Goldman Sachs as Social Entrepreneur
Goldman Sachs’ CEO Lloyd Blankfein and his largest investor, The Wizard of Omaha, Warren Buffett , descended from the mystical heights of Valhalla with some startling news. They were bearing a new mythical golden ring. As they held the ring aloft they made a bold proclamation. They would embark on one of the grandest social entrepreneurial programs of all time by offering some of the rings precious power, about $500 million worth, to capital starved small and mid-size enterprises (SMEs). The 10,000 Small Businesses Initiative will distribute $100 million per year over the next five years to SMEs through Community Development Financial Institutions.
These lords of commerce have heard the cries from endangered SMEs. In their infinite wisdom Blankfein and Buffet understand that the real economy needs to resuscitate and incubate the critical SME segment as an absolute prerequisite to a vibrant economic recovery. The buzz about this news in the marketplace ranged from cynical suspicion at one extreme to puzzled bemusement and ecstatic aplomb at the other.
What motivated Goldman to announce this initiative is an interesting question. Was it guilt, greed or a sense of corporate social responsibility? Some suggest it is a master PR move to counter a growing public perception that Goldman Sachs, the poster child of government favoritism and bailout largess, has leveraged its unfair advantage to achieve historic levels of profitability. Thus enabling management to pay obscene bonuses to company employees. But capital has no psyche, and half a billion dollars is a tall bill to underwrite absolution for some phantom form of guilt. True to its nature, capital always seeks a place where it will find its greatest return. Goldman and Buffett are casting some major bread on the receding waters of a distressed economy. As its foretold in the Good Book , doing God’s work will produce a tenfold return. If the Bible’s math is correct, thats a lot of manna that will rain down from heaven for the shareholders of Goldman Sachs and Berkshire Hathaway. Looks like our modern day version of Moses and Aaron have done it again. Leading their investors across the dangerous waters of the global economy to live in the promised land of happy shareholders.
As one of the world’s preeminent investment banks and purveyor of capitalist virtues, company shareholders must be questioning how Goldman’s managers will realize a return on this investment? Has management examined the potential corporate and societal moral hazards surrounding the program? Surely shareholders have asked when they expect to be compensated for this significant outlay of capital. The desire to realize gain is a more plausible motivator and makes more sense for an enterprise like Goldman and the storied investment Wizard from Omaha.
Its wise to ascribe the best intentions and virtuous motivations to actions that we may not fully understand. This program should be viewed as a seminal event in the history of corporate social responsibility and social entrepreneurship. Its important to understand that institutions that practice corporate social responsibility do not engage it solely as a philanthropic endeavor. Indeed, the benefits of good corporate citizenship pays multidimensional dividends. All ultimately accrue to the benefit of company shareholders and the larger community of corporate stakeholders.
Goldman’s move to walk the point of a capital formation initiative for SMEs seeks to mitigate macroeconomic risk factors that are prolonging the recession and pressuring Goldman’s business. Goldman needs a vibrant US economy if it is to sustain its profitability, long term growth and global competitiveness. Goldman needs a strong regional and local banking sector to support its securitization, investment banking and corporate finance business units. Healthy SMEs are a critical component to a healthy commercial banking sector. Goldman recent chartering as an FDIC bank holding company may also be a factor to consider. This SME lending initiative will provide interesting insights into the dynamics of a market space and potential lines of business that are relatively new to Goldman Sachs. This initiative might presage a community banking acquisition program by Goldman. At the very least the community banking sector is plagued with over capacity is in dire need of rationalization. Goldman’s crack team of corporate finance and M&A professionals expertise would be put to good use here.
Goldman’s action to finance SMEs will also serve to incubate a new class of High Net Worth (HNW) investors. Flush with cash from successful entrepreneurial endeavors, the nouveau riche will be eager to deploy excess capital into equities and bonds, hedge funds and private equity partnerships. Healthy equity markets and a growing Alternative Investment Management market is key to a healthy Goldman business franchise.
Community banks, principal lenders to SMEs are still reeling from the credit crisis are concerned about troubled assets on their balance sheets. Bankers can’t afford more write downs on non-performing loans and remain highly risk adverse to credit default exposures. Local banks have responded by drastically reducing credit risk to SMEs by curtailing new lending activity. The strain of a two-year recession and limited credit access has taking its toll on SMEs. The recession has hurt sales growth across all market segments causing SMEs to layoff employees or shut down driving unemployment rates ever higher. Access to this sector would boost Goldman’s securitization and restructuring advisory businesses positioning it to deepen its participation in the PPIP and TALF programs.
The financial condition of commercial and regional banks are expected to remain stressed for the foreseeable future. Community banks have large credit exposures to SME and local commercial real estate. Consumer credit woes and high unemployment rates will generate continued losses from credit cards and auto loans. Losses from commercial real estate loans due to high vacancy rates are expected to create significant losses for the sector.
Reduced revenue, protracted softness in the business cycle and closed credit channels are creating perfect storm conditions for SME’s. Bank’s reluctance to lend and the high cost of capital from other alternative credit channels coupled with weak cash flows from declining sales are creating liquidity problems for many SMEs. Its a growing contagion of financial distress. This contagion could infect Goldman and would have a profound impact on the company’s financial health.
The 10,000 Businesses initiative will strengthen the free flow of investment capital to finance national economic development and empower SMEs. It strengthens free market capitalism and has the potential to pool, unleash and focus investment capital into a strategic market segment that has no access to public equity and curtailed lines of traditional bank credit. The 10,000 Businesses initiative will encourage wider participation by banking and private equity funds. In the aggregate, this will help to achieve strategic objectives, build wealth and realize broader goals to assure sustainable growth and global competitiveness. All to the benefit of Goldman Sachs’ shareholders and it global investment banking franchise.
Goldman Sach’s has always been a market leader. We salute Goldman Sachs’ initiative and welcome its success.
In September of 2008, Sum2 announced The Hamilton Plan calling for the founding of an SME Development Bank (SDB). The SDB would serve as an aggregator of capital from numerous stakeholders to focus capital investment for SME manufactures. More on the Hamilton Plan can be read here: SME Development Bank.
Risk: SME, bank, recession, unemployment, credit, private equity
You Tube Music: 10,000 Manaics, Natalie Merchant: Dust Bowl
G-20 Stamps Out Tax Havens
The fallout from the recent tax evasion settlement with UBS is reverberating throughout the G-20 community. As we reported back in October, the French Governments action directing banks to close branches and subsidiaries in non-OEDC compliant jurisdictions will pressure all G-20 participants to adopt a more uniform tax code and enforcement practice. The drive to strengthen the respect of tax treaties and the closure of havens to custody assets beyond the reach of national tax authorities signals a new era in multinational cooperation and the eclipse of radical free market tax practices.
The principal drivers for this unprecedented level of cooperation and standardization is the dire need for national tax authorities to recognize and tax revenue streams to help address the burgeoning budget deficits the global economic crisis has has wrought.
Clearly the crackdown on tax evasion is gaining momentum since the global financial crisis has devastated national treasuries. Enormous expenditures on stimulus programs and dramatically falling tax receipts has created a perfect storm and has created an enormous threat to the fiscal soundness of national treasuries.
Forbes reports that Singapore has become the latest in a flurry of jurisdictions complying with Office of Economic Cooperation and Development standards on transparency and exchange of information for tax purposes. Fifteen jurisdictions have come into compliance since April 2009. In addition to Singapore and the sea change occurring in the Suisse banking industry; other governments that have lost revenue to tax havens are individually taking tough action:
–The U.K. government has informed the Isle of Man that it will reduce revenue transfers of value-added tax receipts to the island by 50 million pounds next year, 9% of the island’s revenue.
–French banks are starting to close down their operations in tax havens.
–In Germany, the hiding of funds in Liechtenstein bank accounts has prompted a backlash against tax havens.
–In the United States, White House advisor Paul Volcker in December is due to report on ways of eliminating revenue losses to tax havens.
This heightened regulation and standardization amongst G-20 tax authorities is quickly closing any regulatory tax arbitrage opportunities for global investors. The closure of preferential tax domiciles will heighten the power and reach of national tax agencies enforcement capabilities and the scope of their examination reach. The IRS is stepping up its enforcement and institutional assets to assure that private equity and hedge fund industries comply with all the anti-money laundering laws and stringent tax codes.
Sum2’s IARP helps investment managers assess and manage the growing threat of audit and tax enforcement risk. Sum2’s CARP helps large and mid-size corporations assess compliance and manage IFI audit risk.
Risk: audit, enforcement, regulatory, tax, reputational, litigation
Deloitte’s Nine Principles of Risk Intelligence
Is your business risk intelligent? A review of the following principles offers company executives a concise outline of objectives central to a risk intelligent enterprise. Deloitte recently published White Paper, Effective Integration, Enhanced Decision Making, The Risk Intelligent Tax Executive outlined the following nine fundamental principles.
Nine fundamental principles of a Risk Intelligence Program
1. In a Risk Intelligent Enterprise, a common definition of risk, which addresses both value preservation and value creation, is used consistently throughout the organization.
2. In a Risk Intelligent Enterprise, a common risk framework supported by appropriate standards is used throughout the organization to manage risks.
3. In a Risk Intelligent Enterprise, key roles, responsibilities, and authority relating to risk management are clearly defined and delineated within the organization.
4. In a Risk Intelligent Enterprise, a common risk management infrastructure is used to support the business units and functions in the performance of their risk responsibilities.
5. In a Risk Intelligent Enterprise, governing bodies (e.g., boards, audit committees, etc.) have appropriate transparency and visibility into the organization’s risk management practices to discharge their responsibilities.
6. In a Risk Intelligent Enterprise, executive management is charged with primary responsibility for designing, implementing, and maintaining an effective risk program.
7. In a Risk Intelligent Enterprise, business units (departments, agencies, etc.) are responsible for the performance of their business and the management of risks they take within the risk framework established by executive management.
8. In a Risk Intelligent Enterprise, certain functions (e.g., Finance, Legal, Tax, IT, HR, etc.) have a pervasive impact on the business and provide support to the business units as it relates to the organization’s risk program.
9. In a Risk Intelligent Enterprise, certain functions (e.g., internal audit, risk management, compliance, etc.) provide objective assurance as well as monitor and report on the effectiveness of an organization’s risk program to governing bodies and executive management.
Sum2’s business mission is to help small and mid-sized enterprises (SME) become risk intelligent enterprises. Sum2’s product suites enables managers to implement sound risk management practices guided by these principles of risk intelligence. We firmly believe that consistent practice of sound risk management holds the key to profitability and long term sustainable growth.
Sum2’s Profit|Optimizer product series provides mangers a consistent framework and scoring methodology to assess, aggregate and price risk, identify actions, assign responsibility and align business functions to mitigate risks and achieve business goals.
Sum2’s IARP, helps managers to assess and manage the rising threat of tax risk exposures that present significant compliance risk to the enterprise.
We welcome an opportunity to help you erect a risk intelligence enterprise.
Risk: risk management, business intelligence, compliance, sustainability, profitability
Sum2 Announces Business Alliance with CreditAides
Sum2, LLC is pleased to announce that they will begin to offer the corporate rating products of CreditAides. CreditAides is an independent corporate rating and research firm that provides financial health assessment reports and credit risk analysis ratings on companies using the Z-Score methodology. The CreditAides reporting system is a predictive tool that helps managers gain insights into the financial health of a company. The insights help managers identify a company’s ability to remain competitive and financially sound while measuring the impact of business initiatives to achieve profitability and growth.
James McCallum, the President of Sum2 stated, “The CreditAides quantitative assessment tool is a wonderful compliment to the qualitative risk assessment applications offered in the Profit|Optimizer. Now our clients have a recognized standard to measure the financial impact and returns on capital allocation decisions they implemented as a result of a Profit|Optimizer review. The challenging business cycle requires that managers allocate capital to a few select initiatives. It is critical that managers fund initiatives that mitigate the greatest risk and provide the potential of optimal returns. The combination of CreditAides reports with the Profit|Optimizer will provide our clients with the ability to discern the optimal initiatives to fund and measure the effectiveness of their capital allocation decisions.”
The Profit|Optimizer guides business managers through an thorough enterprise risk assessment. Uncovering the risks and opportunities associated with products and markets, business functions, numerous macro risks and critical success factors are key components of effective enterprise risk management (ERM). ERM requires the assessment and aggregation of hundreds of risk factors. The Profit|Optimizer helps managers identify the key initiatives that will help to maintain profitability and sustainable growth. The use of CreditAides provides an important measurement tool to affirm and validate that managers have made correct bets on capital allocation decisions.
Z-Score Financial Analysis Tool
The Z-Score formula for predicting bankruptcy was developed by Edward I. Altman a Professor of Finance at New York University. The Z-Score is used to assess the financial health of companies and the probability of bankruptcy. The Z-score uses multiple corporate income and balance sheet values to score the financial health of a company. The use of Z-scores is a strategic tool managers use to measure and validate the effectiveness of their business strategy.
Risk Assessment and Opportunity Discovery
The recession has created macroeconomic conditions that are causing widespread business failures. Small and mid-size business enterprises (SME) require effective risk management tools to effectively manage business threats to survive extreme business downturns. Assessing, measuring, aggregating, prioritizing, pricing and initiating actions are the tactical means risk managers use to support the business objectives of the enterprise. Sound risk management practices are central to a healthy corporate governance culture and are central to maintaining profitability and long term sustainable growth for the business enterprise.
The Profit|Optimizer
Profit|Optimizer helps managers assess risk factors and uncover opportunities that are always present in the business environment. The product is based on Basel II working group recommendations that outline optimal risk profiles of SMEs. The Profit|Optimizer incorporates four focus areas.
1.) product and market dynamics (products, clients, competition, supply chain, market segments)
2.) business functions (management, sales and marketing, operations, facilities, IT, HR, accounting)
3.) critical success factors (generic and specific)
4.) macro risk factors (macroeconomic, STEEPLE, SWOT, segment benchmarks, business plan optimization)
SME’s lack of agility and reluctance to change has made it difficult for these businesses to survive severe market conditions. There are tremendous market forces at work in the current business environment that are creating dangers and opportunities for SMEs if they can effectively assess and adapt. Business managers must be astute and exacting how they allocate the precious capital resources required to achieve business objectives. The Profit|Optimizer helps managers make better capital allocation decisions. CreditAides provides fiscal metrics to validate or adjust business strategy and initiatives. Sum2’s risk assessment products coupled with the measurement tools provided by CreditAides creates a leading edge solution for SME risk management. The ease of use and superior value proposition of the combined solution is unsurpassed in the market.
About CreditAides
CreditAides (www.creditaides.com) online business analysis and credit assessment portal provides business managers with important insights into the financial health of their company. Automated financial analysis improves efficiency of the business enterprise. CreditAides reports are used to assess the financial health of clients, supply chain and used to demonstrate financial health and credit worthiness to credit and equity providers.
True underlying financial health of companies has never been harder to identify and never been of greater importance. Across both equity and credit markets, understanding relative financial strengths of companies is paramount for effective business decisions. Good decisions cannot be made without good quality information generated by incisive tools.
About Sum2, LLC
Sum2 (www.sum2.com) was founded in 2002 to promote the commercial application of corporate sound practices. Sum2 manufactures, aggregates, packages and distributes innovative sound practice digital content products to select channels and market segments. Sum2’s sound practice products address risk management, corporate governance, shareholder communications and regulatory compliance. Sum2’s objective is to assist businesses and industries to implement sound practices to create value for company stakeholders and demonstrate corporate governance excellence to assure profitability and long term sustainable growth.
You Tube Video: Ella Fitzgerald, A-Tisket A-Tasket
Risk: bankruptcy, default, market, credit
Survey Says: Corporate Tax Audits on the Rise
A recent survey published by Sabrix indicates that corporate tax audits are on the rise. Eighty-three percent of companies surveyed report an increased number of audits due to state and local tax revenue shortfalls. Survey respondents comprised 140 tax executives from the Forbes Global 2000 Index.
Ninety-six percent of the attendees said that despite the recession, transaction taxes such as sales and use taxes will continue to be an area of focus. In response to the economic downturn, 45 percent of the attendees said their companies had reduced their employee headcount, but 45 percent also increased their investment in tax technologies.
Eighty-one percent of the respondents have made sales and use tax and value-added tax a more strategic focus of their company due to the economy. A similar proportion said they have implemented new programs and processes to remain compliant.
The IRS is under pressure to enforce compliance with federal tax statutes. The US Treasury coffers are seriously depleted given all the stimulus and economic recovery expenditures. The IRS is mandated to assure that corporations comply with all tax laws. The IRS has developed an Industry Focus Issue, (IFI) audit strategy that profiles high risk corporate tax compliance statutes. IFI guides field audit personnel through a risk based assessment of corporate tax compliance. The IFI aggregates and ranks Three Tiers of high risk tax compliance issues. Examiners will conduct rigorous reviews of these issue sensitive factors. The factors concern revenue recognition, sales tax, partnership reporting, and the repatriation of revenue derived in foreign domiciles.
Sum2 has published a product, IRS Audit Risk Program (IARP) that guides corporate tax managers and tax professionals through a risk assessment of their exposure to IFI risk factors. The IARP helps corporate tax professionals score tax risk exposures, determine mitigation actions, estimate remediation expenses and manage tax controversy defense strategies. The IARP is available for purchase on Amazon.com.
Sum2 also has developed the Corporate Audit Risk Program (CARP). The CARP is IRS tax risk assessment tool for corporate tax managers. A single user license for CARP can be purchased on Amazon.com.
Risk: compliance, tax audit, reputation, litigation
You Tube video: Stevie Ray Vaughan, Taxman
Radio Nowhere: Tax Risk Delists Emmis Communications
Misinterpretation of the tax code led to the NASDAQ delisting of Emmis Communications after investors dumped the stock following a restatement announcement. In an 8-K Filing Emmis announced that its previously filed public financial statements cannot be relied on for accuracy. Emmis’s stock price has been trading below $1.00 per share after investors negative reaction to the company’s restatement of earnings and financial condition. The restatement was necessary after Emmis discovered it improperly accounted for the tax treatment of Federal Communication Commission (FCC) licensing rights.
Emmis operates a number of radio stations in key metropolitan markets and was forced to restate its financial statements for the past fiscal year and for the first quarter of this year to adjustments it made in its provision for income taxes. Last year the company wrote down the value of its FCC licenses. This put Emmis into a loss position leading the company to overstate the benefit for income taxes and understated deferred tax liabilities by $25.3 million for its fiscal year ended February 28, 2009.
Emmis CEO Jeff Smulyan, released a statement on the company website that read, “Certainly, ‘restating our earnings’ sounds ominous, but our restatement solely relates to a non cash technical tax issue that has no impact on our operations. While there might be big numbers involved and a lot of paperwork being filed, I don’t see anything to worry about.”
This is an interesting example of the consequences of tax risk. Most tax risk events result in huge settlement amounts, damage to executive reputations and the company brand and sometimes prison terms for the persons and parties involved. The delisting of the Emmis stock and the severe devaluation of shareholder equity is a more extreme result of the failure to mitigate tax risk factors.
Sum2’s Corporate Audit Risk Program (CARP) guides corporate tax managers through a thorough risk assessment of exposures to IRS Industry Focus Issues (IFI). CARP helps tax professionals score threats of IFI risk factors and implement mitigation actions. The CARP lists Emmis tax problem as a Tier Three IFI risk factor. It falls under the communications technology and media industry guidelines for amortization on intangibles, licensed programs and contract rights. The CARP is an indispensable guideline and tool that may have provided insights into the tax risk that led to a costly delisting and evaporation of shareholder equity.
Emmis share price closed today at $1.32. We wish the management, shareholders and employees a speedy remediation to the problems confronting the company and a recovery of the share price to reestablish its listing on the NASDAQ.
You Tube Music Radio: Bruce Springsteen, Radio Nowhere
Risk: tax, shareholder equity, reputation, regulatory
File an FBAR or Find Yourself Behind Bars!
The much ballyhooed IRS amnesty deadline of October 15 for taxpayers who failed to declare assets held in foreign banks accounts is upon us. The highly publicized legal action against UBS and their agreement to turn over account information on thousands of clients to the IRS has created some awareness about the amnesty program. Numerous high profile prosecutions and substantial media coverage of the amnesty program is designed to create a sense of urgency and convey the need to comply with the tax code. Individuals and corporations with assets greater then $10,000 held in foreign bank accounts have until tomorrow to file a Foreign Bank Account Report (FBAR) with the IRS or face potential legal action.
UBS alone has indicated that it has over 52,000 US citizens are private banking clients of the firm. I would guess that most of them have accounts with balances far greater then the $10,000 declaration threshold. Investors participating in private equity and hedge fund partnerships should also be aware that they are not excluded from this reporting requirement. HNW investors and institutions should conduct some extra due diligence on their hedge fund manager. Investors may well be served by inquiring if all the appropriate declarations and forms have been filed by the investment partnership and their administrators. They should call the chief compliance officer at the fund and get an attestation letter that the fund is in full compliance with foreign bank reporting requirements.
Sir Allen Stanford and Bernie Madoff may look good in those orange prison jumpsuits but that doesn’t mean that you become a slave to fashion and succumb to this growing industry trend. All it takes to get compliant and keep the tax man a bay is a little form called an FBAR. Hedge fund managers, CPAs, attorneys and fund administrators can get in full compliance with FBAR filing requirements by implementing Sum2’s BSA Reporting Module. You can down load an FBAR and supporting resources needed to comply with AML and BSA statutes by subscribing to Sum2’s Bank Secrecy Act (BSA) compliance program. This program will help you address this pressing tax compliance requirement.
The IRS and Justice Department officials have conducted a high profile public relations and marketing campaign to convey their intent to aggressively pursue tax evaders and non-compliant corporations. Taking a little precaution will prevent big problems for fund managers and their clients. It may also save you from doing time in The Big House.
Sum2 provides a suite of AML compliance products to help investment managers and broker dealers comply with the AML provisions of The Patriot Act, BSA and OECD best practices. To learn more about our outstanding AML product suite click here. Sum2 e-commerce.
You Tube Music Video: Brother Where Art Thou, In the Jailhouse Now
Risk: legal, compliance, tax, reputation, criminal prosecution
A Growing Contagion: One in Seven Companies Are a Credit Risk
The H1N1 Swine flu threat may be the big topic on CNN but a growing contagion of financial distress is widely infecting small and mid-sized enterprises (SME) with potentially fatal consequences.
CFO magazine reports that 14% of companies are struggling to pay their bills or are at risk for bankruptcy. These findings are the result of a study CFO conducted on 1500 Midcap companies. The 2009 Credit Risk Benchmarking Report indicated that 550 companies of the 1500 made the credit watch list and over 200 of the names were in or are entering a distressed financial condition.
The report measures each company on three factors: cash as a percent of revenue, days payable outstanding (DPO), and DPO relative to the DPO of that company’s industry. The last of these measures is intended to expose which companies are under performing regardless of the economic condition of their industry as a whole. A company scoring low in all three areas is rated a potential credit risk.
The strain of a two-year recession and limited credit access is taking its toll on small and mid-sized businesses. This development is not surprising. The recession has hurt sales growth across all market segments. Banks, still reeling from the credit crisis are still concerned about troubled assets on their balance sheets. Bankers can’t afford more write downs on non-performing loans. Banks remain highly risk adverse to credit default exposures and have drastically reduced credit risk to SMEs by shutting down new lending activity.
Reduced revenue, protracted softness in the business cycle and closed credit channels are creating perfect storm conditions for SME’s. Bank’s reluctance to lend and the high cost of capital from other alternative credit channels coupled with weak cash flows from declining sales are creating liquidity problems for many SMEs. As a defensive maneuver, SMEs are extending payment cycles to vendors to preserve cash. This same cash management practice is also being employed by their clients resulting in an agonizing daisy chain of liquidity pain. SME’s that have concentrated exposures to large accounts are at the mercy of the financial soundness of few or in some instances a single source of revenue.
The growing contagion of financial distress is also a major threat to supply chains. Buyers might prize their ability to drive hard bargains with their suppliers but the concessions won may be the straw that breaks the camels back driving a supplier into insolvency.
It is critical that managers understand all risks associated with clients and suppliers. It is critical that managers assess risks associated with client relationships and key suppliers. In this market, enhanced due diligence is clearly called for. The financial soundness of suppliers and clients must be determined and scored so as to minimize default exposures to your business.
CreditAides is a company that delivers SaaS based financial health assessments on SMEs. CreditAides reports that their clients are becoming more vigilant and thorough in their due diligence of customers and suppliers. They have noted a particular emphasis on the growing practice of reviewing the financial health of suppliers. Supply chain risk is a heightened risk factor for SME’s due to their over dependence on single source. Conducting a financial health assessment on key suppliers and other enhanced due diligence practices mitigates a risk factor that could have potentially devastating consequences. SME manager’s need to button down their due diligence practices to prevent the sickness from infecting their business.
CreditAides SaaS can be accessed here: www.CreditAides.com
You Tube Music Video: Bing Crosby and Rosemary Clooney, Button Up Your Over Coat
Risk: contagion, credit risk, counter-party, supply chain, client, recession, banking
Rutgers Job Study: Full Employment By 2017!
Rutgers University has released a sobering study on expected recovery rates in employment levels for the United States economy. The study, America’s New Post-Recession Employment Arithmetic indicates that the employment deficit has grown so large that it may take until 2017 for the nation’s labor market to return to its pre-recession level.
The study, released by the Edward J. Bloustein School of Planning and Public Policy is a cause for concern. The study reports that the US economy has shed over 7 million jobs since the recession officially began in December 2007. This has reduced the total number of jobs in the United States by 5.8%, the largest drop during any downturn since World War II. The authors of the study, James W. Hughes and Joseph J. Seneca, project that the employment deficit will total 9.4 million private sector jobs by the end of the year.
The study estimates that if the economy adds more than 2 million jobs annually starting next year, it would take until August 2017 – more than seven and a half years – to both recover the jobs lost since December 2007 and create new positions for the roughly 1.3 million people who join the labor force each year.
Hughes and Seneca believe that a recovery in 2017 may be an optimistic assumption. An economic expansion that lasts for seven years is about 50 percent longer than the average for postwar recoveries. Hughes and Seneca refer to the last ten years as “The Lost Employment Decade,” because the U.S. is on track to finish this year with 1.3 million fewer total jobs than it had in December 1999. “This is the first time since the Great Depression of the 1930s that America will have an absolute loss of jobs over the course of a decade” the report states.
The past decade has witnessed a startling reversal in economic fortunes for the US economy. The U.S. finished the 1990s with 19 million more private sector jobs than it had at the start of the decade. Approximately 16 million jobs were created during the 1980s. Before the recession, annual rate of job growth was about 1 million jobs per year, about half of the growth rates of the previous two decades.
Hughes and Seneca believe that this will force states into fierce competition to realize job growth. States must respond by creating desirable environment for business based on costs, affordability, business climates, support infrastructure, labor force quality and tax policies.
We believe that joblessness and unemployment continue as significant threats to economic growth. The conception of the unemployment rate as a lagging indicator is emerging as a lead driver inhibiting economic recovery. High unemployment continues to inhibit consumer spending and works against a rebound in the housing market and related construction industries. Retailers are already bemoaning the bleak forecast for this years holiday shopping season. State and local governments reeling from dwindling tax receipts are beginning to crack under the strain to fund basic community services, public schools and social assistance programs.
The structural dysfunction of the American economy is a critical issue that must be addressed. A concerted program aimed at the development and incubation of SME manufactures will encourage the entrepreneurial energy and kick start badly needed economic drivers to ignite a recovery. Sum2 advocates the adoption of The Hamilton Plan and the creation of an SME Development Bank to reestablish sustainable growth and national prosperity.
You Tube Music Video: Bruce Springsteen Seeger Sessions, Pay Me My Money Down and Erie Canal
(RU and Bruce, Perfect Together)
Risk: unemployment, job creation, SME, political stability, recession,
Mom and Pop Go Chapter 11
The Wall Street Journal ran an interesting article about the devastating effect the recession is having on family owned businesses. The SBA estimates 90% of U.S. businesses are family-owned. During 2008 about 4.3 million businesses with 19 or fewer employees closed according to the Bureau of Labor Statistics. If 90% of those firms were family controlled businesses more then 3.8 million families have lost their livelihoods and most likely have also lost a considerable amount of personal wealth. This drastic dissipation of wealth and family control of assets is yet another blow to the middle class. Its impact of entrepreneurial activity and capital formation initiatives may create additional headwinds for the economy seeking to overcome the deep recession.
John Ward a professor at Northwestern University observed “that the economic downturn is really just the latest setback for family-run businesses. In the 1970s and ’80s, exorbitant income taxes and estate taxes forced many to close. Before that, the anti-establishment movement during and after the Vietnam War made many children reluctant to take over the family business.”
Beth Wood, a family business market development specialist at MassMutual observes that family businesses are “often steeped in tradition and not as flexible to change, tend not to have formal plans in place to respond to crisis. They’ve seen reductions in top line revenue that they just can’t react fast enough to. Problems securing credit in this recession have also prevented some family businesses from getting the funding they need.”
Ms. Wood makes an interesting observation about the importance of business agility. The need to assess the rapidly changing market dynamics is a critical exercise that SMEs must undertake. Business as usual will not get it done. SMEs must begin to transform itself to better align its business model to rapidly changing markets. Conducting a thorough risk assessment and opportunity discovery exercise is critical to creating a sustainable business enterprise. Sum2’s Profit|Optimizer is a critical tool that helps SME managers assess risks, spot opportunities and initiate actions to achieve business growth and profitability.
Family owned enterprises must overcome the gravity of generational business cultures that inhibit and resist change. SMEs will survive and thrive if they can identify emerging opportunities the current business cycle is creating. SME’s will survive and thrive if they have the will, resourcefulness and a supportive culture to change. These are the qualities required for long term sustainability and growth. Business as usual is giving way to a “New Normal,” where adaptability to structural market changes are keys to asset preservation and wealth creation.
You Tube Video: Willie Nelson, On the Road Again
Risk: family trusts, asset preservation, small business, bankruptcy
