If Warren Buffet can admit that his mistakes can be corrected, then we need to copy him.
During the course of insurance company business, sometimes the losses overwhelm the regulated entity. Under supervision, the company enters a "no new business" state in which the claims paying mode of the company takes over and the business is "run off" meaning that investment income and reserves are used to pay policy holder claims. No new business is given to that entity.
The insurance holding company directs new premiums to other entities, which are the "go forward" methods of continuing the business, namely accepting premiums for transferring the risk to the insurance company.
In Florida, State Farm operates wholely owned subsidiaries which write homeowner policies, and other companies which write auto, life and other types of insurance. To change levels oe types of coverages offered, the various companies are opened or closed to producing agents. The company manages it risk portfolio this way.
Similarly, our Federal Reserve must immediately do the same: open a new Federal Reserve System FedRes 2.o.
The existing or FedRes 1.0 will become the run-off entity. The good bank/bad assets can be quaratined from the new banking system.
Existing banks will be allowed to remain in FedRes 1.0, and might be unable to meet the capitalization requirements of FedRes 2.0.
The rules for joining will have to be determined, but much of our problem in the banking, lending, financing arenas have been too much capital chasing too few opportunities. This proposal has the ability to wean the system of this problem, and the market will determine which system will utlimately prevail.
Thursday, March 5, 2009
Friday, February 27, 2009
S&P Discusses Counterparty Risk in CFO Magazine
"...the systemic concern regarding counterparty risk is generally heightened for financial firms. In addition, a lack of liquid markets for many securities has depressed overall access to liquidity for many corporations and financial institutions."
http://www.cfo.com/article.cfm/13209064/c_13208186?f=home_todayinfinance
Just as did Edward Lambert, S&P expresses worries over business's ability to finance each other due to valuation difficulties.
If we rely on trade credit, finance credit, or access to capital markets, the year-long collapse of the credit market is not over yet.
http://www.cfo.com/article.cfm/13209064/c_13208186?f=home_todayinfinance
Just as did Edward Lambert, S&P expresses worries over business's ability to finance each other due to valuation difficulties.
If we rely on trade credit, finance credit, or access to capital markets, the year-long collapse of the credit market is not over yet.
Thursday, February 26, 2009
Eddie Lambert from Sears Holding Annual Report
Mr. Lambert writes today in his letter to shareholders:
"...Don't be fooled by the term "mark-to-market." Mark-to-market is a regulatory convention and not a free market convention.
...What has happened is that we have gone from a system which stressed objectivity and verifiability to a system in which the market price of an asset, under conditions of economic stress and financial dislocation, must be derived using a significant amount of judgment. But this is not where it stops. Once you accept the mark-to-market convention, you begin the debate of what is the correct market price. Different people and different firms end up pricing the same asset differently..."
The problem confronting the entire capitalist system is lack of trust and it stems from lack of "verifiability" as Mr. Lambert writes.
The mortgage/derivatives/"toxic asset" mess we are in came about because the computer models were all proprietary and now, noone trusts their counterparties.
Mortgage default rates were modelled by going back around a decade or decade and a half, a period of rising prices; the modellers ignored the 1980s.
Remember the 1980s?
Hint: think Savings and Loans; think Resolution Trust Corporation.
Had the computer simulations included this time frame, say 1975 to 2005, there would have been a complete 30 year generation of data from which to draw conclusions for pricing models.
By the way, this is the term of home mortgage loans.
So now with mark-to-market the concern raised by Lambert is that the judgement is to not trust the other market participants.
This means no clear agreement on pricing for assets.
This also means no trading of assets because the models are no longer trusted to confirm the valuations, which are hypothetical.
The entire letter to shareholders is found at the Chicago Tribune below:
http://www.chicagotribune.com/business/chi-biz-sears-edward-lampert-letter-feb26,0,4215405.story
"...Don't be fooled by the term "mark-to-market." Mark-to-market is a regulatory convention and not a free market convention.
...What has happened is that we have gone from a system which stressed objectivity and verifiability to a system in which the market price of an asset, under conditions of economic stress and financial dislocation, must be derived using a significant amount of judgment. But this is not where it stops. Once you accept the mark-to-market convention, you begin the debate of what is the correct market price. Different people and different firms end up pricing the same asset differently..."
The problem confronting the entire capitalist system is lack of trust and it stems from lack of "verifiability" as Mr. Lambert writes.
The mortgage/derivatives/"toxic asset" mess we are in came about because the computer models were all proprietary and now, noone trusts their counterparties.
Mortgage default rates were modelled by going back around a decade or decade and a half, a period of rising prices; the modellers ignored the 1980s.
Remember the 1980s?
Hint: think Savings and Loans; think Resolution Trust Corporation.
Had the computer simulations included this time frame, say 1975 to 2005, there would have been a complete 30 year generation of data from which to draw conclusions for pricing models.
By the way, this is the term of home mortgage loans.
So now with mark-to-market the concern raised by Lambert is that the judgement is to not trust the other market participants.
This means no clear agreement on pricing for assets.
This also means no trading of assets because the models are no longer trusted to confirm the valuations, which are hypothetical.
The entire letter to shareholders is found at the Chicago Tribune below:
http://www.chicagotribune.com/business/chi-biz-sears-edward-lampert-letter-feb26,0,4215405.story
Friday, January 23, 2009
For Business Owners Struggling Amidst the Credit Crisis
business owners struggling amidst the credit crisis
The nation is waiting with bated breath for the proposed bailout assistance and economic stimulus package promised by the new incoming administration. Many small businesses simply cannot afford to wait. Not only are American families struggling to get by each day, small and large businesses alike are struggling mightily to stay afloat with a lingering recession and the most precipitous drop in consumer demand since the Great Depression. In the past, business owners have relied on their lines of credit to help bridge the occasional gap in their short term cash flows caused, for example, by seasonal fluctuations. But these days, small business owners who lack adequate credit histories or have not yet established any credit history at all simply cannot gain access to credit at all. In a more disturbing trend, many well-established, profitable companies with excellent, long-term credit histories have found their credit lines reduced considerably, and in some cases, cut off entirely.Since the credit crisis began in 2008, lending requirements have continued to get much more stringent and, depending on the industry in which a business operates, lenders will not extend any credit at all. Those working in the housing or entertainment industries, for instance, may find it extremely hard to get credit without having an impeccable credit history. Many banks and credit card issuers have shuttered established business credit card accounts and stopped issuing small business credit cards almost entirely, effectively shutting down a historically reliable source of financing for small businesses. While a few are still offering a very limited selection of small business credit card products, most card issuers are only offering credit lines that are a tiny fraction of what they have been in the past. In a survey of over 300 small business owners, more than one third of those surveyed have had significant difficulty accessing credit despite government intervention. According to Federal Reserve Governor Frederic Mishkin, who testified this year for the U.S. Senate Committee on Small Business & Entrepreneurship, lending has drastically “tightened for the vast majority of small businesses” in the US in 2008.Small businesses tend to rely on their lines of credit for a variety of different reasons. For many, lines of credit are what supports and supplements day to day operations of the company. Other businesses will need access to credit in order to purchase necessities such as supplies, equipment, computers, and other important items essential to operations. Typically, credit lines for small businesses with 5 employees or less are between $50,000 -$100,000. While day-to-day purchases typically are not large expenditures, it is important that access to such credit be available for newly created small businesses, but especially for ongoing, profitable concerns. If you are a small business owner with a good credit history and have already established a relationship with a local bank, you should be able to qualify for a loan or a small line of credit. Be prepared, however, to present significantly more documentation and background information than you may have in the past about your company’s financial wherewithal. Even with strong, well-established credit histories some businesses will struggle to secure capital from traditional banking and lending institutions and may need to investigate alternative sources of financing such as commercial finance companies or venture capital firms. Finding a bank or a creditor that is willing to provide credit on reasonable terms is no easy bet nowadays, but having a solid relationship with a bank can make a huge difference in your ability to get financing. If you have not yet established a relationship with a local bank, start today by calling several of your local banks and arrange to meet with one of their loan officers. The most important thing to remember is to be prepared ahead of time when approaching lenders about your financing needs. There standards are going to be noticeably more stringent now than in the past so you need to be adequately prepared prior to any meeting with a loan officer One of the single, most important items that you will need to prepare for your meeting with banking representatives is a well thought-out business proposal that clearly states the purpose of your lending needs, how the money will be used and, most importantly, how you plan to pay it back.Here is an outline of the 9 things that you will need in your business proposal before you approach any prospective lender:Business Description: The business description should briefly outline the business type, the products or services that you’ll be marketing as well as the customers that you intend to target.Personal Profile: Your personal profile should outline the background and relevant experience of each of the principle owners that will be responsible for repayment of the loan.Type of Loan: You should specify the type of loan that you are requesting as well as a brief description of its purpose.Business Plan: At the centerpiece of your proposal should be a business plan that outlines your strategy as well as the strengths, weaknesses, opportunities and threats to your business. Your business plan should include sales forecasts and cash flow projections for the next 3-5 years.Repayment Plan: You should also include a loan repayment schedule that will outline how you specifically are proposing to repay the loan. To be safe, you should also include a contingency plan for repayment if your sales and profit forecasts somehow fall short of your projections that will be adequate enough to comfortably meet your repayment obligations.Supporting Documentation: You should include copies of pertinent documents specific to the business that will help verify the business entity such as your articles of incorporation or partnership agreement. Be sure to also include copies of any important contracts specific to the business, such as lease agreements or substantial contracts with outside vendors.Collateral: You should include business and/or personal assets that you can use to secure funding of the loan. Collateral will help to reassure the lender that you have “skin in the game” and you will be less likely to default on the loan should you experience some financial disruption in your business. Collateral might include things such as real estate, equipment, inventory or accounts receivable.Financial Statements: If you are already an established business, you’ll need to have both business as well as personal financial statements for the last 3 to 5 years that include Balance SheetProfit-and-Loss StatementTax Returns (both personal and business)Your balance sheet should outline all of your assets, liabilities and any owner’s equity and the profit-and-loss statement should show corresponding revenue, expenses and profits. The prospective lender will use all of the information provided to calculate a “debt-to-worth” ratio that will indicate how much money the lender can safely lend while staying safely within his predetermined lending guidelines. You should provide copies of both your personal and business tax returns as well and some lenders may require you to provide several credit references. In addition to providing all of your financial documentation, you should be fully prepared to answer any and all questions that the lender might have about them.Personal Guarantees: Most lenders will require a personal guarantee, even for established businesses, of the owners or other principals, holding each personally responsible for the loan repayment. Depending on your circumstances, the lender may require another party’s guarantee or co-signature, particularly if the majority of your assets are jointly owned with a spouse or someone else.Securing credit in today’s business climate is especially difficult but can still be done. With easy short-term financing solutions like business credit cards no longer a viable option, traditional banking and lending institutions just might be one of your only available options. But before you approach any lender, be sure to be prepared, do your homework and gather all of the documentation outlined here ahead of time. Your preparation will serve you well in this new lending environment.
Write, email or call me for assisting you with your work, 727-410-5128
(This article is from special guest contributor Steve Sildon: thanks Steve)
The nation is waiting with bated breath for the proposed bailout assistance and economic stimulus package promised by the new incoming administration. Many small businesses simply cannot afford to wait. Not only are American families struggling to get by each day, small and large businesses alike are struggling mightily to stay afloat with a lingering recession and the most precipitous drop in consumer demand since the Great Depression. In the past, business owners have relied on their lines of credit to help bridge the occasional gap in their short term cash flows caused, for example, by seasonal fluctuations. But these days, small business owners who lack adequate credit histories or have not yet established any credit history at all simply cannot gain access to credit at all. In a more disturbing trend, many well-established, profitable companies with excellent, long-term credit histories have found their credit lines reduced considerably, and in some cases, cut off entirely.Since the credit crisis began in 2008, lending requirements have continued to get much more stringent and, depending on the industry in which a business operates, lenders will not extend any credit at all. Those working in the housing or entertainment industries, for instance, may find it extremely hard to get credit without having an impeccable credit history. Many banks and credit card issuers have shuttered established business credit card accounts and stopped issuing small business credit cards almost entirely, effectively shutting down a historically reliable source of financing for small businesses. While a few are still offering a very limited selection of small business credit card products, most card issuers are only offering credit lines that are a tiny fraction of what they have been in the past. In a survey of over 300 small business owners, more than one third of those surveyed have had significant difficulty accessing credit despite government intervention. According to Federal Reserve Governor Frederic Mishkin, who testified this year for the U.S. Senate Committee on Small Business & Entrepreneurship, lending has drastically “tightened for the vast majority of small businesses” in the US in 2008.Small businesses tend to rely on their lines of credit for a variety of different reasons. For many, lines of credit are what supports and supplements day to day operations of the company. Other businesses will need access to credit in order to purchase necessities such as supplies, equipment, computers, and other important items essential to operations. Typically, credit lines for small businesses with 5 employees or less are between $50,000 -$100,000. While day-to-day purchases typically are not large expenditures, it is important that access to such credit be available for newly created small businesses, but especially for ongoing, profitable concerns. If you are a small business owner with a good credit history and have already established a relationship with a local bank, you should be able to qualify for a loan or a small line of credit. Be prepared, however, to present significantly more documentation and background information than you may have in the past about your company’s financial wherewithal. Even with strong, well-established credit histories some businesses will struggle to secure capital from traditional banking and lending institutions and may need to investigate alternative sources of financing such as commercial finance companies or venture capital firms. Finding a bank or a creditor that is willing to provide credit on reasonable terms is no easy bet nowadays, but having a solid relationship with a bank can make a huge difference in your ability to get financing. If you have not yet established a relationship with a local bank, start today by calling several of your local banks and arrange to meet with one of their loan officers. The most important thing to remember is to be prepared ahead of time when approaching lenders about your financing needs. There standards are going to be noticeably more stringent now than in the past so you need to be adequately prepared prior to any meeting with a loan officer One of the single, most important items that you will need to prepare for your meeting with banking representatives is a well thought-out business proposal that clearly states the purpose of your lending needs, how the money will be used and, most importantly, how you plan to pay it back.Here is an outline of the 9 things that you will need in your business proposal before you approach any prospective lender:Business Description: The business description should briefly outline the business type, the products or services that you’ll be marketing as well as the customers that you intend to target.Personal Profile: Your personal profile should outline the background and relevant experience of each of the principle owners that will be responsible for repayment of the loan.Type of Loan: You should specify the type of loan that you are requesting as well as a brief description of its purpose.Business Plan: At the centerpiece of your proposal should be a business plan that outlines your strategy as well as the strengths, weaknesses, opportunities and threats to your business. Your business plan should include sales forecasts and cash flow projections for the next 3-5 years.Repayment Plan: You should also include a loan repayment schedule that will outline how you specifically are proposing to repay the loan. To be safe, you should also include a contingency plan for repayment if your sales and profit forecasts somehow fall short of your projections that will be adequate enough to comfortably meet your repayment obligations.Supporting Documentation: You should include copies of pertinent documents specific to the business that will help verify the business entity such as your articles of incorporation or partnership agreement. Be sure to also include copies of any important contracts specific to the business, such as lease agreements or substantial contracts with outside vendors.Collateral: You should include business and/or personal assets that you can use to secure funding of the loan. Collateral will help to reassure the lender that you have “skin in the game” and you will be less likely to default on the loan should you experience some financial disruption in your business. Collateral might include things such as real estate, equipment, inventory or accounts receivable.Financial Statements: If you are already an established business, you’ll need to have both business as well as personal financial statements for the last 3 to 5 years that include Balance SheetProfit-and-Loss StatementTax Returns (both personal and business)Your balance sheet should outline all of your assets, liabilities and any owner’s equity and the profit-and-loss statement should show corresponding revenue, expenses and profits. The prospective lender will use all of the information provided to calculate a “debt-to-worth” ratio that will indicate how much money the lender can safely lend while staying safely within his predetermined lending guidelines. You should provide copies of both your personal and business tax returns as well and some lenders may require you to provide several credit references. In addition to providing all of your financial documentation, you should be fully prepared to answer any and all questions that the lender might have about them.Personal Guarantees: Most lenders will require a personal guarantee, even for established businesses, of the owners or other principals, holding each personally responsible for the loan repayment. Depending on your circumstances, the lender may require another party’s guarantee or co-signature, particularly if the majority of your assets are jointly owned with a spouse or someone else.Securing credit in today’s business climate is especially difficult but can still be done. With easy short-term financing solutions like business credit cards no longer a viable option, traditional banking and lending institutions just might be one of your only available options. But before you approach any lender, be sure to be prepared, do your homework and gather all of the documentation outlined here ahead of time. Your preparation will serve you well in this new lending environment.
Write, email or call me for assisting you with your work, 727-410-5128
(This article is from special guest contributor Steve Sildon: thanks Steve)
Tuesday, January 20, 2009
Dangerous Currents for Financial Swimmers
"State Street Corp (STT.N), the world's biggest institutional asset manager, posted rising unrealized losses in its commercial paper program and investment portfolio." This reportage from Reuters today is odd.
How can commercial paper generate unrealized losses?
Does this mean companies are currently in default on short term/unsecured debt? This would justify banks' reluctance to lend to any company.
Earlier this month Southwest Airlines reported that their borrowing cost on $400 million was 10.5% plus liens on 17 Boeing aircraft, an increase of nearly fifty per cent since their previous bond offer.
Taken together, the soaring costs of borrowing along with redemptions for investors in mutual fund type investments means that banks are being forced to recapitalize their balance sheets instead of lending to companies. No amount of zero interest encouragement from US Treasury will change this.
Worse yet, it forces borrowers to begin paying nearly ten points more than the theoretical cost of banks' funds. Has the gap ever been this high for our top rated companies.
http://money.cnn.com/news/newsfeeds/articles/djhighlights/200901201119DOWJONESDJONLINE000485.htm
http://uk.reuters.com/article/businessNews/idUKTRE50J4E820090120
To take advantage of this, business leaders need to work with their suppliers to plan their purchases, while working with their bankers to secure these plans, without borrowing directly from the bank
How can commercial paper generate unrealized losses?
Does this mean companies are currently in default on short term/unsecured debt? This would justify banks' reluctance to lend to any company.
Earlier this month Southwest Airlines reported that their borrowing cost on $400 million was 10.5% plus liens on 17 Boeing aircraft, an increase of nearly fifty per cent since their previous bond offer.
Taken together, the soaring costs of borrowing along with redemptions for investors in mutual fund type investments means that banks are being forced to recapitalize their balance sheets instead of lending to companies. No amount of zero interest encouragement from US Treasury will change this.
Worse yet, it forces borrowers to begin paying nearly ten points more than the theoretical cost of banks' funds. Has the gap ever been this high for our top rated companies.
http://money.cnn.com/news/newsfeeds/articles/djhighlights/200901201119DOWJONESDJONLINE000485.htm
http://uk.reuters.com/article/businessNews/idUKTRE50J4E820090120
To take advantage of this, business leaders need to work with their suppliers to plan their purchases, while working with their bankers to secure these plans, without borrowing directly from the bank
Monday, January 12, 2009
Sales Efforts and Visible Results!
When most salespeople tell their friends and families about their jobs, they are not understood. Recently, my sales efforts have been visible around Tampa Bay and my customers have been standouts to my colleagues, friends and families.
If you are a sales and marketing manager, call me to discuss how my services can best be contracted to produce visible results like these!
Saturday, August 30, 2008
Equity Firms Buying Banks Will Get Great Leverage
CFO Magazine writes that the ultimate leverage of leverage will come from PE private equity firms buying banks.
Then, how will the rest of American business be able to get loans?
http://www.cfo.com/article.cfm/12030834/c_2984321?f=LunchWithLou
Banks, by definition are highly leveraged. If they write down loans and structured finance issues, or take the structured finance products onto their books and book losses, they need additional shareholder capital to support their remaining loans. At this time, they are having great problems raising these funds. (Integrity Bank tried to raise around $5o million unsucessfully this year, and then was FDIC'ed to be reborn Regions Bank in three more days; no investor group was interested in the investment.)
Private Equity will go after the strongest banks and many weaker banks will probably disappear. Those which cannot raise capital cannot make loans. As a matter of fact, they go to their strongest borrowers and call the loans at the end of their terms. Or they modify the loan conditions at the end of the terms.
Whichever happens, the juice to the economy provided by lending institutions is evaporating. PE acquisition of banks will accelerate this process because they ROI demands will force acquired banks to introduce and expand these behaviors of contracting credit.
Then, how will the rest of American business be able to get loans?
http://www.cfo.com/article.cfm/12030834/c_2984321?f=LunchWithLou
Banks, by definition are highly leveraged. If they write down loans and structured finance issues, or take the structured finance products onto their books and book losses, they need additional shareholder capital to support their remaining loans. At this time, they are having great problems raising these funds. (Integrity Bank tried to raise around $5o million unsucessfully this year, and then was FDIC'ed to be reborn Regions Bank in three more days; no investor group was interested in the investment.)
Private Equity will go after the strongest banks and many weaker banks will probably disappear. Those which cannot raise capital cannot make loans. As a matter of fact, they go to their strongest borrowers and call the loans at the end of their terms. Or they modify the loan conditions at the end of the terms.
Whichever happens, the juice to the economy provided by lending institutions is evaporating. PE acquisition of banks will accelerate this process because they ROI demands will force acquired banks to introduce and expand these behaviors of contracting credit.
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