Sunday, November 9, 2008

Obama Adventure Begins

Now that the euphoria of getting elected President is over the real fun begins for Mr. Obama. He has promised change if he was elected. He now enters a good old boy political system that fights change unless his supporters get something out of the change for themselves. He enters a political system that lacks public support and trust due to George Bush and his failed presidency.

His tasks of changing the political status quo so it will accept change is daunting to say the least. Americans want him to fix the economy by saving their homes, provide new jobs and health care too. Corporate America will also place major demands for the President to make changes in the regulations that favor their industries. This is all in addition to winning a lost war in Iraq and he gets to accomplish this all in only four years! He will be a true magician if he can keep only a portion of his promises that he made while running for President.

Mr. Obama is our first black President and he has stepped into one very big world wide economic disaster of epic proportions thanks to our last white President. He will likely but unfairly be held to a higher standard of job performance than any other white President that has ever been elected before him. He will be replacing one of the worst Presidents that this country has seen since President Nixon resigned in disgrace in the 70's. He must set a new example for what our nations leader must stand for in today's world.

I voted for Mr. Obama because I have high hopes that he will help make changes so that every American can have a better life. Mr. Obama has less than ninety days before he is sworn in as our next President. Ninety days is not very long when you have to choose a leadership team and complete your initial plan of attack on the toughest job in the world. Now I will prey for Mr. Obama to be a strong leader so that he may fulfill at least some of his promises to the Amercan people.

Tuesday, October 14, 2008

We Now Have a Forced Bailout-Like It or NOT

Today I read several articles in MSN that really set me off. It stated "Ten days after passage of its $700 billion bailout of the financial sector, the U.S. Treasury has announced that it will implement this program, in part, by giving banks $250 billion in return for shares of their stock."
The shares of stock portion was not part of the original approval package by the US Congress. In other words, the U.S. government will acquire a significant ownership stake in the banking sector. Oh yes, the shares of stock they are talking about are Preferred Shares of stocks that pay a 5% dividend and they carry warrants to purchase common shares in the bank as well. Preferred shares get paid off before the common shareholder like most of the population owns. Oh yes, distributions of dividends for the preferred stock are paid prior to the distribution of dividends to the common share holder.

They politicians say this is not government privatization of the banking system. Maybe not but it is certainly a major step in that direction.

"The goal of this stock purchase is to "inject liquidity." This will, in principle, improve bank solvency and increase bank lending, thereby minimizing the chance of a recession. This approach appears to be favored by the Treasury over the previously announced strategy of buying "troubled assets" from banks." Note the words "in principal" Having been a small business lender in banking for over forty years I can tell you with confidence that a large bank can set aside $ 25MM for loan loss reserves in about five minutes. That means that the solvency of the bank has improved but there is no new money to increase bank lending! The banks can use the new capital in any manner this wish that means they do not have to make any new loans with it.

In addition to the new $ 250 billion for the purchase of the preferred stocks shares the Treasury is planning to guaranty is the debt owed between banks.
"The government may guarantee nearly $2 trillion in U.S. banks' debt and deposit accounts for more than three years in an effort to break the crippling logjam in bank-to-bank lending."
That's the equivalent of about 20 percent of the national debt, which recently blew past $10 trillion, and roughly 14 percent of U.S. gross domestic product — the economy's total output of goods and services.

By the way the $ 10 trillion they state is the national debt does not include another $ 46 trillion in off balance sheet expenses for social security, medicare and military benefits. They somehow never mention the additional $ 46 trillion that you and I as taxpayers must pay for.

The FDIC is also involved in the current turmoil. "Well over half of the roughly 8,500 U.S. banks and savings and loans are expected to tap the FDIC's guarantees. The agency will provide temporary insurance for loans between banks, guaranteeing the debt in the event the issuing bank failed or its holding company filed for bankruptcy. The banks will be charged a special premium for the guarantees. "The FDIC is taking this unprecedented action because we have faith in our economy, our country and our banking system," FDIC Chairman Sheila Bair said in a statement. "The overwhelming majority of banks are strong, safe and sound. The FDIC will guarantee new senior unsecured debt that banks issue to each other between Oct. 14 and
June 30, 2009. It would be insured by the FDIC through June 30, 2012. Senior unsecured debt does not have collateral underlying it but must be repaid before other classes of debt".

Amazing that the FDIC will get their unsecured debt paid "BEFORE" other classes of debt. Every unsecured creditor in bankruptcy or liquidation is always the last to get paid.

"A lack of confidence is driving the current turmoil, and it is this lack of confidence that these guarantees are designed to address." Well I guess we can have faith in the economy until June 30,2012.

"Some of the nation's largest banks had to be pressured to participate by Treasury Secretary Henry Paulson, who wanted healthy institutions that did not necessarily need capital from the government to go first as a way of removing any stigma that might be associated with banks getting bailouts."
Wells Fargo Bank is planning a new $ 20 billion common stock sale. They plan to purchase the preferred shares back with common stock sales proceeds.

Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp. are all supposed to receive $ 25 billion for their preferred stock.

As recently as last week Bank of America could not even sell their own common stock for $ 23.00 per share then dropped to $ 22.00 per share and still could not sell it. They could not sell it because no one can determine how much ion losses they will absorb from the Merrill Lynch purchase. Citigroup did not have enough capital to purchase the Wachovia Bank. Wells Fargo and JP Morgan Chase will have to participate in the preferred stock issuance.

In summary the banks have to sell $ 250 billion in preferred stock to the US Treasury, they will guaranty approximately $ 1.4 trillion in bank to bank loans and the Treasury will purchase
$ 700 billion in bad loans. OK, they can raise insurance premiums for the loan guaranties but no one has mentioned who will pay for the $ 750 billion dollar "bailout".

Unfortunately, these are the only options the American people have at this time so. Congratulations. If you're an American taxpayer, you're about to become the owner of a brand-new $700 billion attempted bailout of the U.S. financial system.

You, I and our children and their children that is who will pay for the "bailout". That sure instills confidence in our banking and political systems for me, how about you?

Sunday, October 12, 2008

Small Business Suffers Again

Over the last 35 years the US economy has had to deal with at least three economic and banking crisis's. These events have changed how corporate banking gets done and it has created an environment for new and inovative lending and investment financing. However, there has been little change in the last 35 years on how the small business owner gets financed in the banking world.

Today's new words of the day describing the current banking crisis are "toxic waste loan portfolios", "mortgage backed securities", the Dow Jones does not decline now it "plunges" or "plummets", the old phrase of "recession" has been brought back as well.

In the 1970's and 1980's we had "problem loan portfolio's" and not many paid attention to the Dow Jones Industrial averages because we did not have 401K's and the Dow Jones averages never "plunged or plummeted" it only went "up" or "down". It seemed we would have a "recession" about every four years around election time.

On every evening news cast we have the so called experts trying to place blame or give their point of view of what is happening in the current economic climate. Like usual, it is the small business owner or the middle class who winds up paying the tab for the government bailouts or now the new term is "rescue" That little word of "rescue" is supposed to make you feel better about your economic situation.

Within the next week or two the large publicly traded corporations will announce their third quarter earnings or losses. If history repeats itself, we will see another round of declines to the Dow Jones averages that may mean more declining stock values, declining retirement and 401k accounts and possibly more bank closings.

We had the energy crisis in the late 70's and early 80's that caused the failure of Continental Bank of Chicago. At that time the closing of Continental Bank was the largest bank failure of our time. Another bank failure that got national attention was the small bank in Oklahoma called Penn Square Bank. I had the pleasure of spending almost every week for two years commuting to Oklahoma to gather and sell off drilling rigs, work over units and drill pipe. There was one small business owner that I met with in his almost empty company office. When we finished our meeting he was singing a song that I asked him about. It was "Brother Can You Spare a Dime" made famous by Eddie Cantor in 1932 after the stock market crash.

Penn Square Bank and Continental Bank were leaders in the innovations of new ways to make loan participation's or to spread their risks after they started to exceed their bank's legal loan limits. There were several books written about these failures and the related greed. So what major changes did banking make? They stopped lending money to the oil and gas companies and started making million dollar commercial real estate loans but no new programs or were created to enhance the small business lending world.

Recently we had the largest bank failure in the U.S history when Washington Mutual failed. Similar to Penn Square Bank, Washington Mutual got greedy by making high risk mortgage loans with very creative financing. Now many consumers are either in jeopardy of losing their homes or have already lost them.

In the late 80's and early 90's another major banking and economic shake up took place when inflation started to cool and interest rates started falling.With property values declining the economy stopped growing again. Commercial real estate values began to plummet and the owner's equity vanished overnight. At that time we had another round of large bank failures.

Today the small business owner has changed an evolved as well. We have the E-Commerce business now. Thousands of entrepreneurs work from their homes on websites in addition to all of the store front owners. Yet we all face the same financing challenges that our predecessors did.
The banking world is currently trying to address their larger loss exposure to their mortgage backed securities exposure. Meanwhile the small business owner who may need a working capital line or who needs a new piece of equipment financed will possibly have to wait for new financing.

The situation is difficult for the small business owner and the banker who wants to help them stay in business. Next time I will discuss other forms of financing or capital that might be available to the small business man.

by Lynn
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