• Robert Pozen on Fair Value Accounting

    In the November Harvard Business Review , Robert Pozen --former adviser to President George W. Bush and Massachusetts Governor Mitt Romney, and current chair of MFS Investment Management--weighs in on the debate over whether accounting rules bear some blame for the financial crisis. And he says that both sides in the argument over whether "fair value accounting" exacerbated the credit crunch a year ago may be wrong: We do not want banks to become insolvent because of short-term declines in the prices of mortgage-related securities. Nor do we want to hide bank losses from investors and delay the cleanup of toxic assets—as happened in Japan in the decade after 1990. To meet the legitimate needs of both bankers and investors, regulatory officials should adopt new multidimensional approaches to financial reporting. Before we can begin to implement sensible reforms, though, we must first clear up some misperceptions about accounting methods. Critics have often lambasted the requirement to write down impaired assets to their fair value, but in reality impairment is a more important concept for historical cost accounting than for fair value accounting. Many journalists have incorrectly assumed that most assets of banks are reported at fair market value, rather than at historical cost. Similarly, many politicians have assumed that most illiquid assets must be valued at market prices, despite several FASB rulings to the contrary. You can read his article here (subscription only). You can also watch Pozen discuss the issue, along with a brief introduction to some of the ideas he puts forward in a new book, Too Big To Save , in this video from Harvard Publishing:

  • Brookings' Karen Dynan on Managing Credit

    There has been a lot of hand wringing about the American addiction to borrowing and the role that behavior played in the crisis (most of it fair), but Karen Dynan , VP of the Economic Studies program at the Brookings Institution says we need to remember the importance of access to credit:

  • Tim Duy: Fed Looking at 'Long Hard Road' of Recovery During FOMC Meeting This week

    The Federal Open Market Committee (FOMC) is set to meet Tuesday and Wednesday of this week. Tim Duy points out that Ben Bernanke and friends will be meeting with a far more positive "economic backdrop" than they have had for a long time. But for all the relatively good economic news there is, uncertainty remains. Duy believes that the FOMC should continue to anticipate slow recovery, and he points to limited consumer credit as a primary reason: Given the steady anecdotal buzz surrounding the deterioration of the commercial real estate market, it is difficult to expect a rapid reversal of these trends. In short, if you think credit markets are still under stress, as the Fed certainly does, and are worried about the availability of credit to support future spending, also among Fed concerns, then shifting rhetorically to signal a tighter policy stance irrational. Moreover, it would seem inconsistent with plans to continue expanding the balance sheet via purchases of mortgage backed securities and TALF assets. So, it seems Duy is telling us not to expect a drastic change in Fed policy until we see a major shift in consumer credit and unemployment. Read Even With Growth, A Long, Hard Road here .

  • Guardian Readers Help The Queen Understand the Credit Crisis

    In November, Queen Elizabeth asked London School of Economics professors why no one had predicted the credit crunch. They had their shot at answering. Now The Guardian is asking readers to answer, and they are coming up with a variety of answers. Surprisingly enough, most commenters do provide nicely thought-out answers, right or wrong. Like this one: Interest rates, particularly longer term interest rates were too low due to the wall of money from Asia buying up government bonds and money from pension funds who were being forced by government legislation to match assets and liabilities which meant buying those same government bonds that Asian central banks were buying. As a result there was a chase for yield, buying assets that yielded more than the equivalent government bond, corporate bonds, utilities, local government bonds and, yes Mortgage backed securities. And in that process risk was either ignored or swept under the carper by the rating agencies who gave very risky assets AAA ratings. Due to this demand for mortgage backed securities the originators of mortgages loosened their lending standards in order to create more 'product' and lent to people who ere in no position to repay, when they started to default the bonds that were previously rated AAA were downgraded and plummeted in value. There you have it, but I'm sure people would prefer something along the lines of, it was all the greedy bankers fault string em up. But the clever comments are worth a read as well. For example: Well, ma'am, you know how nobody is allowed to ask you a direct question because you're too important? Same with the bankers. Read them all here .

  • SBA Administrator Mills on New Loans for Small Business Owners

    Karen Mills was confirmed as head of the Small Business Administration in April, and then in May launched another effort to help small business owners with one of their biggest challenges: getting loans. Mills announced the new America's Recovery Capital loans in her National Small Business Week address : These short-term loans of up to $35,000 can be used to cover payments on non-SBA debt. They have no SBA fees or interest costs for the borrower and are 100 percent guaranteed by the SBA. The loan is for six months, followed by 12 months of no repayment and then 5 years to pay it back. ARC loans are for viable businesses, meaning that the business must have an established history of good performance – but they are in a situation where they just need a little extra help to bridge the “troubled waters.” The SBA is scheduled to accept loan packages from lenders under this program June 15. Mills says the larger efforts by the Obama Administration have begun to unfreeze credit. But she told CNBC 's Your Business that they need to keep working on re-starting the secondary market for loans, and to make the SBA loan process more accessible and less bureacratic for business owners: Visit msnbc.com for Breaking News , World News , and News about the Economy

  • Credit Card Rates Up for Most Small Businesses

    If anything, interest rates should be realtively low these days, but a National Small Business Association survey shows that 63% of small business owners have had the interest rates on their credit cards go up in the last year. As BusinessWeek notes , this has come at a time when small businesses are highly dependent on credit cards: As we’ve noted before, credit cards have replaced business loans for many small companies. Most business owners aren’t using credit cards for convenience and paying off the balance each month. Instead, they’re using credit card debt to fund operations and investments: 60% of business owners surveyed reported carrying a monthly balance, with 37% carrying $10,000 or more. For one in three businesses, credit card debt accounted for at least 25% of the company’s overall debt. This might help explain the NSBA's pushing a small business amendment to the Credit Card Act of 2009 currenlty working its way through Congress. Read the full NSBA report here .

  • Marketplace Whiteboard: Shadow Banking

    The Federal Reserve tried to jump start nonbank consumer lending through Term Asset-Backed Securities Loan Facility ( TALF ) . TALF is aimed at hedge funds and investment firms--or "shadow banks." In this Whiteboard segment, Marketplace's Paddy Hirsch explains the importance of the shadow banking system in the US economy: Shadow banking from Marketplace on Vimeo .

  • Yale Economists on the Financial Crisis and the Depression Threat

    Robert Shiller writes in a Bloomberg commentary today that the US is in danger of facing another Great Depression. And while he lauds the Obama Administration for "stronger efforts to date" than during the Depression, he calls for more stimulus spending: In the face of a similar Depression-era psychology today, we are in need of massive pump-priming again. We appear to be in a much better situation due to the stronger efforts to date. Still, there is a danger that, because of a combination of faulty economic theory and inadequate appreciation of human psychology, as well as deep public anger, we will not continue with such stimulus on a high enough level. We desperately need to be persistent, keeping our government response adequate for the problem at hand on a sufficient scale and for sufficient time. Earlier this week, Shiller discussed the financial crisis and the current recession as compared to the Great Depression with his fellow Yale economists John Geanakoplos and Richard Levin (also president of Yale). They also compared the current government response to the government efforts during the Depression, and deficits and stimulus spending (Levin calls World War II the stimulus package for the Depression) from both periods. Some of the conversation is a repeat of a February panel in which these three economists were all participants. If you have already viewed that discussion (available here ), you can skip to 15 minutes in on this video (which has the added benefit of skipping most of the Yale back-patting, if that is unappealing for any reason). You can read Shiller's Bllomberg commentary here.

  • Six Small Businesses that Got Startup Cash

    Tim Figgins decided to become a small business owner last year. He had been a business consultant, but chose to buy a boat shop in Newark, Ohio when he learned the owners were looking to retire. In order to get started, he needed a to find a bank willing to lend startup money. And as we know, the last 12 months have been a very tough climate for small businesses looking for loans. But, according to CNNMoney.com Small Business , Figgins was able to work with a bank that has a lot of experience giving out Small Business Administration backed loans, Huntington National Bank in Columbus, OH: While most SBA lenders have sharply cut their loan volume, Huntington has ramped up. One major factor is that the bank keeps the loans it originates, rather than reselling them in bundles to investors. That secondary market underpins as much as half of all SBA-backed lending; when the bottom fell out of it in September, many banks unable to resell their loans then lacked the liquidity to make new loans. Huntington steered clear of that trap. But the bank's officers also emphasize that their success comes from perfecting the SBA procedures. "If you don't do the loans frequently, it can be challenging," says Jeff Rosen, Huntington's business banking director. "We have a process that is easy to meet the demand, because our specialists focus on SBA lending only." CNNMoney profiles Figgins and five other small business owners who were able to get financial backing for their startups. Read about them here .

  • The Fed Buying Treasury Bonds

    The Federal Reserve has been battling the credit crisis for half a year now. In December, it lowered interest rates to near zero, and today it announced that it will buy $300 billion in long term government securities and $850 billion in securities from Fannie Mac and Freddie Mae. This from the Fed's press release: In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The markets seemed to respond positively to the announcement, as the Washington Post points out : Stocks rose dramatically this afternoon after the Federal Reserve announced that it is expanding unconventional efforts to lower interest rates and stimulate the economy by increasing its purchases of mortgage-related securities by $750 billion and buying $300 billion in long-term Treasury bonds. Read the Fed's press release here .

  • Obama and Geithner Unveil Plan to Get Credit Flowing to Small Business

    In a meeting with small business owners at the White House today, President Obama and Treasury Secretary Geithner outlined a $15 billion package aimed at helping small businesses obtain credit. Updated video: The plan calls for the 21 largest banks that receive federal money to report monthly on their lending to small businesses (smaller banks receiving federal dollars will report quarterly). The plan will also use $730 million from the stimulus plan to reduce loan fees for small businesses, and raise the government guarantee on some Small Business Administration loans to 90%. In the announcement, Geithner called on banks to start pumping dollars into Main Street ( from Reuters ): "We need every bank in the country to do everything in their power to provide the credit that small businesses need to operate, expand and add jobs," Geithner said in remarks prepared for delivery to bankers and small business leaders at the White House. "You need to make the extra effort to make sure that good loans are getting to credit-worthy small business in order to serve the larger public good of moving this nation toward recovery." Details of the plan are available from the Treasury Department here . And you can read a transcript of Sec. Geithner and President Obama's comments here .

  • Geithner says US Government has 'Great Obligation' to Lay Out Comprehensive Reform

    Treasury Secretary Timothy Geithner told Charlie Rose last night that the US banking system was not strong or resilient enough to respond to the fallout from the subprime mortgage crisis, and that the regulatory system "designed largely 90 years ago," did not adapt to new challenges: Later, Geithner told Rose that the Obama Administration needs to simultaneously fix the banks for the short term and build a better foundation for the whole system: You saw that in the campaign layout, a set of very ambitious proposals for reform. And in some ways, we face these two critical obligations today. One is to get the economy back on track, fix this system, get credit flowing again, arrest this deepening recession, but at the same time we have this great obligation to lay out for the American people and the world a commitment to the kind of comprehensive reform so that the crisis like this never happens again. And we’re going to move as quickly as we can on both those fronts. The president had the leadership of Congress in the Oval Office two weeks ago to start that process on building consensus on a reform. You’re going to see him lay out to G 20 to the leaders of the world a very comprehensive framework. You know, people talk about this a lot, but not much was done frankly in the run up to the crisis, and we have to take advantage of this opportunity, where we’re living with the acute damage caused by those judgments to put in place a set of reforms that will prevent this from happening again. And the president believes deeply in this stuff, and you’re going to find us very aggressive and creative and ambitious in the scope of change we’re going to try to bring about. You can watch the full interview here . And Greg Mitchell of Editor and Publisher provides a transcript here .

  • The weak get weaker: Corporate liquidity, asset sales, and the extensive use of bank lines of credit at lower-rated firms

    Each quarter the Duke University / CFO Magazine Global Business Outlook Survey polls thousands of chief financial officers around the world. The most recent survey concluded February 27 and reflects the views of 1,268 CFOs in the U.S., Europe, and Asia. This entry by John R. Graham of Duke University's Fuqua School of Business draws on the February 2009 and November 2008 surveys. The credit crisis of late 2008 has spilled into 2009, and the lack of funding has hampered the ability of many corporations to make the ideal operating and investment choices. We recently completed an in-depth study of how tight credit is affecting corporate activity. When a company is able to invest in positive net present value (NPV) projects, this means that the project returns more than the company's cost of capital, thereby increasing firm value in the long run. When credit is tight, as it is now, companies are not always able to obtain the necessary financing to pursue positive NPV projects. Due to the current credit crunch, more than half (55 percent) of U.S. companies tell us that they have recently had to cancel or postpone positive NPV projects. European and Asian companies are in a similar situation. This is bad for the economy in the long run because it spreads the effects of the current credit crisis into the future - less cash flow will be produced one or two years from now due to the cancellation of good projects today. Limited liquidity can hurt any company, but the problems are most acute among firms with poor credit ratings. For these firms, credit markets have nearly shut down. When external borrowing is limited, a company must rely more on internal funds, such as profits, asset sales, or cash on the balance sheet. For low-rated firms, profits are often poor, further limiting options. In our analysis, we found that struggling U.S. firms started 2008 with cash and marketable securities on the balance sheet equal to about 15 percent of total assets but ended the year with cash and marketable securities amounting to only 12 percent of assets. These financially constrained firms burned through a startling one-fifth of their cash holdings in just one year's time. Again, similar patterns are observed in Europe and in Asia. On the bright side, companies that are stronger financially were able to maintain cash of about 15 percent of asset value. Ironically, this indicates that most financially strong firms should not need to borrow extensively from credit markets, even though these are the only firms for which credit markets remain fairly open. In contrast, low-rated firms are burning through their internal reserves, while at the same time finding limited access to external sources of funding. What can a poorly performing firm do if it has limited profits, shrinking cash reserves, and little access to external capital? One option is to sell assets in order to obtain funds. Among firms that tell us they have experienced problems accessing credit markets, an astounding 56 percent indicate that they have sold assets in order to free up funds for other uses. While it is possible that some companies are finally shedding underperforming divisions (which would be a good thing), when you consider the depressed state of asset markets, it is likely that many of these recent asset sales have occurred at fire sale prices. Thus, asset sales have provided little relief. Firms that are struggling to access new capital can also rely on previously established lines of credit. Normally, credit lines are used for temporary "bridge" loans or as a short term substitute for cash. Today, we find evidence that lines of credit are instead serving as a "last resort" source of funds. U.S. firms have lines of credit with maximum borrowing capacity equal to about 23 percent of total asset value on average. We also find evidence that credit lines do in fact substitute for cash in that firms that have less cash on the books have a tendency to maintain larger credit line capacity. What is most astonishing about our credit line analysis is the degree to which they are currently drawn down. The typical U.S. company has drawn about 38 percent of the maximum allowable borrowing on its credit line. Companies with credit ratings of A or higher have drawn down less than 30 percent of maximum on average, while companies rated BBB or BB have drawn nearly 40 percent of the maximum allowed by their credit lines. Notably, companies rated B or lower have drawn nearly 70 percent of their line of credit capacity. This is alarming because it indicates that poorly rated firms have nearly used all available debt capacity. This draw down on credit lines among poorly rated firms has been exacerbated by a "just in case" phenomenon at some companies. That is, many poorly rated companies are drawing on their credit lines now as a precaution, fearing that their banks will eliminate their credit lines in the future (if, for example, the...

  • An Animated View of the Credit Crisis

    Los Angeles-based designer Jonathan Jarvis has created a whole new way of looking at the credit crisis. Here it is: Jarvis says "The goal of giving form to a complex situation like the credit crisis is to quickly supply the essence of the situation to those unfamilar and uninitiated." The above project does seem to hit the mark. Jarvis's Website is here .
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