Sum2’s Hamilton Plan Getting Scholarly Attention
The following research paper on The Hamilton Plan was written by Deepak Verma, a business student at Baruch College. To our knowledge it is the first scholarly research that incorporates the Hamilton Plans theme of a focus on SME manufacturing.
ISSUES MANAGEMENT PROJECT
Prof. Michael Kirk Stauffer
DEEPAK VERMA
The Societal and Governmental Environment of Business
Baruch College, the City University of New York
December 16, 2009
Table of Content
Topic Page No
1. Executive Summary 2
2. The Issue: Shrinking Manufacturing Base 3-4
3. The Origin of the Issue and Solution 4-5
4. Small & Medium Enterprises; Catalyst of Sustainable Growth 6
5. Initiative for Development of SMEs 7-8
6. Future of SME and SMEs in USA 9
7. Appendix : References 10
EXECUTIVE SUMMARY
Living beyond means is not sustainable. One of the primary reasons of prolonged Economic and Credit Crisis in United States is its low manufacturing base and American way of consuming more than what is produced. This research paper will examine issue of shrinking manufacturing base of USA, unfair and unethical business practices adopted by countries such as China to boost export thereby causing trade deficit to USA, reasons for low manufacturing base and role of small and medium enterprise (SME) manufacturers in developing a sustainable manufacturing base of the US economy.
Prior to coming at Baruch College for pursuing MBA in finance and investments, I worked for over 10 years with Small Industries Development Bank of India (SIDBI), an apex financial institution of India engaged in the development and financing of SMEs and micro financial institutions. Having worked with this financial institution, I realized the importance of SMEs in bringing sustainable economic development and employment creation, particularly in a mixed economy like India.
The paper will discuss on public-private initiative in USA for development of SMEs, their efforts and capital investment for empowerment and financing of SMEs. Various initiatives taken by private and public sector will be analyzed. Efforts have been made to forecast future of SMEs vis a vis manufacturing sector, role of community development financial institutions (CDFIs), and flow of commercial bank credit and private equity investment in SMEs in the United States.
THE ISSUE: SHRINKING MANUFACTURING BASE
Why should shrinking manufacturing base be an issue in a market driven service oriented economy like US? Federal Reserve Chairman Ben Bernanke stated on Feb. 28, 2007, “I would say that our economy needs machines and new factories and new buildings and so forth in order for us to have a strong and growing economy.” Strong Manufacturing base is the only solution to rising trade deficit and industrial job loss. Manufacturing promotes innovation which leads to investments in equipment and people, research and development, improved products and processes and increase in productivity and higher standards of living. Increase in manufacturing leads to increase in demand for raw materials and other commercial services.
United States has transitioned from an agricultural economy to Industrial economy to a service economy. Over a period of this transition US has lost its manufacturing base substantially and has been importing goods from around the world which has resulted into huge trade deficit and industrial job losses. IMF has categorized the US current account deficit as unsustainable. Warren Buffet also once commented “The U.S trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to political turmoil… Right now, the rest of the world owns $3 trillion more of us than we own of them.”
Since the United States joined the WTO, US trade deficit has risen from $150.6 billion in 1994 to $817.3 billion in 2006. US reliance on imports ranges from electronic items to apparels and other consumables. For example, electronic items sold in United States are developed by companies such as Philips, Toshiba, Sony, Hitachi, Samsung and Sharp. We have lost significant market share in Auto Industry also. Toyota has surpassed General Motors to become leading auto manufacturer in terms of global sales. Ironically, items such as clothing and apparel where USA had its dominance are also being imported from foreign countries. Over 90 percent of clothing and shoes sold in the United States are made in foreign countries. US economy has thrived on consumerism which has led to increase in demand for goods over the years but production of domestically manufactured goods has been declining, thereby giving rise to imports from foreign countries and loss of industrial jobs.
Critics of the argument say it is the increase in production efficiencies, resulted from technological innovation and advancement that has resulted in loss of jobs. Additionally, it is the increase in consumption which is the root cause of import deficit rather than shrinking manufacturing base. Undoubtedly long term data indicates an increase in US manufacturing, but the way we are loosing our manufacturing share from last 2 decades and if we continue shrinking, we will soon have no choice but to consume whatever is dumped in our market and will be on the mercy of foreign imported goods. Increase in manufacturing has not kept pace with global growth in manufacturing in USA. Since 2000 global manufacturing growth has been 47%, whereas USA has recorded a growth rate of only 19%.
ORIGIN OF THE ISSUE & SOLUTION
What is causing shrinking manufacturing base in the United States? Is it purely competitive and cheaper products manufactured in Asia and Europe or some other factors are also responsible? Undoubtedly competitive global business environment has severely affected domestic production in the United States, this crisis in large arises due to unfair and unethical business practices adopted by its trading partners mainly China. Some of those practices are significant government subsidies, currency manipulation, large-scale dumping in the U.S. market, and other market-distorting practices. Additionally, unfavorable govt. policies, tax structure, increase in cost involved in healthcare, litigation, and regulation has significantly affected the bottom line. Increase in cost and strict regulation forced manufacturing units to move their facilities to other countries where companies do not face those kinds of impediments. Companies operating in the U.S. started outsourcing low-value tasks like simple assembly or circuit-board stuffing, but lower cost of outsourcing and shrinking margin lured them to continue outsourcing sophisticated engineering and manufacturing capabilities that are crucial for innovation in a wide range of products. As a result, the U.S. has lost or is in the process of losing the knowledge, skilled people, and supplier infrastructure needed to manufacture many of the cutting-edge products it invented.
Is there any way to bring back our manufacturing base?
The view that the U.S. should focus on R&D and services is completely flawed. Manufacturing is part of the innovation process and United States has to expand its manufacturing base to remain a world leader.
Following may be suggested to address the issue:
(1) Increase the tariffs on foreign goods so that they are more expensive than domestic goods.
(2) Demand the same level of quality in all foreign goods as American goods.
(3) Diplomatic measures should be taken to create pressure on foreign countries particularly China to stop manipulating their currencies.
Efforts should be made to open up foreign consumption markets adequately to U.S. producers so as to increase export and minimize trade deficit and should endeavor to combat predatory foreign trade practices aimed at undermining U.S. producers in their home market. Next big step is to promote small and medium enterprises to set-up manufacturing units.
SMALL & MEDIUM ENTERPRISES (SMEs); CATALYST OF SUSTAINABLE GROWTH
The issue of shrinking manufacturing base in the United States has been discussed by economist, policymakers, industrialists, and think tanks since economic integration and various measures to improve domestic manufacturing base have been suggested. But considering our free market dominance no sincere efforts were made to expand manufacturing base. Alarming rise in trade deficit and current economic and credit crisis which resulted in to massive industrial job loss has called for immediate intervention of private-public participation to protect and develop domestic manufacturing base for long term sustainable economic growth of United States. It is this time only that the role of SME manufacturers was felt inevitable to address this alarming issue.
President Obama during an interview said “We’ve got to make sure that we’re cultivating small businesses and entrepreneurs who are going to be driving employment growth,” the President said, “so that 20 years from now we can look back and we can say, ‘This was the pivot point, this is where we started to turn the corner.”
US need to change course at this point of time and need to develop a network of small and medium enterprises focusing on cleaner and green technology. The U.S. can explore strategies used in emerging markets for development of SMEs. According to Hau L. Lee, a professor at Stanford Graduate School of Business, “America needs large industrial zones devoted to specific industries–similar to zones in Taiwan, Singapore, Malaysia, and much of China. Such areas offer tax breaks, cheap or free land, workforce training, plenty of water and power, and agencies that serve as one-stop shops for all of the necessary permits and regulatory approvals.” A national level specialized financial institution may be created to provide low cost credit to newly setup SMEs in the manufacturing sector. US strength lies in high end technology, innovation, R&D, robust infrastructure, and know-how.
INITIATIVE FOR DEVELOPMENT OF SMEs
US govt. runs a number of programs for providing technological know-how, contracting opportunities, counseling and assistance, financing, and R&D facilities to small and medium enterprises. Some of the prominent programs run by US department of commerce are Manufacturing Extension Program, Advanced Technology Program, Technology Transfer, and Small Business Innovation Research (SBIR) Program. State govt. and number of govt. agencies are deployed for implementation of these schemes across the United States. SBA provides technical and financial assistance to SMEs through its partner lending institutions.
On November 17, 2009 The Goldman Sachs Group, Inc. launched 10,000 Small Businesses — a $500 million initiative for development of 10,000 small businesses across the United States. The plan envisaged to provide greater access to business education, mentors and networks, and financial capital to small businesses. Lloyd C. Blankfein, Chairman and CEO of Goldman Sachs quoted “Small businesses play a vital role in creating jobs and growth in America’s economy.” Warren Buffett, CEO of Berkshire Hathaway also mentioned “Our recovery is dependent on hard working small business owners across America who will create the jobs that America needs. I’m proud to be a part of this innovative program which provides greater access to know-how and capital – two ingredients critical to success.”
Sum2 LLC, a firm which assists SMEs in implementing sound business practices by offering a series of programs and products, announced The Hamilton Plan on Labor Day. The Hamilton Plan is a ten point program to foster the development of manufacturing in the United States by tapping the entrepreneurial energy of small and mid-size enterprises (SME). The Hamilton Plan requires concerted focus of investment capital to fund development and establishment of an SME Development Bank (SDB) which will focus, manage and administer capital formation initiatives to incubate and develop SME manufactures.
I contacted James McCallum, CEO of Sum2llc to discuss the issue of shrinking manufacturing base and how SMEs can help in restoring manufacturing base in the United States. In response to my comment here is what he stated “It is pretty amazing that the United States has not done more to specifically encourage and address the unique needs of this critical economic driver. Many Asian countries are miles ahead of the US in SME banking and capital formation. These banks have extensive portfolios of finance products and technical assistance they provide to SME’s. The reasons that the US lacks focus in this area are many. US commitment to free market forces has badly warped our economic infrastructure. SMEs in the US have primarily relied on community banks for financing. Most of which went for real estate and construction projects. SME manufactures have just about disappeared from the economic landscape of the US. The credit crash and the economic malaise are awakening our understanding of the critical nature of SMEs and our need to manufacture products. Goldman’s 10,000 Businesses Initiative coalesces nicely with the Hamilton Plan we developed in 2008.”
USA MANUFACTURING & SMEs IN YEAR 2030
With the concerted government efforts for promotion and development of SMEs and private sector initiatives such as “10,000 Small Businesses plan” by Goldman, SMEs will be largely benefited having access to innovative financial products and services from a network of financial institutions. Ten point program suggested in Hamilton plan, if implemented, will bring cluster based development of SME manufacturers. Cleaner and green technology will drive long term sustainable growth, increase national income and result in employment creation. Healthy SMEs will be focusing on export of goods thereby reducing the trade deficit and offer a new market for commercial banking sector. High-tech growth oriented SMEs will also have access to private equity investments and will offer a new avenue of diversification to private equity industry.
But the task of SME development is a challenging task and requires strong will on the part of different stakeholders. SMEs are considered to be the riskiest segment of borrowers from a financial institution’s perspective and thus struggle for timely and adequate credit. Access to technical and market information, financial assistance and trained and educated workers is the biggest challenge for SMEs. Future SMEs require sound business practices such as corporate governance, risk management, stakeholder communications and regulatory compliance.
I believe that SMEs are sine qua non for manufacturing sector & I can foresee a bigger space for SMEs in next 20 years from now. I am so intrigued with the idea of SMEs development and their contribution in the economic growth that in the long run I wish to work as a freelancer offering consultancy and advisory services on financial and strategic matters to SMEs. I would work with a network of financial institutions, venture capitalists, engineers, environmentalists, social workers, suppliers, and policy makers so as to offer SMEs a comprehensive set of services.
APPENDIX: REFERENCES
U.S. Needs to Return to Its Manufacturing Base
http://seekingalpha.com/article/119136-u-s-needs-to-return-to-its-manufacturing-base
Securing America’s Future: The Case for a Strong Manufacturing Base, A Study by Joel Popkin and Company, Washington, D.C. June 2003, Prepared for the NAM Council of Manufacturing Associations
http://www.pmihome.org/Popkin_Study_3-03.pdf
President predicts it will take decades to revive declining U.S. manufacturing base?
Manufacturing & Investment Around The World: An International Survey Of Factors Affecting Growth & Performance, ISR Publications, revised 2nd edition, 2002. ISBN 978-0-906321-25-6.
Economy Watch: Economy, Investment & Finance Report
http://www.economywatch.com/world_economy/usa/export-import.html
USA Manufacturing output continues to increase (over the long run), Curious cat, Investing and economics blog
Alliance for American Manufacturers http://www.americanmanufacturing.org/issues/manufacturing/the-us-manufacturing-crisis-and-its-disproportionate-effects-on-minorities/
Can the future be built in America? http://proquest.umi.com.remote.baruch.cuny.edu/pqdweb?index=28&did=1860761601&SrchMode=1&sid=2&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1259505905&clientId=8851
TO SAVE AMERICAN MANUFACTURING: USBIC’S PLAN FOR AMERICAN INDUSTRIAL RENEWAL BY Kevin L. Kearns, Alan Tonelson, and William Hawkins
http://americaneconomicalert.org/USBIC_Save_American_Manufacturing_Jobs_Plan.pdf
Goldman Sachs Launches 10,000 Small Businesses Initiative
http://www2.goldmansachs.com/our-firm/press/press-releases/current/10-k-business.html
Goldman Sachs as Social Entrepreneur http://sum2llc.wordpress.com/
Hamilton Plan by Sum2llc http://sum2llc.wordpress.com/2008/09/03/sme-development-bank/
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Risk: SME, manufacturing, economic revitalization, social wealth
New Day Rising: ADP Employment Report
Rising Sun Taft McWhorter
ADP has released its National Employment Report for January. Non-farm private employment decreased 22,000 during the month on a seasonally adjusted basis. The ADP report indicates that job loss is decelerating. Many believe that the massive governmental intervention to recapitalize the banking sector and stimulus programs extending unemployment benefits and the provision of funding aid to state governments are key elements that are helping to stabilize the economy.
Highlights of the ADP report include:
January’s ADP Report estimates non-farm private employment in the service-providing sector increased by 38,000, the second consecutive monthly increase.
Employment in the goods-producing sector declined 60,000, with employment in the manufacturing sector dropping 25,000.
The employment decline in the manufacturing sector was the lowest since January of 2008.
Large businesses, defined as those with 500 or more workers, saw employment decline by 19,000 while small-size businesses with fewer than 50 workers, declined 12,000.
Employment among medium-size businesses, defined as those with between 50 and 499 workers, increased by 9,000, the first increase in employment since January of 2008.
Employment in the financial services sector dropped 16,000.
Construction employment dropped 37,000. This drop marks the third straight year of consecutive monthly employment declines and brings the total decline in construction jobs since the peak in January 2007 to 1,804,000.
Sum2 advocates the establishment of an SME Bank to sustain long term economic growth.
For information on the construction and use of the ADP Report, please visit the methodology section of the ADP National Employment Report website.
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Risk: unemployment, recession, recovery, political
Schulte Roth & Zabel Navigating A Brave New World
This years Schulte Roth & Zabel’s (SRZ) 19th Annual Private Investment Funds Seminar stuck a very different pose from last years event. One year on from the global meltdown of financial markets, languishing institutional certainty and the pervading crisis of industry confidence has been replaced with a cautious optimism. The bold swagger of the industry however is gone, in its place a more certain sense of direction and expectation is emerging. Though managers continue to labor under unachievable high water marks due to the 2008 market devastation, 2009 marked a year of exceptional performance. Investment portfolios rebounded in line with the upturn in the equity and bond markets. Liquidity improved and net inflows into the industry has turned positive during the last quarter as large institutional investors and sovereign wealth funds returned to the sector with generous allocations. These are taken as clear signs that the industry has stabilized and the path to recovery and the healing of economic and psychological wounds are underway. Yes the industry will survive and ultimately thrive again but it will do so under vastly different conditions. The new business landscape will require an industry with a guarded culture of opaqueness to provide much greater transparency while operating under a regimen of greater regulatory scrutiny.
The 1,900 registered attendees heard a message about an industry at a cross road still coming to terms with the market cataclysm brought on by unfettered, unregulated markets and excessive risk taking. SRZ offered an honest assessment in examining the industries role in the market turmoil. Speakers alerted attendees to an industry at a tipping point. To survive the industry must adapt to a converging world that believes that uniform market rules and regulations are the surest safeguards against catastrophic systemic risk events. A global political consensus is emerging that expresses support for industry regulation as an effective tool to mitigate the pervasiveness of fraud and market manipulation that undermines investor confidence and ultimately the functioning of a fair and efficient open free market.
Paul Roth, Founding Partner of SRZ, noted in the events opening remarks that the market is beginning to recover as evidenced by industry AUM once again exceeding the $2 trillion mark; but he warned that any exuberance needs to be tempered with the understanding that the new normal would not resemble the pre-crash world. The days of cowboy capitalism and radical laissez-faire investing are clearly over. Indeed Mr. Roth wryly observed “the industry must develop a maturity about the need for change. He concluded “that the industry must respond by playing a constructive role in forming that change.”
The conference subject matter, speakers and materials were all top shelf. Break out presentations on risk management, regulatory compliance, distressed debt deal structuring, tax strategies and compensation issues all reinforced the overriding theme of an industry in flux. The presenters passionately advocated the need to intentionally engage the issues to confront accelerated changes in market conditions. By doing so, fund complexes will be in a position to better manage the profound impact these changes will have on their business and operating culture. Subject issues like insider trading, tax efficient structuring, hedge fund registration, preparing for SEC examinations and the thrust of DOJ litigation initiatives and how to respond to subpoenas were some of the topics explored.
To highlight the emerging regulatory environment confronting the industry, a presenter pointed to the Southerization of the SEC. This is an allusion to the hiring of former criminal prosecutors from the Department of Justice, Southern District of New York to go after wayward fund managers. The SEC is ramping up its organizational capability to effectively prosecute any violations of the new regulatory codes. The growing specter of criminal prosecutions and the growing web of indictments concerning the high profile case of Mr. Raj Rajaratnam of the Galleon Group was presented as evidence of an emerging aggressive enforcement posture being pursued by regulators. Managers beware!
Presenters made some excellent points about how institutional investors are demanding greater levels of TLC from their hedge fund managers. This TLC stands for transparency, liquidity and control. Creating an operational infrastructure and business culture that can accommodate these demands by institutional investors will strengthen the fund complex and help it to attract capital during the difficult market cycle.
The evening concluded with an interesting and honest conversation between Paul Roth and Thomas Steyer, the Senior Managing Partner of Farallon Capital Management. The conversation included increased regulatory oversight, compensation issues, industry direction and matching investor liquidity with fund strategy, capacity, structure and scale. Mr. Steyer manages a multi-strategy fund complex with $20 billion AUM, his insights are borne from a rich industry experience. He made the startling admission that Farallon has been a registered hedge fund for many years and he believes that the regulatory oversight and preparation for examiners reviews helped his fund management company to develop operational discipline informed by sound practices.
Mr. Steyer also spoke about scale and that additional regulatory oversight will add expense to the cost of doing business. Mr. Steyer believes that it will become increasingly difficult for smaller hedge funds to operate and compete under these market conditions.
Another interesting topic Mr. Steyer addressed were issues surrounding investor redemption and fund liquidity. During last years SRZ conference investor liquidity was the hot topic. Fund preservation during a period of market illiquidity and a fair and orderly liquidation of an investment partnership were major themes that ran through last years presentations. Mr. Steyer struck a more conciliatory tone of investor accommodation. He confessed his dislike for the use of “gates” as a way to control the exit of capital from a fund. In its place he offered a new fund structure he referred to as a “strip” to allocate portfolio positions to redeeming partners in proportion to the overall funds liquid and illiquid positions. He stated he believed that strategy to be more investor friendly.
Schulte Roth & Zabel has once again demonstrated its market leadership and foresight to an industry clearly in flux, confronting multiple challenges. These challenges will force fund managers to transform their operating culture in response to the sweeping demands of global market pressures, political impetus for regulatory reform and the heightened expectations of increasingly sophisticated investors. The industry could not have a more capable hand at the helm to help it navigate through the jagged rocks and shifting shoals endemic to the alternative investment management marketplace.
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Risk: industry, market, regulatory, political
NFIB Reports Decline in Small Business Optimism
The National Federation of Independent Business (NFIB) has just released the Small Business Economic Trends Report for January 2010. The report published since 1973 measures small business sentiment on numerous economic and business factors that confront small businesses.
This months report indicates a decline in business optimism. The NFIB index fell 0.3 points in December to 88. That’s up from the lows of March 2009, but has been below 90 for 15 months. “Optimism has clearly stalled in spite of the improvements in the economy,” the NFIB said.
Highlights Reported by Forbes Digital:
- Jobs: 10% of the owners increased employment (the highest reading of 2009), but 22% reduced employment (seasonally adjusted). Over the next three months, 15% plan to reduce employment (down two points), and 8% plan to create new jobs (up one point), yielding a seasonally adjusted net-negative 2% of owners planning to create new jobs, a one-point improvement from November.
- Credit: Regular borrowers (accessing capital markets at least once a quarter) continued to report difficulties in arranging credit at the highest frequency since 1983. A net 15% reported loans harder to get than in their last attempt, unchanged from November. Although “that is not nearly as severe as the financial distress reported in the pre-1983 period, 24 months of recession have sapped the financial strength of many small firms,” Dunkelberg said. Eight percent of all owners reported that their borrowing needs were not satisfied, down two points from November. The remaining 92% of all owners either obtained the credit they wanted or were not interested in borrowing. Only 4% of the owners reported finance as their number one business problem (down one point).
- Profits: 54% reported lower earnings compared to the previous three months. Of those, 65% cited weaker sales, 4% each blamed rising labor costs, higher materials costs and higher insurance costs, while 6% blamed lower selling prices. Poor real sales and price cuts are responsible for much of the weakness in profits.
- Prices: 10% of the owners reported raising average selling prices, but 33% reported price reductions yielding a net-negative 22% (seasonally adjusted) of owners who cut prices in December. Plans to raise prices fell one point to a seasonally adjusted net 3% of owners, 35 points below the July 2008 reading. “The weak economy continued to put downward pressure on prices,” said Dunkelberg. “Widespread price cutting contributed to the reports of lower nominal sales.”
- Costs: On the cost side, the percent of owners citing inflation as their number one problem (e.g. costs coming in the “back door” of the business) fell two points to 2%, and only 3% cited the cost of labor.
Components of the Optimism Index include: Labor Markets, Capital Spending, Inventory and Sales, Inflation, Profits and Wages, Credit Markets
The NFIB Report can be downloaded from the Sum2 website. NFIB Optimism Index
The NFIB Research Foundation has collected Small Business Economic Trends Data with Quarterly surveys since 1973 and monthly surveys since1986. The sample is drawn from the membership files of the NFIB.
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Prognostications and Expostulations for 2010
We’re going out on a limb with this one or given thats its winter we’ll say we’re walking on thin ice. We’ll gaze into the crystal ball and pontificate on eleven subject areas for 2010. With some we hope we will be wrong. With some we hope we will be right.
1. Stock Market: Buoyed by well managed earnings by the large multinational companies in the DOW, principally as a result of cost reduction initiatives and exposure to global markets the Index will finish up 6% and close at 11, 011 on the last trading day of 2010. Given an inflation rate of 4% investors will realize a 2% gain on equity investments in DOW constituents. S&P 500 and NASDAQ will be flat gaining 2% for the year.
2. Iraq War: The war in Iraq will continue to wind down. America will scale down its military presence in the country. Troop levels in the country will approximate 85,000 by the close of 2010. Though direct American military involvement in conflicts will decline, Iraq will experience civil unrest as Kurd nationalists, Shiite and Sunni Muslims seek to protect their political and economic interests.
3. Afghanistan War: The escalation of America’s military presence in Afghanistan will move the theater of war further into Pakistan. The Taliban will be satisfied to harass US forces by engaging in a guerrilla war. Taliban and Al-Qaeda supporters will use the opportunity to increase the level of urban terrorist attacks in the large cities of Pakistan. Al-Qaeda confederates will seek to reestablish base of support in Somalia, Yemen and ties will begin to emerge in Latin American narco-terror states.
4. Iran: The political situation in Iran will continue to deteriorate. This is a positive development for regional stability because it will force the ruling regime to cede its nuclear program development initiatives. Iran will not be able to capitalize on the US draw down in Iraq. It will become increasingly isolated as Hezbollah and Hamas pursue actions that are less confrontational to Israel in Palestine and Lebanon. The ruling Caliphate position will weaken due to internal political dissent and external economic pressures.
5. China: It will be a year of ultra-nationalism in China. Its stimulus program that is targeted to internal development will sustain a GDP growth rate of 8%. China will use this opportunity to strengthen the ideological support of its citizens to fall in line with the national development initiative. Globally China will continue to expand its interests in Africa and will cull deeper relationships with its Pacific Rim club member Latin America. China will continue to use US preoccupation with its wars in Afghanistan, Iraq and skirmishes in Yemen and Somalia as an opportunity to expand its global presence with a message of peace and cooperation.
5. US Mid Term Elections: Republicans will gain a number of seats in Congress. The continued soft economic conditions, state and local government fiscal crisis, war weariness and cut back in services and rising expenses will make this a bad year for incumbents and the party in power, namely the democrats. Sarah Palin will play a large role in supporting anti-government candidates drooling over the prospect of winning a seat in government.
6. Recession: Though the recession may be officially over, high unemployment, home foreclosures and spiking interest rates will hamper a robust recovery. The end of large government stimulus programs and the continued decrease in real estate values also present strong headwinds to recovery. We predict a GDP growth rate of 2% for the US economy. Outsourcing will abate and a move to reintroduce SME manufacturing will commence.
7. Technology: The new green technology will focus on the development of nuclear power plants. The clash of the titan’s between Google’s Droid and Apple’s I Phone will dominate tech news during the year. Lesser skirmishes between Smart Phones makers or the war of the clones will continue to explode altering the home PC market and continue to change the market paradigm for old line firms like DELL, Microsoft and HP. SaaS or cloud computing will gain on the back of lean business process initiatives and smart phone application development and processing infrastructure will encourage cottage industries fueling the cloud and making for some new millionaires. The tension between the creators of content and search and delivery will begin to tilt back toward the content providers. Litigation involving social networking sites will be filed to create safeguards against its use as a tool to control and manipulate behaviors thus threatening civil liberties and privacy rights.
8. Culture: The Googlization of civilization will allow individuals to embrace paternal corporatism as a pillar to add efficiency and order to their lives. Multiculturalism will continue to grow in the US. However a growing political backlash against it will become more of a prominent theme as Teabaggers agitate for a return to the true values of America. Electronic arts will make major leaps and bounds as commodification continues to be a driving force in the world of art. Printed words like books and newspapers will continue to dramatically decline. Writing, drawing and playing musical instruments skills will ebb as people prefer to develop digital skill sets. Texting and Tweeting make for poor practice for extended compositions.
9. Latin America: Instability will grow in Latin America as narcodollars continue to undermine political stability in Columbia, Venezuela, Mexico and Panama. The US will increasingly become involved in the conflicts between petro and narcodollars. Mexico’s stability will be increasingly undermined by the power and corruptible influence of the drug trade. China’s influence on the continent will grow.
10. European Union: The EU will continue to manage itself for stability. It will yearn to return to its aristocratic roots and will become increasingly conservative. It will continue to have a complex relationship with the expanding Muslim community. A call to deeper nationalism will arise out of a growing influence of Islam and the inefficiencies of EC bureaucrats in Belgium. The EU will continue its union of expediency to counterbalance their distrust of Russia and their distaste for America.
11. Environmental Justice: Though awareness continues to grow concerning the need to mount and implement large scale solutions to halt the problem of global climate change; the political will and resources required to drastically alter the planets current trajectory in growth of carbon emissions from the burning of fossil fuels remains unaltered. Social responsible enterprises, small businesses and individuals continue to make a difference. Eco friendly small businesses, urban farming, capital formation initiatives around renewable energy businesses are hopeful signs of a market response to the pressing problem. China is investing heavily in becoming a market leader out of business savvy and environmental necessity. Until the great powers of the world can come to some collective agreement on how to limit , cap or trade carbon credits we’ll have to be content to separate the trash and recycle, reuse and reduce.
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Risk: unfulfilled predictions will make me look bad
Joyeux Noel
May the light of peace guide you.
May the warmth of gratitude envelop you.
May the grace of giving embolden you.
May the joy of the season be with you.
May the spirit of love move within you.
Merry Christmas
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The Profitability of Patriotism: SME Lending
What a difference a year makes. A year ago the banks came crawling to Washington begging for a massive capital infusion to avoid an Armageddon of the global financial system. They sent out an urgent SOS for a $750 billion life preserver of tax payers money to keep the banking system liquid. Our country’s chief bursar Hank Paulson, designed a craft that would help the banks remain afloat. Into the market maelstrom Mr. Paulson launched the USS TARP as the vehicle to save our distressed ship of state. The TARP would prove itself to be our arc of national economic salvation. The success of the TARP has allowed the banks to generate profits in one of the most prolific turnarounds since Rocky Balboa’s heartbreaking split decision loss to Apollo Creed. Some of the banks have repaid the TARP loans to the Fed. Now as Christmas approaches and this incredible year closes bankers have visions of sugar plum fairies dancing in their heads as they dream about how they will spend this years bonus payments based on record breaking profitability. President Obama wants the banks to show some love and return the favor by sharing more of their recapitalized balance sheets by lending money to small and mid-size enterprises (SME).
Yesterday President Obama held a banking summit in Washington DC. Mr. Obama wanted to use the occasion to shame the “fat cat bankers” to expand their lending activities to SMEs. A few of the bigger cats were no shows. They got fogged in at Kennedy Airport. They called in to attend the summit by phone. Clearly shame was not the correct motivational devise to encourage the bankers to begin lending to SMEs. Perhaps the President should have appealed to the bankers sense of patriotism; because now is the time that all good bankers must come to the aid of their country. Failing that, perhaps Mr. Obama should make a business case that SME lending is good for profits. A vibrant SME sector is a powerful driver for wealth creation and economic recovery. A beneficial and perhaps unintended consequence of this endeavor is the economic security and political stability of the nation. These are the worthy concerns of all true patriots and form a common ground where bankers and government can engage the issues that undermine our national security.
The President had a full agenda to cover with the bank executives. Executive compensation, residential mortgage defaults, TARP repayment plans, bank capitalization and small business lending were some of the key topics. Mr. Obama was intent on chastising the reprobate bankers about their penny pinching credit policies toward small businesses. Mr. Obama conveyed to bankers that the country was still confronted with major economic problems. Now that the banks capital base has been stabilized with Treasury supplied funding they must get some skin into the game and belly up to the bar by making more loans to SMEs.
According to the FDIC, lending by U.S. banks fell by 2.8 percent in the third quarter. This is the largest drop since 1984 and the fifth consecutive quarter in which banks have reduced lending. The decline in lending is a serious barrier to economic recovery. Banks reduced the amount of money extended to their customers by $210.4 billion between July and September, cutting back in almost every category, from mortgage lending to funding for corporations. The TARP was intended to spur new lending and the FDIC observed that the largest recipients of aid were responsible for a disproportionate share of the decline in lending. FDIC Chairman Sheila C. Bair stated, “We need to see banks making more loans to their business customers.”
The withdrawal of $210 billion in credit from the market is a major impediment for economic growth. The trend to delever credit exposures is a consequence of the credit bubble and is a sign of prudent management of credit risk. But the reduction of lending activity impedes economic activity and poses barriers to SME capital formation. If the third quarter reduction in credit withdrawal were annualized the amount of capital removed from the credit markets is about 7% of GDP. This coupled with the declining business revenues due to recession creates a huge headwind for SMEs. It is believed that 14% of SMEs are in distress and without expanded access to credit, defaults and bankruptcies will continue to rise. Massive business failures by SMEs shrinks market opportunities for banks and threatens their financial health and long term sustainability.
The number one reason why financial institutions turn down a SME for business loans is due to risk assessment. A bank will look at a number of factors to determine how likely a business will or will not be able to return the money it has borrowed.
SME business managers must conduct a thorough risk assessment if it wishes to attract loan capital from banks. Uncovering the risks and opportunities associated with products and markets, business functions, macroeconomic risks and understanding the critical success factors and measurements that create competitive advantage are cornerstones of effective risk management. Bankers need assurances that managers understand the market dynamics and risk factors present in their business and how they will be managed to repay credit providers. Bankers need confidence that managers have identified the key initiatives that maintain profitability. Bankers will gladly extend credit to SMEs that can validate that credit capital is being deployed effectively by astute managers. Bankers will approve loans when they are confident that SME managers are making prudent capital allocation decisions that are based on a diligent risk/reward assessment.
Sum2 offers products that combine qualitative risk assessment applications with Z-Score quantitative metrics to assess the risk profile and financial health of SMEs. The Profit|Optimizer calibrates qualitative and quantitative risk scoring tools; placing a powerful business management tool into the hands of SME managers. SME managers can demonstrate to bankers that their requests for credit capital is based on a thorough risk assessment and opportunity discovery exercise and will be effective stewards of loan capital.
On a macro level SME managers must vastly improve their risk management and corporate governance cultures to attract the credit capital of banks. Through programs like the Profit|Optimizer, SME’s can position themselves to participate in credit markets with the full faith of friendly bankers. SME lending is a critical pillar to a sustained economic recovery and stability of our banking system. Now is the time for all bankers to come to the aid of their country by opening up credit channels to SMEs to restore economic growth and the wealth of our nation.
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Risk: banking, credit, SME
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
