Bankers - Get a Clue…
March 31, 2009
Here’s my problem with banks. They just don’t seem to get it. Ok, first they take tax payer money to get bailed out. Then they use it for bonuses. That’s just one glaring example, of course. But that’s not what I’m talking about. The following is a scenario that has happened to many people around the country. If this has happened to you, please let me know.
John (not his real name) is a businessman in L.A. He had good credit. His FICO score was 715. He was only using $40,000 of a $100,000 line of credit. His debt ratio was 40%. Two years ago, John could have gotten hundreds of thousands of dollars in loans and lines of credit for his business. But here is what happened to John.
2008 was a little rough. Sales were down a little, as people weren’t buying as much. So John wanted to get some more credit for his business. He heard that in order to qualify at the banks, his debt ratio should be 30% or lower, so he took $10,000 cash and paid down his current debt to $30,000. Now he was at 30%. Then, within the next 24 hours, the bank slashed John’s credit from $100k to $30k. By no fault of his own, John had just gone from a good credit risk (715 FICO and 30% debt ratio) to a bad credit risk (630 FICO and 100% debt ratio). The fact that his debt ratio went from 30% to 100% dropped is FICO scores immediately. So when John went to get a line of credit from his bank, they told him he didn’t qualify. Is it just me, or is this situation F&%#d up?
The banks have basically created a situation where nobody can qualify for credit. And I don’t think the bank got the memo. They don’t seem to see the connection. The right hand doesn’t know what the left hand is doing. Until the banks realize that they are creating another problem, the average person will still be getting the shaft. President Obama wants to get the credit markets flowing again. The banks are supposed to start lending again. But who will they lend to if nobody can qualify?
So what is the solution? I don’t know. I’m open to suggestions. First, the banks have to understand that by their actions, they have just turned good credit-worthy people into bad people. The FICO and debt-ratio criteria for personal guarantors has to be re-evaluated. This is the same problem that car dealers are having. People still want to buy cars. That’s not the problem. The problem is that nobody can qualify for an auto loan. The same is true with home loans. Nobody can qualify because of the banks’ deleveraging policies.
It is frustrating for everyone. Tell your banker. Tell your congressman or senator. Tell President Obama. Maybe they are so busy trying to save the banks that they can’t see how its affecting us normal people.
The government’s plan is to buy up all the toxic assets from the banks and have investors buy and sell them. This will take the bad assets off the banks’ balance sheets so they can begin lending again. This should start happening very soon. But my question to the banks is this, “Who are you going to lend to?”
Cycle or Reset
March 31, 2009
Everything goes in cycles. It always does. The economy always goes up and down. Recessions come and go. We always get through them. But what about today’s recession/depression? Is it the same or different? Many smart people are saying that this time its different. People are saying that this will be a permanent reset to our economy, and not just the usual cycle. And it makes sense if you trace the history of how we got where we are today.
Here’s the short version. It would make a great movie. It involves power and greed. Our economy has been based on easy credit. We got used to the practically free money the banks were giving in loans, credit cards, mortgages, etc. Our savings rate was less than 0% in this country. We were surviving on credit. And the banks didn’t really care, because they would package up all those loans and sell them to Wall Street who would then repackage them and sell them on the global market. It was fueled by greed and allowed to proceed because of lack of regulation. There is no one person or group to blame. It started with people doing no-doc (liar) loans with the banks as complicit partners. The banks allowed it because they were being pressured from Wall Street for more loan packages.
In the end, it created an unsustainable bubble. There was no way it could continue. So when it finally came crashing down, it didn’t just go through a regular cycle. And it didn’t affect just the U.S. It created a global financial crisis. The downside is that we are going to realize that things need to reset back to where they should be. Banks have been deleveraging since last year. The credit crunch turned into a credit freeze for most banks. People’s credit lines have been slashed. People are having to learn to live within their means. With credit maxed out, many people are reverting to a cash and carry system. You can only spend what you have. The people who are slow to come to terms with this reset are the people who will be in the worst situation.
In our business, we have been telling people for months about the banks and the credit crunch. Unfortunately, many people are still in denial and think they are still living in 2006. The strategy for this year is to stop and reassess your situation and to start planning and preparing for when the market rebounds. There will be more regulation. The banks’ criteria for getting money will be more difficult. So make no mistake, this is not your usual economic cycle. Expect the economy to reset to a lower level than what you may be used to. It won’t be forever. Things will get better. But this year, everyone needs to face reality. Be positive. Don’t let it get you down. The one good thing I see coming from this crisis is that people are beginning to talk about things like virute and family and the more important things in life. When times are tough, people and families come together. Maybe its an American trait, I don’t know. But we will all get through this year. And things will get better.
Private Equity & the Capital Market
March 31, 2009
Last week I went to a Global Private Equity Conference in Glendale Arizona hosted by Thunderbird School of Global Management. The mood was somber yet hopeful. The general consensus is that more government involvement is not necessarily a good thing. Investors are bracing for a lot of new regulations. From December ‘08, many hedge funds and high net worth investors simply got out of the game and are sitting on the sidelines until the market settles down a bit. There is over $11T sitting on the sideslines right now just waiting.
Investors are no longer looking for the big payoff and 30% ROI. This year, people are more concerned with capital preservation. Everyone is being cautious. The new rule of thumb is to be conservative and have steady returns of maybe 5-15%. The question is where to invest.
It seems the best place to invest these days is in infrastructure and clean technology both in the U.S. and emerging markets. President Obama has already set aside billions of dollars to fund green technology. If you have green tech projects or if you are looking to invest in green tech projects, please contact us.
Nobody seems to know how we’re going to come out of this financial crisis. It is new territory for everyone, and nobody has the solution. Most people seem to agree that the recession (or depression) will continue for the rest of this year. At least everyone has become fully aware of the problem, and things are being done to fix the system.
So this year, the strategy seems to be to sit tight, be conservative, and prepare for when the market turns around. The market will rebound. It always does. But where it lands this time, nobody knows…
The Corporate Code, Only $995
