Posts Tagged ‘TALF’

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: TALF’s Legacy CMBS program is an abuse of our taxdollars

Saturday, November 7th, 2009

You know that feeling you get when you eat ice cream and it gives you that pain in the side of your head?  Try making sense out of the government program:  TALF – Legacy CMBS and you’ll get the same pain: brain-freeze.

I understand the need to jump-start the securitization markets.  That process is vital to ensuring that banks meet their fundamental obligation to support the credit needs of individuals and businesses, which in turn is vital to our economic recovery. 

However, the Legacy CMBS program has absolutely nothing to do with helping market participants meet the credit needs of households and small business.  I’ve looked at this program from several different angles.  I’ve spoken to folks “in the know” about the processes and procedures in the CMBS market.  I’ve learned a lot and I admit, I still don’t understand it all.  But of one thing I’m certain:  it ain’t helping to get the banks to lend to the small business community.

My question, and the basis for this writing, is to figure out how the Legacy CMBS program meets the fundamental goal of TALF.  It begs to be asked, and answered,  in light of the fact that there have been ZERO newly issued CMBS processed through the TALF, while there have been over $6 Billion in Legacy CMBS processed.   

Let’s start with the easy stuff:  The initial premise of WHY the TALF program was created in the words of the Federal Reserve

The Federal Reserve created the Term Asset-Backed Securities Loan Facility (TALF), 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.

The premise makes sense.  Years ago, banks held loans on their books. They retained the credit risk and therefore were diligent in applying safe and sound lending practices to all the forms of credit described above.    As the need for more credit expanded through our society, the banking industry’s lending functions were limited by the amount of capital they carried.  The securitization process was born.  Banks made the loans, bundled them together and sold them off to Wall Street.  They got their money back (and a nice profit to boot) and began the process anew.  Credit flowed. 

Wall Street, in turn,  purchased these pools of loans (commercial mortgages, residential mortgages, credit cards, auto loans, SBA loans, student loans, etc),  divided them up into segments called tranches that had different ratings:  investment grade and non-investment grade.  Each of these tranches were converted into what the layperson might know as a bond issue, which is really the same as an “asset backed security”.  The bonds were then sold in large and small pieces to lots of different investors:  some individuals, mutual funds, banks, pension plans and other institutional investors. Through this step,  the funds returned back into the hands of the Wall Street firm,  who, in turn,  purchased more loans from the banks.  Credit flowed.

The tranches or classes, defined by CUSIP numbers,  are paid to the bond-holders in a particular order.  The highest rated classes are paid first, both from the monthly loan payments that the “original borrower” makes and from those loans that are perhaps refinanced and paid off in full.  Those tranches at the bottom of the list have the highest risk, since they are the last to be paid out.

Okay, I’ve over-simplified, but hopefully you’ve gotten the gist of things without the brain-freeze.

As the demand for new loans increased, banks started to make loans without any consideration to the rules governing safety and soundness in lending.     We all know where that led us:  right here in the middle of our nation’s economic collapse. 

As our economy deteriorates,  loan default rates by the original borrowers increases.    That, in turn, lowers the value of the bonds.  First problem:  many of these bonds are held in the capital accounts of banks, insurance companies and investment firms.  When the bond values decline, so does the financial industry’s capital.  The second problem is that as the bond market’s performance deteriorates, there are less investors willing to buy the bonds and the market dries up.  Basically, no one wants to buy this crap.  If there isn’t a buyer, then you can’t sell.  Bond prices plummet some more, and therefore financial industry’s core capital  plummets. 

Additionally, if no one will buy the bonds,  Wall Street stops buying the loans from the banks, and the banks stop making the loans.  Financing becomes virtually impossible to find and the credit market is frozen.

TALF… to the rescue.  We need to get the securitization market flowing.  Through the TALF program the government virtually guarantees payment to the bond holders.  Under TALF, Wall Street, conceptually,  will start to buy new loans and put out new bond issues through securitization.  The banks know they have a market in which to sell the loans they make, and so they begin to lend again.  If  only that was actually happening!!!   If there were newly issued CMBS being processed through TALF, then I’d see some hope in the success of this TALF scheme.   But alas, it’s not to be.

What value, then,  does the TALF Legacy CMBS program have in fostering lending activity?  Legacy CMBS’s represent  loans that were ALREADY made, ALREADY sold to Wall Street, ALREADY packaged up and divvied up and sold to individuals and institutional investors.  When the FRBNY takes a piece of an OLD securitization as collateral and makes a loan, using those bonds as collateral, NO NEW MONEY goes to the banks.  The bank already got that money  years ago.  No new money means no new lending.  The Legacy CMBS TALF program is one big act of smoke and mirrors. 

The CMBS TALF program is supposed to spur the lending functions of banks when the FRBNY finances the purchasing of NEW commercial loans.    Consider this fact:  To date  TALF financing  has not been used to purchase any NEW commercial mortgages.  Conversely, it has been used to purchase over  $6 Billion in Legacy CMBS

How, then, has Legacy CMBS TALF  helped promote lending?  Simply put…. It hasn’t!!!!  Which firms are utilizing the Legacy CMBS TALF program?  Sorry, says the FRBNY:  TALF rules say we don’t have to share that information with the public.  So much for the new age of transparency.   What, then, is the purpose of the Legacy CMBS program?  I have my own theory, which I’ll share with you here. 

For those of you who are willing to risk a little brain freeze, here is a great site to visit:  http://www.cmbs.com/securitization.aspx?dealsecuritizationid=292

It’s a perfect picture of one of these securitizations.  The loans were originated mostly by Bank of America and then to some extent by Barclays and Bear Sterns.    The securitization’s name is BACM 2005-3.  You’ll see here the list of all the properties that were financed, the interest rate charged, the maturity date of the loan, the type of property and where it’s located.  It’s an interesting conglomeration of loans which include $250 Million in financing to the Woolworth Building, $74+ million in financing to the Queens Atrium,  various hotels, Walgreens and CVS stores and  sundry other  multifamily, industrial, retail and office properties across the United States.

I thought it was fascinating to look at.  I came upon this report when I searched the TALF site for CUSIP numbers that were approved for collateral in a Legacy CMBS transaction:  namely CUSIP number 05947UR42.  I’m not singling this issue out for any reason.  They just happened to win my web-surfing lottery.

Here’s what I learned.  A Wall Street firm (perhaps a bank or their investment firm counterpart) will go out buy a bulk of bonds, that carry the same CUSIP number, from the market.  They need to put together a minimum of $10 Million in one bond issue to borrow against them from the FRBNY. 

In step one, the Wall Street firm comes up with funds to buy the bonds in the secondary bond market….. not a terribly difficult task for them.  Then, they take them to the FRBNY, pledge them as collateral, borrow money from the FRBNY and in doing so they get …… most of their money back (minus the haircut).  Now, if , or maybe more accurately when, that  bond portfolio, backed by commercial real estate,  fails to perform, the investment firm or bank counterparty simply turns their bonds over to the FRBNY in full payment of their loan.  Any future losses on those bonds from that portfolio will be funded by the taxpayers.  

What does the investment firm or bank counterparty do with the cash they received from the loan they got from the FRBNY.  They go out and buy MORE previously issued bonds.  Then they take those bonds, bring them to the FRBNY, pledge them as collateral, and once again, get most of their money back.  Each time they do this, they pass the risk of that Commercial Mortgage Backed Security (less the haircut) on to the taxpayer. 

Furthermore, they are now holding an investment which they can value on their books without having to mark-the-value to market, thanks to the TALF program and our taxpayer guarantee.  They have limited their losses and any depreciation in value of their bond holdings.

The Legacy TALF program only benefits the Wall Street firm that has the resources and means to buy up the bonds and bring them to the FRBNY’s window for a loan.  It isn’t helping the smaller community banks that are sinking under the pressure of ever higher default rates on commercial mortgages they hold.  And it isn’t getting the big banks to start lending again.  If the government wants to argue that shoring up the  capital positions of these few firms taking advantage of the Legacy CMBS TARP program is helping to stabilize these  financial firms, I’d buy that argument.  But then, they shouldn’t be promoting the program under TALF whose primary mission is :   to help market participants meet the credit needs of households and small businesses through new securitizations.

Legacy CMBS TALF is not doing THAT!!!   Churning previously issued commercial real estate bonds for a few savvy Wall Street financial companies does not promote lending to consumers and small business.  It provides absolutely no incentive to promote new lending functions  and it isn’t.  A better acronym might be:  SUC OFF which stands for “Shoring Up Capital by Overextending Federal Funding”.

By the end of the TALF program, which the government estimates will finance up to $2 Trillion dollars of Asset Backed Securities, these firms will have accumulated tens of billions of dollars in bonds guaranteed by our tax dollars which they will simply hold in their capital portfolios.   I’ve been called cynical.  Well so be it.  Until I see the CMBS program under TALF used to finance NEW commercial loans, I will continue to call it like I see it:  A government bailout in sheep’s clothing and an inappropriate use of our tax dollars.

Related Articles:

Looming Crisis:  CMBS Defaults Pit Banks Against Each Other in Senior, Junio Fights (Nov. 8, 2009)

Fed to Add Older CMBS to TALF Lending Program in July (Update3) – May 19, 2009 

Fed Announces Expansion of TALF to Legacy CMBS – May 26, 2009

TALF:  Introduction of Commercial Mortgage-Backed Securities (CMBS)  – June 16, 2009

 

 

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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 asks: TALF, Trepp LLC and JP Morgan Chase Connection… is there a conflict of interest?

Thursday, June 18th, 2009

I hate the TALF program.  It is going to come back to bite each and every one of us ….  the taxpayers.  First it was designed to get our securitization market flowing again, presumably to unfreeze the credit markets.  It was to be a mechanism for the Treasury Department to guarantee, with our tax dollars, toxic loans stripped from the Banks’ balance sheets.  It was duplicitous and it was designed to be that way.  Now, in addition to subprime credit cards, subprime auto loans (FRBNY’s words, not mine), student loans, and small business loans, they’ve tagged on Commerical Mortgages.

So I went to the FRBNY’s website to read up on the terms and conditions  and found that the FRBNY has hired a collateral monitor, a company by the name of Trepp LLC.   And I was simply curious to find out if I could find out who really owned Trepp and if it’s involvement is as “arms length” as one would expect it to be.

Here is an interesting interview by CNBC with Tom Fink, senior vice president of Trepp.  I noticed that CNBC never once asked him if there could be any perceived conflict of interest with Trepp accepting this position as “The Feds new Toxic Avenger”.

So, I pose this question to the blogging universe and to our leaders on the Hill and to President Obama: 

How many Commercial Mortgages will Chase Bank be allowed to unload through TALF, a government program that has hired as its collateral monitor  Trepp LLC  whose UK Parent company utilizes, as their stockbroker, a company that is owned 50% by JP Morgan Chase.

Does anyone else see this as a conflict of interest?

Here’s the back up data to this question.  Read it and decide for yourself.  If you think I’m wrong, I’d love to hear you tell me why you think I’m wrong.

About Trepp, LLC  
 

 

 

Trepp LLC, headquartered in New York City, is an established independent provider of CMBS and commercial real estate information, analytics and technology in the securities and investment management industry. Trepp serves the needs of both the primary and secondary markets by providing one of the largest commercially available trading quality CMBS deal libraries, as well as a suite of products for the CRE derivatives and whole loan markets. Trepp’s clients include broker dealers, commercial banks, asset managers, and investors.  

 

 
 

 

 

 About PPR

PPR, headquartered in Boston, is an established provider of independent global real estate research and portfolio strategy services to the institutional real estate community. PPR provides views on markets in North America, Europe and Asia and offers expertise in real estate markets, real estate portfolio analysis, mortgage risk, and the design of real estate investment strategies. Clients include commercial banks, insurance companies, Wall Street firms, rating agencies, government agencies, pension funds, investment advisors, real estate investment trusts, and private investors.

Trepp and PPR are each wholly owned by DMG Information, Inc., the business information division of Daily Mail and General Trust, plc (DMGT).

And here’s information on the parent company:  Daily Mail and General Trust , plc (DMGT)

 and their “stockbrokers”

 Stockbrokers
JPMorgan Cazenove Ltd
20 Moorgate
London
EC2 6DA
Great Britain
http://www.cazenove.com/

Cazenove Group is a private company, registered in Jersey, which holds the 50% interest in J.P. Morgan Cazenove, the joint venture with J.P. Morgan.J.P. Morgan Cazenove is one of the UK’s leading investment banks. Jointly owned by J.P. Morgan and Cazenove, it combines innovative and impartial advice with a broad range of capabilities and proven execution skills.

 

 
 

 

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Anonymous Banker says TALF is laundering bank bad debt with our taxdollars

Wednesday, June 10th, 2009

I’ve written extensively on the TALF program.   And while I always suspected as much, I now have come to the certain conclusion that TALF is the goverment’s way of laundering new and existing subprime auto loans subprime credit cards loans, that are currently on the books of the banks or their investment bank subsidiaries, with our taxdollars.  The program is complete thievery.  And shame on everyone for not being up in arms about what is happening.  Journalists… I’m putting you all on the top of that list.  You are failing this country miserably.

I, for one, don’t want my tax dollars used to purchase sub-prime car loans and credit card loans.  I don’t even want to hear the word sub-prime again, in my lifetime.  I want the banks to be responsible lenders and verify income and debt when they issue a credit card or an auto loan.  And I don’t want my office computer spurting out a pre-approved offer of a credit card to any customers.  Yes, this is still happening and will continue to happen because our Regulators are allowing it to happen in direct violation of all the laws governing safety and soundness in bank lending.  And why are the banks still willing to grant credit in this irresponsible manner?  Because they know they can sell these toxic assets off through the TALF program and any losses on these bad loans will be paid for by our taxes and the taxes paid by our children and our grandchildren, and for generations that follow.

If a bank is allowed to sell its toxic assets through the TALF program, and if the TALF program is funded with TARP funds,  then any bank that sells its assets through TALF is still benefiting from TARP.  Therefore, any bank that is selling their bad assets off through TARP  should still be subject to executive compensation limits and restrictions on dividends, among other rules.  If  banks want to be truly independent of our government’s meddling, then let them live and die by their bad lending practices and eat all the sub-prime credit card and auto loans they granted and continue to grant. 

The government has set aside $200 Billion dollars to fund the TALF program.  On June 2nd, the banks laundered $3.3 Billion dollars in auto loans and $6.2 Billion dollars in Credit Card loans (out of a total of $11 Billion dollars in total loans laundered in just that day). 

In light of President Obama’s wonderful new plan for “transparency”, I think the TALF program should publish, along with the list provided above,  the dollar amount sold by each bank in each category.    Let’s see which of our banks are truly  independent and unconcerned and don’t need to be bailed out.  Does anyone believe that JP Morgan Chase, American ExpressCo., Goldman Sachs Group Inc., U.S. Bancorp, Captial One Financial Corpl, Bank of New York Mellon Corp., and State Street Corp are NOT participating in the TALF program?  Then prove it to me.  Tell me which banks are selling these assets through TALF!!!!! 

TALF program rules require that  the “ABS have a long-term credit rating in the highest investment-grade rating category”.  How does our government dare to defend this term in light of the fact that they are using TALF to strip SUB PRIME credit card and auto loans off the banks’  balance sheets.  I’m not guessing at this.  It is on the TALF website.

Please, join me in my outrage.  Reach out to your Congressional leaders, IN PERSON.  Challenge them on these decisions.  Bring them a copy of this blog and ask them to defend the actions I’m describing.  Make them accountable for the programs they are approving.  Write to your journalists.  Demand that they give these issues the media attention deserved and needed to inspire our people into action.  Each and every one of us must take responsibility and become part of the solution.  They are counting on us to quietly follow, like sheep.  Show them that the people of this country have back-bone and will stand up for what we believe in.   If you fail to do this, then, in my opinion, you have relinquished your right to bitch.

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Anonymous Banker Asks: “Did our country’s leading banks lose their SBA lending rights”

Saturday, May 16th, 2009

In light of the devastatingly poor SBA lending results and the fact that the SBA has been dragging their feet in implementing the new lending programs dictated by the Economic Recovery Act, I started reading deep into the bowels of the SBA website and the Code of Federal Regulations that govern the criteria banks must meet in order to have SBA lending and SBA securitization status.

And after doing so, one has to wonder if ANY of our leading banks are qualified, under clearly defined government regulations,  to partipate in the SBA lending programs.

The SBA Website and  the Code on Federal Regulation  states that the banks have to meet these criteria:

1.  Operate in a safe and sound condition using commercially reasonable lending policies, procedures, and standards employed by prudent Lenders. 

That rule alone takes most of our banks off the SBA lending list.  They all violated the regulations on safety and soundness and in so doing created this nation’s economic crisis .

2.   Have continuing good character and reputation, and otherwise meet and maintain the ethical requirements of §120.140

Dictionary.com defines reputation as  the estimation in which a person or thing is held, especially by the community or the public generally.  How many of our nation’s leading banks would be considered by our general population to have a good reputation?   I can’t think of any, can you?

3.  Holding sufficient permanent capital to support SBA lending activities (for SBA Lenders with a Federal Financial Institution Regulator, meeting capital requirements for an adequately capitalized financial institution is considered sufficient permanent capital to support SBA lending activities)

Based on the recent stress test results and our governments demands that the following banks raise additional capital:  Bank of America, Wells Fargo, Citigroup, Regions, SunTrust, Fifth Third, PNC and KeyCorp; can one imagine that these banks have met the requirements to be adequately capitalized?  If they were, then why would we be demanding that they raise additional capital?  Does that mean that somehow, behind the scenes, these banks have been told that they don’t qualify as SBA lenders?  Is it any wonder that our Small Business Community can’t find any SBA lenders among the biggest banks that took our taxdollars in the bailout? 

Based on this information and what I see each day as a banker to the Small Business Community, it is my general opinion that our government leaders are completely and intentionally fooling us into believing that there is any support intended for the Small Business Community.  It simply is not so!

 

SBA Securitization Market

If my suspicions are correct, then I think it is incumbent upon the Small Business Administration to direct the small business owner accordingly and come clean with the general public.

The Code of Federal Regulations CFR 120.4 also defines the conditions that need to be met for a bank to securitize their SBA loans.  And this is where it gets really interesting.  Our leaders expound on the need to get the securitization markets flowing in order to stimulate lending and the future of our economic recovery.  This mission is the foundation on which the TALF program was built and at the core of the American Recovery and Reinvestment Act of 2009.  Yet, based on the criteria defined in CFR 120.4, it is unlikely that any of our lead banks will be able to securitize SBA loans.  If SBA loans cannot be securitized, then that would mean that the banks would have to hold them on their books, and we all know that isn’t going to happen.

Here are a few of the guidelines, but I recommend that you all read the code in its entirety:

1.  Securitization —A “securitization” is the pooling and sale of the unguaranteed portion of SBA guaranteed loans to a trust, special purpose vehicle, or other mechanism, and the issuance of securities backed by those loans to investors in either a private placement or public offering.

2.  A Lender may only securitize 7(a) loans that will be fully disbursed within 90 days of the securitization’s closing date.  If  the amount of a fully disbursed loan increases after a securitization settles, the Lender must retain the increased amount.

This part pretty much kills any chance of a small business obtaining an SBA working capital line under the 7(a) program. 

3.  Have satisfactory SBA performance, as determined by SBA in its discretion. The Lender’s Risk Rating, among other factors, will be considered in determining satisfactory SBA performance. Other factors may include, but are not limited to, on-site review/examination assessments, historical performance measures (like default rate, purchase rate and loss rate), loan volume to the extent that it impacts performance measures, and other performance related measurements and information (such as contribution toward SBA mission);

Which part of the SBA’s Guiding Principles  is our banking industy supporting as they systematically withdraw credit from small business, systematically increase business credit card rates to upwards of 25% and have generally refused to support the small business owner through any meaningful lending programs?

According to IRS.gov, in 2006 (the most updated numbers they had)  there were 22 million sole proprietor tax returns filed in 2006 and an additional 3.2 million S-corp returns filed for businesses with revenue under $1 million dollars.  These companies generated over 1.2 trillion dollars in revenue and paid salaries of over $200 Billion dollars and rent (supporting our nations commercial property owners) of over $70 Billion dollars.

If the Big Banks are not going to support this group through meaningful lending programs, then perhaps it is time for Ms. Mills and the SBA to focus on providing  the incentives and support required for the community banks to increase their lending initiatives to the local markets they serve so well.

Our regulators have failed us in the past and I’d like to know if  the SBA is  enforcing the regulations that are in place that dictate exactly what banks are allowed to participate in SBA lending and securitizations.  I think that in light of the new transparency rules supported by President Obama, we have a right to know if the lead banks are simply refusing to participate in SBA lending or if they have been justifiably banned from participating for non-compliance of our goverment regulations. 
 
If my suspicions are correct, then I think it is incumbent upon your office to direct the small business owner accordingly and come clean with the general public.
 

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Anonymous Banker weighs in on SBA and the Economic Recovery Act: Rhetoric or Redemption – Time will tell

Friday, April 10th, 2009

Is the new SBA lending program simply more bailout for banks or truly designed to help the stuggling small business owner? 

 

Well, really, who cares?  With all the billions being poured into the financial companies and auto industry, any plan that helps the small business owner is a good plan, in my book. 

 

I see three components in the Economic Recovery Act that should help revive lending to our nation’s small business community.  That is, IF the banks actually cooperate and finally start to meet their fundamental role of making loans.

 

The first program will make available $15 Billion dollars in SBA 7(a) loans and 504 loans backed by guarantees  to the banks of up to 90% .  Borrowers will not have to pay SBA lending fees which provides a meaningful cost savings in their quest to obtain working capital.  It is under this program that our Community Banks have an opportunity to shine and to show our Congressional leaders the vital role they play in supporting the business communities they serve.

 

The government originally rolled out the TALF program, designed to jump-start the securitization markets for Credit Card, Auto, Student….. and yes, tagged onto the end, Small Business Loans.  In an effort to increase credit availability and support economic activity, the Federal Reserve Bank of New York  agreed to lend money, on a non-recourse basis, to investors who purchase Asset Backed Securities from banks. Thusfar, regardless of the guarantees, the TALF program has not increased Small Business lending initiatives by the banks.  The reasons are obvious:  First, in this economic environment the investors don’t want even the small risk associated with SBA lending.  And secondly, because the confidence in these asset backed securities  has been completely eroded, no one really wants to buy them.  And finally, our leaders have not required the banks to start lending, but merely to file reports that will reflect how little they are doing.

 

So with TALF doomed to failure, at least as far as Small Business Lending is concerned, our leaders have gone back to the drawing board to sweeten the pot.

 

It’s TALF with a twist.  While this $15 Billion program provides the originating bank with a 90% guarantee, the government realized that they would not be able to budge the banks unless the banks had assurances that they could divest themselves of these loans after they made them.  With that in mind, our Treasury Department announced that it “will be a ready buyer of the loans in the secondary market.”  

 

And this is where the community banks and perhaps credit unions will play a vital role in getting these funds into the hands of the small business owner.  These banks will originate the SBA loans and sell them, ONE AT A TIME, to the broker/dealer.  The broker/dealer will gather these loans together, from the originating banks,  and sell them….. directly  to the government.

 

Since the announcement of this program, there’s been a big to-do about whether the broker-dealers will participate or whether the Federal Plan to Aid Small Businesses is Flawed.  It seems that since the $15 Billion dollars, used to fund this program, is coming from TARP funds, the broker-dealers that act as the intermediary between the originating banks and the Treasury may be subjecting themselves to TARP restrictions such as limits on Executive Compensation. 

 

Personally, I don’t believe that President Obama, our Congressional leaders or the folks in the Treasury Department intended this interpretation.  Perhaps the simplest way of looking at this is to see these broker-dealers as ‘contracted intermediaries’ by the Treasury Department.  The Treasury cannot be expected to purchase one loan at a time from the banks across our nation.  In order for the program to work, they must have a broker-dealer facilitate the purchasing, packaging and subsequent resale of these loans to the Treasury.  There you have it – and I am sure over the next few days, and with the encouragement of the SBA’s new Administrator, Karen Gordon Mills, this situation will be resolved to everyone’s satisfaction.  Perhaps this is an opportunity for Treasury to create a working partnership with a broker-dealer that didn’t put up barriers to the success of this plan.   

 

This is a plan that will work.   It’s smaller than I would have liked, but it should bring a sense of renewed confidence to our Small Business Community.  New money, new loans, community bank lending, and an opportunity to revitalize our economy one business at a time, create and save jobs and send a clear message that the small business owner’s significant contribution to our economic recovery is recognized and supported.

 

ARC Stabilization Loan

The second program, which has not been rolled out by the SBA yet – but coming soon, is the ARC Stabilization Loan (America’s Recovery Capital).   These loans are to be originated by pre-approved bank lenders (yes many of those same banks that have refused to make business loans over the last several months but had no trouble taking billions in bailout funds from the government).   The loans will be backed 100% by the SBA and will have a maximum loan size of thirty-five thousand dollars. 

 

The $255 million dollars in ARC funding translates into a significantly higher loan volume because it represents the guarantee and the interest subsidy provided by the program.  Borrowers will not have to start repayment for twelve months and full repayment is expected within five years.  Since the SBA will  subsidize the interest on these loans,  the ARC program will provide relief to the business owners as our nation makes its way through the beginnings of our economic recovery. 

 

Once again, I’m counting on Ms. Mills to move this program along to where it needs to be.  I’ve had several conversations with local SBA District Offices and would have liked to see the terms of this program more clearly defined.  The big question is this:  Will ARC merely provide “six months worth of interest payments on existing loans” to the small business owner?  Because if that is the case, then the vast majority of these loans will be for extremely small amounts that banks will be uninterested in processing and ultimately will not make very much difference for the small business owner. 

 

These first two programs, to be truly meaningful, should allow the banks to refinance some of the smaller working capital credit lines that are, today, being systematically pulled by the banks?  I understand that Chase, for example, recently froze working capital credit lines for tens of thousands of their business clients, the vast majority of these lines being under $100,000.  And they are not alone in this process.  I’m told that it is Chase’s intention to give these customers an opportunity to present updated financial information and to reinstate the credit lines for those businesses found to be credit worthy under the bank’s new credit criteria.  Refinancing these credit lines under newly created SBA loans funded by the ARC program or what I lovingly call the ‘TALF with a twist” program, would be an excellent alternative to leaving the viable small business owner without any form of credit.  Additionally, and under the right circumstances, one effective use of these funds would be to refinance credit card debt accumulated by our small business owners, many of whom are now subject to the interest rate increases upwards of 20% recently implemented by the banks.  Most of these borrowers would significantly benefit from the relief provided by SBA lines and particularly those that provide interest rate relief.   

 

Make no mistake about it.  The ARC program, if used as I describe above, would most certainly be, yet another, bailout for the banking industry.   But let’s put that aside for the moment.  My concern today is for the Small Business Community who is, once again being slammed by our financial industry leaders when they most need our help.  Let us hope that these programs will allow the small business owner to refinance their existing debt, significantly reduce their monthly payments and gain the temporary relief to their cash flow needed to weather this economic storm.  We need to help them keep their workers employed, pay their rent and remain in business. 

 

Don’t be fooled.  This is not a bailout program for the business that is out-of-business but hasn’t come to terms with that finality.  The ARC program states that the business has to be ‘viable’ and what that means is yet to be determined.  Borrowers should expect to provide financial information regarding sales/revenue and income.  So for those small business owners that over-extended through the business liar-loans,  businesses that ‘stated income’ that they now cannot support with tax returns:  I don’t think you will qualify.  And if you are one of the small business owners that like to make money, but don’t want to pay taxes:   You won’t qualify either.  If you can’t make it on your own, then the banks will be writing off your debt and taking the loss.  Shame on the banks and shame on you.  

 

I’d like to add one final observation.  When a bank cancels a business credit line, they do this without warning.  The line is simply frozen and no additional draws are allowed.  A letter is sent to the business owner requesting updated financial information, AFTER the credit line is revoked.   In a frenzy, the business owner faxes in their financials to a nameless, faceless person who evaluates their condition.  In my experience, I have seen the following reasons provided in the bank’s refusal to reinstate the lines of credit:  (a)  Decrease in revenue and/or profit (b) weaknesses in cash flow  (c)  debt to income too high. 

 

Well, no s_ _ t, Sherlock!   We ARE in a recession, and I dare not use the “D” word here.  Our country, and the world, is in the grips of an economic tsunami that the banks caused. This situation is rooted in the financial industries endless quest for greater profits and the absence of any safe and sound lending practices, further compounded by our Regulators refusal to halt the industry’s despicable practices over the last ten years.

 

We are now caught between a rock and a hard place.  These loans are the hardest to underwrite.  The smaller businesses that will benefit from ARC funds and from refinancing debt under the ‘TALF with a twist’ funds,  simply don’t have anything for the banks to wrap their greedy little arms around.  And it will be difficult to determine which company truly has a chance of weathering the storm and which, despite any refinance of debt, will be forced to close its doors.  Furthermore, simply terming out working capital lines will not provide the relief needed.  We need to slash their interest rates, continue the lines as revolving credit so that it can be used and re-used over the next three years, and then, after a time, term it out.  SBA already has the product matching this description.  Now the SBA has to give the banks specific criteria so they are comfortable  with the conversion.  There can’t be any second guessing or Monday morning quarterbacking on this process.  If President Obama, our Congressional leaders and our Regulators are truly committed to helping the small business owners across this great nation, then DO IT.  Jump in with both feet.  Yes, there will be losses.  But there will also be jobs saved and tax revenues generated and an increase in confidence so critical to our recovery.    

 

The third program, which is already in effect, is the expansion of the existing Micro-loan program.  These loans are granted by special non-profit community-based lenders  throughout the country (microlenders), and not typically by banks.  It provides for fifty million in new loans.  But don’t count on any special rates.  SBA website reports that micro-loan interest rates range from 8% to 13% , which is still better than the usurious rates many banks have started to apply to business credit cards and small revolving lines of credit.  Most microloans are directed at the very small and struggling business and yet, these are the loans that come with application fees in the $500 range.  I am unmoved by this program and so far, disappointed in the channels that are supposed to get these funds into the hands of the small business owner. 

 

For those business owners still interested in applying for a micro-loan, finding a lender might prove difficult.  You can start by visiting this website: http://www.sba.gov/localresources/district/az/index.html and selecting your local SBA office from the dropdown box.

 

Congratulations to Arizona, Los Angeles, San Diego and Santa Ana California,   Jacksonville Florida, Boston Mass, Nebraska, New Hampshire, NY-New York,  Oregon, Rhode Island, South Dakota, Houston-Texas, Utah, Virginia, Seattle-Washington and West Virginia.  If I left any out, I apologize.  But COME ON – SBA site developers.  The folks out here need help and only 17 of the 71 offices appear to provide any information on current SBA lenders and/or Microlenders in your area. 

 

And to our New York District Office, our thanks for your prompt reporting of loan volume in your area and the names of the banks that have continued to support our Small Business Community during these last five months.  Your site reports that for the SBA fiscal year which ended September 30, 2008 there was an AVERAGE of 290  7(a) loans made each month and over $33Million in 7 (a) loans made within your district each month.  However, from October 1, 2008 through February 28, 2009, in this same district, only an AVERAGE of 70  7(a) loans were made each month and only an average of about $14.5 Million in 7(a) loans were issued.  These figures support that over the last five months, SBA  7(a) loans decreased in number by 75% and in dollars of loans granted by 56%. 

 

SBA should require that every district office post up-to-date SBA lending results.  It’s important for the business owners in our country to understand which banks are supporting the needs of the small business community and the economic recovery of this nation, and which banks have snubbed their noses at our leaders’ endless pleas to apply the bailout funds to meaningful lending programs.   The New York District Report indicates that  JP Morgan Chase, who accepted $25 Billion in TARP funds,  dropped from the number one SBA lender to number  9, having made a total of 40 SBA loans totaling just over $2.8 Million.  Bank of America, who received $45 Billion in TARP funds, moved from the #2 spot to number 33.  BofA’s support of the small business owner was represented by 12 SBA loans totaling $410,000.  And Citbank, who previously held the number 5 ranking,  made a total of 3 SBA loans totaling  just over $1 million dollars.  This nation provided Citibank with $50 Billion dollars.  I leave it to the reader to draw their own conclusions from these numbers.

 

To America’s small business owners and to each and every individual, I offer the following advice:  Stop complaining and DO something.  Go establish a banking relationship with one of your local community banks and reward them with your bank accounts.  If possible, pick one of the banks on the top of the SBA participation list. Check out their bank rating here:  http://www.bankrate.com/rates/safe-sound/bank-ratings-search.aspx?t=cb. Find the best bank in your area and encourage all your friends and business associates to move their accounts.  Yes, it will be inconvenient to make a move.  But if we, the people, act together in unison, we can send a clear message to the financial industry that we will not stand by and let them tear of life out of this country with their greed and avarice, and then reward them by banking with them.  We will not do business with them, when they have failed us, and continue to fail us,  so miserably. 

 

And to President Obama and our Congressional leaders:  We thank you for your efforts and we look forward to a prompt and effective resolution to the release and implementation of your new SBA Recovery Plan.  Please hurry!!!

 

 

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Anonymous Banker comments on TALF update released Feb 6, 2009

Saturday, February 7th, 2009

Earlier this week, I responded to an article on TALF in the WSJ by Alan Blinder

Since then, the FRBNY has released additional information and I’ve modified, slightly, my response to address the information in the release.   I sent the following into Scott Lanman in response to his article in Bloomberg entitled, Fed Steps Back From February Plan to Start TALF Loans “

As an aside, I don’t actually think the FRBNY has “stepped back” on TALF.  My read of the releases, November, December and this most recent, all indicate that the program was due to start in February.  I don’t see anywhere that they have pulled back from that date.

Here is my take on TALF.  It is not going to accomplish what our government proposes it will accomplish.  And I believe they know it.     

While I agree with Mr. Blinder’s opinion that “a market by market approach makes a start on a cure”, I vehemently disagree that TALF “offers a transparent rulebook”.
 
Let’s all agree on one thing. It was the banking industry failure to apply safe, sound and prudent underwriting criteria to mortgages they issued over the last six to ten years that created the economic crisis we are in today. Zero down payments, no income verification, no loan to value standards. They knew they would be divesting themselves of the risk when they sold these loans through mortgage backed securities. The direct result of this act was the devastation of our country’s economic foundation, which was previously built on a level of confidence and faith and trust in our banking institutions. (Our regulators also failed us when they allowed the banks to continue in this manner in direct violation of Regulation H….. but that story is for another day).
 
Prior to the age of securitization, banks funded loans through balance sheet activities. They underwrote the credits and held the risk as their own. Securitization of assets was designed to allow for off-balance sheet funding of loans, provide investors with a reasonable return on their investment with a measurable and reasonable risk and provided the overall credit market with reduced funding costs that perpetuated the lending cycles. It was brilliant. Until it was abused.  Now, because of the banking industry’s greed, there is no more CONFIDENCE in the assets being underwritten by banks, and that is across all categories and specifically those loans that TALF will fund: Credit Cards and Auto Loans.
 
With respect to credit cards and auto loans, I am absolutely certain that the banks are still not applying any income verification to these loans. I tested they system with a car loan and a credit card loan and both were approved based on falsified information and therefore, only on credit score. No income verification was applied and no debt to income measurements were applied. You can read my report here: http://anonymousbanker.com/?p=42
 
Until our government ensures that the banks start to apply reasonable credit underwriting guidelines to all forms of credit (yes that means income verification for all loan requests and an understanding of the consumers debt level in relation to their income), investors will never have any confidence in asset backed securities absent a government guarantee. And I, for one, do not want my tax dollars to go towards any program that absolves the banks of their responsibilities to the public and to this country by perpetuating their lax credit standards. We need confidence based on the quality of the underlying loans and not based solely on the government guarantee. Without addressing credit underwriting standards, the TALF program is simply just another bail-out program designed to transfer existing and new credit risk from the banks, through the investors and then onto the taxpayer by virtue of the new government guarantee.
Additionally, the transparency that Mr. Blinder states he sees in the TALF program is, in my opinion, distressingly absent. In fact, the word I would use to describe the Federal Reserve Board’s release on the T.A.L.F program is …
Duplicitous: given to or marked by deliberate deceptiveness in behavior or speech.

 Let’s look at the proposal: What is a non-recourse loan? Non- recourse means that the F.R.B.N.Y takes the bundle of loans that were underwritten by the banks without any income verification as direct collateral to their loan to the investor. If too many loans default, and the investor is unable to meet the principal and interest payments due to the FRBNY, then the F.R.B.N.Y will seize the collateral. This simply means the FRBNY will take ownership of the consumer and small business loans. The F.R.B.N.Y’s recourse is limited to the value of that collateral, which consists of the original loans made by the banks to the consumer and small business. This system of non-recourse lending puts the F.R.B.N.Y in the first-loss position with these bundled loans, not the investors and certainly, not the banks!

 

 

 Non-recourse financing only protects a lender that utilizes prudent underwriting guidelines and, by its very nature, encourages them to only lend a reasonable percentage of the collateral value.

 

 Banks that originate the consumer and small business loans, cannot directly borrow from the FRBNY to securitize these loans. What this means, is that they can’t make new toxic loans or take existing toxic loans they currently have on their books, and borrow through TALF to securitize them ……within the same transaction. What does this really mean? Let’s say that Chase bundles up $20 million in loans they originated. And Bank of America bundles up $20 million in loans that they originated. Chase could not use their loans as collateral to borrow through the TALF program. But there is nothing to STOP THEM from selling their $20 Million in toxic loans to Bank of America through the program. And in turn, Bank of America could sell their toxic loans to Chase through the program. In truth, the TALF program COULD be used to simply ‘launder’ the toxic loans between the banks that are already receiving funds from the Emergency Economic Stabilization Act of 2008. And I think that ‘launder’ is exactly the right word because this process will allow the banks to take the toxic loans off their books, pass them through the TALF program, and bring them back onto their books, nice and clean and fully guaranteed by our taxdollars!!!

 

 

This loophole does nothing to encourage the banks to improve their credit underwriting standards. Furthermore, TALF fails to require banks to direct the funds they receive, when they sell the loans, back into the market in the form of new loans. The government is assuming that the banks will do this on their own. Our government also assumed that the capital they injected into the banks would be directed towards lending and the bankers have basically hoarded those funds. Without clear direction, the banks cannot be counted on to meet the underlying intentions of TALF and improve credit availability to the public.
Further examination of the TALF program must make one focus on its definition of the term “recently originated”. The latest FRBNY release states that: Auto loans must be originated after October 1, 2007; Small Business Association (SBA) loansafter January 1, 2008; student loans must have had a first disbursement date after May 1, 2007; and for credit card loans, the new asset backed security must be issued to REFINANCE existing credit card Asset-Backed Securities that MATURE in 2009. That’s the worst rule of all because it doesn’t matter when these credit card accounts were initially granted. It permits banks to transform old toxic credit card debt that’s on the bank’s books into government guaranteed credit card debt.
 
TALF also states that eligible collateral must have a long-term credit rating in the highest investment grade category. There is an apparent contradiction of terminology: “recently originated” and “long-term credit rating” are mutually exclusive terms. You can’t be both at the same time.
 
On Feb 6th, the FRBNY finally released the conditions for what they call the “haircut”, that portion of risk that will be borne by the investor.  For credit cards, it ranges from 5% to 11% and for auto loans, it ranges from 6% to 16%.  When a bank grants credit to a small business to purchase commercial real estate, first, as an abundance of caution they almost always require the personal guarantees of the owners.  In the larger commercial loan transactions, these loans may be granted on a ‘non-recourse’ basis, but then the loan to value is almost certainly 80% and more often than not, 60% to 70%.  If this is standard for bank non-recourse  lending secured by real estate, why then would our government agree to a lower percentage for unsecured debt.   
 
 
 
Additionally, when banks make real estate loans they calculate cash flow or capacity to repay on the property and take into consideration a vacancy rate.  Prudent lending practices govern this  process. Through TALF, our government is guaranteeing loans on which the banks have not performed the most nominal form of income verification, and then they propose to apply a loan to value of  between 95% and 84%  when using these loans as collateral.  This is not prudent application of our tax dollars!  
 
 
 
My final observation is that T.A.L.F does not clearly define how that $200 Billion dollars must be allocated between the various loan types: student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. Since S.B.A loans, by their very nature, carry a government guarantee of between 50% and 75% to the banks, then isn’t there a double guarantee under this program? One guarantee from the S.B.A and one under T.A.L.F? It doesn’t seem possible that the government wants to give two guarantees on the same loan! If they are unconcerned about this, it is because they KNOW that the TALF funds will NOT BE USED to stimulate SBA financing by the banks.
 
More to the point, however, is that if the program doesn’t require the banks to allocate a percentage of these resources specifically for S.B.A. lending, it is unlikely that the banks will increase their S.B.A lending functions. They will direct these resources to the other unsecured loan categories that carry higher interest rates and therefore higher immediate returns upon their sale under TALF.

 I understand what the Federal Reserve Board is trying to accomplish, and applaud it for its efforts. I just think they should be more transparent and forthcoming in the way they describe the plan. And our leaders should finally realize that the ones that have the money, and ability to commit our taxpayer dollars, get to make the rules. This program, absent major re-regulation of the lending procedures currently used by banks; and minus a clearly defined requirements on allocation of these funds, is just another accident waiting to happen.

 

 

 If this program was designed to meet it’s fundamental goal: to increase confidence in the Asset-Backed Securities market so that banks would once again lend to the consumer and small business, here’s what they need to do.

  • Make the TALF funds available ONLY as a means to finance newly generated loans- specifically loans issued after January 1, 2009, and for those loans issued in compliance with the newly defined credit underwriting standards set above.
  • Require that the proceeds from the sale of loans sold through the TALF program be put BACK into these same types of loans so that banks cannot merely divest themselves of loans already on their books and hoard these new funds.
  • Enact legislation that will impose credit underwriting standards on the banks that make the loans. This policy will create confidence in the loans that are being granted and subsequently sold. Confidence based on the actual value of the loan and not based on a government guarantee. The guarantee would be gravy.
  • The program must direct specific amounts of the TALF funding towards specific loan categories such as SBA loans. Without such direction, banks will simply focus on credit cards and other loans that have higher interest rates and that will provide them with higher levels of immediate income. Nothing will be done to help the business owners in this country.
    Over the course of this crisis, we have maintained that the confidence in the banking industry and its leadership has been thoroughly eroded. Confidence in our political and regulatory agencies has also vanished. As long as there is no confidence, there can be no recovery.  The Federal Reserve Board’s apparent dissemblance in its presentation of the T.A.L.F program will simply make things worse. False assurance is worse than no assurance. Transparency is more than a virture, it’s a necessity, and the devil in the TALF lies in its details, or lack thereof.

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