David Kirkpatrick

May 27, 2010

Fallout from the financial meltdown and bailout

Lehman Brothers Holdings is suing JP Morgan Chase.

From the link:

Lehman claims JP Morgan “siphoned off” billions of dollars of assets in the days leading up to its bankruptcy.

JP Morgan was Lehman’s main short-term lender before its September 2008 collapse. It is accused of contributing to the failure by demanding $8.6bn of collateral as credit markets tightened.

JP Morgan has called the lawsuit “ill-conceived”.

March 13, 2010

Want to get mad at the bank bailout all over again?

Filed under: Business — Tags: , , , , , — David Kirkpatrick @ 2:50 pm

Read this report on the shenanigans Lehman Brothers undertook to hide its precarious financial state. Recall the Lehman bankruptcy is what really freaked everyone out and even though it might not have been the actual cause of the bank bailouts, it was most likely the key trigger.

From the link:

It is the Wall Street equivalent of a coroner’s report — a 2,200-page document that lays out, in new and startling detail, how Lehman Brothers used accounting sleight of hand to conceal the bad investments that led to its undoing.

The report, compiled by an examiner for the bank, now bankrupt, hit Wall Street with a thud late Thursday. The 158-year-old company, it concluded, died from multiple causes. Among them were bad mortgage holdings and, less directly, demands by rivals like JPMorgan Chase and Citigroup, that the foundering bank post collateral against loans it desperately needed.

And:

According to the report, Lehman used what amounted to financial engineering to temporarily shuffle $50 billion of assets off its books in the months before its collapse in September 2008 to conceal its dependence on leverage, or borrowed money. Senior Lehman executives, as well as the bank’s accountants at Ernst & Young, were aware of the moves, according to Mr. Valukas, the chairman of the law firm Jenner & Block and a former federal prosecutor, who filed the report in connection with Lehman’s bankruptcy case.

Richard S. Fuld Jr., Lehman’s former chief executive, certified the misleading accounts, the report said.

March 11, 2010

Merchant cash advance, a small business capital option

Filed under: Business — Tags: , , , , , — David Kirkpatrick @ 10:48 am

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)

February 18, 2010

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.

January 27, 2010

TARP is a profit center

Who’d a thunk this last October when this thing was jammed through Congress.

From the link:

Guess what? The federal government will make money on bailing out the banks.

According to new numbers issued today by the non-partisan Congressional Budget Office, a key part of the much-loathed Troubled Asset Relief Program, or TARP, has become a profit center for the U.S. government.

The CBO projects the government will ultimately make a profit of $7 billion from assisting the banks: $3 billion from the Capital Purchase Program, in which the government propped up banks by purchasing preferred stock; $2 billion from helping Citigroup (CFortune 500); and another $2 billion from helping Bank of America (BACFortune 500).

In other words, the banks are on track not only to pay taxpayers back all the $200 billion plus we’ve lent them, but put a dent — albeit a small one — in our enormous budget deficits.

I blogged against the massive bank bailout and basically threw up my hands by the time ARRAS came around. I’m happy to report I was completely wrong at the time. TARP and subsequent stimulus may not have been the best possible solution (there’s no way to know, find out or even guess), but it’s not a failure and could even be provisionally considered a success. Reducing the budget by a penny would be a success for the program in my book.

December 7, 2009

The bank bailout may end up in the black

Who’d a thunk this a year ago?

From the link:

The Treasury Department expects to recover all but $42 billion of the $370 billion it has lent to ailing companies since the financial crisis began last year, with the portion lent to banks actually showing a slight profit, according to a new Treasury report.

The new assessment of the $700 billion bailout program, provided by two Treasury officials on Sunday ahead of a report to Congress on Monday, is vastly improved from the Obama administration’s estimates last summer of $341 billion in potential losses from the Troubled Asset Relief Program. That figure anticipated more financial troubles requiring intervention.

The officials said the government could ultimately lose $100 billion more from the bailout program in new loans to banks, aid to troubled homeowners and credit to small businesses.

Still, the new estimates would lower the administration’s deficit forecast for this fiscal year, which began in October, to about $1.3 trillion, from $1.5 trillion.

November 6, 2009

Overdraft fees — consumer banks v. consumers

Consumer banking has largely been about screwing the customer for a long time — at least as far as the large, national, impersonal banks (you know, the ones that advertise on television) go. Long ago, something like 15 years ago, I wrote an article for a business magazine on some of the underhanded techniques consumer banks were using to gouge customers.

Back then one of the growing trends was charging a premium for what was called a “meatspace transaction.” Although it sounds vaguely pornographic, a meatspace transaction was anything that involved a living teller, either face-to-face or through drive-up banking. Happily that bit of foolishness didn’t have any legs. One troubling practice that did, and still does, is overdraft fees and how they are processed.

They are almost unavoidable in terms of the bank will happily let you go below your balance instead of declining the transaction.

From the link:

Ever write a check thinking you had plenty in your account to cover it? Make a debit card purchase before your paycheck cleared? How about the time you withdrew $5 too much from the ATM?

Sure, your bank was happy to cover the amount. Why not? Although touted as a customer “convenience,” overdraft fees have been soaring. Last year, overdraft charges generated nearly $24 billion dollars for banks and credit unions. That’s 35% more than just two years earlier, according to the Center for Responsible Lending.

Warning! No Warning

The first problem with overdraft fees is that you don’t receive any notice that the transaction you’re about to make will exceed the balance in your account. If you did, at least you’d be able to choose whether you want to continue with it or not.

In some cases you can trigger overdraft charges even if your online statement shows you have plenty in yourchecking account! That’s because your balance is “theoretical” and doesn’t reflect the fact that a recent deposit may not have been in your account long enough for the funds to “clear.”

But the really dirty part of the process is how your incoming transactions are handled:

The Re-ordering Trick

Another criticism is that financial institutions can play games with your transactions in order to trigger a cascade of overdrafts.

For instance, say you make four debit card purchases in a day. Your available balance was $90. The first three transactions were for $25, $20, and $40. The last one was for $100. If taken in chronological order, there is adequate money in your account to cover the first three purchases. Only the last one would result in an overdraft charge.

But that’s not the way your bank computer system is programmed. Instead, it will change the order of your purchases in order to deplete your account sooner by subtracting the largest transactions first.

In the above example, your $100 purchase would come out of your account ahead of the other three. Since it exceeds your balance by $10, it generates a $35 charge. Next, with your account already under water (according to the bank’s math), your other three purchases are posted. You end up paying $140 (4 x $35) for the “convenience” of overdraft protection.

Quite the trick there. Consumer banks have been playing so dirty for so long, and were on the receiving end of so much government bailout money Congress is stepping up to the plate for the consumer at long last.

We’ll see where this ends up, but I think it’s about time Main Street was given a little protection from practices that should have been illegal from the get-go. I guess we ought to be happy consumer banks didn’t go around breaking kneecaps like Vinny from the corner might have. Because really, that’s about the only difference between usury and a typical consumer bank.

Also from the link:

Kathleen Day, a spokesperson for the Center for Responsible Lending, calls the current state of overdraft fees “ridiculous” and an “outrage.” The Center and other consumer protection organizations place the blame squarely at the feet of the Federal Reserve, which regulates most large financial institutions in this country.

“The Fed has known for years these practices are hurting customers and they’ve failed to act,” charges Day. The Senate Finance Committee has drafted the “Fairness and Accountability in Receiving Overdraft Coverage Act,” or the FAIR Act, which would limit overdraft fees banks can impose.

February 11, 2009

A brilliant bank bailout plan …

Filed under: Business, Politics — Tags: , , , , , , , — David Kirkpatrick @ 4:47 pm

… from Andy Kessler. Andrew Sullivan called this idea “wacky,” but I like it. Certainly not all that wacky — just a way outside the box.

From the link:

Now with TARP 2.0, renamed a friendly Financial Stability Plan, the idea is to entice private capital to buy these bad loans and derivatives in an effort to set the “market price.” But Mr. Geithner hasn’t solved the dilemma of banks not wanting to sell and become insolvent. Moreover, no one is going to buy these securities ahead of Mr. Geithner’s action with the “full resources of the government” to bring down mortgage payments and reduce mortgage interest rates. Lower mortgage payments means mortgage-backed securities would be worth even less. Six months to a year from now, big banks may still be weak and the ugly “n” word of nationalization will be back.

Mr. Geithner should instead use his “stress test” and nationalize the dead banks via the FDIC — but only for a day or so.

First, strip out all the toxic assets and put them into a holding tank inside the Treasury. Then inject $300 billion in fresh equity for both Citi and Bank of America. Create 10 billion new shares of each of the companies to replace the old ones. The book value of each share could be $30. Very quickly, a new board of directors should be created and a new management team hired. Here’s the tricky part: Who owns the shares? Politics will kill a nationalized bank. So spin them out immediately.

Some $6 trillion in income taxes were paid by individuals in 2006, 2007 and 2008. On a pro-forma basis, send out those 10 billion shares of each bank to taxpayers. They paid for the recapitalization.

Each taxpayer would get about $100 worth of stock for each $1,000 of taxes paid. Of course, each taxpayer has the ability to sell these shares on the open market, maybe at $40, maybe $20, maybe $80. It depends on management, their vision, how much additional capital they are willing to raise, the dividend they declare, etc. Meanwhile, the toxic assets sitting inside the Treasury will have residual value and the proceeds from their eventual sale, I believe, will more than offset the capital injected. That would benefit all citizens, not the managements and shareholders who blew up the banking system in the first place.