Before you read the interview, I am encouraging all of you to contribute your comments below, at the end of this interview.  I expect that most of you won’t be surprised by any of the answers to the questions below, in fact, most of you will think to yourselves, ‘Doesn’t everyone already know this?’

However, the majority of people out there really don’t know what’s happening in banks and lending.  A program that was intended to pull banks, and thus our economy out of this crisis, has only invited more abuse and greed in the banking world, and further delayed inevitable bankruptcy.

• How long have you been with this particular bank?

15 years

• Is this a community bank, a regional bank, or national?

It is a community bank that focuses on commercial loans.

• What is your title at the bank?

I was a commercial loan officer for 10 years. I am now Vice President of the commercial division of our bank.

• Tell me a bit more about how lending has changed over the last few years at your bank? For example, number of loans your bank was making then, versus now, the requirements then versus now,  etc.

In 2006 we were making 125 commercial loans per year.  In 2009, we made 36 commercial loans.  In 2006, we lent based on appraised value, up to 85% of appraised value.  We also did not require borrowers to have a depository relationship with us in 2006.  Now, we lend primarily based on the DSCR, and up to 75% of value or the purchase price.  However, our average loan to value is actually only 70%.  We also require borrowers to establish a depository relationship with us. Typically 20% of the loan amount.

• So let me clarify what you’re saying. If a borrower comes to you with a commercial building that he or she can buy for fifty cents on the dollar, you are still requiring a 30% down payment based on the purchase price plus an additional cash deposit of 20%?

Correct. Even if the building is worth much more than our customer is buying it for, we are still only lending 70% of the actual purchase price.

• O.k., let’s use an example then, just to illustrate the numbers here. Let’s say I’m able to buy a building that’s worth $2 MM for $1 MM.  I’m coming to your bank for a loan of $1 MM to buy this building.  In this case, I’ll need to bring in a $300,000 down payment in cash as well as a $140,000 cash deposit.  This is a total of $440,000 in cash that I need to put up for a loan of $700,000?

That is correct.

• Wow. Unbelievable.

Yes, that is the reality I’m afraid.  If we give you a loan at all.

• So based on what you told me about only issuing 36 commercial loans total last year, you aren’t really lending right now are you?

Frankly, no.

• Do you think your bank will stay afloat and outlast this crisis?

Yes, I think we will.  The only reason we’re still operating is due to the conservative stance our President took at the end of 2006.  After 2006 we began to curtail our lending a bit because our President could see the bubble about to burst.  During that time, there was a lot of pressure on us to compete with other banks. The lending environment was very competitive, and frankly, it was out of control.  Some of our competitors were making 48 hour closings on commercial loans. In order to compete for the business, we were being pushed to do the same. Looking back, this was ridiculous, but at the time, it was just, well, business as usual.  Unfortunately, our competitors that were putting pressure on us at that time to keep up, well, they’re all out of business.

• That’s sad.  I guess the writing was on the wall though. Your bank’s President sounds like a smart guy.

Yes. He was, and is. Too bad our Board of Directors forced him to resign shortly after the bubble burst.

• What has happened to your bank since the bubble burst?

Well, we bought a larger, regional bank that was going out of business.  The problem is, they only had to disclose their “bad loans” at the time of the purchase. They did not have to disclose those loans that they knew were about to become “bad loans.”  So, shortly after the purchase was complete, we found out about a lot of problematic, or soon to be bad loans in their portfolio.  And, just as we feared, many of these “problematic” loans started to go into default, soon after the purchase.

• So what now?

Unfortunately, we must set aside a large sum of capital in reserves to cover these bad loans, 80% of the loan amount, for each loan that is in default.  This has eaten up all of our capital, which we could be using to make new commercial loans.  This is the primary reason we are unable to lend right now.  We are not lending because we are short on capital.

• But what about the TARP money from the government? Didn’t your bank receive any of this?

Yes, we’ve received over $50 MM.

• Wasn’t this government money meant to keep banks like yours lending? $50 MM is a lot of money to make loans with.

Yes, technically it was meant for that purpose. But I think most banks like ours are using their TARP money to cover bad loans on their books.

• Ugh. That’s the ugly truth.  So, that $50 MM dollars, that was lent to you by the U.S. government to keep lending, and indirectly to keep the wheels of our economy turning. You are using that to cover your bad loans and not to make new ones? And there’s no accountability, no regulations on this?

Correct to the first question. And, no, not really, to the second question. There are no regulations. It’s a pretty screwed up system. I can say that because I’m on the inside. I know first hand how it ticks. And this is exactly why I’m not supposed to say that we are not lending. If anyone caught wind that we are “not lending,” we’d be in a lot of trouble and those government loans would be called in immediately, if we weren’t shut down altogether.

• So what about your commercial borrowers? The ones that have a long-term relationship with your bank? Are you renewing their loans?

No. Unfortunately these are the customers that are getting hurt the worst in this whole thing.

• Why?

Well most of them have just completed their Phase I financing and are coming back to us for perm.  Some of these customers have been banking with us for over 20 years. We know their first names and we’ve seen their kids grow up etc.  When they come to us for this perm financing or after a 3 to 5 year call to refinance, we have to tell them to pay us off and go to another bank.

• What happens to them?

Most of them are so strong that we are hoping that they will be able to obtain a loan elsewhere.

• This seems backwards. Aren’t you trying to obtain more deposits? These customers are taking their deposits and walking.

Well, right now we need to raise capital through stock issue.  Investors won’t look at our stock unless no more than 20% of our portfolio is secured by commercial real estate.  This means we have to get this ratio down to attract investors to purchase our stock.  This is why we are not issuing new commercial loans. I think a lot of banks are in this same position.

This concludes the end of the interview with a banker.  This story is not the same for all banks.  Some banks are stronger than others and have sufficient capital to continue making news loans.  However, the truth is that many banks are actually turning away long-term customers that have never made a late payment on their commercial loans. Customers with which they have built long-term relationships for 20 years or more.  These are the people who are truly getting hurt in all of this.

The more grim outcome of banks not lending, even though they have been lent millions by the U.S. government in order to keep doing so, is that the mere action of lending to businesses is what fuels our economy.  This action creates jobs, and inventories of stuff that people buy, or services that people buy and sell, and profits which allow loans to get paid back, and then the cycle repeats itself over, and over, and over again.  Lending is the impetus behind this precious cycle.

Please leave your comments, good or bad, negative or positive. I’d love to hear from you on this controversial topic. Or, share your own story or a story of your clients. Please share.

Posted by Corey Curwick on March 21, 2010

Seth Godin spoke yesterday in Salt Lake City and I had my first opportunity to hear him give a live talk.  Sure I’ve heard him speak before: while narrating his audio book Tribes, while speaking on the Marketing Over Coffee pod cast twice, and of course, I’ve certainly seen him on YouTube.  Part of me expected to hear a lot of what I’ve heard before from Godin.  But surprisingly, Godin’s live presentation yesterday was certainly NOT more of what I’ve heard from him before.  In fact, the presentation was so powerful that I both laughed and cried, as if I was watching a great movie.

Why did I laugh?  Godin puts together a slide show presentation to go along with his talk. The funny photos he chose for the slide show take some of the seriousness out of the very serious subject matter at the center of his talk.  These photos capture the unexpected things and people in life that catch you off guard and make you snicker.

But I did say I cried too, and why did I cry? I cried because of the reality check that Seth’s talk gave to me and to most of the other 600 people that attended the event.  The reality check was at the heart of the talk and had to do with the new economy that is right before our eyes.

What are some of the implications of this new “digital age” in terms of your job or your business? Will your job become automated or just eliminated altogether?

Having followed the traditional, educational path myself, by pursuing a Graduate Degree from a prestigious school, I too have had to swallow the fact that the old rules no longer apply.

You are probably wondering, ‘who is this Seth Godin guy and what kinds of things was he talking about?’  Some of the main concepts of Seth Godin’s talk yesterday were the following:

• Replaceable people versus irreplaceable people in the job market.
• Getting and keeping a good job used to be about “not” talking too loudly or “not” standing out.  Nowadays if you don’t stand out and don’t talk too loudly you’re dispensable or replaceable.
• The individual has more power than ever before in history to create something amazing because of the infinite reach of the internet.  Before the internet, you could blame a publisher if your didn’t make it as an author or you could blame the music industry if you didn’t make it as a musician.  Now you have no excuse.

These were just some of the concepts from Seth Godin’s presentation yesterday, as there were just too many good ones to count.  If you don’t know who this guy is yet, I encourage you to get your hands on at least these three books from Seth Godin:

1. Purple Cow
2. Tribes
3. Linchpin (just released!)

Godin’s books will change the way you think about your “job” today and your “job” in the future.  He will change the way you think about your business too.  Read all of his books if you can, but the three I’ve listed above are, in my opinion, the “must reads” by Seth Godin.  Ironically, I wrote a post on the blog one year ago yesterday that referenced Godin. The title of the post was, “How Can Small Business Best Survive Recession.” Check it out if you haven’t read it.

If you are already familiar with Godin’s work, what are your thoughts on the three concepts I’ve listed above? I’d love to hear from you.

Posted by Corey Curwick on February 13, 2010

The term “Chimerica,” Ferguson explains, comes from the economies of the two countries being so “intertwined” that they essentially became “one economy.”  Thus the ‘marriage’ analogy. With China’s international reserves totaling $2.1 trillion, 70% of these are in dollar-denominated securities.  But the Chinese aren’t going to stop buying dollars, Ferguson says. If they do, their currency will inevitably appreciate against the dollar and further hurt exports.

But what would be the result of the “divorce” that Ferguson refers to between the two countries?  Ferguson hints that a “cold war” may be on the horizon and a “strategic rivalry” between the two economic superpowers.  All of this is probably obvious to most of you, however, Ferguson did highlight some pretty eye-opening facts in the article.  Take a look at the article and please, post your comments. I’d be curious to see what your thoughts are about the fate of “Chimerica.”

Posted by Corey Curwick on October 6, 2009

These days, it’s hard to imagine a world without discount internet sites where product is sold at a deep, deep discount off of its retail price.  These aren’t just auction sites either, but rather sites where product is simply dumped, regardless of its origin.  For example, a shirt that retails for ninety dollars in the store, my fiancée recently found on the internet for $10 plus shipping.

Will retail as we know it die, as the popularity of these discount websites continues to grow?

I think the answer is probably no. Retail will never completely die, people still need to go and try on wedding dresses and wander aimlessly around shopping malls. However, I do think that the big days of retail are officially over. As consumers become more savvy online, there will be more tire kickers.  And this trend will just grow and grow.

Brick and mortar retail giants, unless they dramatically alter their business models and their distribution models, are doomed. As shareholders flee the space and banks stop funding commercial retail, the giants will certainly fall.  We’ve seen both Circuit City and Best Buy slowly crumble. What other big box names will follow?

Any opinions on the future of retail as we know it?

Posted by Corey Curwick on September 19, 2009

Niall Ferguson, an expert in international financial markets, discussed an article he wrote, that also appeared in the July/August Edition of the ‘Harvard Business Review’ called The Descent of Finance.  It’s no wonder I found the interview fascinating.  After I dug around on the web to find out more information about Ferguson, I discovered that “TIME” magazine had named him one of the ’100 Most Influential People in the World.’

Ferguson is the author of, The Ascent of Money: A Financial History of the World and, The House of Rothschild: Volume 1: Money’s Prophets: 1798-1848, a fascinating account of a legendary banking dynasty’s rise to power.

Ferguson believes that a “descent of finance” began back in 2007.  In the interview, he gave both optimistic and pessimistic views on the current financial crisis.  He remarked that the Obama Administration’s response to the crisis is a combination of “Milton Friedman’s approach to monetary policy combined with John Maynard Keynes approach to fiscal policy.”

On an optimistic note, Ferguson said that the U.S. is not in another Great Depression but instead compares this “deep” recession with another time in U.S. History which followed the financial crisis of 1873.

The most fascinating part of the interview was when Ferguson observed that the Dollar Currency Crisis may not show up in exchange rates, but rather, in commodity prices. His reason for this observation is based on the co-dependent relationship between the U.S. and China.

“The Chinese don’t like where they are, as holders of massive amounts of Dollar-denominated debt.  But they’re not sure quite where to go.  In other words, they don’t have an immediate alternative to the dollar.”

But what about trading dollars for Euros? Ferguson believes that switching to the Euro is not an attractive option because the banking crisis is as bad in Europe as it is in the U.S.

“And, even if they did switch right now in a big way, it would then cause a Dollar Crisis which would hurt them severely, as they are sitting on $2 trillion dollars worth of predominately dollar-denominated reserves.  Meanwhile, the Federal Reserve is printing dollars nearly without limit, in an attempt to re-flate the U.S. economy .”

They are “kind of trapped,” Ferguson said.

Another fear for China lies in their dependency on exports.  If their currency appreciates against the dollar, this will certainly hurt exports.

From here, Ferguson suggests that the price of commodities seem to be a better measure of the “declining global confidence” in the dollar. He goes on to say that China would be better off accumulating piles of copper or barrels of oil rather than Dollars or Euros.

Please post any comments you may have on these ideas posed by Ferguson. I strongly encourage you to check out Ferguson’s article in the  “Harvard Business Review” or listen to the interview on the pod cast, “Harvard Business IdeaCast.”

I am definitely an advocate of using the history of financial markets as a lens through which to view current financial events.  Any additional thoughts or commentary on these specific topics? Check out Niall Ferguson.

Posted by Corey Curwick on July 11, 2009

But what happened to the Peso?  Argentine citizens who the day before had $100,000 USD in their bank accounts, overnight had only $50,000 USD in their accounts.  Could this same hyperinflation happen in the U.S. as inflationary pressures increase from the new economic stimulus measures?

But what are some of the similarities between Argentina in 2001 and what is happening right now in the U.S.?

• In the late 1990′s, Argentina entered a deep recession. The government responded by lowering interest rates and increasing government spending. The U.S. government responded similarly in 2008. Both the U.S. and Argentina received warnings from the IMF that their monetary policies were unstable.

• In both countries, the recession continues leading to a liquidity crisis, debtors begin to default on borrowed funds falling like dominoes, followed by bank failures also like dominoes.
• In 2000, Argentina responded to the credit crisis by continuing spending.  Barack Obama’s plan to stimulate the economy is to continue deficit spending.
• Argentina was having trouble finding investors in other countries to lend it money. To make its debt more attractive, it increased the yield of its Treasury Bonds.  The same is happening in the U.S.
• Eventually Argentina was unable to make debt payments which resulted in currency devaluation.  If the U.S. cannot find new buyers for its debt, a similar result will be currency devaluation.

However, the alternative view is that the U.S. is NOT headed down the same inflationary path. Why?

Each dollar the Fed creates by buying government bonds adds to the money supply.  Each dollar is subsequently loaned numerous times (the multiplier effect), and those credit dollars are money just like the original dollar the Fed created. The credit dollars also add to currency inflation. The popular fear about inflationary effects from huge federal deficits comes from the theory that, due to scarcity of credit, the number of credit dollars is currently reduced; so currency inflation will not occur. Even if that theory is correct now, the money supply will increase when credit availability returns to normal.

Who agrees or disagrees with this alternative view? Or who agrees or disagrees with the first view that the U.S. is indeed heading down this path?

If anyone understands Argentina’s progression toward hyperinflation, please add to this thread.

Posted by Corey Curwick on March 9, 2009

However, the largest changes have occurred so gradually, so slowly, and so many of them we are only seeing now.  One example is that many publicly traded companies, whose reign consumers never thought they’d see end, are  beginning to close their doors left and right.

But wait.  Isn’t it obvious that the recession is to blame for the mass closings of big boxes and other behemoth companies?  Although the recession is partly to blame, it is important to understand that there is another reason.  The mass bankruptcies of these huge publicly traded companies is also a result of the new economy beginning to come into full bloom.

What does this mean? Essentially what the new economy coming into full bloom means is that bigger is no longer better.  No longer is economy of scale an advantage, in fact, its quickly becoming a liability.

As an MBA I was taught to take a successful business model and replicate, replicate, replicate until you take the company public.  Then, as Robert Kiyosaki says, “You can print your own money.”

But I just don’t think you can do it that way anymore.   What’s happening to the Fortune 500 is living proof.  However grim this news is for large companies, this is good news for small companies.  Small companies that have grown slowly despite pressure to blow up and go public as quickly as possible will begin to see the prudence in their decision to remain small.  This is also good news for entrepreneurs who feel pressure to go big.

Any further insight into what this new economy could mean for investors?

Posted by Corey Curwick on January 30, 2009

The price of oil has dropped nearly 70% since July when the price hit its peak.  The lower prices have definitely served to prop up the U.S. Economy in recent months.  I think consumers can more easily justify their loose spending habits with the price of oil so low. But will OPEC’s newly announced production cuts drive up the price of oil again and bring the U.S. Economy to its knees?

I do think these oil production cuts will serve to drive up the price of oil from where it is now, to a better equilibrium around $70 to $80 per barrel.  This will surely stifle growth of the U.S. Economy in Q1 and into Q2 but what other effects will be imminent?

Any further thoughts on this?

But according to free-market proponent, writer, and blogger for the Financial Times John Gapper, this year marks the implosion of the hedge funds industry.  Is this then the real straw that broke the camel’s back as Liu said?

Gapper also writes that the woes of the auto industry look like a cake walk compared to the losses of 2008 in the hedge fund industry.  I agree with Gapper that you don’t see hedge fund investors crying to the government to bail them out.  But are they indirectly being bailed out anyway?

According to Henry C.K. Liu the collapse of one of the giants meant the collapse of the others.  But what came first, the chicken or the egg, as they say?

I encourage in-depth commentary on this topic as it’s a topic I don’t completely understand. Perhaps commentaries from Liu or Gapper?? Ha ha.

Article Sources: http://www.ft.com/cms/s/0/b99c1a00-c2ed-11dd-a5ae-000077b07658.html?nclick_check=1

After comparing the price ranges of gold from this time last year, it’s interesting to note that the price range has gone up steadily since then.

In October of 2007 the low was approx. $725/oz with a high price of hovering around $790/oz.

Last month’s low was around $710/oz while the high was around $910/oz.

This 30 day volatility is certainly due to the uncertain market conditions but, since September of last year, gold prices have tended to go up and up fairly steadily.

If this isn’t a signal to keep on buying gold I don’t know what is.  Would anyone like to provide some further insight on this?

Ft.com article by Chris Flood found at:  http://www.ft.com/cms/s/0/7177d3c6-b65f-11dd-89dd-0000779fd18c.html