What a difference a year makes. A year ago the banks came crawling to Washington begging for a massive capital infusion to avoid an Armageddon of the global financial system. They sent out an urgent SOS for a $750 billion life preserver of tax payers money to keep the banking system liquid. Our country’s chief bursar Hank Paulson, designed a craft that would help the banks remain afloat. Into the market maelstrom Mr. Paulson launched the USS TARP as the vehicle to save our distressed ship of state. The TARP would prove itself to be our arc of national economic salvation. The success of the TARP has allowed the banks to generate profits in one of the most prolific turnarounds since Rocky Balboa’s heartbreaking split decision loss to Apollo Creed. Some of the banks have repaid the TARP loans to the Fed. Now as Christmas approaches and this incredible year closes bankers have visions of sugar plum fairies dancing in their heads as they dream about how they will spend this years bonus payments based on record breaking profitability. President Obama wants the banks to show some love and return the favor by sharing more of their balance sheets by lending money to small and mid-size enterprises (SME).
Yesterday President Obama held a banking summit in Washington DC. Mr. Obama wanted to use the occasion to shame the “fat cat bankers” to expand their lending activities to SMEs. A few of the bigger cats were no shows. They got fogged in at Kennedy Airport. They called in to attend the summit by phone. Clearly shame was not the correct motivational devise to encourage the bankers to begin lending to SMEs. Perhaps the President should have appealed to the bankers sense of patriotism; because now is the time that all good bankers must come to the aid of their country. Failing that, perhaps Mr. Obama should make a business case that SME lending is good for profits. A vibrant SME sector is a powerful driver for wealth creation and economic recovery. A beneficial and perhaps unintended consequence of this endeavor is the economic security and political stability of the nation. These are the worthy concerns of all true patriots and form a common ground where bankers and government can engage the issues that undermine our national security.
The President had a full agenda to cover with the bank executives. Executive compensation, residential mortgage defaults, TARP repayment plans, bank capitalization and small business lending were some of the key topics. Mr. Obama was intent on chastising the reprobate bankers about their penny pinching credit policies toward small businesses. Mr. Obama conveyed to bankers that the country was still confronted with major economic problems. Now that the banks capital base has been stabilized with Treasury supplied funding they must get some skin into the game and belly up to the bar by making more loans to SMEs.
According to the FDIC, lending by U.S. banks fell by 2.8 percent in the third quarter. This is the largest drop since 1984 and the fifth consecutive quarter in which banks have reduced lending. The decline in lending is a serious barrier to economic recovery. Banks reduced the amount of money extended to their customers by $210.4 billion between July and September, cutting back in almost every category, from mortgage lending to funding for corporations. The TARP was intended to spur new lending and the FDIC observed that the largest recipients of aid were responsible for a disproportionate share of the decline in lending. FDIC Chairman Sheila C. Bair stated, “We need to see banks making more loans to their business customers.”
The withdrawal of $210 billion in credit from the market is a major impediment for economic growth. The trend to delever credit exposures is a consequence of the credit bubble and is a sign of prudent management of credit risk. But the reduction of lending activity impedes economic activity and poses barriers to SME capital formation. If the third quarter reduction in credit withdrawal were annualized the amount of capital removed from the credit markets is about 7% of GDP. This coupled with the declining business revenues due to recession creates a huge headwind for SMEs. It is believed that 14% of SMEs are in distress and without expanded access to credit, defaults and bankruptcies will continue to rise. Massive business failures by SMEs shrinks market opportunities for banks and threatens their financial health and long term sustainability.
The number one reason why financial institutions turn down a SME for business loans is due to risk assessment. A bank will look at a number of factors to determine how likely a business will or will not be able to return the money it has borrowed.
SME business managers must conduct a thorough risk assessment if it wishes to attract loan capital from banks. Uncovering the risks and opportunities associated with products and markets, business functions, macroeconomic risks and understanding the critical success factors and measurements that create competitive advantage are cornerstones of effective risk management. Bankers need assurances that managers understand the market dynamics and risk factors present in their business and how they will be managed to repay credit providers. Bankers need confidence that managers have identified the key initiatives that maintain profitability. Bankers will gladly extend credit to SMEs that can validate that credit capital is being deployed effectively by astute managers. Bankers will approve loans when they are confident that SME managers are making prudent capital allocation decisions that are based on a diligent risk/reward assessment.
Sum2 offers products that combine qualitative risk assessment applications with Z-Score quantitative metrics to assess the risk profile and financial health of SMEs. The Profit|Optimizer calibrates qualitative and quantitative risk scoring tools; placing a powerful business management tool into the hands of SME managers. SME managers can demonstrate to bankers that their requests for credit capital is based on a thorough risk assessment and opportunity discovery exercise and will be effective stewards of loan capital.
On a macro level SME managers must vastly improve their risk management and corporate governance cultures to attract the credit capital of banks. Using programs like the Profit|Optimizer, SME’s can position themselves to participate in credit markets with the full faith of friendly bankers. SME lending is a critical pillar to a sustained economic recovery and stability of our banking system. Now is the time for all bankers to come to the aid of their country by opening up credit channels to SMEs to restore economic growth and the wealth of our nation.
You Tube Music Video: Bruce Springsteen, Seeger Sessions, Pay Me My Money Down
Risk: banking, credit, SME
This summer Georgia and other southwestern states emerged from their prolonged drought by experiencing the nightmare of devastating floods. It was shocking to see how volatile and changeable the climate of that region was becoming. I counted my blessings that I lived in New Jersey because our moderate climate saved us from living through those types of extreme weather events.
During the summer my wife and I took a trip to Northern California. We hiked through the dwindling Redwood forests and scaled peaks in Lassen Volcano National Park. It’s beauty was at times overwhelming. One afternoon we took a dip in the pristine Yuba River but we had to cut that short due to the raging 49er fire that destroyed over 50 homes and businesses. We were happy to return home to New Jersey where the problems posed by wild fires and exceedingly dry climate are not that great a threat.
In addition to a temperate climate another benefit New Jersey offers its residents is the famous Jersey Tomato. Those with discerning pallets eagerly await the end of summer when farmers begin the harvest and bring to market the agricultural crown jewel of the Garden State, our beloved Jersey Tomato. It is big, juicy and luscious. It doesn’t require a sandwich or Hogi to sit upon. Its is great with a touch of basil leaf or sitting a top a slice of fresh mootz, that Jersey slang for mozzarella cheese. You can make an entire meal of it if you add some crusty Hoboken brick oven bread. Yes, Jersey at its culinary lip smacking best.
One Saturday morning my wife returned from Abma’s Farm in Wycoff with the devastating news that their would be no Jersey Tomatoes this year. Unusually excessive rainfall across the region had destroyed much of the crop. We would have to do without our much looked forward to annual treat. I was crushed. I started to do a bit of research into this degustibus disaster.
I discovered that Jersey farmers are coping with heavy crop losses after steady summer rains saturated fields, creating an environment ripe for overgrown weeds, rot and disease. The downpours damaged crops, from tomatoes, green bell peppers and corn, to barley, peaches and watermelon, decimating whole crops or severely reducing yield.
Wilfred Shamlin of The Courier Post reported on the economic impact the unusual weather had on some of the states farmers. His report is an important anecdotal record of the economic distress changing weather patterns can cause. The observations and quotes from farmers directly effected by this years extreme weather change is an important testimony on the risk of climate change and its impact on crop yields and economic solvency of small farmers agricultural businesses.
“The rains have just killed me this year,” said Tucker Gant, 51, a vegetable and fruit farmer in Elk, who estimates his total losses this year at nearly $220,000.
In Mullica Hill, Fred Grasso, 52, said late frost damaged his peaches and rot ran through his tomatoes, green bell peppers, zucchini and watermelon. “Nobody has ever seen rain as drastic as this year, even talking to old-time farmers,” said Grasso, a third-generation farmer who estimates losses so far at roughly $50,000.
“Weeds are a big issue, especially in a wet year. When it’s time to cultivate, you can’t and when you finally get in there and cultivate, and it rains day after day, weeds set in and reroot because of the moisture,” Grasso said. “Weeds steal nutrients from crops, grow tall and block out sunlight, and prevent plants from drying out after rainfall. And constant rain creates problem because the weeds grow faster and herbicides get washed away before they work.”
“It’s never been that bad as far as I can remember,” said Gant, pointing to water pooling in a field as he drove his pickup truck along a bumpy dirt trail toward 35 acres of barley overrun by tall weeds. “I have never seen water lay there more than two days. It should have been harvested, but you can’t harvest weeds taller than barley.” Blueberry and peaches thrived in the wet weather but the same disease responsible for the Irish potato famine attacked South Jersey’s tomato crops.
“Farmers’ yields will be down this year because a lot of fruit out there wasn’t able to be marketed,” said Michelle Casella, an agricultural agent for Rutgers Cooperative Extension for Gloucester County. Gov. Jon S. Corzine has requested that 15 counties be declared disaster areas by the U.S. Secretary of Agriculture after rain, hail, wind and even a tornado caused crop and property damage across the state. The designation would allow farmers with severe weather-related losses to apply for emergency low-interest loans.
This year’s hay crop was such poor quality that Gant marked down the price for landscapers, making 25 cents profit per bale rather than $1.50. Though struggling, Gant and Grasso are bent on persevering as operating costs continue to climb. Gant’s losses include $30,000 on bales of straw for mom-and-pop stores that order 15,000 bales and sell it as decoration during the holidays. He grew enough straw to make 10,000 bales but he had to buy the remaining 5,000 bales from a neighboring farmer. Crop losses have cut into profits that the Gant and the Grasso family normally would have invested back into the farm. “We have cut every corner we can without hurting the business itself,” Grasso said. “We’re at just about the limit where we can’t cut anymore. I’m trying to conserve.”
Gant said he has depleted his retirement savings and supplements his income by working three days a week repairing tractor-trailers. He often works 16-hour days on the farm. His wife also works full-time. He has trimmed unnecessary expenses, postponed farm equipment upgrades, and criticizes the federal government for coming to the aid of car dealers and other big businesses, but not farmers.
“Where’s the bailout for farmers?” Gant asked.
“When everything went into the toilet, my costs didn’t go down one bit,” Gant said.
Gant said he would need a $250,000 loan to bail out his farm.
Gant remains optimistic that he can ride out the recession. He’s planting seeds now so he can get barley, rye and wheat next spring.
“We’ll get there. It’s just a matter of time,” he said. “I believe in the Lord. I know He’s going to take care of me. That’s one reason I’m confident we can come back.”
As all farmers know, we reap what we sow. We trust that Mr. Gant’s optimism and faith will help to restore the good fortunes of farmers and the hungry citizens of New Jersey. We should also view this as an opportunity to begin the sowing the seeds to address the problems of climate change. Even in an area as blessed as New Jersey. Farmers livelihoods and a significant portion of the economy of New Jersey depends on the economic viability of small farmers. I also have a selfish reason to address the threat of climate change. I continue to crave the taste of the sweet fruits of our farmers yields and pray that the Jersey Tomato makes a reappearance on our dinner plates next summer.
This article extensively used the report of Mr. Wilford S. Shamlin at The Courier Post.
To Reach Wilford S. Shamlin at (856) 486-2475 or firstname.lastname@example.org
You Tube Video: Billie Holiday,Lets Call the Whole Thing Off
Risk; small businesses, farmers, agriculture, climate, Jersey Tomato
Riskrapper is pleased to participate in this years Blog Action Day. The subject is climate change. We hope you enjoyed the post.
More than 7000 bloggers have registered to participate and thousands more will join in the next 24 hours. There’s already buzz growing across the blogosphere and on Twitter in anticipation, with updates from around the world every minute about the upcoming event.
There is a wonderful story in the New Testament from the Book of Matthew. It tells about a man Jesus discovers in a synagogue with a withered hand. The Pharisees who were the fundamentalists of their day asked if it was lawful to heal on the Sabbath? Jesus answers that it is always lawful to do the right thing on the Sabbath. Jesus understood that The Divine Healer requires us always to be mindful as to how to respond to those in need even if that means violating supposedly sacred rules to do so.
The Republican Party opposition to the economic stimulus legislation reminds me of this story from the Gospel. The passage of the recovery bill in the congress was accomplished without one affirmative vote from the GOP. Almost every Republican to the last member cited concern about the country sliding into socialism. Taking a cue from lead party shill Rush Limbaugh, the self anointed demagogue and chief has been howling about the government sponsored recovery plan. Speaking for all Republicans, Rush states that government involvement will lead to the corruption of free market enterprise, ballooning administrative bureaucracies and the sure return of the debauchery of erstwhile earmarks splayed about in an orgy of pork barrel spending sprees.
The economy like the man with the shrived hand needs healing. He cannot find work if he is not healed. The doctor is in the house and being faithful to the Hippocratic Oath is compelled to heal despite the incantations of conservative demagogues of damnable results if ideological dogmas are violated.
An interesting historical analogy steeped in realpolitik can be found in a famous statement made by Deng Xiaoping as China’s disastrous Great Leap Forward was concluding. Said Deng: “I don’t care if it’s a white cat or a black cat. It’s a good cat so long as it catches mice.” This was interpreted to mean that being productive is more important then upholding beliefs in communism or capitalism.
The leader of China at the time, Mao Tse-Tung saw this type of thinking as a great threat to his power. To consolidate his power and mitigate the threat Deng’s thinking represented, Mao launched the equally disastrous Cultural Revolution. Deng and his policies were rehabilitated years later only after the damage of the Cultural Revolution became apparent. The adoption of liberalized economic reforms and the eradication of ideological strictures has done wonders for China. Like Mao, the GOP demands ideological purity regardless of the effect. The United States has pursued the policies advocated by the GOP since the Reagan Administration. Those policies and philosophies have brought us to where we sit today. A moribund economy over dependent on a financial services industry, leverage and the availability of cheap credit.
President Obama’s recovery program is classic move taken from the Keynesian economics playbook. It offers a massive capital infusion into the economy that is funded by an increase in Federal debt and a generous tax cuts that should satiate the most rabid Reaganomic raconteur. Obama is not beholden to ideology. The Great Empiricist has proclaimed the death to all ideologies and is not beholden to the stale bread of old dogmas. Obama is willing and most able to craft solutions from tools and systemic loam to effect the cure. He might even resort to a dollop of supply-siderism and sprinkle a bitty bit of voodoo economics on the zombie republicans to get the American economy going again.
You Tube Video: Dr. John, Gris-Gris Gumbo Ya Ya
Risk: economy, politics, recession
A large meteor that hit the Yucatan peninsula 65 million years ago is considered one of the causal factors that led to the mass extinction of the dinosaurs. The theory gained wide acceptance after a photogemmetric satellite captured the image of the Chicxulub Crater centered just off the peninsulas northeast shore. The meteor theory seemed to solve the dinosaur extinction mystery of how a dominant species that ruled the earth for 200 million years can suddenly disappear. Apparently the theory suggests that the extinction happened more with a bang then a whimper.
Like the Chicxulub meteor, the economic crash of 2008 promises to claim a dramatic toll of corporate victims and drastically alter the landscape of the global capitalist system. The casualty list prominently includes some marquis corporate banking brands like Bear Stearns, Lehman Brothers, WAMU, Wachovia, Fannie, Freddie, Fortis, RBS, NorthernRock and threatens to claim the solvent souls of a UBS or Citibank. The State of California and the Sovereign State of Iceland are also endangered and the economic crisis may claim them as its biggest prize.
Hedge funds are quickly folding up shop. Morgan Stanley estimates that the AUM of the industry may shrink from $1.9tr to $900bn due to market losses and investor redemption and withdrawals. At its peak the global hedge fund industry was estimated to offer AIM products by over 6000 providers. By the close of the next year the size of the industry will be considerably smaller as capacity downsizes to serve less demand. Downsizing will also be the prevailing theme for community banks, RIA’s and CTA’s as excess capacity is worked out of the system through closures, consolidations and seizures. This contraction will effect industry service providers that sell services to the financial services market. Lawyers, accountants, IT providers and consultants will be hard pressed to maintain their book of business as the market for their services contracts.
Free marketeers and Social Darwinists may find it right and fitting that the financial services industry comprises the bulk of the corporate casualty list due to their culpability in nurturing this economic apocalypse and their proximity to the epicenter of the crash. The Hollow Men who led the US economic colossus to this dramatic self immolation however won’t have to fall on their swords. Their champion in the Treasury Mr. Paulson has swaddled them in a protective TARP so these masters of the universe can don superman capes to continue their selfless endeavor of saving the US economy from a total collapse.
Unfortunately the deadly meteor that almost liquidated the banking system is spreading outward to what some refer to as the real economy. Goldman Sachs’ indicates that the recession will shave a cool $1.3tr from the GDP. This will inhibit buying power by individuals, corporations and governments. Some economists fear that this will create enormous deflationary pressure prolonging the recession. Many see similarities with the Japanese recession of the 1980’s. That recession brought on by the burst of Godzilla sized real estate and equity market bubbles lasted for over a decade. Japanese central bankers cut interest rates to almost zero and the vicious downward spiral of the economy recovered as a result of SE Asian and North American market demand drivers that fueled tremendous export growth.
Retail is another sector that will be particularly hit hard by corporate failures. Industry statistics indicate that 14,000 retailers are expected to close their doors during the next year. US auto dealerships from the Big Three are expected to contract by 25%. The auto industry is a major hub of a large and intricate manufacturing supply chain and as such this sector will be hit hard with business closures as well. Construction, housing and domestic oriented leisure industries will continue to stagnate as the American consumer buying power evaporates. Not good news for an economy so strongly dependent on consumer spending.
Yesterday the National Bureau of Economic Research (NBER) announced that the economy went into a recession in December 2007. Its a bit funny that it took a year for the NBER to hear, feel and detect the Chicxulub Meteor that crashed into our economy. Today’s Employment Report from ADP indicates that the US economy shed another 250,000 jobs during the month of November. Now that the reality of the recession is upon us the corporate endangered species list will be a pressing problem and success metric that the Obama Administration will need to squarely address with any stimulus package he plans to enact to get the economy moving again. This actually bodes well for the passage of a rescue package for the Big Three Automakers. One thing is certain, urgent action is required or our economy will continue to go down not with a bang but with a whimper.
You tube video: Ranny Weeks and Orchestra: Out of Nowhere
Risk: recession, bankruptcy, solvency, rescue package, economic stimulus
In a sign of the weak state of the dollar, the Belgian-Brazilian brewer, InBev has made an unsolicited takeover offer to acquire the leading American brewer and corporate icon Anheuser-Busch (BUD). The much beloved maker and marketer of America’s favorite beer, InBev’s $46.3 billion offer for BUD is indeed a tall drink to down but is the latest example of the growing thirst of foreign investors for cheap American assets.
InBev’s offer may raise the ire of patriotic beer drinkers. Many see the acquisition as another example of the decline of America’s industrial capacity. The acquisition has the potential of becoming an emotional issue for Americans because of the strong cultural and national identification of the brand with the American psyche. Busch Stadium the home of the baseball Cardinals in St. Louis, the Clydesdales delivering Christmas trees to snowed in rural homesteads, frogs incantating the BUD mantra in the bayous of the south and urban hipsters greeting homies with a “waz up”has thoroughly ingrained the brand identity and product consumption into the American experience.
America is up for sale at bargain basement prices. The rise of the EURO against the dollar, constrained domestic credit markets and free markets insatiable thirst for efficiency, rationalization and optimal returns are basic economic drivers of this Trans Atlantic-Pan American cross border acquisition.
It will become a prominent theme for American business for the foreseeable future. When you say Budweiser, you said it all.
Risk: dollar denominated assets, currency, brand marketing, American industry, M&A, foreign exchange, EURO, EU,