Small business still being ground down by credit crunch

I’ve done a lot of blogging about the ongoing credit crunch, and last week exposed an article at Forbes that attempted some linguistic sleight-of-hand to argue — quick look at my waving hand over here — there is no credit crunch.

Here’s an article on the same topic from CNN Money that actually cites some real numbers on just how tough things remain for Main Street, and maybe just a little bit why small- to medium-sized business owners are still chafed over the bank bailouts from the fall of 2008.

And yes, small business and personal households are truly suffering under a crippling credit crunch that does not have an ending point in sight.

From the link in the second graf:

Small business loans continue to dry up at the nation’s biggest banks. Eleven top TARP recipients — including Wells Fargo, by far the nation’s largest lender to small companies — cut their collective small business loan balance by more than $2.3 billion in December, according to a Treasury report released late Tuesday.

The drop marked the eighth consecutive month of declines for the 11 banks. In that time, their total loan balance has fallen 7%, to $169.4 billion. Seven of the reporting banks have cut their small business loan balance every single month.

“Credit is still tight for many small businesses,” the Treasury acknowledged in a Feb. 10 report.

The 22 banks that got the most help from the Treasury’s bailout programs have been filing monthly lending reports to the government, and since April, they’ve been required to break out their small business lending. But as of this month’s report, the 10 banks that have completely repaid their bailout funds in June are no longer required to divulge their lending.

The small business credit crunch and unemployment

These two elements — little to no credit for small business and a difficult rebound from deep unemployment — are integrally tied together. Small business jobs are the backbone of the U.S. economy, and small businesses need revolving credit to help ensure cash flow. When your accounts receivable go from averaging 20 days to averaging 45 days, ongoing business expenses become an issue.

I know several small businesses that are currently in a state where invoices are getting paid late so in consequence the companies pay late and the entire cycle helps no one. With banks not providing credit to worthy small businesses the entire system is being ground down by a lack of liquidity.

This example is almost beyond belief and perfectly illustrates where the banking industry — both local and national — is doing real damage to the economy’s small business backbone.

From the link:

Veteran Chicago restaurateur Ivan Matsunaga needs a $300,000 loan to finance a renovation of his flagship pizza restaurant into a higher-end eatery. The revamp is required for his lease renewal, but it will also create job opportunities: Matsunaga estimates that he’ll need five additional staffers to run the updated restaurant.

Three banks turned down his loan request — including a community bank Matsunaga personally invested in at its launch three years ago.

“How perplexing is it that they would not reciprocate? What type of banking environment exists where they currently have $100,000 of my money and yet they won’t give me a loan?,” Matsunaga asked at the hearing. “If my bank were to approve my loan today, I, for one, would create jobs immediately.”

Big banks have shaved more than $10 billion from their small business lending totals over the past six months, which drew sharp criticism from Senators at Wednesday’s hearing. “I know that my situation is not unique,” Matsunaga said. “I have had numerous discussions with my peers who are frustrated by these same issues.”

Credit crunch continues

The headline for this linked article is, “Fewer banks tightened credit standards, Fed reports.” Very misleading in terms of the reality on the ground.

Here’s the real news from the subhead:

But credit availability probably won’t return to normal before mid-2010, report says. Also, the Fed and Treasury extend the TALF emergency financing program aimed at boosting lending.

End of credit crunch in sight?

Maybe. If nothing else things are looking better. Seems like a lot of indicators are on the uptick right now.

From the first link:

Multiple market signals are leading analysts to bet that the worst credit crisis since the 1930s is easing, as debt markets slowly heal after two years of extreme upheaval.The return of private investors to markets they had shunned as recently as the first quarter this year, a surge of corporate debt issuance, and the easing of inter-bank lending rates all indicate that financial rescue measures by government are working, analysts said.

Yet while debt markets are on the road to recovery, turning around a battered economy will be a longer haul that’s still fraught with danger, they said.

“The revival of corporate bond issuance and the narrowing of spreads from the peaks are good news,” says Ward McCarthy, managing director with Stone & McCarthy Research Associates, in Princeton, New Jersey.

The bad news however includes “continued poor performance of many financial firms and the persistent reluctance of banks to lend,” especially to homeowners, adding stress to an already strained housing market, said McCarthy.

U.S. house prices are still sliding and foreclosures rising in many places. Federal Reserve Chairman Ben Bernanke has warned the job market may struggle for another two years.

Home equity credit crunch hurts entrepreneurs

Many small business have been relying on home equity loans as opposed to Small Business Adminstration loans or lines of credit based solely on the business. This avenue of funding has proven to be very, very volitile in today’s financial market. As home value drops, banks are very quick on the draw to freeze home equity credit. Just one more obstacle in the path of Main Street business.

From the link:

As home equity lines vanish, other avenues of small business financing are also running dry. More than 40% of small business owners polled in April by the National Small Business Association said the limits on their credit cards had been cut in the past year, and 63% said their interest rates went up. Bank lending is in freefall. Even with stimulus incentives, the SBA backed 30% fewer bank loans to small businesses last quarter than it did a year earlier. The agency’s lending volume has dropped to less than half what it was before the recession set in at the end of 2007.

The allure of home equity loans is their liquidity: Business owners can tap cash without submitting detailed business plans. But easy access can be a double-edged sword.

“Used properly, home equity lines of credit are great and get the job done. But a business that isn’t self-sustaining can’t pay it back, and that’s where the problem lies,” says Norm Bour, a debt management strategist and founder of BusinessCashFlowPros.com in Laguna Niguel, Calif.

Small business credit crunch

Tight, or no, credit for small business continues. Here’s some tough advice from Doug Tatum, co-founder and chairman emeritus of Tatum, an Atlanta-based consulting and executive search firm that specializes in helping growing companies with finance issues. Tatum is the author of ”No Man’s Land: What to Do When Your Company Is Too Big to Be Small and Too Small to Be Big” (Portfolio, 2007).

From the link:

Q.What’s your advice for businesses looking to borrow money these days?

 

A. Quit trying. The credit markets are tougher than I’ve ever seen them, aside from the Carter years.

Q.But it takes money to make money, right?

A. Entrepreneurs have a limited amount of bandwidth, and they have to quit wasting their time chasing the impossible. They need to think about how they can change their business model to become profitable. That’s where the capital to grow will come from. I just spent some time with a health care consulting company that pulls in $6 million in [annual] revenue with plans to grow to $10 million. They are just bobbing, weaving and growing despite how hard it is out there.

Q.Why hasn’t the government been able to open up the credit markets?

A. Banks have become cautious about what they have on their balance sheets. They still don’t know what their portfolios are worth. That means they’re waiting for the next shoe to drop, which could be the commercial markets. I talked to the C.E.O. of a community bank who told me that they have the regulators telling them when and where they can lend money. So while you might have politicians saying, ‘Lend, lend, lend,’ the regulators are holding the banks back.

Credit crunch continues to hurt small business

This seems like an area ripe for stimulus. Main Street and all that …

From the link:

Business brokers, who bring buyers and sellers together, say there are a growing number of people who want to buy, including many who have lost their jobs over the past year and need to make a living. And there are plenty who want to sell, including baby boomers hankering for retirement.

Getting financing for deals is still tough, although the government has taken steps to make Small Business Administration loans easier to obtain. The brokers say banks are not only uneasy about borrowers, they’re also questioning the health of the companies up for sale.

“Even with those changes, we feel that it seems as if the money may never reach the small business owner,” said Jeff Hoops, senior vice president of The Haley Group in Paso Robles, Calif.

Small businesses have found it hard to borrow from banks for years, long before the recession; a neophyte owner or company has been too risky for many banks to take on. The recession and banks’ unwillingness to lend in general over the past six months have made it that much harder.

Credit crunch continues

Not the greatest news from this AccountantsWorld article:

So have inflation worries finally replaced credit conditions atop the list of investors’ biggest concerns? Is the credit crunch finally waning? Not a chance.

An August survey of economists conducted by the National Association for Business Economics did show an uptick in worries about energy prices and inflation, to 16% and 15%, respectively. However, 46% of economists said the credit crunch and the state of the financial system was their top worry.

“The more persistent threat is going to be the credit crunch,” says First American Fundschief economist Keith Hembre. As the economy weakens and the unemployment rate rises, inflation pressures should ease, he says.

But the credit crisis is like a bad song stuck on repeat: Each time it plays, the tune grows more annoying.

Credit crunch hits small biz

Small businesses are strainging under credit card debt. The analysis comes on the heels of Advanta Corp.’s just released earnings report. Advanta is an issuer of small-business credit cards.

From the AccountantsWorld.com link:

The financial health of small businesses is deteriorating quickly, if Advanta Corp.’s earnings, released yesterday, are any indicator.

The issuer of small-business credit cards from Spring House said it gave up on collecting $130.5 million of its customers’ debts in the second quarter, up from $102.1 million in the first quarter and $50.7 million a year earlier.

“The economy continues to challenge small-business owners and their ability to pay bills,” said Dennis Alter, chairman and chief executive officer of Advanta, which last year was the fifth-largest credit card lender to small businesses, according to the Nilson Report.

Advanta has ratcheted back on growth while it tries to get a handle on troubled loans to its customers, which typically have 10 or fewer employees and less then $1 million in annual revenue.

Retail feeling the crunch

Aside from Wal-Mart, the retail numbers this quarter are pretty bleak and not promising to be much better over the traditional big holiday season.

Here’s an example from today — Abercrombie & Fitch:

Abercrombie & Fitch Reports Third Quarter Results;

Third Quarter Net Income of $63.9 Million or $0.72 Per Diluted Share;

Board of Directors Declares Quarterly Dividend of $0.175;

Company Provides Update for 2008

NEW ALBANY, Ohio, Nov. 14 /PRNewswire-FirstCall/ — Abercrombie & Fitch Co. (NYSE:ANF) today reported unaudited results which reflected third quarter net income of $63.9 million and net income per diluted share of $0.72 for the thirteen weeks ended November 1, 2008, compared to net income of $117.6 million and net income per diluted share of $1.29 for the thirteen weeks ended November 3, 2007.

  Third Quarter Highlights

   — Total Company net sales decreased 8% to $896.3; comparable store sales
      decreased 14%

   — Total direct-to-consumer net sales decreased 6% to $57.5 million

   — Abercrombie & Fitch net sales decreased 8% to $385.8 million;
      Abercrombie & Fitch comparable store sales decreased 8%

   — abercrombie net sales decreased 14% to $109.5 million, abercrombie
      comparable store sales decreased 20%

   — Hollister Co. net sales decreased 7% to $383.6 million; Hollister
      comparable store sales decreased 18%

   — RUEHL net sales increased 7% to $13.5 million; RUEHL comparable store
      sales decreased 25%

   — Net income for the third quarter was $63.9 million

   — Net income per diluted share in the third quarter was $0.72

Mike Jeffries, Chief Executive Officer and Chairman of the Board of Abercrombie & Fitch Co., said:

“Our third quarter financial results reflect a pull back in consumer spending and a difficult economic environment that is having an affect on all retailers.  However, during these difficult times, we remain firmly committed to the aspirational positioning of our brands, providing an unparalleled store experience for our customers and investing in initiatives that will allow us to continue the international expansion of our brands.  We are mindful of the current environment and will continue to operate the business with a seasoned and disciplined approach, looking for efficiencies within our operations.”

Update — Here’s a Wall Street Journal piece on the sector.

From the link:

U.S. retail sales took a record dive in October as consumers afraid for their jobs continued a retreat heading into the holiday shopping season and cut back spending on a wide variety of goods ranging from cars to furniture to electronics.

Separately, U.S. import prices fell at a record pace last month, further evidence that falling oil prices and the slowing global economy are having a rapid damping effect on inflation. Assuming that trend is confirmed by upcoming producer and consumer price reports, Federal Reserve policymakers should have added flexibility to address the credit crisis through liquidity programs and even more rate cuts without worrying about an inflationary outbreak.

Retail sales tumbled 2.8% last month from the previous month, the Commerce Department said Friday. It was the fourth drop in a row. Sales in September decreased 1.3%, revised down from an originally estimated 1.2% decline.

Economists expected a 2.4% drop in sales during October, the first month of the fourth quarter. The 2.8% drop was the largest since records began in 1992. The previous record was a 2.65% decline in November 2001.

Update 11/19/08 — And here more news, a bit more focused on the online retail sector, via AccountantsWorld:

The retail industry continued to see signs of a sharp pullback in consumer spending, both online and in stores.

Growth in online sales slowed to a near halt in October, comScore, a research firm, is expected to report on Tuesday. Separately, Lowe’s and Target reported Monday that third-quarter profit fell as consumers cut back on large home-improvement projects and discretionary purchases.

 

Online spending grew by only 1 percent over October 2007, comScore said. That was the lowest monthly growth rate since comScore began tracking e-commerce in 2001, and was down from 5 percent in September.

In the past, e-commerce has been somewhat protected from cutbacks in consumer spending that have affected retail stores, because online shopping was perceived as more convenient. Consumers also turned to online outlets to compare prices easily.

Bank lending important to small business

Much more important than expected in terms of financing small business. The total credit freeze when the financial crisis hit hurt everyone, but the ongoing credit crunch on small businesses and entrepreneurs may be a fairly big piece of the slow economic recovery puzzle.

From the link:

Small businesses are more sensitive to the contraction of bank lending than previously thought, and the conventional wisdom about how small businesses finance themselves may be hogwash, according to a new working paper from the National Bureau of Economic Research.

The paper, “The Capital Structure Decisions of New Firms,” found that newly created firms rely heavily on “outside” debt financing, such as owner-backed loans, business bank loans, and business credit lines. The average amount of bank financing is seven times greater than the average amount of
“insider”-financed debt — money from family members and personal networks of the owner. Those groups were previously thought to be the primary providers of fuel for start-ups.

Merchant cash advance, a small business capital option

There’s a serious credit crunch out there right now, as anyone in business — particularly small- to mid-sized business — knows. Remember all that TARP bank bailout money from fall 2008? The biggest recipients of federal dollars continue to cut lending to small companies and seven of the top 11 TARP banks cut their small business loan balances every reporting month from the time they received taxpayers dollars through the end of 2009. Small Business Administration-backed loans are taking up some of the slack, but where else can a small company turn when looking for loans for business or just extra operating capital?

Merchant cash advance

One option is the merchant cash advance market. This industry has existed for around a decade and has really ramped up during these tough economic times coupled with an extremely tight credit industry. Merchant cash advance providers give businesses a lump sum of immediate cash in exchange for a percentage of future sales or future credit receivables. A disadvantage of a merchant cash advance is the equivalent interest rate can be pretty high when compared to a more traditional business bank loan or line of credit, but this capitalization option does offer some advantages over working through a bank.

The upside

The key upside is it’s available, and right now a bank loan in this credit market just might not be an option. Other advantages include a relatively quick approval process, bad credit won’t prevent you from obtaining a merchant cash advance and the only collateral you really need is strong credit card sales.

If you decide to pursue a merchant cash advance remember to consider the money you’re advanced as a loan to be repaid, not as just some extra cash going into the business account. Merchant cash advances aren’t the best way to capitalize your business, but they serve a very necessary function for businesses looking for, or needing, liquidity in a tight credit economy.

_(sponsored)

Quite the misleading lede

Here’s the lede in an article about the banking industry and the ongoing credit crunch:

Those wicked bankers–refusing to lend to small businesses! So say the pols. The reality is something else.

You read that and think, man this whole credit crunch thing is just some sort of hoax cooked up by the mainstream media or opportunistic politicians. Then you hit the link up there, read the article and realize the gist of it is a lot of businesses have drastically cut expenses and are now self-capitalizing because profitability is up and operating costs are down.

The problem there is those companies drastically cut expenses — those pesky things like salaries for jobs that no longer exist and such — because the banking industry completely screwed Main Street and continued a ridiculous credit squeeze long after receiving billions in Federal bailout money. And trust me, the credit crunch is still going on.

It’s great some companies managed to pare down to the point of self-capitalizing. But I bet both the newly unemployed from those companies, and the now overworked employees doing a job that once was covered by two, or more, workers would prefer for those companies to hoard a little more cash (something like what banks are still doing) and dip into the credit market to cover operating costs. I bet some of the companies would love to do just that, but can’t — why?, because of that still overly tight credit market

Recycling TARP funds for small business loans

As much as I think the deficit is a significant issue, the ongoing credit crunch for small business is a much more pressing issue for the economy. Recycling money that bailed out Wall Street to give Main Street a leg up is probably good politics, but more importantly, it is good policy.

From the link:

President Obama called on Congress Tuesday to recycle $30 billion of the remaining Troubled Asset Relief Program (TARP) funds into a new government lending program offering super-cheap capital to community banks that boost their small business lending this year.

Touted last week in Obama’s State of the Union address, the plan is the latest incarnation of a proposal the president first floated in October. While credit conditions for large businesses have improved over the past year, small companies are still widely reporting problems finding the capital they need to fund their operations.

More news from the “no duh” department

Today it’s from Treasury Secretary Tim Geithner:

“This credit crunch is not over,” Geithner at a small business financing forum in Washington hosted by the Treasury. “It may feel dramatically better for large companies, but it is not over for small businesses across the country.”

Auctioning accounts receivable

An interesting source of cash for small business during this ongoing credit crunch.

From the link:

Cash flow has become a leading concern for small firms as banks reduce credit lines, shorten maturities and raise rates, according to a May study by the Credit Research Foundation. Among the companies surveyed, 45% said the financial crisis was straining their access to working capital. Almost 70% reported a slowdown in customer payments, and 61% said their top priority was to boost cash flow by getting clients to pay what they owe faster.

The Receivables Exchange (TRE), which runs an online auction market for accounts receivable, is benefiting from these trends. More companies have been turning to the two-year-old firm to raise money as traditional credit sources dry up.

“We take the most liquid of the assets on the balance sheet that they can modify and allow those to trade on a transparent, standardized exchange,” says Nicolas Perkin, president of the New Orleans-based company

Banks still not lending

Yep, that financial sector “free money, no strings” bailout last year really looks good right about now. The entire concept, at least as it was sold to the public, was to give banks cash so they could ease the credit crunch and start lending money apace.

Here we are months later and credit is still tight. Very tight.

From the link:

Many banks have made it harder for borrowers to obtain all kinds of loans over the last three months despite a $700 billion federal bailout program and a flurry of other bold moves to stem the worst financial crisis to hit the U.S. since the 1930s.

The Federal Reserve in its quarterly survey of bank lending practices released Monday found large numbers of banks reporting tighter credit standards across a broad range of loan products _ from credit cards and home mortgages to business loans.

Nearly 60 percent of banks responding to the survey said they had tightened lending standards on credit card and other consumer loans, about the same share as in the previous survey released in early November. And about 80 percent of domestic banks said they tightened lending standards on commercial real-estate loans, slightly less than the roughly 85 percent that reported doing so in the previous survey.

All told, though, the proportion of banks that “reported having tightened their lending policies on all major loan categories over the previous three months stayed very elevated,” the Fed concluded.

Greg McBride, senior financial analyst at Bankrate.com, predicted that banks _ whose lax lending standards for home mortgages contributed to the financial meltdown _ won’t be in any rush to loosen lending standards.

“Even when lenders come back to the marketplace and become willing to lend again, who they lend to is not going to change,” McBride said. “The tighter qualification standards that we’ve been seeing are here to stay for the foreseeable future regardless of whether or not there is stress in the credit markets and a deep recession. Lenders won’t go back to giving out credit like candy anytime soon.”

Collection agency gives up and uses witchcraft

Yeah it’s Lithuania, but this is comical. I hope it’s a hoax. If not, good luck there, guys. Lets us all know how this turns out.

From the link:

In these difficult times for creditors, a Lithuanian debt collector is offering an unconventional service to retrieve arrears: witchcraft.

The Vilnius-based firm has hired Vilija Lobaciuviene, the Baltic nation’s most famous self-styled witch, to hunt down companies and individuals who are failing to pay their debts amid the credit crunch.

“There are certain people, who are using this crisis situation and refuse to pay back banks or other companies,” said Amantas Celkonas, director of the Skolu Isieskojimo Biuras, or debt collecting bureau.

“Our new employee will help them to understand the situation, reconsider what is right and wrong and act accordingly,” he said. “We will also help those who are in real trouble, suffering from psychological impact of bankruptcy and depression.”

Citigroup to split into two parts

At this point nothing is surprising about the financial crisis.

From the link:

Citigroup Inc (C.N), scrambling to survive losses triggered by the credit crunch, unveiled plans to split in two and shed troubled assets, and reported a quarterly loss of $8.29 billion.

The banking giant also said it expected more departures from its embattled board, which is losing former Treasury Secretary Robert Rubin as a director later this year.

Still, the bank’s shares rose 4 percent in premarket trading, in part because investors hoped the plan to separate its most troubled assets into a new company would help revive the company.

“It’s one of the first steps toward some positive news and the end of this nightmare,” said Michael Holland, founder of Holland & Co in New York, which manages more than $4 billion of investment.

Citigroup, whose shares have plunged 87 percent since the beginning of 2008, said it recorded $28.3 billion of writedowns and credit losses in the 2008 fourth quarter. Losses over the past 15 months total more than $92 billion.

Watch out for deflation

You may be lamenting the outrageous cost of the bailout, you might have been hurt by the credit crunch and you are most likely gearing up for a 2009 full of only one certainty — that the entire year will be filled with nothing but uncertainty.

After all that, who’s this boogyman breathing hot, rancid air down the back of your neck? Deflation.

From the link:

Deflation, the steadily falling prices that are a byproduct of the virulent global recession and financial-market weakness, has emerged as a top danger for monetary policy markets in the U.S. and Europe, top central bankers made clear Sunday.

In separate comments, Lucas Papademos, the number-two official at the European Central Bank, and Janet Yellen, president of the San Francisco Federal Reserve Bank, and one of the most influential officials at the Fed, said that they would quickly seek to contain the danger of deflation if it emerges in coming months.

Their remarks came at he American Economics Association convention.

Yellen said the U.S. faces a clear risk of deflation: “The odds are high that over the next few years, inflation will decline below desirable levels.”

To keep falling prices from becoming entrenched, the Fed would have to make it clear to the financial markets that such an outcome is unacceptable.

“I am optimistic that, by clearly communicating the Fed’s commitment to low and stable inflation and by backing that commitment up with determined policy actions should the need arise, any deflationary pressures caused by the weak economy can be contained,” Yellen said.

Toyota turns the lights off for 11 days

GM and Chrysler may have shut factories down this month to save money and prep for an uncertain future. Toyota has followed-suit because of slumping sales.

The credit crunch hit automakers hard, and now that hard times are settling in it’s an easy bet the market for new cars will become very soft. Not many people are going to trade-in a working car, and less likely still, a paid-off car under this economic climate.

From the link:

Toyota Motor Corp (7203.T) is to halt production at its Japanese plants for 11 days in February and March as a sharp slide in U.S. sales has left dealers’ lots full of unsold cars.

A 37 percent slump in December sales in Toyota’s biggest market was its sharpest fall in more than a quarter of a century and worse than declines at struggling U.S. rivals General Motors (GM.N) and Ford Motor (F.N).

“I never expected the crisis to spread this fast and leave this deep a scar,” Toyota President Katsuaki Watanabe told reporters at a Tokyo event hosted by Japan‘s top business lobbies.

Toyota had already announced a three-day production halt for this month at its 12 directly operated Japanese plants — four car assembly plants and eight for engines, transmissions and other components.

A sweeping suspension of domestic production is almost unprecedented. In 1993, Toyota halted output for one day as a strong yen hammered sales.

Japanese-built cars make up around 40 percent of Toyota’s sales in the United States, where foreign-made cars and trucks have been piling up at ports and dealers’ yards.

The financial crisis and math

Yep, it’s a release dump day. For any regular reader who wonders why I’ll post a press release, sometimes without any real additional commentary — you’d be amazed at how much “reporting” at news websites and even print news outlets are nothing more than reworked press releases, often without any new information added.

Years ago when I did daily reporting for LocalBusiness.com as a freelancer I did nothing more than get a release from my editor, try and get an interview with a principal at the company putting the release out there and writing a story within a couple of hours at most.

If I couldn’t secure an interview I’d do the story purely off the release with maybe some info pulled from the company’s website for filler. Rough estimate would be 70% of my stories done for LocalBiz were of this variety.

This is why I present my blog readers unadulterated releases. I give you the entire story as presented by the source. Sure it’s been spun up by the PR writer, but you get the whole picture without me trying to un-spin anything or maybe leaving something out that you’d really enjoy.

With that in mind, here’s a release on this year’s ongoing financial crisis from the mathmatical perspective. Not sure if I totally agree with the first sentence there.

The release:

The crash of 2008: A mathematician’s view

Markets need regulation to stay stable. We have had thirty years of financial deregulation. Now we are seeing chickens coming home to roost. This is the key argument of Professor Nick Bingham, a mathematician at Imperial College London, in an article published today in Significance, the magazine of the Royal Statistical Society.

There is no such thing as laying off risk if no one is able to insure it. Big new risks were taken in extending mortgages to far more people than could handle them, in the search for new markets and new profits. Attempts to insure these by securitisation – aptly described in this case as putting good and bad risks into a blender and selling off the results to whoever would buy them – gave us toxic debt, in vast quantities.

“Once the scale of the problem was unmistakably clear from corporate failure of big names in the financial world, banks stopped lending to each other,” says Bingham. “They couldn’t quantify their own exposure to toxic debt – much of it off balance sheet – so couldn’t trust other banks to be able to quantify theirs. This led to a collapse of confidence, and the credit crunch, which turned a problem in the specialised world of exotic financial derivatives into a crisis in the real world. Once the problem became systemic, government had to step in to bail the system out with vast quantities of public money.”

Professor Bingham suggests that to learn more and predict financial future, we should look to our past, likening the current crisis to the ‘Tulip Mania’ in the Netherlands in 1636 where huge prices were paid for futures in tulips, which then turned out to be as worthless as sub-prime mortgages today.

Even Alan Greenspan, the long-serving former chairman of the US Federal Reserve, admits that mistakes were made in the past. To avoid repeating these mistakes, we need to learn from them. This needs a new mind-set, new policies, and much more proactive regulation.

Bankers complain that the risk models they used predicted problems as dramatic as today’s only every few centuries. “This is like talking about the details of how to steer a boat on a river,” says Bingham, “what matters there is whether or not the river is going to go over a waterfall, like the Niagara Falls.”

 

###

Old Grey Lady in the red?

The New York Times Company is in no small degree of financial distress. Old media has been squawking about its problems — and they are real — for a number of years. Like many of the old order theyhaving a hard time dealing with the changing digital world and loss of their bread-and-butter, advertising, particularly local classified advertising which has been coopted by Craigslist and others.

The ongoing financial crisis and credit crunch just pile misery onto these woes. I’d hate to see print disappear altogether, but it may well be heading that way. I actually dumped my local newspaper subscription early this year. Prices went up, quality and size went down and all the news except for a little local reporting and sports I’d already read more than one place online.

From the link:

The New York Times Company plans to borrow up to $225 million against its mid-Manhattan headquarters building, to ease a potential cash flow squeeze as the company grapples with tighter credit and shrinking profits.

The company has retained Cushman & Wakefield, the real estate firm, to act as its agent to secure financing, either in the form of a mortgage or a sale-leaseback arrangement, said James Follo, the Times Company’s chief financial officer.

The Times Company owns 58 percent of the 52-story, 1.5 million-square-foot tower on Eighth Avenue, which was designed by the architect Renzo Piano, and completed last year. The developer Forest City Ratner owns the rest of the building. The Times Company’s portion of the building is not currently mortgaged, and some investors have complained that the company has too much of its capital tied up in that real estate.

The company has two revolving lines of credit, each with a ceiling of $400 million, roughly the amount outstanding on the two combined. One of those lines is set to expire in May, and finding a replacement would be difficult given the economic climate and the company’s worsening finances. Analysts have said for months that selling or borrowing against assets would be the company’s best option for averting a cash flow problem next year.

Crude below $44

Oil is at its lowest point in four years. I’ve blogged before a relative of mine with a vested interest in, and knowledge of, the petro industry is predicting a floor in the $20s. I read today that Merrill Lynch agrees with my relative.

From the link:

Oil fell more than 6 percent on Thursday to its lowest level in nearly four years in response to further bleak economic data that could spell a deeper decline in global energy demand.

The number of U.S. workers on jobless rolls hit a 26-year high last month, the government said, while another report showed U.S. factory orders fell sharply for the third month in a row.

U.S. light crude dropped $2.86 to $43.93 a barrel by 1:13 p.m. EST after slipping as low as $43.77 — the lowest since January 2005. London Brent crude fell $2.87 to $42.57.

Oil prices have dropped more than $100 a barrel from record highs over $147 in July, as the global credit crunch has eaten into demand in large consumer nations.

Car loans the latest financial crisis casualty

Mortgages have been an issue for a while because of the ongoing subprime troubles, but some other real-world effects of the financial crisis are showing up on “Main Street” to borrow the buzzword of the bailout — car loans are becoming hard to find.

From the WSJ link:

The era of easy auto loans has come skidding to a halt.

Mortgages were among the first consumer products to be hit by the credit-market freeze. Now car loans and leases are drying up as dealers, auto-finance companies and other lenders are having trouble finding money to lend to car buyers. The upshot: Those with less-than-stellar credit are getting shut out of loans, and even some so-called prime borrowers are having trouble getting financing.

“You have to just about be walking on water to get financed,” says Mike Jackson, chief executive of AutoNation Inc., the largest U.S. chain of dealerships. He added that the subprime market is “basically almost closed” but “even with our prime customers, banks are looking for a reason to say no.”

AutoNation dealerships sold 532,862 light-duty cars and trucks last year, and this year, amid the credit crunch, that number could fall by as much as 20%, Mr. Jackson says.

M&A at lowest point in four years

First quarter merger-and-acquisitions are at the lowest point since 2004. The economic downturn is blamed for the low level of activity.

From the link:

It’s been clear for a while that merger-and-acquisition activity has been weak in the U.S. But volume in the first quarter has now fallen to the lowest level in four years.

“The slowdown’s key drivers are the credit market’s problems and the economic downturn in the U.S., and potentially global, economies,” Mark Shafir, chairman and global co-head of M&A at Lehman Brothers, told the Financial Times, which reported on the level of inactivity. Private equity firms, for example, seem to have nearly evaporated in the market due to the credit crunch. In fact, many seem busier trying to rework or walk away from previously agreed upon deals. Indeed, the FT pointed out that deals announced by financial buyers plunged 71 percent, to $52.6 billion, the lowest volume since the first quarter of 2004.

With the credit markets all but shut down, PE firms are unable to obtain financing to do deals.

New FASB rule on derivatives

Little heard about before recently, and still pretty arcane, derivatives reporting must now meet a Financial Accounting Standards Board disclosure rule.

From the CFO.com link:

Under the new rule, issuers must disclose the fair values of derivatives they use, as well as their gains and losses from the instruments, in tables accompanying their financial statements. Perhaps with a nod to the current credit crunch — FASB was in the last stages of hatching the standard as the subprime crisis deepened — the standard requires companies to reveal features of their derivatives that are related to credit risk.

To be sure, the standard changes nothing about the accounting for derivatives. But it does make the often-cloudy reporting of them much more transparent to the users of financial statements, Mulford thinks. “With these tables, derivatives can’t be hidden from view in a way they were on, say, Enron’s balance sheet and income statement,” he told CFO.com. “Investors will be better able to assess the contribution of derivatives to earnings and financial risk, and in the process, they’ll be better able to judge earnings sustainability.”

The new standard requires employers to reveal where they put the results of their derivatives investments on their financial statements and spell out how much they are; how derivatives are accounted for; and how derivatives affect their balance sheet, income statement, and future cash flows. (While 161 requires companies to disclose where they report derivatives’ effects on their income statements and balance sheets, it doesn’t require such reporting in cash-flow statements. FASB plans to address disclosures of derivatives’ location on cash-flow statements in the context of its ongoing project on financial-statement presentation.)

How banks are damaging small business and the economy

This ought to be sobering news for anyone still fretting over the state of the economy and why Main Street isn’t feeling anything close to a recovery right now.

From the link:

In the last two years, $40 billion worth of loans to small businesses have evaporated, and correcting the problem should be “front and center among our current policy challenges,” Ben Bernanke, chairman of the Federal Reserve, said in a speech Monday.

Loans to small businesses dropped from more than $710 billion in the second quarter of 2008 to less than $670 billion in the first quarter of 2010, according to bank financial reports submitted to the Federal Financial Institutions Examination Council.

Looking at these two reasons for the dramatic drop in business credit the first certainly has a role, but the second is the actual killer. I know of many small businesses that would happily take on new debt but can’t because their credit lines were slashed to the bone (sometimes for no discernible reason other than the overall economy was bad) and haven’t seen that credit flexibility return to this day.

He cited weaker demand from Main Street businesses worried about taking on more debt during tough times, “deterioration in the financial condition of small businesses during the economic downturn,” and a lack of supply of available credit.

“Clearly, though, to support the recovery, we need to find ways to ensure that creditworthy borrowers have access to needed loans,” Bernanke said.

Banks v. homeowners

I’ve already blogged about what banks are doing to small business, and the overall economy as a result. Here’s more of the same tight-fisted lending practices (with those tight fists wrapped around taxpayer’s money via the various bailouts) geared toward homeowners looking to refinance during this time of ultra low interest rates courtesy of the government.

From the second link:

Mortgage rates in the United States have dropped to their lowest levels since the 1940s, thanks to a trillion-dollar intervention by the federal government. Yet the banks that once handed out home loans freely are imposing such stringent requirements that many homeowners who might want to refinance are effectively locked out.

The scarcity of credit not only hurts homeowners but also has broad economic repercussions at a time when consumer spending and employment are showing modest signs of improvement, hinting at a recovery after two years of recession.

Twitter hit with DoS attack

Web 2.0 social networking apps seem to be under fire today with Twitter hit with a denial-of-service attackand additional reports have both Facebook and LiveJournal experiencing problems.

Once again proving that axiom of the net — get popular and find a big target on your back, or servers as the case may be.

From the link:

Twitter, the popular micro-blogging service, was crippled Thursday morning by a denial-of-service attack.

The extended silence in a normally noisy Twitterworld began around 9 a.m., according to TechCrunch. Later, Twitter posted a note to its status update page saying the site had been slowed to a standstill by an attack.

In a denial-of-service attack, hackers typically direct a “botnet,” often made up of thousands of malware-infected home PCs, toward a target site in an effort to flood it with junk traffic. With the site overwhelmed, legitimate visitors cannot access the service.

“On this otherwise happy Thursday morning, Twitter is the target of a denial of service attack. Attacks such as this are malicious efforts orchestrated to disrupt and make unavailable services such as online banks, credit card payment gateways, and in this case, Twitter for intended customers or users,” co-founder Biz Stone said in a blog post. “We are defending against this attack now and will continue to update our status blog as we continue to defend and later investigate.”