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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.

You Tube Music Video: Bruce Springsteen, Seeger Sessions, Pay Me My Money Down

Risk: banking, credit, SME

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December 15, 2009 Posted by | banking, credit crisis, economics, FDIC, government, SME, TARP | , , , , , , , , , , , , , , , , , , , , , | Leave a comment

Radio Nowhere: Tax Risk Delists Emmis Communications

radiosMisinterpretation 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

October 15, 2009 Posted by | business, CARP, CPA, IARP, IRS, regulatory, reputation, Sum2, Tax | , , , , , , , , , , , , , , , , , , , , , | 3 Comments

Rutgers Job Study: Full Employment By 2017!

help wantedRutgers 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,

October 8, 2009 Posted by | associations, business, commerce, economics, government, Hamilton Plan, labor, manufacturing, poverty, recession, risk management, SME, unemployment | , , , , , , , , , , , , , , , , , , , | 2 Comments