Community Bank Director Chimes In Regarding Small Business Lending

In response to $30 Billion Offer No One Wants - Small Businesses Hit by Deflation I received this email from a director of a small bank.

Hello Mish,

I sit on the board of a small community bank and I can attest to the fact that our loan portfolio is in excellent shape even when taking into consideration today's dismal economy. That is not to say a loan is good when made can go bad but if that happens, our bank has sufficient collateral pledged against the loan to cover such short falls. We also review our loan loss reserve and increase as needed based on criteria established under current banking regulations.

Sure there are numerous troubled banks identified by the FDIC but I feel many of these banks will survive.

All banks should be making reasonable earnings with today's low interest rate environment. For community banks, loans are vital and banks are interested in making loans to individuals or businesses that meet our underwriting standards but loan demand is down. A big majority of our loans are just loans leaving another financial institution. Why would someone leave one bank for another?

Of course loan interest rates play a part in the decision but I think a big part is the relationship a customer develops with the loan officer. Dealing directly with a local loan officer who understands your business and is genuinely interested in your business is vital.

Today many larger banks only use local loan officers to bring in the loan request but the decision to make the loan and the terms rest in some committee located in a town far away. Most small business persons will leave such a bank for a local bank with more personalized service.

It's ridiculous that Congress passed and our president signed a bill to provide funds to smaller banks for more loans. As a bank director, there is no way this plan can work. If a bank needs more deposits for loans, assuming the bank has sufficient capital, a banker can easily get more deposits from the public at a much lower cost than the bill passed by congress.

Our government is totally out of touch with the real world and passed this legislation strictly as a political move to make the public think they are trying to help small businesses.

This bull, I mean bill, should be labeled TARP II or some similar acronym.

Bazooka Lending Theory and Practice

Unlike October 2008, when Paulson forced the CEOs of the 9 largest banks to accept funds (See Compelling Banks To Lend At Bazooka Point) no one is forcing small community banks to do anything.

This is what I wrote in 2008 ...

For now, you can force banks to take money, but you can't force them to lend it.

Bazooka Theory

There seems to be a fine line between ...

1) Illegally forcing supposedly well capitalized banks at bazooka point to take money on questionable terms

2) And illegally forcing those same banks at bazooka point to lend it

Self Preservation

Thus the best thing banks can do with that money is sit on it. Yet the penalty for sitting on it is the difference between what the Fed will pay on bank reserves and the 5% interest banks have to pay at bazooka point for borrowing money they did not want in the first place. If banks do start lending like Paulson wants, defaults are guaranteed to increase dramatically.

Someone needs to tell Paulson to go to hell but no one at the table had enough courage to do it.

Here We Go Again

Banks paid back those "forced loans" as soon as they could. Small business lending did not go up, nor should it have. Credit worthy customers were (and still are) few and far between.

Nonetheless, here we go again, except this time it's voluntary.

Hells bells, if a program that forced banks to take money at bazooka did not compel banks to lend, how is a small voluntary program supposed to do it?

Supposedly, this plan will create another 4 million jobs according to president Obama. Hmm. It seems we spent a trillion dollars yet created no jobs, so offering $30 billion (little if any will be taken) to create 4 million jobs would be a feat indeed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Sunday Funnies 2010-09-26 Suck It Up Buddy; Protesting Nonunion Wages; Virtual Sports Fans

Protesting Nonunion Wages at Walmart



Fire Fighter Heroes



Actual Fans: Are They Necessary?

The Wall Street Journal explores the question Actual Fans: Are They Necessary?

Fans of Triestina, a professional soccer team from the northern Italian city of Trieste, were greeted with a surprise Saturday when they arrived at the team's stadium for a game against Padova.

For the first time in four years, nearly every seat in the "Colaussi" stand, which runs along one side of the field and faces the television cameras, appeared to be taken. That stand alone, which holds 10,000 fans, would have nearly doubled the team's average attendance from the previous year.

On television, the crowd looked impressive. But in person, the scene looked a bit strange. The fans were clad in scarves and winter coats�unusual for a balmy September afternoon. They failed to make a sound when the home team ran out on the field and didn't budge when the match ended in a scoreless draw.

Turns out there was a good reason for this: These "fans" were actually two-dimensional images of fans printed on a giant sheet of vinyl and stretched across the empty seats.

"It's depressing," says supporter Marco Caselli. "It's as if we're sending out the message that Trieste has no flesh-and-blood fans, just cardboard cutouts."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Cold Hard Reality Hits Oregon, Treasurer Calls for Halt in State Borrowing, Postponement of Pressing Needs

At long last the truth in Oregon's finances is plain for everyone to see. Please consider Oregon's Treasurer calls for halt in state borrowing

Oregon Treasurer Ted Wheeler wants the Legislature to cut up its credit cards before convening in January as the combination of plummeting revenues and past borrowing threaten to lower Oregon's credit scores and increase future borrowing costs.

Wheeler on Friday called for a halt on new borrowing backed by the state's general fund until its finances recover. The recommendation was unanimously endorsed at a special meeting Thursday of the state's Debt Policy Advisory Commission.

Based on the latest shrinking revenue projections, the commission also has asked the Department of Administrative Services to "reconsider the timing" of some projects that have been approved by lawmakers but for which the bonds have not yet been issued.

That list includes a wide mix of pressing needs and stimulus measures around the state, from the new state hospital, a collaborative research building at Oregon Health & Science University, a statewide emergency radio network and a slew of projects at community colleges.

"This is the cold, hard reality," Wheeler said, "and I'd rather raise it now so when my colleagues in the Legislature convene in January, there are no surprises and they are fully familiar with that reality."

While general obligation bonds are typically used to finance big capital projects with an extended life, lawmakers have tapped them to fund operating costs in the past. The state borrowed $431 million in 2003 to cover operating expenses as it struggled to recover from the last recession. It will be repaying those bonds in $70 million installments until 2013, which will free up borrowing capacity in 2014.

Until then, the state's capacity for new debt is essentially zero, according to a report delivered to the debt policy advisory committee from Treasury's debt management division.

Mistakes a Plenty

Borrowing money to cover operating expenses is just plain stupid. The results speak for themselves. Oregon is out of borrowing capacity until 2014 and it is currently deep in the hole on revenues. That is a toxic mix.

Rep. Peter Buckley, D-Ashland, who co-chairs the Ways and Means Committee, said "the Legislature has carefully managed borrowing to stay within the 5 percent limit and will continue to do so."

Anyone who thinks Oregon has "carefully managed" this mess is an incompetent fool.
Rep. Peter Buckley should be ousted.

Pressing Needs?

Just look at the nonsense labeled "pressing needs"

• New state hospital
• A collaborative research building at Oregon Health & Science University
• A statewide emergency radio network
• Slew of projects at community colleges

There is not a damn one of those things that can remotely be considered a "pressing need". Indeed, If I was an Oregon Taxpayer, I would hope every one of them is not just postponed but scrapped.

It's stupid stuff like that that helped get Oregon in this mess. Moreover, and more critically, Oregon also has the same as every other state: unaffordable union salaries and pensions.

Critical Problems

Oregon has several major problems.

• Those in office cannot distinguish between a desire and a "pressing need"
• The legislature is beholden to public unions
• Most of the Democrats thinks the solution is to tax everyone to death to make up for falling revenues

Genuine Pressing Needs

Oregon needs a change in governorship and the state legislature.

It's time to boot governor Ted R. Kulongoski and all the idiots who cannot distinguish between a desire and a pressing need. Most importantly, Oregonians need to elect candidates for every office willing to take on the public unions as has New Jersey governor Chris Christie.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Only 18% of Americans Have "a Lot" of Confidence in US Banks

According to Gallup, Americans Confident in Own Bank, but Not U.S. Banks

The percentage of Americans saying they have a "great deal" or "quite a lot" of confidence in U.S. banks stands at 18%, continuing a trend of low confidence recorded throughout the economic downturn.



In the same survey, 6 in 10 Americans express confidence in their main or primary bank, defined as the place where they do most of their banking business.

Confidence in U.S. Banks Remains Fragile

Gallup data show that the reputation of America's banks continues to suffer from the fallout of the financial crisis and bank bailout. On the other hand, bankers should take some solace in that the majority of their customers have a positive view of the place where they do most of their banking.

What Does "Confidence in Banks" Mean?

Confidence can mean many different things. For example, I am quite confident a huge percentage of banks are insolvent.

I am also confident the vast majority of banks are hiding bad housing loans, bad commercial real estate loans, and have not properly marked-to-market probable credit card losses. Moreover, I am confident that large banks, especially Citigroup, are still hiding hundreds of billions of garbage in off-the-book SIVs.

Sadly, the Fed is not just turning a blind eye to such behavior, but encouraging it.

To help pay for hidden and pending losses, I am confident that banks will raise fees as much as much as permitted by law to nickel and dime customers to death.

To balance this mess out, I am quite confident that FDIC will be honored, no matter what it takes.

Finally, I am confident that interest rates banks offered by banks will stay low because the Fed is going to keep short-term rates as low as he can for as long as he can, to help insolvent banks slowly recapitalize over time.

Whether or not this is "confidence inspiring" or not is certainly subject to a vast amount of subjective interpretation.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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$30 Billion Offer No One Wants - Small Businesses Hit by Deflation

When government passes out the money normally people are lined up, in advance, with both hands out. When that does not happen, it's because the offer smells like a rotten fish.

Please check out Obama's latest rotten fish offering as described in Small businesses, community bankers may snub Obama's $30 billion loan program

President Barack Obama's $30 billion small community business lending program faces one big challenge: many of the community banks and businesses it's supposed to help don't want it.

The lending program is part of a bill that passed the House of Representatives on Thursday and now awaits the president's signature. The legislation contains a mix of tax cuts and credits aimed at helping small businesses. The centerpiece of the bill is an effort to make billions of dollars available to community banks for loans to small businesses.

Bank executives say their customers don't want loans, even at low interest rates, because the sluggish economy has chilled expansion plans. Some say the federal money isn't worth it because they fear it will come with too much regulatory oversight.

"We have taken a strategic decision not to have our primary regulator, the government, also be a partner in our bank," said William Chase Jr., CEO of Triumph Bank in Memphis.

Chase said the bank already has enough capital to meet the paltry demand for loans. "Our business customers are mired in uncertainty and are reluctant to invest in their businesses," Chase said.

The $30 billion fund will be run by the Treasury Department, and money will be awarded to banks deemed strong by regulators. Banks that have less than $10 billion in assets are eligible.

"It will provide incentives to invest and create jobs for 4 million small businesses," Obama said at a news conference Sept. 10. "It will more than double the amount some small business owners can borrow to grow their companies."

Obama has to bridge the gulf between money that's available and the needs of businesses. The NFIB survey found businesses don't intend to borrow until they have more customers.

Community banks will have to pay an annual dividend of 5 percent to the U.S. Treasury. However, when banks increase their lending to small businesses, their dividend rate declines on a sliding scale. So, if a bank increases its small-business lending portfolio by 2.5 percent, the dividend payment goes down to 4 percent and so on, said Paul Merski, chief economist at the Independent Community Bankers of America, the lobbying group for small banks.

The dividend payment increases to 7 percent if banks don't lend to small businesses.

Noah Wilcox, CEO of Grand Rapids State Bank, with two branches in Minnesota, said he already has more capital at his $250 million bank than he can lend out.

"Many of our clients, business owners, put their projects on ice in 2008 because their job number one is to see their company through to the other side of this economic crisis," said Wilcox.

Somehow Obama takes credit for creating 4 million jobs from $30 billion that will never be spent because the terms for banks are preposterous and small businesses do not want the money anyway.

This is just what I predicted yesterday in Ass Backwards: Senate to Shelve Bush Tax Cuts for Individuals; House to Pass Small Business Tax Cuts

Buying Preferred Shares Amazing Convoluted

Buying preferred shares of banks to get them to lend is amazingly convoluted. Banks need to decide business risks of lending and make those decision on risk, not on government prodding.

The only possible saving grace for such monstrous stupidity is that Zandi is likely correct when he says banks may not take the offer in memory of TARP. Nonetheless, this is yet another step down the path of more seriously misguided government intervention.

Republicans were correct to object to this foolishness.

Tax Credits for Capital Spending Make Little Sense

Given the #1 problem facing small corporation is lack of customers, it makes little sense to entice businesses to increase capacity. Payroll tax credits suffer the same flaw.

Please see my response to both those ideas in Response to Nouriel Roubini on "America Needs a Payroll Tax Cut"

NFIB Small Business Trends

Inquiring minds are taking a look at NFIB Small Business Trends for September.

LABOR MARKETS

There is no life in the jobs market. The Bureau of Labor Statistics (BLS) reported 67,000 new private sector jobs in August, but 45,000 were from education and health care which are heavily dependent on government spending, not exactly �Main Street�companies. Eleven (11) percent (seasonally adjusted) reported unfilled job openings, up one point from July but historically very weak. Over the next three months, eight percent plan to increase employment (down one point), and 13 percent plan to reduce their workforce (up three points), yielding a seasonally adjusted net one percent of owners planning to create new jobs, down one point from July but positive for the fourth time in the last 22 months.

CAPITAL SPENDING

The frequency of reported capital outlays over the past six months fell one point to 44 percent of all firms, again hitting the 35 year record low. The environment for capital spending is not good. Interest rates are low but the record long recession has eroded financial strength. More importantly, the prospects that investment spending and/or hiring will somehow increase profits are low. Four percent characterized the current period as a good time to expand facilities, down one point. A net negative eight percent expect business conditions to improve over the next six months, seven points better than July but still more owners expect the economy to weaken than strengthen. Owners do not trust the economic policies in place or proposed, fear the economic implications of massive deficits and are distressed by global and national developments that make the future more uncertain.

INFLATION

The weak economy continued to put downward pressure on prices. Seasonally adjusted, the net percent of owners raising prices was a negative eight percent, a four point increase from July. August is the 21st consecutive month in which more owners reported cutting average selling prices that raising them.

COMMENTARY

The Index has been below 93 every month since January 2008 (32 months), and below 90 for 25 of those months, all readings typical of a weak or recession-mired economy.

Inflation? Not a threat. Far more owners have cut prices than raised them for 21 months in a row. Deflation? It certainly feels that way to a quarter of the owners reporting price declines for the goods and services they produce and sell.

Here are a few charts from the article.

Prices Received



Actual Price Changes



Single Most Important Problem



The single most important problem is lack of customers. Access to credit is not even on the list. Small businesses don't want loans because they don't have any customers and prices they receive are falling like a rock.

This is deflation in action, and it is crucifying small businesses.

So what does Congress do?

Why it sets up a convoluted $30 billion program, onerous on small banks, so those small banks (who don't want the money) can offer loans to small businesses that do not want the money either!

But hey, it creates another 4 million jobs according to president Obama. Why he must have saved or created 20 million jobs this year alone.

One just might not know it judging from Question of the Day: How Many People Have Exhausted All Their Unemployment Benefits?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Privileged Public Union Liars Show Up Begging for Tax Hikes and Handouts

You can always count on the police (count on them to pick your pocket and say they are doing it for you). The Miami Herald explains the sorry state of affairs in Commission starts budget debate.

In January, Miami-Dade County Manager George Burgess wrote commissioners that he expected property values to plummet 12 percent, a record drop that would significantly reduce government revenues.

Yet, Burgess -- along with the county mayor and commissioners -- subsequently agreed to give county employees salary and benefit increases totaling $132 million.

Now, to help pay for it, Burgess is asking commissioners to support a tax rate increase on homeowners across Greater Miami that will bring in an additional $178 million in revenue.

As the final budget hearing got under way at 5:14 p.m. [September 23, 2010], county commissioners were staring at what many expected to be a long and contentious night to finalize a new budget and property tax rate.

At the outset, 179 people had signed up to speak at the public hearing and a long line of others waited to sign up in the lobby of County Hall.

A grassroots group of property owners gathered in the ground floor of County Hall shouting ``No more taxes'' and waving signs opposing the proposed tax rate hike. ``We Pay Taxes For Services. Not For Bureaucracy,'' read another sign.

A few feet away, police officers gathered in force to support the proposed budget. ``We've got our contract already. This is not about us.... This is about the residents of the community. We want them to be safe,'' said John Rivera, president of the Dade County Police Benevolent Association.

One police officer estimated about 300 police officers and 200 corrections officer had turned out for the session.

Across the hall was an equally strong turnout of county fire-rescue workers in pink T-shirts.

The political stakes spiraled higher Wednesday, when Miami businessman Norman Braman -- who has a history of bankrolling fights against county government -- declared his intention to support and finance a recall campaign against the mayor and any commissioners who support a tax rate increase.

Turnout of Taxpayers, Turnout of Liars Not Surprising

We should not be surprised by the taxpayer turnout. Nor should we be surprised that the turnout of liars was even bigger. Those who stand to benefit at the expense of others are always the first to have their hands out.

"We've got our contract already. This is not about us."

If ever there was a blatant lie, the statement "This is not about us" ranks right at the top of the list. The police could easily take a pay cut or a benefit cut. Instead they want to suck the taxpayers dry.

Correct Solution is Bankruptcy

On August 30, I stated Miami is bankrupt. I also encouraged residents to show up at the meetings. Please see Bankrupt Miami in Fiscal Emergency, Breaks Employee Contracts, Hikes Property Taxes; What You Can Do for details.

The only way the citizens of Miami can hope to escape the tyranny of the police, other public unions, and government employees in general is for the city to declare bankruptcy. The unions and other public employees can then see what their pensions are worth in bankruptcy court.

Judging from their enormously greedy actions, they deserve nothing.

Support the Recall Campaign

If you live in Miami, please support businessman Norman Braman and his effort to start a recall campaign against the mayor and any commissioners who support any tax rate increase.

Once a recall is out of the way, voters need to elect someone willing to tell the police and fire unions to go to hell. The best way to do that, perhaps the only way to do that is for the city to declare bankruptcy.

Investigate County Manager George Burgess

Finally, I believe it would be appropriate for the district attorney to investigate Miami-Dade County Manager George Burgess for misappropriation of public funds and conflicts of interest.

While not on the same scale as what happened in Bell, California (See "Corruption on Steroids" Bell Officials Arrested, Criminal Charges Filed), no one in their right mind could have agreed to give county employees salary and benefit increases totaling $132 million knowing what Burgess did about Miami's dire fiscal situation.

Of course, it is always possible George Burgess is merely insane instead of criminally insane or on the take.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Question of the Day: How Many People Have Exhausted All Their Unemployment Benefits?

Inquiring minds are asking "How many people have exhausted all of their unemployment and extended unemployment benefits?"

For starters, to exhaust benefits, one first must have had them. That excludes those who are self-employed. It also excludes those fresh out of high school or college, and looking for a job for their first time.

I have a series of charts from reader Tim Wallace that will help explore the issues. The charts are based on weekly unemployment claims data put out by the states.

Click on any chart to see a sharper image.

Continuing State and Extended Federal Unemployment Benefits



Note that in spite of the recovery, we still have not made a dent in the number of people collecting benefits.

Percentage of Eligible Now Collecting Benefits



The above chart shows the number of people collecting unemployment benefits or extended unemployment benefits, divided by the number of eligible participants.

The current data point consists of 3,891,808 continuing claims + 5,253,587 extended and EUC claims (a total of 9,145,395) divided by the eligible benefits pool of 126,763,245.

The result is an unprecedented 7.2% of those eligible, now collect unemployment benefits.

Eligible Unemployment Insurance Pool



The above charts all courtesy of Tim Wallace.
For more charts from Tim Wallace please see What does Petroleum Distillates usage say about the Recovery?

Thanks Tim!

The last chart helps address the opening question. Note that the eligibility pool is nearly back to 2004 levels!

In 2008 there were 133,690,617 covered participants. Now there are 126,763,245 covered participants. The drop from the peak is 6,927,372.

Implications and Analysis

The implication is at least 6,927,372 have exhausted all of their unemployment benefits.

Indeed, the number may be considerably higher because every first-time job seeker who found a covered job since the pool peak in 2008, displaced someone in the eligibility pool who exhausted all benefits.

All things considered, at least 7 million people exhausted all unemployment benefits with some unknown portion of them coping via an option to start collecting social security. Moreover, those prematurely opting for social security, did so with reduced benefits.

People are Broke, Congress Responds

With the exception of those opting for social security, some 7 million people who want jobs and once collected unemployment benefits, now have no job-related income.

Think those 7 million people are about to go on a spending spree? Think those forced into social security are about to go on a spending spree? Think the self-employed with no income are about to go on a spending spree? Think the 26 million unemployed or under-employed are about to go on a spending spree? Think the countless millions of working Americans barely scraping by are about to go on a spending spree?

Well, I don't either.

Yet, look at the response from Congress - Ass Backwards: Senate to Shelve Bush Tax Cuts for Individuals; House to Pass Small Business Tax Cuts.

Senate Democrats Ready To Shelve Tax Cut Vote

TPM reports Senate Dems Ready To Shelve Tax Cut Vote

A senior Senate Democratic aide told TPM today there won't be a vote on extending the Bush tax cuts in the upper chamber before the November election, a blow to party leaders and President Obama who believed this would have been a winning issue.

"Absent a stunning turn of events, we're not going to do tax cuts before the election," the aide told TPM.

"We have a winning message now, why muddy it up with a failed vote, because, of course, Republicans are going to block everything," the aide said.

Tax Credits for Capital Spending Not The Right Approach

Given the #1 problem facing small corporation is lack of customers, it makes little sense to entice businesses to increase capacity. Payroll tax credits suffer the same flaw.

Please see my response to both those ideas in Response to Nouriel Roubini on "America Needs a Payroll Tax Cut"

Indeed, I received this email from the president of a small corporation just yesterday.

Dear Mish:

I agree with your analysis of the statements by Roubini re: payroll taxes. As a business owner with four employees, I�d welcome them; however, such breaks would not entice me to hire another employee.

Have a good day.

I am quite certain that sentiment represents the vast majority of small business owners.

The one thing small business owners need is customers. It's hard to get more customers when government is going to start taking a bigger bite out of everyone's pay check.

But hey, who cares if the economy goes to hell. After all, scoring political points is far more important!

People are broke, yet Congress opts to punish those still working by letting tax cuts expire. Is this amazing or simply par for the course?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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