed out to recapitalize many of the leading banks in this nation, and without the increase in FDIC insurance and the Money Market Mutual Fund Stabilization Program, our entire financial system and the very core of our economy would have been shattered. I do not dispute the necessity of these programs.

However, to declare victory–to even allude to the hope that, as Treasury Secretary Geithner stated, “We are back from the edge of the abyss”–is a tremendous miscalculation of what our future holds, and more importantly how the future is viewed by the people and small business owners of this nation. For above all confidence is the necessary ingredient, and it simply does not exist out here in the real world. Without a feeling of hope in our future, consumer spending will continue to lag, putting a tremendous strain on our nation’s small business community–on which there has been little, or dare I say, no focus by our government leaders.

While there is much rhetoric around programs to promote small-business lending, know this: the granting of SBA loans is in the hands of the very banks that have tightened credit until the small business owner cannot even breathe. The SBA has lending guidelines that the banks are ostensibly supposed to follow. But in the institution where I am employed, whenever I submit an SBA loan, it is declined. And when I inquire as to why it has been declined, I am given reasons that the loan does not qualify under the “bank’s” lending criteria. When I ask why they are holding the credit to the bank’s criteria and not to the SBA criteria (which is somewhat less restrictive), I am consistently told that the bank has a right to hold the credit to a higher standard than that imposed by the SBA. The banks that are given the authority to grant these loans have simply refused to apply the less stringent SBA criteria to the underwriting process!

Additionally, Congress would do well to implement regulations protecting business owners from deceptive credit card practices, deceptive merchant service credit card practices, usurous credit card rate increases, the passing of FDIC insurance premiums onto business banking accounts, the cancellation of credit lines when business borrowers have not missed any payments, and the increase in bank fees across the board for services such as wire transfers, checkbooks and ACH services.

Back to the banks. Of course they need to tighten underwriting standards. But most bankers state that the key reasons for making less loans is twofold: (1) lower demand for loans because borrowing needs declined, and (2) deteriorating credit quality of applicants.

Well, golly-gee-wiz! If the banks measure credit quality, as they do, by analyzing revenue and income trends, then clearly few applicants will qualify for loans during this economic depression! But I see business owners taking extreme steps to reduce expenses, commensurate with reduced revenues, and demonstrating their ability to manage their companies through this crisis. They still need funding, though, and there is simply no place for them to go since the banks have abandoned their fundamental obligation as lenders.

The lack of available capital to support our nation’s businesses has a direct impact on unemployment: if the business owner does not have confidence in his ability to obtain reasonable levels of financing, there will be no new job creations, and worse, an increase in unemployment.

Do I really need to spell out the domino effect that invariably ensues when that happens? Just one reason why I predict that unless there is a reasonable focus on small business lending, we will continue to totter on the edge of the abyss. The SBA has been known to lend directly in emergency situations, such as 9/11 and Hurricane Katrina. Is this economic crisis, combined with the banking industry’s general reticence to lend, perceived as less of a crisis than these events? Personally, I am not confident that our government will enact the necessary legislation to stimulate lending. I hope my prediction in this regard is less accurate than the one I made last November on the credit card bailout.

Reprinted from Bizbox

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Anonymous Banker says please PIN your debit card purchases

Saturday, September 12th, 2009

I can’t even watch a golf match without getting pissed off at the banks.  Chase’s Sapphire card and their television commercials, run during the FedEx Golf  Tournament, are a perfect example of how the banking industry systematically screws over the small business owner.  This ad is Chase’s attempt at brainwashing the consumer into using their debit card in a way this is most costly to the business owner and most profitable to the bank.

First, Chase issues a “reward” debit card to every new consumer or business opening a checking account.  In fact, when you open a business or personal checking account with Chase, you can’t even “opt-out” of getting a  debit card because Chase’s computer system won’t let the banker open the account without issuing a rewards debit card.  This should be no surprise since Chase is one of the largest providers of merchant services to the business community.  And debit cards with reward points provide higher returns to the bank and higher costs to the business merchant that accepts the card.

Second,  Chase trains their consumer customers to use their debit card as a credit card.  Their mantra is “Don’t PIN the card”.  In fact, Chase Bank waives basic personal and business checking  monthly maintenance service fees if the account owner uses their debit card five times each month, but only if they don’t PIN the card.  Don’t PIN the card, don’t PIN the card, don’t pin the card….. says Chase Bank!

Chase has all types of rewards programs.  Some are free to the cardholder.  Upgrades can cost the consumer $25 to $65 a year.  And here are the terms, from the Chase website, defining how you earn your rewards:

 ”Qualifying purchases” include all Debit Card purchases made without using a Personal Identification Number (PIN).  “Non-PIN” purchases include purchases you sign for, Internet purchases, phone or mail-order purchases, small dollar purchases that don’t require a signature, bill payment (where billers process the transactions as a credit card), and contractless purchases (purchases made by holding your blink (sm) – enabled card to a secure reader.)  Purchases authorized with your PIN and ATM transactions do not earn points.  For a full description of Qualifying purchases, please see the program terms and conditions.

With all the different rewards programs and Merchant service rates, it’s hard to be precise.  But even estimating on the side of the bank, the consumer would have to spend at least $1875 to earn a $15 gift card.  Those same purchases generate merchant service costs to the small business owner of about $30 to $48.  The profit goes to the bank.

When you, the consumer, think about the rewards you get off your debit card (if you remember to actually cash in your rewards), consider this:  All those extra fees that are paid to the bank by the store owner are really paid by YOU in the form of higher prices.  You lose and the small business owner loses.  The only one that gains is the bank.

Consider the cost of prime time TV advertising and how costly this is to the bank.  And Chase Bank uses this air-time to brainwash the consumer into developing a habit specifically designed to screw over the small business owner.  Chase is trying to instill buying habits that are very costly to YOU.  If your purchase is more than $15, then please, PIN THE CARD!!!  Perhaps then, Chase won’t run these ads while I’m trying to relax and watch a good golf match and I can forget, for that brief span of time, just how despicable the banking industry really is.

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Anonymous Banker’s Call to Action for Small Business Owners

Monday, September 7th, 2009

I’ve been a small business advocate for thirty years.  About a year ago, I brought up the Perc-up.Org  site in an attempt to gather people in support of needed changes in credit card laws.  My site didn’t have much of an impact.  But in the end, credit card reform DID get enacted.

When our congressional leaders passed the regulations inhibiting banks from deceptive credit card practices, they abandoned the Small Business Owner.  In fact, despite all their rhetoric, nothing has been done to provide any assistance to this group that drives our nation’s economy.  SBA plans, be damned.  They reach so few and are handed out by the very banks that have turned their backs on Small Business customers.

The Perc-up site encouraged the people of this nation to write to their Congressional Leaders and provided the links to do so.  I personally wrote several letters to various Congressional leaders and received back boiler-plate emails, completely unresponsive to my queries.

Therefore, I recommend that we all attack this from another direction.  Call your Congressman’s office and request a face to face meeting to discuss your issues.  Bring your credit card statements with you.  Make them take note of the financial hardship you are enduring due to the banks unrelenting increases in credit card rates.  Vocalize your support for new legislation that will set a national usury rate.

Each day I encounter consumers and business owners that had been able to keep current on their revolving debt.  But with each rate increase in the midst of declining revenues, brought about by this economic crisis CREATED BY THE BANKING INDUSTRY, more and more consumers and business owners are falling behind.  The rate increases are a self-fullfilling prophesy.  The banks say they need an increase in rates to help offset the increase in credit card losses.  I say, the increase in rates is CAUSING a good portion of the credit card losses.  Yes, the banks need to recapitalize; for without a banking system, this country’s economy is doomed.  But we have supported every plan to help banks recapitalize as reflected in our nation’s debt which ultimately translates into debt that each American must bear.  In the matter of credit card interest rates, the banking industy must relent and they will never do so on their own.

The Perc-up site was meant to be inspiring.  I wanted to give the people of this nation a sense that if we all worked together towards a common goal that we COULD make a difference.  Our government is counting on our complacency on this issue.  Let’s show them that they are wrong.  Take some action -  ANY ACTION.  Call your congressional leader’s office, set up a meeting, send an email, send an email every day, mail them a letter with copies of your credit card statements (black out your account number please), and if you are a group with perhaps a Ralph Nader’s influence: organize a March on Washington in support of usury laws.

We all must DO something.  My Mom used to say:  If you don’t vote, you lose your right to complain.  (Actually, she was more colorful in her words).        

I say:  If you take no action, then you lose your right to complain.

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Anonymous Banker weighs in on Money Market Funds – Risk and Reward

Thursday, September 3rd, 2009

I still follow Joe Nocera’s column and I feel the need to respond to his most recent article, It’s Time to Admit That Money Funds Involve Risk.  The difference between having my responses on his site and having them on mine….. besides reaching about fourteen million readers,  is that now I get to write as many words as I think it takes to tell the whole story.

 

Joe needs to recollect Tim Geithner’s response to the question: What do the banks owe this nation?  The government guarantee that the money funds would not “break the buck” is a perfect example of government intervention to restore confidence and prevent disaster, all at no real or apparent cost to the taxpayer.

 

It is not the “average Joe” who has their money in money market funds.  These investors are substantially more savvy than the average American that opens a savings or money market account with a bank.  And to imply that they are led to believe that there is safety in the Money Market Fund product is ridiculous.  These investors knew better…. and know better.

 

So here’s my take on Money Market Funds.

 

First, there are some banking rules that you need to know.  Banks, by federal law cannot pay interest on checking accounts.  Not surprisingly, this is one federal regulation that the banks don’t violate.  With the exception of NOW accounts that have always paid a miniscule amount of interest to the individual, sole proprietor and not-for-profit business, banks reap the rewards and profits that come from checking accounts. They pay you nothing and they earn a lot on them by lending it back to you through credit cards at 30% interest.

 

Banks also have to reserve ten percent of all checking account deposits.  That means that they have to keep those funds on hand, ready to pay the checks you write.   When they pay interest on an account, like a savings or money market, they have to limit the number of transactions on those accounts to six per month.  So the average individual and business owner cannot earn interest on their liquid bank checking accounts and are severely limited in the number of checks they can write on their bank money market account.  Therein lies the difference between a checking account, a bank Money Market Account and a Money Market Fund.

 

The first Money Market Funds popped up in brokerage houses.  If you had your  account with say, Merrill Lynch, you could open a Money Market Fund and earn market rates AND write as many checks as you wanted.  As a banker, I’ve been competing with this account for twenty years.  So imagine this:  In 2006 a liquid Money Market Fund was paying about 4.25%.  A bank money market about 3%.  And a bank checking account …. Zero.  

 

If you are a savvy investor and if you don’t need the services of the bank to take your deposits, cash your payroll and petty cash checks, provide you with coin and currency, etc. you opened your “business operating account” (alias Money Market Fund) with a brokerage firm and earned interest.  If you needed these other services, then you opened a small checking account with the bank and kept the rest of the funds in the Money Market Fund….earning interest.

 

 

It’s important to note that the Fund Manager or Broker, receives fees for managing these portfolios of investments, typically between 1% and 1.5%.  The investor’s return is AFTER these fees are deducted. 

In 1999, with the repeal of the Glass-Steagall Act, the playing field was leveled.  Banks bought investment firms or partnered with outside investment firms and began to offer these Money Market Funds in their retail stores and business banking centers. 

 

Still, they are not products that are well advertised.  The banks want employees to bring in accounts as checking accounts that pay no interest.  Only  if we are unable to win the business by offering conventional bank products, are we then allowed to ‘sell’ these Money Market Funds to our customers.  The idea behind this is that the bank makes more money by using the depositors checking account funds than they make on the management fees on the Money Funds.  Has anyone in this country ever received a mailing from their bank recommending that they convert their checking to a Money Market Fund.  Never!

 

Along with this product line comes pages of disclosures and a Prospectus.  Still, it baffles my mind how the SEC can allow this product to be sold in the retail bank by unlicensed folks like myself.  But they were, and they are.  Our regulators once again turn their back on the laws they are obliged to enforce.  But I digress.  

 

The consumer or business owner, selecting this product receives and signs all sorts of documents with the following types of disclosures:

 

Risk Factors for all Mutual Funds

Please remember that an investment in a mutual fund is:

            Not guaranteed to achieve its investment goal

            Not a deposit with a bank

            Not insured, endorsed or guaranteed by the FDIC or any government agency

            Subject to investment risk

 

Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Funds.

 

What part of this can be misinterpreted?

 

 

 

The Dollars and Sense of it:

Let’s take the most conservative of these Money Funds:  The Treasury Money Market Fund and look at the return to the investor that kept an average of $50,000 in balances.   The average ANNUAL RETURN  from 1994-1998 was 4.74%,  and from 1999 to 2003 it was 2.76%.   I can’t give more updated numbers because I’m taking them from a prospectus released in 2004.  Still, these levels of returns remained through at least 2006. 

 

This Money Market Fund investor earned $18,750 on their $50,000 liquid account over ten years, used the account in lieu of a bank checking account and were able to write an unlimited number of checks. The same bank depositor that had a checking account earned …. Zero.

 

If the fund breaks the dollar and drops even as low as  $.90 per share, they would  lose $5000 of their $50,000 investment and are still ahead $13,750.  They had all the disclosures and were  a type of investor that knew the rules and the risks. 

 

On a larger scale, if these funds hold 3.5 Trillion dollars in assets, under management, the management fees which average at least 1%  provide a minimum of THIRTY BILLION dollars a year in income to the Wall Street Fund Managers.  With these types of returns enjoyed these many past years, perhaps they should be the ones to step up to the plate and provide the guarantee.

 

I have a hard time feeling sorry for these folks.  Nonetheless, I still have to agree with the government’s decision to temporarily provide a guarantee against “breaking the buck” and return confidence to the people.  But now, more than ever, these investors have been warned and going forward they must evaluate their risk and act accordingly.

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