from Entrepreneurial:
Why America’s small businesses are becoming like banks
By Terra Terwilliger The opinions expressed are the author's own.
Over two years after the start of the Great Credit Crisis, banks are still not lending money. But big businesses know exactly where to go for a quick, interest-free loan … the little guy. Even as corporate profits recover, big companies continue to squeeze their small vendors, stretching out payment terms and writing late checks. Unfortunately, this blatant exploitation is damaging the small business economic engine that drives half of US GDP.
A friend who owns a small consulting company recently received notice from a Fortune 500 client that henceforth their payment terms would be extended from 90 to 120 days. No discussion, no recourse, just a fancy legalese version of “we’re going to start paying you later because it’s better for us, so get used to it.”
That’s as if your employer casually one day sent you a letter saying that they were going to start paying you 30 days late. Unfortunately, you wouldn’t be able to tell your landlord, the gas company and the supermarket the same thing. Your bills still have to be paid on time.
My friend is not alone. Last August, The Wall Street Journal published an article titled “Big Firms are Quick to Collect, Slow to Pay,” which revealed how companies with more than $5b in annual sales were systematically slowing payments to suppliers, while speeding up their own collections. The analysis showed that companies with revenues over $5 billion took an average of 55.8 days to pay suppliers, compared to 53.2 days a year earlier … and compared to the 40.1 days in which businesses with revenues under $500 million pay up.
The situation is not getting better. “We just updated our payables analysis for 2010,” says a spokesperson for REL Consultancy, the company that did the original WSJ research. “We see the same trends in 2010. Large companies continue to pay slowly, and they are still using their muscle to make their suppliers accept longer payment terms.”
Big companies not only force vendors to accept painful terms, they also don’t reliably pay up. According to the Experian Business Benchmark Report of July 2010, the average days beyond terms (days a company is late on paying according to its own billing standards) for companies with over 1,000 employees increased by 5.6% over the past six months, with 17% of all monies owed delinquent. Some of these delays are doubtless due to billing errors or legitimate disputes about payment. Some are bids to wring a few more days of cash flow out of already stretched vendors.
Can recovery and credit crunch coexist?
(James Saft is a Reuters columnist. The opinions expressed are his own)
New studies from the Federal Reserve and European Central Bank show that, whatever else, a recovery in the economy is not being supported by a resumption in bank lending, raising concerns about how exactly growth will become self-sustaining when official stimulus ebbs.
The ECB last week released its loan survey showing banks tightened credit yet again for businesses and consumers, though at a less severe rate than in the previous quarter. Much was made of the fact that banks said they expected to ease terms to businesses, but not individuals, slightly in the last three months of the year.
Days later the Fed was out with its own survey, and again the news is getting worse more slowly, which must mean it is time to pop open the tap water. Banks are tightening terms and conditions to large firms, though fewer are doing so than before. Of course we should be thankful for small mercies, but the fact remains that this is a relative rather than an absolute survey, which means that even if fewer are being tougher the vast majority are being just as tight with money as they were three months ago when things were very tight indeed.
But wait, I can almost hear you ask, banks are making money again. If not making loans, what are they doing with it? Funny you should ask, they are lending it to the government. According to Fed data October marked the first time in years that banks held the same amount in Treasuries and Fannie Mae and Freddie Mac bonds as they did in commercial and industrial loans. Business loans have plunged 18 percent in a year, while Treasury and agency bonds are up 8 percent.
Banks are choosing to lend to the government and to government-backstopped mortgage firms because they see it as the best way to survive: hunker down, take fewer risks and content yourself with the thin gruel and thin margins of taking deposits and lending to the entity insuring those deposits. It’s a good way to get solvent but it will take a terribly long time.
Falling demand for credit is a factor too. Firms are concentrating on expanding margins by cutting back on costs, rather than positioning themselves for an upswing in demand. That means they want fewer loans to support capital expenditure. It also sadly means that they are not yet hiring.
One man’s debt is another man’s credit scheng1. My biggest worry is that one man’s credit will be the rest of mankind’s (including women and children… even those unborn yet) debt. Democracy is dead, long live the monarch?
from From Reuters.com:
How has the credit crisis affected you?
The demise of Lehman Brothers a year ago sparked a collapse in financial market confidence and set of a series of reactions that have spread hardship into the four corners of the globe.
Reuters News has charted the key events and their impact in "Times of Crisis" -- a major new multimedia production on Reuters.com. (See it here.)
We'd like to add the experiences of Reuters readers. So, if you or your family have been affected by the events of the past year then use the comments section below to share your story.
I had been a college graduate for 3 months when Lehman collapsed. Since then, I’ve gotten a better job with better wages, improved my living standard, and paid off the credit card debt I accrued in college.If the recession had come a year or two later, I probably wouldn’t have been as cautious starting out and I would be feeling the effects more than I am.
U.S. should batten down the TARP
– James Saft is a Reuters columnist. The opinions expressed are his own –
The U.S. faces a lengthening series of request from industries and interests seeking shelter under the Troubled Asset Relief Program, most of which it should dismiss out of hand.
YRC Worldwide, a large trucking company, told the Wall Street Journal it will seek $1 billion in TARP funds to help relive it of its pension obligations.
YRC said that about half of the $2 billion it will owe in pension payments over the next four years covers the costs of retirees who worked not for it but for other companies, now vanished, that are part of a multi-employer pension plan.
That’s certainly an irony but doesn’t seem to be the basis for a claim on the public purse.
YRC is not systemically important and its pension woes, presumably the result of negotiation and free agreement, must be its own responsibility.
Next up: states and municipalities.
The last line of this article says it all for me, and I completely agree.
Time for China’s banks to think local
– Wei Gu is a Reuters columnist. The opinions expressed are her own –
When foreign strategic investors were invited to take stakes in Chinese banks, the word “strategic” had a clear meaning for their hosts.
The banks were supposed to stay in for the long term, and that’s why they had the chance to buy big stakes at bargain prices. Yet many have behaved like “foreign speculative investors”, as they are now called in China — they took the cheap deal and then flipped the shares for a fast profit.
Chinese banks looked to the West for access to capital, risk management and exposure to fast growing and sexy new products. But now China no longer needs as much foreign investment.
Meanwhile some of the fancy new financial products China once craved have turned out to be toxic, and the risk management skills of the so-called teachers from the West look tarnished in the wake of the credit crunch.
The recent exodus by cash-strapped Western banks such as RBS, BofA, and UBS, all of whom sold out of Chinese banks for fat profits, has left behind a sour taste.
LAST OF THE BIG 5
Fascinating. I think it will be crucial for China’s banks to start looking within the country to help formulate sophisticated banking concepts that fit the Chinese market, rather than continuing to look elsewhere. Obviously, as you indicate, not everything in the global banking industry is “one size fits all.”
Barclays monoline insurance ploy pays off
– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –
By Margaret Doyle
Barclays has avoided the dead hand of state shareholding and, on Thursday’s evidence, it looks as though it will escape completely.
Barclays Capital has enjoyed a storming first quarter — so good it is hard to see it being sustained — which has allowed the bank to make more big write-downs and still report a 15 percent increase in pre-tax profit.
The key question is whether its provisions against so-called level 3 (hard to value) assets are sufficient.
On the face of it, they do not appear to be, because they have provided for a write-down of 24 percent on an alphabet soup of American junk assets. That compares to a write-down of 75 percent taken on a bunch of similar assets by Societe Generale, which unveiled an unexpected first-quarter loss.
Both bought insurance against a deterioration in the value of these assets, in Barclays’ case, 27 billion pounds-worth, from “monoline” insurers.
Turning the tables: Can you help Davos leaders?
Davos is a well-rehearsed event and everyone knows the part they should play. Business and political leaders gather each year to tackle the major challenges of a global economy while the rest of the world, or those of its citizens who are interested, look on from afar. But this year, for obvious reasons, things are different. The notion of leadership has been coupled in the public mind with that of responsibility. The tone here is a little more humble and the attitude more open-minded. There’s a recognition that new thinking is required. A suitable time, perhaps, to turn the tables on convention and have Davos delegates ask the questions they can’t answer and for global citizens to offer solutions.
Gamefully opening the discourse is Professor Klaus Schwab, Founder and President of the World Economic Forum.
If you’ve got suggestions for Klaus then use the comments section below.
The crisis has to run its course. The best resolution to this problem is to let the market eliminate the problems through bankruptcy. Attempts to prop up failed institutions and businesses is fruitless, these entities need to fail, otherwise we’ll never have a solid foundation to build upon. Also, there has to be transparency and revision to central bank policy, we can’t have central banks manipulating the markets the way they have in the past. Controlling market behavior through artificially low interest rates and currency inflation does not work…the present situation is a clear testament to the failings of current economic thought.
The failings of central economic planning we’re supposed be have been killed off, yet here we are again trying to run a supposed free market economy through central economic planning.
Unless we cease this incessant meddling we’ll continue to get more of the same. Let the liquidation of debt occur and allow better business managers to acquire the assets and move forward. The idea that we reward failure through bailout policy is absurd. And the idea that we reward private sector failure with public sector money is even more disturbing.
Credit control will be much more intrusive in future
– John Kemp is a Reuters columnist. The views expressed are his own –
The international system of bank regulation, epitomised by the Basle II process and the light-touch principles-based regulation of Britain’s Financial Services Authority (FSA) has comprehensively failed.
In too many instances, light-touch principles-based regulation with an emphasis on banks’ internal risk controls turned out to be no effective regulation at all.
Former Fed Chairman Alan Greenspan was the most prominent proponent of this approach, which relied on the profit-maximising self interest of financial institutions to limit risk-taking to prudent levels.
In this view, bank leaders themselves could be relied upon to manage their institutions prudently — after all bankruptcy is not in the interest of shareholders. Previous bank failures (such as Barings) were the result of failure to measure risks properly, or failures of internal communication and control.
So the job of regulators was to set out principles and ensure banking institutions had adequate internal systems and controls, then allow senior management to ensure the overall level of risk was prudent.
This reliance on internal risk-management systems has proved to be a huge error. As Greenspan himself noted recently, bank leaders had not acted in the careful manner he had expected when he pushed for them to be freed from the old, more restrictive regime.
Why this backlash against Basel II?
The first lesson I learned 15 years back when I joined an Indian Bank (incidentally by name Indian Bank) as Probationary Officer was to never ever get in to the Real estate lending. The Real estate lending was seen, is seen and will be seen by the public sector banks in India that cautiously. It’s a kind of taboo for public sector banks in India. Over a period, they have also liberalized their policies but still with a lot of caution. Indian public sector banks have largely survived the present turmoil. I am not blaming the banks who are bullish on the real estate funding. But, it reflects the underlying risks involved in this exposure.
Let’s visit American market for once:
1. Banks knowingly take exposures on sub-prime borrowers.
2. They are nicely wrapped under CDSs
3. CDSs are rated high in the market.
4. Banks buy nicely packed CDSs at high premiums without knowing the crap under the wrap.
5. Sub-prime borrowers default.
6. Banks collapse.
7. Basel II has failed.
Why can’t the so called John Kemps and Alan Greenspans say for once CDSs failed? The high bonus driven profit maximization strategies of the banks with least sympathy to the public funds are prime reasons for the market turmoil.
Let us now get in to a story mode:
I earn 100 bucks a month, I can invest a maximum of 100 bucks in stock market or take an exposure for 5 times of that which is 500 bucks if I do day-trading (depending upon the margin requirements, assuming 20 per cent). I invest in good scrips based on the market research and some kind of tips from my broker. (This is similar to the Standardized Approach for credit risk suggested by Basel II wherein banks take external ratings supplied by Moodys, S&P, Fitch etc. into consideration). Once I get some sort of maturity as a player in the market I develop my own mechanisms to identify which company is good and which company is bad etc. (This can be correlated to the Internal Ratings based approach suggested by Basel II wherein you rate your own customers based on various risk parameters and risk profiling). I make all my sincere efforts to understand the market dynamics before taking any exposure. I leave no stone unturned to dig out the risks involved. After all, it is my hard earned money. I don’t require any Basel II here.
Let us suppose, my stock market exposures are regulated by Basel II, then Basel II has given me ample room to initially understand the market over a period (The Standardized Approach) and then move on to my own developed mechanisms (The Advanced Approach). Do I still expect Basel II suggest me to restrict my exposure to only 500 bucks, as this is the maximum I can leverage? Can’t the so called best brains of the world (Harvards, London BSs, IIMs) working with Lehmans with fab bonus driven packages understand the basic risk management principle in any walk of life, in this case the LEVERAGE (Mind you, there is a leverage point in dealing with spouse also). When Lehmans were collapsed, their leverage was well above 25 times.
Further extension to the above story, If I am greedy enough, I start borrowing from my next door neighbor and invest in the market and when market collapses, I sit pretty and blame my wife (Banks blame Basel II) as I was never told by my wife not to borrow from others. I apply for an IP and there ends my liability to my next door neighbor.
Basel II is aimed at improving the risk management practices, not policing against deeds and misdeeds of the banks. If the Banks’ management chose to be dishonest, Basel 20 or 200 also can not help.
A new direction in global financial regulation
– John Kemp is a Reuters columnist. The views expressed are his own –
UK Prime Minister Gordon Brown’s call today for a new G20 charter of principles on financial regulation reflects an emerging consensus among policymakers that, once the immediate crisis has passed, the regulatory framework must be fundamentally redesigned.
In particular, policymakers are concerned with how to correct the basic moral hazard problem in which bankers have an incentive to extend too much credit, while private firms and households have an incentive to take on too much debt.
A consensus is emerging that the volume of credit expansion needs to be restrained and managed as a separate policy objective. This marks a sharp break with past practice — in which central banks attempted to control the cost of credit by manipulating short-term interest rates, but have increasingly left its quantity to decisions by individual banks and borrowers.
There is also something of an emerging agreement that if credit control is a separate economic objective alongside “internal balance” (output-inflation) and “external balance” (trade and capital flows) then a new instrument needs to be developed to achieve this target.
With three targets (internal balance, external balance and financial balance) Tinbergen’s Rule says there need to be three independent policy instruments — fiscal policy, monetary policy, and a distinct credit policy.
In his recent speech to the CBI Annual Dinner in the East Midlands last week, Bank of England Governor Mervyn King alluded to the need to develop a new policy instrument to achieve credit-policy objectives. He stated a strong preference it should not be interest rates. King argued rates should continue to be used to target output and inflation.
from The Great Debate UK:
Britain faces recession without housing ATM
James Saft is a Reuters columnist. The opinions expressed are his own.
Even in the good times, many British consumers were borrowing against their houses just to fund routine consumption, indicating a big hit to come for retail sales and for the banks who hold the loans.
With house prices falling rapidly and mortgage debt tougher to get, it is no surprise that homeowners are less able and inclined to borrow against their houses in order to spend.
That will be hitting the High Street now - analysts are expecting a 0.6 percent fall on the month in retail sales for November when data are released later this week. But a rise in unemployment next year could expose a really serious weakness in household finances, as consumers who counted on being able to extract wealth from their houses to smooth consumption in bad times find that, when bad times come, the wealth isn't there and the banks don't want to lend anyway.
Researchers at Durham University looking at survey data found that 37 percent of homeowners borrowed against their house between 2002 and 2005, typically realising about 6,000 pounds. That's a lot people borrowing a lot of money against very illiquid and now hard to realise assets.
Even more interesting is the pattern of what householders were doing with the money and what was happening to them when they decided to borrow. Over time the proportion of people borrowing to re-invest in their houses through improvements fell, while more was finding its way into day-to-day costs, according to Susan J. Smith, a professor at Durham and one of the authors of the study.
This was borne out by a high percentage of equity borrowers who had lost their jobs, become pregnant or had a child in the year they borrowed.
So while we were all releasing equity from our homes in order to pay off credit cards, pay for annual holidays etc., our employers were benefiting from the fact that we weren’t asking for pay rises, as we “felt” wealthy. Hence the gap between the rich business owners and the poor employees has grown, and no one even noticed…
