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.

A fish story

Very fishy behavior from that font of fail that is Bank of America …

From the link:

Dr. Alan Schroit was shocked when he arrived at his Galveston, Texas, vacation house only to find a seizure notice from Bank of America plastered on his padlocked front door.And that wasn’t the only nasty surprise.

Schroit summoned the police to get into his own home. When he did, he was met with the “overpowering putrid smell” of 75 pounds of rotten fish, according to court documents.

He had recently gone fishing and was storing his copious catch for a family gathering. But the bank’s foreclosure agent had shut off the home’s power.

The kicker: Schroit doesn’t have a mortgage with Bank of America, or with any bank for that matter. He owns the house free and clear!

Bank of America has been accused of several wrongful lockouts in recent months, many of which have resulted in lawsuits against the company.

“We sincerely apologize to the homeowners affected for the confusion and stress these errors have caused,” said Bank of America spokeswoman Jumana Bauwens. “We are working aggressively to improve our process through formal training, enhanced checklists and improved communication.”

Schroit has since reached an undisclosed settlement with the bank according to his attorney. Court documents show that Schroit wanted compensation that would be “adequate to deter BOA’s arrogance.”

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Want to read more BoA fail from the same link? Here’s a bird tale to join the above fish story.

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

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.

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.

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

Taxation temperature? Cold days ahead for the financial industry

And given the performance of the financial industry, coupled with some massive public relations missteps and populist uprising looking to put at least a few banker’s heads on pikes for a Main Street parade, it’s a pretty safe bet when D.C. goes looking for new money banking and financial services will be the most public targets.

Here’s a breakdown of seven potential tax changes coming this year. Over half target the financial industry.

From the link:

Tax banker bonuses more

The populist fury unleashed when bonuses were paid to AIG executives is back. This time it’s during bonus season on Wall Street, where investment banks are expected to distribute tens of billions of dollars to reward their employees for the banks’ 2009 performance.

House Financial Services Chairman Barney Frank, D-Mass., will hold a hearing on Wall Street compensation next week. On the agenda will be consideration of bonus taxation, as well as President Obama’s proposal to tax banks to make up for any bailout money that isn’t repaid.

Frank’s committee doesn’t write tax law. That’s up to the House Ways and Means and the Senate Finance committees. But he is beating the drums for change.

“I think compensation has gotten excessive,” Frank said in a statement. “I want to underline what we are already doing. Frankly, in the hope that maybe the Senate will be even more inclined to [act].”

So don’t be surprised if talk of a banker bonus tax is revived. But it’s not clear how viable it would be. “That’s more politics than policy,” Schwarz said.

I’m not happy with the banking industry either, but …

… Geithner is absolutely correct on this tax proposal. All this would do is further economically depress the very people it’s designed to protect.

From the link:

With popular anger building as big banks show profits and pay sizable bonuses while unemployment remains high, the Obama administration has come under pressure at home and abroad to support a financial transactions tax on institutions and to heavily tax their executive compensation.

But the United States, led by the Treasury Secretary Timothy F. Geithner, has been opposed, arguing that a transactions tax would simply be passed on to customers and a bonus tax could be easily circumvented.

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.

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.

Another TARP bank pays the nation back

This week it’s Bank of America. Good to see the money back in public coffers, but this move doesn’t exonerate the company for its malfeasance over the past year. At any rate it’s another $45 billion in bailout dollars the taxpayers get back, plus an extra $2.54 billion in Treasury payments.

Of course do you think BofA, or any other of the TARP banks for that matter, would be magnanimously paying the public back so quickly if the Feds hadn’t cracked down this year and seized control of executive pay and other business functions? I want the banking industry working outside of government influence, but I also want the banking industry working without using public money with no-strings-attached.

2009 Wall Street bonuses …

… are not going to go over all that great. I understand the nature of compensation in the financial industry, but sometimes image is everything, and the industry has a pretty shabby image on Main Street.

From the link:

Ask yourself, in this day and age, with officially reported unemployment at 10.2%, the highest since 1983, should a 36-year-old derivatives trader get $10 million or $15 million in bonus money on top of a $400,000 to $1 million direct salary. It’s the hot-button money issue of our time, the only visible totem of Wall Street that the public can easily understand. The public sees headlines about stocks being up 62%, the Dow over 10,000, gold at $1,100 an ounce, interest rates at zero and a handful of financiers able to buy $40 million apartments.

It’s a great time to play the market, sure, but the overall effect on the economy is pretty hollow when small and medium businesses cannot borrow money. Treasury Secretary Geithner admits to this huge vacuum, but he has no concrete or meaningful solution.

TARP recipients to get White House mandated pay cut

I’m no fan of the government telling a business how much it’s going to pay executives, but you have to say the major TARP recipients brought this on themselves. After the forced bailout (most of these players had no choice but to go along with the bailout) the situation became no longer business as usual. Somehow that point was lost on the C-level at Citigroup, BoA, GM, Chrysler, GMAC, Chrysler Financial, and especially AIG. The end result? The pay packages of 175 top executives are going to start seeing much lighter pay checks.

Cue an entire chorus of nanoscale violins.

From the link:

The Obama administration will soon order the nation’s biggest bailed-out companies to drastically cut the pay packages of 175 top executives, a senior administration official confirmed to CNN Wednesday.

Kenneth Feinberg, who was named the White House’s pay czar in June, will demand that each of the seven largest bailout recipients lower the total compensation for their top 25 highest paid employees by 50%, on average, the official told CNN.

And here’s the big number:

Under the plan, which is expected to be officially released by the Treasury Department next week, annual salaries for executives at those seven firms are expected to fall 90%, on average, the official said.

TARP banks not lending to Main Street

I’ve already blogged on the upside of this issue — that is, the Obama administration is helping Main Street through expanding the lending capacity of the Small Business Administration and letting smaller banks in on some TARP action. The downside of this issue is eight of the top ten TARP recipient banks have cut small business loans since May. And that is disgusting.

From the second link:

The TARP program was set up to recapitalize banks so that they would bolster their lending to consumers and small businesses. In March, as the administration and the SBA took steps to stimulate small business lending, Treasury Secretary Tim Geithner ordered the top TARP recipients to begin sending the Treasury monthly reports on their small business lending activity.

“We need every bank in the country to do everything in their power to provide the credit that small businesses need to operate, expand and add jobs,” Geithner said as he announced the new requirements. “Given the role many banks played in causing this crisis, you bear a special responsibility for helping America get out of it.”

But in the five months they’ve been sending in those reports, the 22 biggest TARP recipients haven’t increased their small business lending. Instead, they’ve cut their outstanding balances by $8 billion. As of Aug. 31, the 22 reporting banks held a collective small business loan balance of $261.3 billion, down 3% from when they began reporting in April.

Check out this list of shame:

UBS to clients …

… “oops.”

From the link:

UBS, the embattled Swiss bank that is being forced to divulge the names of about 4,450 account holders to the IRS, may have inadvertently tipped its hand on their identities by sending them registered letters through the U.S. Postal Service.

Here’s a handy bailout tracker …

… from CNNMoney.

Want to see what’s happening with all that bailout money and what’s gone where with Troubled Asset Relief Program, Federal Reserve rescue efforts, Federal stimulus programs, FDIC bank takeovers and other financial and housing initiatives, plus the dollars handed over to Amerian International Group, take a few minutes and hit the link.

Revolving credit in a squeeze play

The economy is tough, and banks — those beneficiaries of federal stimulus largess — aren’t making conducting daily business any easier. Putting the squeeze on revolving credit is yet another exhibit of banks keeping the purse strings tightly drawn.

From the link:

Indeed, banks are “universally adjusting” the terms on revolving lines of credit, according to a June report from CreditSights.

Banks are cutting the size of revolvers, upping interest rates, shortening maturities, and enhancing their collateral positions, regardless of where companies fall on the credit-quality spectrum, says the report, written by analyst Chris Taggert.

Revolving lines of credit are a critical capital source for payroll, buying raw materials, and paying rents, as well as a liquidity backstop for commercial paper. Higher rates and reduced capacity on such debt can mean companies have to consume more of their cash on hand in daily operations.

About those bank stress tests

Here’s more information on the nuts and bolts.

From the link:

The Federal Reserve marshaled hundreds of supervisors to spend 45 days rigorously reviewing the banks’ detailed loan data. They applied exacting estimates of potential losses over two years, along with conservative estimates of potential earnings over the same period, and compared them with existing reserves and capital. The results were then evaluated against strict minimum capital standards, in terms of both overall capital and tangible common equity.

The effect of this capital assessment will be to help replace uncertainty with transparency. It will provide greater clarity about the resources major banks have to absorb future losses. It will also bring more private capital into the financial system, increasing the capacity for future lending; allow investors to differentiate more clearly among banks; and ultimately make it easier for banks to raise enough private capital to repay the money they have already received from the government.

The test results will indicate that some banks need to raise additional capital to provide a stronger foundation of resources over and above their current capital ratios. These banks have a range of options to raise capital over six months, including new common equity offerings and the conversion of other forms of capital into common equity. As part of this process, banks will continue to restructure, selling non-core businesses to raise capital. Indeed, we have already seen banks, spurred on by the stress test, take significant steps in the first quarter to raise capital, sell assets and strengthen their capital positions. Over time, our financial system should emerge stronger and less prone to excess.

Banks will also have the opportunity to request additional capital from the government through Treasury’s Capital Assistance Program. Treasury is providing this backstop so that markets can have confidence that we will maintain sufficient capital in the financial system. For institutions in which the federal government becomes a common shareholder, we will seek to maximize value for taxpayers and enable these companies to attract private capital, thereby reducing government ownership as quickly as possible.

Some banks will be able to begin returning capital to the government, provided they demonstrate that they can finance themselves without F.D.I.C. guarantees. In fact, we expect banks to repay more than the $25 billion initially estimated. This will free up resources to help support community banks, encourage small-business lending and help repair and restart the securities markets.

Banks want backsies

Oh, now they see the light since Bush’s blindly giving team is gone and Obama’s group demanding oversight with teeth is in place.

I hope these banks are able to repay the taxpayer’s money very quickly. I predicted some of the oversight rules put into place by the new economic team might cause some executives to see the capitalist light and decide the public dole of corporate socialism wasn’t so great after all.

Heh.

From the link:

Even before the government announced its latest efforts to fix the troubled banking industry on Tuesday, executives at Goldman Sachs and Morgan Stanley said they wanted to repay the money quickly. Both banks received $10 billion under the first rescue plan last fall.

Paying back all those funds would be difficult in this tough economic environment. But banking executives worry that the government may intrude further into their businesses as long as they are beholden to Washington.

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.”

Bank nationalization backgrounder

Courtesy of the Wall Street Journal. The topic of bank nationalization is going to be all over the place for while. If you’re wondering what it’s all about and how it might affect your day-to-day banking hit the link. Plenty of material there on loans, disadvantages and more.

A sample from the primer:

What does “bank nationalization” mean?

A nationalized bank is owned and run by the government. The shocks of the credit crisis last fall spurred lawmakers to seminationalize the banking sector; nearly 314 institutions have already signed over some of their shares and other securities to the Treasury in return for $350 billion in government TARP funds. The government could now go a step further by taking complete ownership of certain troubled banks.

Why nationalize banks?

It makes sense only if banks are in danger of failing. In Western countries, nationalization is largely used as an emergency method to prop up banks during tough times. It is typically used to lend to small and medium-sized businesses and restructure burdensome loans to consumers.

Bankruptcy reform is driving foreclosures

After the shenanigans of the last couple of years, I think the banking industry needs government oversight to stand on its neck for a year or two. Clearly bankers are incapable of taking charge of themselves.

Bankruptcy is a powerful tool that never should have been altered for individuals. It shouldn’t be abused, but sometimes it is necessary.

From the link:

There’s no shortage of blame for the mortgage crisis that drove the economy into the ditch.

But here’s a fresh culprit: the 2005 bankruptcy reform act, which was strongly pushed by the credit card industry.

So say three researchers at the Federal Reserve Bank of New York, who argue that the legislation shifted risk from credit card lenders to mortgage lenders, helping trigger the surge in home foreclosures.

Before Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, households could erase their unsecured debts by filing for Chapter 7 liquidation. That freed up income that distressed homeowners could use to make mortgage payments.

The new law, however, forced better-off households seeking bankruptcy protection to file under Chapter 13. That chapter requires homeowners to continue paying their unsecured lenders.

In other words, say the Fed researchers, cash-strapped homeowners who might have saved their homes by filing Chapter 7 are now much more likely to face foreclosure.

“Is it just coincidence that the surge in subprime foreclosures that has rocked financial markets came right after the bankruptcy reform in 2005?” they asked. “Is that surge just about falling home prices, bad mortgage decisions and weak economic conditions?

“No and no.”