The Market Ticker

Here comes the whines - once again - on small business lending:

WASHINGTON—U.S. regulators Friday urged banks to continue lending to credit-worthy small businesses, responding to growing criticism from Capitol Hill and the White House that regulators' aggressive post-crisis supervision is cutting off credit.

The Federal Reserve, Federal Deposit Insurance Corp. and other state and federal regulators in a joint statement said they were concerned about the contraction in lending to small businesses as banks respond to the financial crisis by tightening lending standards.

I can speak to this because, well, through most of my adult life I've operated and owned a small business in some form or fashion.

When I was in my 20s I formed Macro Computer Solutions, Inc.  A subchapter S corporation that had two owners and shareholders, it was the prototypical "small business."  We did data wiring, consulting work of various sorts and sold white-box PCs to local businesses in Chicago - including a firm that was later acquired by Waste Management.

It was a decent living, but a hard-working one.  Neither of the principals (myself included) had much.  I had almost nothing - literally.  A paid-for car, some personal possessions, a few thousand in savings.  That's all.  The other guy had a house with a big fat note on it, a couple of cars, some personal possessions, a wife and a dog.  Really.

Regular guys trying to make it all work.

Loans?  You're kidding, right?  With what for collateral?

Eventually we split up the company and closed it.  I went to work for a Fortune 50, he went to work for a large national association, both doing what we knew how to do.  We didn't close because we were forced out, but rather because we were made better offers for our time.

The name (Macro Computer) was one of the things I got to "keep" when we split things up.  It later was re-filed first as a DBA and then as an S-corporation, later converted to a "C".  That incarnation of the firm - with myself as the controlling shareholder - was the one that operated MCSNet, the Internet provider.

A couple of times I went to talk to banks about loans.  But once again, I didn't have a lot in the way of assets.  Oh sure, I had the company, and it had receivables and assets, but I didn't personally have much.  Certainly I didn't have $100,000, $500,000 or $1m in "home equity" that I could pledge - I was a renter for a good part of my time as a CEO.  I had some cash, but cash can be spent quickly, right?  I might want a new boat, or an expensive car.  Who could possibly know?

What was the answer to my inquiries?  Simple:

And why wouldn't it be?  Remember, lending - sound lending - is based on the "C"s:  Capacity, Character, Collateral, Capital and Conditions.

I had capacity, economic conditions were good, and my character was fine - I had no record of screwing people over and my credit record was excellent.

But I lacked both collateral and capital personally, and if the business had the capital why would it need the loan?

What's being asked for here is for lending institutions to dispense with the 5Cs of credit and instead write loans based on phantom collateral and absent capital.

Let's face it - if the principals of the business have the capital or collateral why don't they take out the loan in their own name or loan the business their capital (at interest) and bear the risk?

The answer to that is obvious, isn't it?

Later in the 1990s of course people were falling over themselves to lend me money with no capital or collateral required.  Lucent offered to "sell" me literal millions worth of telephone and data switching equipment "on credit" either as a capitalized lease or on a "payment plan" that was effectively zero-interest.  Guess what?  It destroyed them when those loans to businesspeople that never should have gotten them blew up in their face.

I learned an important lesson from all this in the late 1980s and 1990s - you don't really need loans to set up and operate a small business.  You need guts and the willingness to work long hours and take risk.  Personally.  Yes, you'll grow slower.  So?  You'll own what you earn - it will be yours, not the bank's.  You'll keep your opportunities to yourself, instead of always looking over your shoulder.  And when the time comes to expand, whether it be by buying more stuff, adding employees or moving to a new, larger location you'll do it based on cash flow, not on whether you can make the minimum payment on some note and pray that you'll be able to roll it over at reasonable interest rates in a year or two.

Folks, this bleating is backwards. 

I ran businesses in multiple areas of operation for more than a decade and never once did I take a bank loan.  We paid people out of our business checking account, we had normal Net 30 commercial credit terms with suppliers, and we invoiced people we did work for.  Yes, there were times that the checkbook was lean - very lean - and a few during which I wondered if we'd make payroll.  But we did it, and when MCSNet really took off it meant that instead of being a slave to some banker behind a desk, I ran the place the way I thought it should be run, I made expansion plans based on what I believed to be reasonably-attainable goals, and I bought hardware with my checkbook instead of trying to figure out whether I could make payments factored by "growth rates" based on some fantasy.

This bleating from places like The Wall Street Journal and the crackpots of advocacy is misplaced.  If you're a small businessperson and you can't make a go of it without unsound loans - that is, loans made without full regard to the 5Cs - then you shouldn't get the loan.  Most of you shouldn't take the loan whether you can get it or not - the interest costs are just a millstone around your neck that will restrain both your choices and profitability in the future.

The day of the Ponzi is over folks. 

Grow organically, manage your cash flow, and ask yourself this - if you lack collateral or capital, why should someone else loan it to you if you're not able to pay it back? 

If you don't lack capital or collateral, why is it that you want someone else - in this case a bank - to take risk with THEIR capital you won't take with YOURS?

Bloomberg said:

Feb. 5 (Bloomberg) -- U.S. stocks rose, rebounding from the biggest losses since March, as investors speculated the European Union may come up with a solution for budget deficits in Greece and Spain and consumer credit dropped less than forecast.

Bah.

Here's the shorter-term outstanding credit picture...

And the rate of change....

Yes, there was a small uptick in non-revolving debt taken on (cars?) but the credit card rate-of-change continued to blow and during the Christmas month it declined by a net $8.5 billion.

Let me also point out that last December, which allegedly was the "depths of Hell" when it came to consumer behavior, revolving credit declined by $6.6 billion. 

This December revolving debt declined by 29% more than it did last Christmas season!

Now perhaps you can square that with the claims of a "good" Christmas season that had increased consumer sales, and perhaps you can claim that this somehow represents that the de-leveraging is coming to an end in the consumer space, but I cannot.

First, from a "big-picture" perspective, here's the consumer credit outstanding graph going back to the late 1960s:

The so-called "consumer revolution" happened through "increased earnings" eh?  Uh, no.  It happened due to increasing leverage, and this report, may I remind you, does not include mortgages - that's in the Z1, which comes out quarterly.

Here's reality folks: people are paying down their credit cards and keeping their car loans current by ignoring their mortgage notes!

The percentage of consumers delinquent on mortgages, but current on credit cards rose to 6.6 percent in the third quarter of 2009 from 6.3 percent in the previous quarter and 4.9 percent in the same quarter a year earlier, a new study developed by TransUnion showed.

The trend first emerged in the first quarter of 2008 when it was at 4.3 percent, Chicago-based TransUnion said.

So in reality we have people who are maintaining their spending by living free in their homes, producing this sort of credit report snippet, as I reported on yesterday:

That's more than a year of "120 days+ late" reported, sequentially, with no foreclosure to close the file.

We have here a mexican standoff.  The American People have increasingly figured out that the banks are lying about their asset quality and in fact are lying about their profitability by marking their "assets" to myth - that is, ignoring bad loans.  They are doing this by refusing to foreclose on defaulted mortgages, as that action would force them to recognize the loss.

Therefore, the logical thing for a consumer who is strapped for money to do is to erect their middle finger toward the bank that holds their mortgage, and instead pay their credit card and live on the money they would otherwise send in for the mortgage, thereby pumping their lifestyle beyond what they could otherwise afford.  Some people are undoubtedly doing this even if they could pay the mortgage.

This is what happens when the government countenances, embraces and even promotes false accounting and bogus financial activities - the people figure out the game and come along for the ride as well.

This is "touted" by mainstream media and the government as "economic improvement" when it is no such thing.  The underlying quality of the assets behind those loans continues to deteriorate as the payments are not being made.  The deficiency continues to grow, eroding the capital base behind the book of alleged "assets."   Eventually this rot of the foundation will cause the all-on catastrophic collapse of these banking "empires", and since we have refused to cage the credit-default swap monster and in fact empowered him by legalizing bogus "mark to model" accounting fictions the deficiency has been allowed to grow to the point that, if we allow this to continue much longer, not even governments are likely to be able to stop it when it begins to topple.

Do not be fooled by false Gods.  The fact of the matter is that consumers have hit the wall.  We continue to believe that consumer credit loads are "reasonably serviceable" yet the percentage of the civilian workforce that is employed is back to where it was before "women in the workforce" became a serious component of working America, and near the peak levels of the years prior to that time.

In summary we have solved nothing, credit outstanding deteriorated in the revolving space at a rate 29% faster than it did during the last Christmas season, and there is no good news to be found in the employment coverage ratio - the critical factor for the government being able to raise coverage for its debts via taxation.

PS: You think the big bad central bankers don't know this?  If they truly believe everything is ok, China really doesn't have trillions of Yuan in bad debts in their banks that are being hidden, and we're not going to see lots of Portugese-style auction failures along with Greece, Spain, and eventually the UK and America follow it down the bowl, why is there a secret meeting of central bankers taking place in Australia this weekend?

I know I keep harping on this, but it's important.

I keep getting copies of various evidence that the banks are not properly handling defaulted mortgages. The instance I present here is a mortgage - a "conventional" loan - that has been reported as "120 days past due" to the credit bureaus for THIRTEEN CONSECUTIVE MONTHS.

What the hell sort of game is this? 

Note that it was also reported 60 late twice too, but that's reasonably possible - it went late, went 60 late, the debtor made one attempt to pay it down but still was 60 late, then gave up.

This person has been living in their house without making a mortgage payment for nearly a year and a half, and the bank - it's one of the "Big Three" - HAS NOT FORECLOSED.

This crap has to stop folks.  Yeah, this is an anecdote, but I have to ask whether the auditors have looked into this.  A loan that has this "payment history" ought to be carried at recovery value, but that would mean it would be "marked to the market", and we know the banks all got permission to mark 'em to "model" back in the early part of 2009.

This sort of BS game is too damn prevalent.  There is no reason other than cooking of the books that institutions would hold paper like this in a perpetual "not paying and not gonna pay either" state rather than foreclose and take the hit - except to present a view of their financial status that is less than completely honest.

"Extend and Pretend" may have been made legal but that doesn't make you solvent - it just means that the government made legal what formerly was called accounting fraud, and the inescapable reality is that eventually the cash flow will get you anyway.

To the banks: CUT IT OUT!

To the regulators: STEP ON SOME NECKS!

To Congress and "The Cops": STOP THE LOOTING AND START PROSECUTING!

Really.

You know that class that was required in "High School", and was largely responsible for it having its moniker - because you could literally be stoned through it and get a 100?

Well Reich failed, because he couldn't balance a checkbook.

Alright class, here's your assignment: Look at President Obama's budget proposal, spending freeze, jobs bill, stimulus, tax hikes on upper-income individuals, and proposed deficit commission. Also take a look at the fees he wants to impose on the biggest banks, and his proposed regulations of Wall Street. Look at his stalled trade agenda. Now, explain the big picture.

Ok, I'll take a shot:

$500 billion in newly-embedded STRUCTURAL deficits in concert with rapidly-falling tax revenues = ultimate insolvency of the US Treasury.

Oh wait, you didn't like that answer.  Here's what Reich said:

If you're about to write "more taxes and more spending," you're either not thinking hard enough or you're a Republican running for office this November.

To see the big picture you need to keep your eye on three big things. The first is the extent of government spending needed to offset the continued reluctance of consumers and businesses to spend.

It's not reluctance.  It's inability.  That's usually what happens when your general mantra is "I can't be out of money - I still have checks left!" and then try the same trick with your credit card only to have it come back "REALLY DECLINED."

You don't have to be an orthodox Keynesian to understand that as long as the private sector is deleveraging the public sector has to borrow and spend in order to keep the economy moving forward.

I don't have to have an IQ larger than my shoe size to understand that when the private sector has reached it's leverage limit it is not possible to "spur" it to take on more leverage - that is, to borrow and spend that which isn't earned in the present tense. 

All government borrowing and spending does in that case is make the ultimate deleveraging (across the entire economy) WORSE.

Of course those who pray at the Keynesian altar (or for that matter, virtually all the other altars when it comes to economics) don't have "D" (debt) anywhere in their economic calculations and pronouncements.

Their error is primary - they believe in "MV = PQ", but think "M" is the money supply.  It's not - it's the credit supply, but for each dollar of credit there is one of debt, and when the ability to carry that debt reaches its limit you have hit the economic wall and "P", "Q" or both must CONTRACT.

Reich, I'll issue to you you the same challenge I issued to Krugman - want an hour-long debate with me on Internet radio?  This coming Monday or any Monday - simply get ahold of me and I'll be happy to hash it out with you.

It's a hell of a lot harder to influence people when you have to defend your claims rather than just spout off on the opinion page - where nobody has the ability to force you to defend your preposterous claims.

Can someone revoke this jackass' degree?

Or perhaps I should award him an honorary degree in lying?

Just one paragraph please...

Let’s talk for a moment about budget reality. Contrary to what you often hear, the large deficit the federal government is running right now isn’t the result of runaway spending growth.

Really Paul?

How about some facts instead of lies?

Argue with The Fed if you'd like Paul, but unless you're prepared to have a discussion on the actual facts, shut the hell up.

PS: Your claim about interest costs being "manageable" relies on foreigners being willing to continue to lend the Federal Government money for a near-zero interest rate while at the same time our labor force is collapsing.  Bonne chance mes amis.

PPS: Here's an open challenge to you - want to come on for an open debate with me on Internet Radio?  Bring your best rapier - you'll need it.