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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