Archive for December, 2009

Anonymous Banker: Consumers – It’s Time to Go Shopping

Monday, December 21st, 2009

If we are looking to see any meaningful improvement in overall employment in 2010,  we’ll need to boost our spending during this holiday season. 

Consider this:  Following the dismal sales results of the Christmas 2008 shopping season,  2.1 million people lost their jobs in the first quarter of 2009.   

While it’s true that unemployment dropped from 10.2% in October to 10% in November, these results are skewed.  First, there has been an increase in the number of people that are perceived as having “left the job force”, those that haven’t looked for work for the last four weeks.  Second, there was a rise in the number of folks that secured “temporary” employment, which typically always goes up during the Chrismas season.  

Wall Street will put their usual positive spin on increased sales that will be realized by some companies.  But it’s not hard for a Best Buy to pick up market share in the wake of Circuit City closing its doors.  So one won’t always be able to gauge the movement towards economic recovery by individual store results.   

And as we hear announcements comparing this season’s cumulative totals to last years, remember, it won’t be hard to show positive results over December 2008 numbers.   

Consumer confidence is at an all time low.  Yet consumer spending drives 70% of our economy.  Those still employed are worried about losing their jobs.  Many are worried about losing their homes.  Folks are dealing with increase in heating, water and electric costs, while gas prices continue to sneak up.  They’ve been battered by the banking industry’s unrelenting rise in their credit card rates and the slashing of their credit lines.  None of these things will encourage Christmas spending this season.

Still, in this season of giving, please remember that our holiday spending has the power to jump-start 2010.   We need to send a signal to business owners and managers that we are confident that better times are upon us and that we are confident in our nation’s ability to recover.  Consumer spending is the best way to send that message.  And it’s the only thing that will encourage the creation of new jobs early-on in 2010.

To those that are still feeling blessed in these challenging times, embrace the spirit of Christmas.  Buy a toy for the child of a neighbor that is unemployed.  Put together a basket of food and leave it at their doorstep.  For those of us that are less fortunate, donate some time to a local soup kitchen serving others.  If ever there was a time to do this, the time is now.

My heartfelt wishes to you all for a very Merry Christmas and blessings for the New Year.

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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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