Posts Tagged ‘Small Business’

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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Anonymous Banker: Please join me and Congressman Alan Grayson in Taking on the Fed

Tuesday, October 13th, 2009

I know I’ve been harping on  the TALF program which  is divesting banks of toxic credit card and autoloans.  TALF was supposed to get credit flowing  by breathing life into the securitization market for bank loans. Our country’s economic system became dependent on the securitization process to manage the flow of credit.  Securitization translates into banks initiating  loans, then packaging them together and selling them off through a product called Asset Backed Securities (ABS). 

The ABS’s are purchased by investors such as insurance companies, mutual funds and pension plans.  Ultimately, we, as individuals are the purchasers through these other investors.

If you were going to buy a pool of assets, and in this case I focus on credit card and auto loans, what level of due diligence would you expect the bank to perform in evaluating these loans?  Most banks today have a pre-programmed “scoring” system.  It puts significant weight on the credit score of the borrower. In large part, this scoring process is governed by Regulation B, the Equal  Credit Opportunity Act.

During the years of sub-prime mortgage lending, what the banking industry did was grant loans on what was called “stated income”.  The borrower simply “told” the bank what they earned and the bank simply took their word for it.  Today, we are calling these loans “liar loans”.  The banks failed to apply even the most basic of credit underwriting processes to these loans:  income verification.   Banks simply stopped caring because they knew they would be divesting themselves of these loans when they sold them to Fanny Mae and Freddie Mac.  We all know how that turned out.

You’d think we would have learned our lesson.  But we have NOT!!

Go into a bank today and apply for a credit card or go into a car dealership and apply for an auto loan.  All you need is a credit score over 680 and you are likely to be approved.  You will be asked for your basic information:  Name, address, social security number, phone number, date of birth, etc. 

Then you will be asked to “state your household income” and if it’s a business credit card you will be asked to “state your annual revenue”.   The bank does not verify this information.  They ask for no tax returns, they ask for no pay stubs.  They ask for NOTHING!! 

In the August 18, 2009 Term Asset-Backed Securities Loan Facility: Frequently Asked Questions, it states:

What types of non-mortgage receivables are TALF eligible?

Auto-related receivables will include retail loans and leases relating to cars….

Eligible credit card receivables will include both consumer and corporate credit…

How are subprime versus prime defined for auto loan, auto lease, and credit card ABS?

Auto loan and lease ABS are considered prime if the weighted average FICO score of the receivables is 680 or greater. Commercial receivables can be excluded from this calculation if historic cumulative net losses on these accounts have been the same or lower than those on receivables to individual obligors and this information is available in the prospectus.

Credit card ABS are considered prime if at least 70 percent or more of the receivables have a FICO score greater than 660. FICO scores must reflect performance data within the last 120 days. For credit card trusts where the percentage of receivables with a FICO score of greater than 660 is not disclosed, the subprime haircut schedule will apply.

Consider this:  Small Business working capital lines of credit issued by banks cannot be sold through TALF.   And early on in this financial crisis, the banking industry systematically cancelled credit lines across the nation to the small business community.  No warning.  They simply mailed the customer a letter stating that their credit line had been cancelled.  These decisions were not based on any repayment history and point-in-fact, many of these borrowers never missed a payment.  The banks decision was based primarily on the credit score they pulled.  If the score was less than 720, the line was cut.   This was the banks way of divesting itself of risk on these lines.

These lines, over at least the last five years, were granted to businesses without the banks verifying any financial information on the companies or the owners that personally guarantee these loans.  Lines of $5000 to $100,000 were the most affected.  The banks wrote to the customers and said they could reapply, if and only if they submitted current financial information to the bank.  The reconsiderations were done on a case by case basis.  Today, all new credit applications to small businesses require tax returns, both personal and business, for proof of revenue and proof of income.  Thank goodness!

Over the last year, over $21 Billion dollars in credit cards and over $10 Billion dollars in auto loans have been sold by the banks through the TALF program.  And these loans were ALL granted without any form of income verification.  Yet the amounts are the same  ($5000 to $50,000) as those of the working capital lines which are held to a much different credit underwriting standard.

Our bank regulators, all of them, have put in place regulations regarding safety and soundness in lending.   The foundation of these regulations come from  the Federal Deposit Insurance Corporation Act of 1931.   Included in these regulations are guidelines on lending which speaks to loan documentation and credit underwriting.  The regulations state:

C.  Loan documentation. An institution should establish and maintain loan documentation practices that:

1.  Enable the institution to make an informed lending decision and to assess risk, as necessary, on an ongoing basis;

2.  Identify the purpose of a loan and the source of repayment, and assess the ability of the borrower to repay the indebtedness in a timely manner;

D.  Credit underwriting. An institution should establish and maintain prudent credit underwriting practices that:

1.  Are commensurate with the types of loans the institution will make and consider the terms and conditions under which they will be made;

2.  Consider the nature of the markets in which loans will be made;

3.  Provide for consideration, prior to credit commitment, of the borrower’s overall financial condition and resources, the financial responsibility of any guarantor, the nature and value of any underlying collateral, and the borrower’s character and willingness to repay as agreed;

Here is  the thorn that pricks me each and every day as I witness the banks granting credit cards and auto loans to so many borrowers that have no hope of ever repaying this debt and to those that continue to incorrectly state their level of income.  This  interagency regulation governing safety and soundness does NOT state that the banks don’t have to apply the basic rules in lending  if they are going to sell off the loans through TALF and stick the taxpayer with the risk.   Yet, in the face of this regulation, which is supposed to be enforced by our bank regulatory agencies:  FDIC, OTS, OCC, and FRB, there comes along a program, TALF, which ENCOURAGES the banks to violate the most basic directive for safety and soundness:  income verification.

And the banks flaunt this behavior in their Regulating Agency’s  face.  With one hand, banks pull back credit to the small business community, because these loans must  continue to be carried on the banks books.   Banks are  now (thank goodness!) requiring tax returns for all business loans.  They generally refuse to lend to a business whose owners have a  credit score of under 720.  Some banks even set different underwriting criteria for “customers” and for “non-customers”.  Chase Bank, for example defines a business customer as one who banks with them for more than six months and maintains average deposit balances in excess of $5000.  Their approval rate for non-customer loans is a mere fraction of those for customer loans.  (I have to wonder if this special evaluation criteria would be supported by CRA which is designed to ensure that banks lend in the communities in which they do business and not just to the customers with whom they do business….. but that is for a different article).

On the other hand, compare the underwriting standards used by these same banks for credit card loans to businesses and consumers and consumer auto loans.  The amounts of the loans are, again, in the same range:  $5000 to $50,000.  Yet the banks refuse to apply ANY safety and soundness standards in underwriting these credits simply because …. they are going to absolve themselves of the risk when they sell them off through TALF.  Additionally, they are granting these loans to borrowers that have credit scores as low as 660 and 680, again, because they are going to divest themselves of the risk through TALF and those scores make the loans eligible for the TALF program.

What can you do about this? 

The New York Fed has  established a 24-hour telephone and internet-based hotline for reporting of fraudulent conduct or activity associated with the TALF.  The hotline can be reached at 1-866-976-TALF (8253) or www.TALFhotline.com.

I seriously have no personal vested interest in correcting this situation.  In fact, I probably risk losing my job each time I write one of these articles.  But I feel quite strongly about TALF’s  risks to us, as taxpayers, and to the future of our country’s economic recovery.  We cannot recover if we continue to allow the banks to make the same mistakes over and over.   

As citizens of the United States, we enjoy a democracy that provides us with a level of freedom not experienced elsewhere in the world. Written into the framework of our constitution is the idea that if we, as a people, demand a change, it must be made. The change may not be the will of Congress, but if the people call for a change in a law that they feel is unfair and detrimental to the health of our nation’s economic foundation, then it is incumbent upon our Congress to listen and to act.

I hope after reading this article you will take a moment to send your email to the TALF hotline, protesting both the use of our taxdollars to divest the banks of these new toxic credit cards and auto loans and demanding that our Regulators force the banks to apply reasonable verification of income for all forms of credit, not just the loans the banks will hold on their books.   I will also provide links on my website that will guide you through the process of writing to your Congressional leaders.  You may feel free to use this Anonymous Banking article to express your concerns.

When you write to the TALF police, please also ask them why, in this new age of so-called transparency, the TALF rules do not require the disclosure of the names of the banks that are selling these assets, how much each bank is selling and what form of credit they are selling.  I asked them.  They emailed me back and said TALF rules don’t require them to share this info.  Transparency?????

Let’s be heard on this issue. If you don’t do it for yourself, then please consider doing it for the security of our future generations.

Please share this article with your friends, family and business associates.

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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 Weighs In on the Slashing of Credit to our Small Business Community

Friday, May 8th, 2009
In response to a recent article over at Business Week, “Snipping Credit lines for Small Businesses”, which discusses how JPMorgan Chase and others are slashing small-business lending in an effort to shore up their balance sheets, I must, unfortunately, question the use of the word ‘snipping’–which, to me, sounds like a tiny trim. Au contraire. Dig deeper and you will find that banks are slashing tens of billions of dollars in credit to our nation’s small business owners.

Does the Obama administration care about small-business credit? It certainly says it does. A typical press release from the Treasury Department avows as much.

But is this for real? Or it this simply rhetoric? As a business banker, I sit in my office each day and deal with small business owners, which I define as those with annual revenue up to $10 million, but often less than $1 million. I see their worried faces as they come into the bank, letter in hand, wondering why their credit lines were frozen. These people need help, and so far as I can tell, they’re not getting it from the administration.

I took a random sampling of approximately 360 lines that received letters similar to the one described in the Business Week article. These 360 accounts represented $20 million in potential money loaned out, which actually owed just over $12 million. About seventy accounts had no balances outstanding and represented $4 million in potential credit. This particular bank (and I’m sorry I can’t identify it for our readers) froze all these lines to any further draws, with an intent to term them out. Based on this sampling, the average credit facility was just over $50,000.

At first glance, these numbers don’t appear devastating, especially when the new buzz words being bandied about are in the billions and trillions. But my sampling is just a drop in the bucket. Imagine that this is happening not to 360 businesses but to 36,000 businesses in one bank. That results in $2 billion in cancelled credit lines. Now imagine that each of the five largest banks (and I’m being gracious) have taken similar action, resulting in the systematic cancellation of 180,000 lines. That would mean that more than $20 billion of working capital has been taken away from the U.S. small business community. I personally believe that the results are much larger than even this.

I understand the need for all banks to recognize the quality or deterioration of loans they hold on their books and their need to effectively reserve for losses, particularly in these trying economic times. But it has been my experience that many of these borrowers never even missed a payment and have met their commitments as agreed.

And what about the prospect of converting credit lines to term loans? Business Week points out, “Business owners who accept the conversion to a term loan will likely see dramatically higher monthly payments.” Once again, a good point; and once again, a drastic understatement. Working capital lines of credit often have monthly payments equal to interest only. They may, in some cases, carry a minimum principal payment equal to 1% of the outstanding loan amount (it depends on the bank and their rules under the original loan agreement).

Take a $50,000 loan at a rate of Prime +2%. Under the interest-only scenario, the monthly payment would be $218.75. If a principal payment of 1% is required, the monthly payment would be $718.75. However, the same $50,000 loan termed out over five years (and with an increase in rate to between 7.5% and 10%) would now carry a monthly payment of just over $1000! So the end result of converting lines to term loans is that the banks have increased the monthly payments for the small business owner by at least 40% across the board while cancelling their access to future working capital.

Let me make this clear to President Obama. Not only are the banks not making business loans to small business owners, they are systematically withdrawing billions of dollars in credit lines from the small business market.

While our president is rallying our Congressional leaders in support of his positions on credit card reform–reform that is likely to exempt small business owners, by the way–he may want to share these observations from the front lines of the banking world so that our leaders can begin to understand and focus their efforts on protecting our nation’s small business community.

Cross Posted at BizBox

 

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