The Occupy Movement claims to represent 99% of Americans.
They are against corporate greed and callousness and the political acquiescence
that nurtures both. There is a real growing disparity of wealth in America
and many citizens are concerned that they will never get their “fair share” of
our wealth. Query: Is Wall Street or Washington taking notice of this
historical movement?
Perhaps they are. But in the context of a musical metaphor,
it is similar to one grace note within a concerto lasting over an hour. It is a
little blip in the news of some interest; clearly it is not much of a threat at
this time to the elitist One Percent Majority.
Query: who are the One Percent Majority? According to
President Obama, there are about 300 thousand people that control 99% of the
wealth in America.
The very wealthiest individuals are on the Forbes Four Hundred list, the
richest people in the world. People like Warren Buffett, Nelson Peltz, Biss
Ackman and Carl Icahn are a part of the One Percent Majority. They are the Presidents and CEO's of America's largest companies.
Query: how can so few people influence and control so much?
Money talks. Money buys lobbyists. In effect, lobbyists buy politicians though
not directly or usually not illegally. Nevertheless, our system allows
corporations to spread unlimited money on politicians. Politicians need money
because of the enormous cost of getting elected and re-elected. It is said that
to be a successful politician, you have to campaign on a full time basis. This
leaves little time to deal with national and international issues. Money
showered on politicians buys political favors; it buys access to politicians to
influence their vote to favor the One Percent Majority.
Tax rules and Security and Exchange Commission rules are
influenced by the One Percent Majority. This helps to keep the One Percent
Majority intact. Of course, sometimes fraud such as Bernie Maddoff ponzi scheme
and the former U.S.
senator Jon Corzine’s little problem of the missing Billion dollars put some
dents in the wealth of the One Percent Majority. Nevertheless, the trend of
corrupt politicians is clear.
Former New Mexico Governor Bill Richardson faces a “Pay to
Play” investigation. Former Illinois Governor Rod Blagojevich was sentenced to
14 years in federal prison this week for a corruption spree that included
trying to auction President Barack Obama’s vacated Senate seat. The Wall Street
Journal today reported that fifty money managers have “used Securities and
Exchange Commission rules to keep confidential their stakes in certain
companies”. Prominent in this disclosure is Warren Buffet’s Berkshire
Hathaway’s $10.7 Billion stake in IBM Corp.This list is far from identifying all such individuals.
The One Percent Majority are not a majority in the normal
sense. A majority is generally 51% or more. The One Percent Majority is a majority
because of their political and economic power. They influence American tax
rules, tax rates, government spending, economic policy and political votes.The One Percent Majority has 99% of America's economic and political power.
Although some Banks are a part of this One Percent Majority,
in general, commercial finance companies are not involved because they simply
are not rich enough. By providing purchase order financing, inventory financing
and accounts receivable financing they may help some individuals rise to the
One Percent Majority; but this is probably few and far between the norm. Some
venture capitalists have scored hits with companies like Google and Face Book
which gives newly minted Billionaires entrance into the One Percent Majority.
Even so their win loss ratio is probably worse than one out of ten.
The bottom line: The One Percent Majority exists. It has
never been acknowledged as the source of our economic and political problems,
except in a more generalized way. Power to the people is a nice saying but the
people who have the power are in the One Percent Majority.
The members of the Republican Party have signed a written
pledge not to raise taxes under any circumstances. Lobbyists and loyal
Republican political groups threaten any Republican that breaks this pledge with
a vow to do everything in their power to see that a “bad Republican” will not
be re-elected by giving vast support to their challengers the next time at the
polls. This has created Congressional gridlock regarding solving the problems
of the ongoing financial crisis.
The Democrats seem more reasonable and flexible is proposing
some tax increases, some cuts in government spending; they are making efforts
to compromise with the Republicans when no compromise seems possible. Thus, the
recession continues. The foreclosures continue. The jobless in America
are at an all time high, perhaps excepting the great depression of the earlier
1930’s. Query: will the Occupy Movement have any positive effect on the
impending crisis?
It is hard to get your hands around what the Occupy Movement
really stands for. It is not clear-cut like the protests in the 1960’s against
the Vietnam War. The Occupy Movement’s war cry seems to be “we are the 99%!"
Congress must listen and act regarding our needs for jobs, housing, medical
needs, and retirement needs.
The countervailing
forces are very strong. Editorials in the media like the Wall Street Journal
generally seem to support the status quo for the top 1%. Houses and
Condominiums are advertised for sale at staggering prices: $5 to $100 million
for a house in Silicon Valley. The ads in the Wall
Street Journal seem directed to the rich. Jewelry for $10-$50,000; a simple
women’s dress for $2500 and a purse to go with it for $3000 all can be yours if
you are a part of the top 1%.
Perhaps the Occupy Movement will become a political movement
that will force politicians to work together again; the Vietnam
protests produced this result and a long period of prosperity followed. Just like the Vietnam war, the US needs to get out of Iraq and Afghanistan immediately. We can declare victory as we leave. The alternative is endless dead bodies and billions of American dollars wasted with no end in this millennium.
Query: when will banks have customers that are qualified to
borrow to buy a house as a normal, common outcome of a loan application? Query:
when will banks have customers that are qualified to borrow to expand or start
businesses? Query: when will banks be able to predict the future value of homes
or when the economy will sustain a prolonged period of positive growth? Query:
will the European debt crises drag us down no matter what these outcomes are? We are years away from any solution; and that will take many more years to make the US economy healthy again. Perhaps five to ten years if substantial change is effected Americans will have reason to be optimistic about our economic future.
The real risk takers today are the venture capitalists, the
commercial finance companies that offer hard money loans for real estate,
purchase order financing, inventory financing, and factoring for business to
grow.It is interesting to note that one thing these lenders have in common is a virtual lack of government regulation.
The bottom line: Unless the Republicans and the Democrats
listen to the Occupy Movement and agree to compromise, the United
States will continue to have homeless children,
jobless families, and reduced government services for decades to come, at least for the so-called 99%.
The G-20 conclave in Europe, attended
by President Obama and many of the world’s leaders, is attempting to formulate
plans to prevent the bankruptcy of Greece,
Italy and Spain.
It is a well known fact that the US
economy is teetering on the brink of a economic collapse into a depression; a
so-called super committee of Republicans and Democrats are attempting to find
agreement regarding spending cuts and tax increases that will define the US
economy for years to come.
Similarly, the European leaders are attempting to agree to a
plan that will prevent the collapse of the Euro and the Bankruptcy of many
European nations. Query: what does this have to do with a Tri-party Reverse
Repo?
Wikipedia, the free encyclopedia, has a discussion of
repurchase agreements, forward contracts, tri-party repos and tri-party reverse
repos. Additional information may be obtained from A White Paper Prepared by
The Federal Reserve Bank of New York
dated May 17, 2010 entitled
“TriParty Repo Infrastructure Reform”. Their report is 68 pages long. In order
to understand this obscure corner of the financial industry it would help to
have a four year economic degree from Yale or Harvard, a master’s degree in
economics and several years of practical experience at a major securities firm.
This is a $1.6 Trillion dollar lending market. It effects the entire world.
In the novel, “Invaders from Mars” mysterious machines
arrive all over the world. Other machines with Martians in them come out of the
big landing machines and engage in frantic activity. Nobody understands what is
going on. One day the smaller machines leave the arrival area and start to
destroy all humans on the planet Earth. What a surprise!
This first week of November, 2011 a major Wall Street securities
firm, MF Holdings Ltd. declared bankruptcy because of bad bets on European debt
instruments. Today, November 4, 2011
the Wall Street Journal reported that “MF Global Masked Debt Risks” on the
front page headline. Further, “For the past two years, MF Global Holdings Ltd.
May have disguised its debt levels to investors by temporarily slashing the
debt it was carrying before publicly reporting its finances each quarter…” It
also appears that about $633 million of customer accounts are missing. Query:
is the tip of a bad financial iceberg? Query: is this like the fictional Martians from “Invaders from Mars”?
The bottom line: Banks, Securities Firms, Venture
Capitalists, Commercial Finance companies that provide accounts receivable
financing and purchase order financing are all subject to the risks of today’s
international financial risk taking. The actual extents of these risks are
obscured in the balance sheets of many of the largest institutions in the
world. Will the world’s economy plunge into a depression or will the G-20
leaders and the US Republicans and Democrats find ways to compromise debts and
solve legitimate differences of opinion in economic theory? If they can all
understand Tri-party Reverse Repo’s at least there can be some cause for optimism.
The planet's economy is in turmoil. Greece appears to be upsetting the European currency agreement to keep the Euro stable. Italy may fall as well. The interrelationships between US Banks and European Banks is difficult to quantify. The risks are tremendous.
Private investment Companies are also in peril, at least those who are heavily invested in European debt. The US Congress is ignoring lectures by former congressmen about the need to compromise to prevent a full blown depression in the US. A major US firm, MF Global Holdings, LTD, that invested in foreign debt went bankrupt yesterday.
Billions of dollars of US commercial and residential real estate are in foreclosure, bankruptcy, or liquidation. Compounding this problem, the legal eagles are attacking the foreclosure process to gain concessions from lenders that may or may not be reasonable. In San Francisco, people who have been foreclosed and evicted are illegally re-ocuppying their former houses. People are marching in Oakland, California to shut down the local economy for a day to protest the gross unfairness our economic problems have created. In any event these events will slow down the process of the stabilization of the US economy.
Can the Banks, the Commercial Finance Companies that provide accounts receivable financing and purchase order financing save the US economy from disaster? This is a great unknown.
It will take several years to find out the answer to this question.
The bottom line: These are perilous times of unprencedented complexity. Turning off the television and avoiding the newspapers will not help. The problem is all around us and we are a part of it, whether we know it or not. We are also the answer to our problems, whether we know it or not. What we do collectively as the Earth's civilization will determine the future of our planet.
Much has been written about Steve Jobs since his recent demise. His authorized biography is a number one best seller. It was recently reported that Steve Jobs was incensed at a dinner he attended with President Obama. "Why can't you fix the problem we have with visas for foreign tech workers who are desperately needed in Silicon Valley?" he asked. The President replied he did not have the authority to make such a change in the US immigration laws. As far as Steve Jobs was concerned, this was unacceptable.
For the last several years it appears that with regard to measures to improve the US economy, the Democrats and Republicans cannot agree on anything of significance. The Republicans are on hundred percent against new taxes; this is a posture that clearly favors the one percent of America's richest people. The Democrats believe a combination of tax increases and budget cuts are required to fix the US economy. Congress is paralyzed by this stalemate.
The economy is paralyzed by this stalemate. The housing crisis will not go away without a significant improvement in the economy which creates more jobs and more personal income for the vast majority of Americans to be able to purchase a home again.
Commercial finance is paralyzed by this stalemate. Banks are sitting on gigantic amounts of money, almost interest cost free, and they do not have enough customers who qualify to lend the money out prudently. This filters down to private commercial finance companies that engage in accounts receivable financing and purchase order financing. Their clients are having a difficult time securing the orders to obtain financing that would significantly improve the economy.
The Occupy Oakland protesters and the Occupy protesters in other cities are venting their frustrations with encampments and calls for strikes. College students are finding that their degrees, often financed with enormous personal debt, do not insure them a job much better than they might have found if they spent the past four years working in a low level, low income job.
The bottom line: change is required to correct these problems. Perhaps there should be more women at the heads of corporations, more women in the US Congress, or more men that are capable of compromising their strongly held opinions for the good of all of America.
Players of brass instruments are unique: the sound they produce comes from air buzzing through a piece of metal called a mouthpiece. Placing one's lips on the mouthpiece, buzzing the lips with air through the brass instrument creates the sound for a trumpet, trombone, tuba, or french horn. This is quite different than pushing down the key of a piano or plucking the string of a guitar.
Sometimes players of brass instruments find that for some reason they cannot play their instrument normally because the act of playing causes pain in the lips and the musician suddenly has no ability to play. This can occur after decades of practice and performance. Sometimes the player's mouthpiece leaks air when the musician tries to create a note. In a nutshell, the sound is bad.
The problem is that the embouchure has become dysfunctional and has stopped working comfortably. There is a muscle, called the orbicularis oris; it circles the lips. If this is broken a skilled surgeon can diagnose it and perform appropriate reconstructive surgery.
The average problem is more elusive to determine. It may be a torn muscle, a pinched nerve, a fatigued muscle, a stretched muscle, a ruptured muscle. The bottom line: you cannot see it, you cannot ex-ray it to determine the underlying cause; it is debatable what it is and how to fix it.
Why is our broken economy like a broken embouchure? The similarities are many. Most people would agree that the economy is not working well or properly. The cause of this problem is difficult to see. Politicians, both Republicans and Democrats are engaged in a dysfunctional relationship. They do not agree on the causes of the problem and disagree completely regarding what to do about it. It is debatable exactly what our economic problems are and reasonable people can differ regarding how to fix it.
In any event both of these problems may be fixed by individuals within the system; if they are not fixed, for the musician music will become a non-participatory activity and for individuals, living in the USA could become a real nightmare on account of lack of jobs, lack of food, lack of institutions with the power and money to help people in need and even a lack of police and firemen to quell serious situations.
The public may eventually force politicians to compromise to solve our problems. The public may eventually elect leaders that can inspire individuals to create new business which in turn will create new jobs and restart our economy in a positive direction.
The Federal Reserve and Banks will help to a degree. Private financial entities that provide venture capital, purchase order financing, accounts receivable financing and inventory financing will help in the business world. Hard money lenders will help in the real estate world where regulated financial institutions cannot to take the risks required for financing.
The similarities between a broken economy and a broken embouchure may be an odd comparison but the parallels are compelling.
" That Used to Be Us" is a new book by Thomas Friedman and Michael Mandelbaum. It forcefully analyzes the state of the United States economy, the world economy, global warming, poor education in the USA, what is wrong with the politics and economy of the USA today and how to fix it.
Steve Jobs recently passed away. He was probably the greatest visionary inventor of our times akin to Thomas Edison. His inventions, the Imac computer, the ipod, the iphone, and the ipad have revolutionized the world.
This is good for the entire world in general and probably bad for the USA in the short run. Query: why is it good for the entire world?
It is good for the whole world because people in all countries cannot be kept isolated by autocratic barbaric rules. Witness the fall of Moammar Khadafy in Libya yesterday. This would have not happened without cellphones and computers. Information is available to everyone and the documentation of the repression in Libya on the internet caused the downfall of Khadafy.
Witness China, now the largest producer of solar panels. This a good thing because it fosters green energy which will help to prevent global warming. Immense knowledge is available everywhere in the world where there is access to a computer and the internet.
On the other hand, for all the good that Steve Job's inventions created (and we need thousands more of people like him) these inventions have contributed to the dumbing down of America. Many kids in the USA spend 7 to 8 hours per day texting, playing games on their electronic screens and watching movies or TV shows instead of studying to become employable. The foreign born students get it and are studying hard not only to be first in their class, but to be the best in the world.
The solution to our economic problems involves putting these American kids on another course; the course to higher education that will enable them to create new products and services, to create new companies with 3, 15 or 300 new employees to make up for the jobs that have been lost forever in our country because of foreign competition and innovation. We cannot compete in the world marketplace with employees that cannot read, write or think critically and originally.
I believe that the Banks of the USA are virtually paralyzed by their regulators and new well intentioned but counterproductive rules. I think that when and if these new companies are created, purchase order financing and accounts receivable financing aka factoring will play a large part in helping new companies grow. Private unregulated companies and charge more and take greater risks.
The Republicans in the USA are an odd bunch. According to Michele Bachmann who spoke at the Commonwealth Club in San Francisco yesterday, the biggest problem confronting America is same-sex marriage. She is against it. HELLO!
This county's biggest problems are the economy, global warming, our education system and our failing infrastructure. Unless the Republicans wake up and realize that we must raise taxes, reduce spending, take measures to reduce global warming (which they deny it even exists) and improve our educational system, America will become a second rate citizen of the world.
The most generalized definition of asset based lending is
any kind of lending secured by an asset. For consumers, a familiar form of
asset based lending is an equity line of credit secured by their house. If the
loan is not repaid according to its terms the home is repossessed by the lender
by various methods of foreclosure or through bankruptcy.
The equity line of credit is technically a second lien on
the house behind a first lien which often was used to purchase the house. There
is a big difference between a second deed of trust loan and an equity line of
credit on a house that is critical to understanding, in a commercial context,
the difference between factoring and asset based lines of credit.
Here is the
analogy:a second deed of trust on a
house is for a fixed amount that is totally funded on the date of the
transaction. For instance, a $100,000 second trust deed at 10% interest only
would require payments of $10,000 per year. A $100,000 line of credit on a
house at 10% interest would require payments of varying amounts depending on
the loan outstanding at the end of the month and the method that the contract
calculates the interest payment. In any event the payment amounts are not
fixed; they are dependent on the outstanding principal.
In a commercial context an asset based line of credit may be
secured by accounts receivable, inventory, equipment, machinery, real estate,
and intellectual property including trademarks and patents. There are hundreds
if not thousands of banks and private finance companies that offer factoring,
also known as accounts receivable financing. A much smaller subset of lenders
offer asset based financing secured by multiple forms of assets. Query: why is
this true?
Accounts receivable that have been authenticated through
notification and verification with the obligor are generally worth 100% of the
dollar. When a product or services has been sold and the buyer is creditworthy
and accepts the sale as legitimate there usually are no questions regarding the
amounts owed to the creditor. Other assets such as inventory, machinery,
patents and real estate require appraisals to determine value and these values
can change subsequent to the date of the valuation. These valuations can be
quite costly.
When a commercial finance company or bank agrees to finance
an account receivable they generally agree to advance 80% of the amount of the
invoice provided that the purchaser agrees to pay to their lockbox the amount
due within 90 days. When the invoice is paid the agreed upon interest and fees
are deducted and the balance is remitted to the seller of the product or
service. This is more similar to a second deed of trust than a line of credit
because an absolute amount is loaned (80% of the invoice) and a fixed charge is
the consideration for the transaction.
Compare this to an asset based line of credit in the
commercial context. The totality of values of the accounts receivable,
inventory, machinery, and intellectual property are considered with respect to
the amounts available for cash advances on any particular day. The transaction
may not require notification and verification to the purchaser if the credit of
the seller is strong enough.
Whereas both types of transactions require significant due
diligence on the front end of the transaction, asset based lines of credit are
easier to manage from the creditor’s point of view. There is more collateral to
support the transaction and every advance does not require significant detailed
analysis. It is because asset based lines of credit are easier to manage,
larger in dollar amounts, and usually transacted between more sophisticated
parties, the cost of the transaction is usually significantly lower than an
pure accounts receivable lending facility.
Asset based lines of credit are more expensive than
factoring credit facilities on the front end because more analysis and
appraisal and due diligence are required. Conversely on the back end, asset
based lines of credit are significantly less expensive than accounts receivable
financing for the aforesaid reasons, sometimes fifty percent less expensive.
All other thing being equal, would you rather pay 13% or 30% for your cash
advances? This was exactly the experience of one of the customer's of Gregg Financial Services.
In the late 1960’s the Beatles composed a song for the Album
Revolver called “Taxman”.
Many factoring contracts are like a Taxman; they take too
much of your profits especially if you can qualify for an asset based line of
credit from a reputable lender. Here are the lyrics:
Don't ask me what I want it for, (ah-ah, mister
Wilson)
If you don't want to pay some more. (Ah-ah, mister Heath)
'Cause I'm the taxman,
Yeah, I'm the taxman.
Now my advice for those who die, (taxman)
Declare the pennies on your eyes. (taxman)
'Cause I'm the taxman,
Yeah, I'm the taxman.
And you're working for no one but me.
Taxman!”
The bottom line: accounts
receivable financing, or factoring, is like a taxman on your profits if you can
qualify for an asset based line of credit at a preferable rate.
The U.S. Congress has passed the first iteration if financial reform to respond to the meltdown of the American economy. Will it be effective? One wonders how it could possibly be successful. Query: why?
Because the new laws do not address the too big to fail issue and reform of Freddie and Fannie. 2010 will go down in history as one of the worst years for bank failures in the history of our nation. Most every time a bank fails another bank picks up the good assets and as few of the bad assets as they can negotiate. The big banks get bigger and the number of banks gets smaller. This is not a solution to the too big to fail problem.
Equally important is the failure to reform Freddie and Fannie. The securitized mortgage market is returning and it is becoming business as usual for these giants of turning mortgages into securities. Until Freddie and Fannie are reformed another crisis in housing looms for the U.S. economy. Adding to this precarious situation is the debacle of British Petroleum's gigantic oil spill and the effect on our economy and property values in a vast part of America. These issues need to be addressed by Congress and as of this writing it appears that the Democrats and the Republicans are not talking to each other.
A friend of mine started a Bank two years ago. Their
business plan was excellent and they were acquired by a Bank Holding Company
before they opened. In other words, the organizers made money before they
funded their first loan!
The bank was well capitalized and well run. No bad checks
and no bad assets were on the balance sheet. Nevertheless, my banker friend,
the President and CEO, was not happy. He quit at the end of last December. Why
would someone give up a fine salary at a successful Bank?
He quit because he hated working there. The main reason was
the conflict between the Holding Company’s pressure on the Bank to make more
loans, today’s economy, and the pressure of the U.S.
regulators not to make any unsafe or unsound loans. He was torn apart by these
two powerful forces. Gregg Financial Services believes that all banks are under
similar pressures.
Today’s Wall Street Journal reported on two of the world’s
most astute real estate investors, Tishman Speyer Properties and BlackRock Inc.
They defaulted on $4.4 Billion in debt that was used to acquire apartment
buildings in New York for $5.4
Billion in 2006. The investors are loosing over a billion dollars and the banks
that are taking a deed in lieu of foreclosure are probably going to also take
substantial losses. It appears that the same forces that tore my banker friend
apart caused this deal to collapse.
It is no secret that people are not borrowing money in
sufficient quantities to turn the economy around. Conversely, banks are not
lending money to many people who desperately need it. The residential mortgage
meltdown has seriously damaged the US
economy and the looming commercial mortgage meltdown may cause many more banks
to fail.
My banker friend estimated that another 1000 Banks will fail
this year. Another source estimates that as much as 40% of our 8000 banks are
at risk of failing. The FDIC insurance fund is insolvent. Freddie Mac and
Fannie Mae are technically bankrupt but for the indulgence of the US Treasury.
The bottom line: 2010 is going to be a tough year for the US
economy and asset lenders of all types. Accounts receivable financing, purchase
order financing and real estate financing face unprecedented challenges this
year.
