Posts Tagged ‘Economic Recovery’

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 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 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:


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 the coming business debt debacle

Saturday, February 21st, 2009

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?

  1. 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.
  2. 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.. 
  3. 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. 
  4. 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.
  5. 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.

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