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!!!
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.
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.”
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.
“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.