What is it with these people?
Banks. Don’t you wish you didn’t need them? At the heart of some of our most spectacular corporate collapses, even some of our most famous frauds, you will find one or more banks hurriedly tucking the dollar bills into their pockets even as they tut-tut the miscreants.
Money, as they say, makes the world go around. Financial management classes teach us that being totally cashed up without debt is poor use of capital. And with leverage, we can buy, do, be – so much more than our limited bucket of bucks allows.
More often than not, we need credit simply – but critically – to bridge the gap between expenditure to develop and deliver a product or service and receipt of revenue from profitable sales of that line item. Trust me, we’d do without it if we could.
So why is it that right when we need it most, the banks are squirreling it away? Governments worldwide are bailing them out, guaranteeing their deposits, paying out debt and making new credit available to them at unprecedented low rates. They are doing this because there is a direct relationship between the level of lending and economic growth.
While I’m no economic theorist, I do understand that when regulators want to slow the rate of growth they increase interest rates. Making the cost of money higher reduces the availability of cash from the demand side, forcing an economic contraction. Of course, I’ve never understood why governments see the need to do this, but I digress. The fact remains that making credit available at historically low rates is supposed to reduce the risk of lending, make it more readily available, and therefore fuel economic growth. I think. Anyway…
Cheap credit, direct bailouts through nationalisation and now (in the US) the Troubled Asset Relief Program (TARP) are all meant to help get the global economy moving again. TARP explained: what began as a USD $750-billion program to buy out toxic assets has evolved into a dozen separate initiatives that cover up to USD $3 trillion in loans and loan guarantees and direct spending.
According to a Wall Street Journal analysis of US Treasury Department data this month, the biggest recipients of taxpayer aid made or refinanced 23% less in new loans in February 2009, than in October, the month the US Treasury established the (TARP). But within those numbers is something more disturbing: Commercial lending slumped by about 40% over the same period.
Those numbers are born out in the multitude of anecdotal stories such as this: Republic Windows & Doors in Illinois lost the line of credit from its primary lender, Bank of America, and was forced to shut down. The Associated Press reported that employees of Republic Windows & Doors were given three days notice that the factory would be closed. Union representatives allege that BOA will not allow Republic to pay workers, BOA has denied responsibility for any payments Republic owed its employees. According to the Chicago Tribune, BOA cited a downturn in the company’s business for the cancelation.
Well hello, when do you think it is a company needs a loan? The very point of a line of credit is to get you through the lean times so you can keep paying wages and rent and so on, until business picks up again. Yes, even good businesses with good people can find themselves in just such a situation.
Even when banks are lending, credit criteria have tightened faster than a flu pandemic’s flight path. And the fees would make a high class hooker blush.
OzMinerals – the world’s second largest zinc producer, Australia’s third largest diversified miner, and a substantial producer of copper, lead, gold and silver – needed an extension of credit earlier this year while it negotiated the sale of assets to Chinese giant, Minmetals. The sale, valued at USD $1.2 billion, even at today’s valuations is not that big deal, but it gives OzMinerals firm ground on which to stand and catch its breath in this tumultuous market. But with debt repayments due in the midst of these discussions, the logical necessary step was to roll the debt over for another six months.
OzMinerals is under extreme pressure to achieve substantial debt reduction from its banks. It needs this sale to do just that. If there is no operating business, there is no sale. Here is a company facing an ignominious end without the Chinese lifeline. All it needs; all it asked for was a little more time from its creditors.
The extension was ultimately granted, and for the privilege, OzMinerals was charged $94 million. Bring on the smelling salts. This isn’t the value of the loan, it is not the fee accrued in generating a loan, it is the fee for stamping a new due date on the paperwork.
The banks profiteering from the misery of the miner were Australia’s ANZ, Commonwealth Bank, National Australia Bank, and the UK’s Royal Bank of Scotland, Bank of Scotland and the French flagship, BNP Pariibas. I can understand the UK and French banks sucking down the Buscopan. But really, the decision was a no brainer and the fee for making it, obscene.
No good can come of throwing public money at the moneylenders. Not just because there is no guarantee they will pass it on to businesses that build, buy and sell stuff, but because we also know from experience – from their own industry reputation – that they are likely to misuse it.
The banks themselves claim to be doing it tough at the moment. This, while they take the government handouts and continue spending on bonuses and perks.
Northern Trust in Chicago is bewidlered by a Congressional and media backlash on its February 2009 splurge, shortly after laying off 450 staff and receiving $1.6 billion in TARP funding.
Putting the savings and top-ups to good use, Northern Trust paid a confidential sum to sponsor a PGA event at the Riviera Country Club in LA. That sum covered the USD $6.3 million in prize money, several million in advertising on CBS Television, operating costs, travel and accommodation, meals and entertainment. Flying in hundreds of clients and employees, they didn’t exactly slum it in these supposedly austere times, staying at the Beverly Whilshre, Ritz Carlton in Marina Del Rey and Casa Del Mar, Santa Monica.
Guests were entertained by headline groups Chicago, Earth Wind & Fire, and Sheryl Crow. Not to mention lavish cocktail parties and gifts from Tiffany and Co.
Good for the LA economy for a weekend at least. Clearly, my invitation was lost in the mail. See the bank’s defence here.
Setting aside the contentious issue of Lehman Brothers bonuses – a saga that continues still as the companies that rescued Lehman’s operations around the world struggle with legacy bonuses cemented into contracts even as the company teetered on the edge of existence – let’s talk about good old fashioned corruption.
Federal investigators in the United States have now started 20 criminal probes into possible securities fraud, tax violations, insider trading and other crimes associated with the (just six-month old) TARP program.
Writing in the LA Times April 21st, 2009, reporters Ralph Vartabedian and Tom Hamburger say the disclosures reinforce fears that the hastily designed and rapidly changing bailout program run by the Treasury Department and Federal Reserve is going to carry a heavy price of fraud against taxpayers.
Crimes suspected in 20 bailout cases – for starters
The cases represent only the first wave of investigations, and the total fraud could ultimately reach into the tens of billions of dollars, according to Neil Barofsky, the special inspector general overseeing the bailout program.
Barofsky said the complex nature of the bailout program makes it “inherently vulnerable to fraud, waste and abuse, including significant issues relating to conflicts of interest facing fund managers, collusion between participants, and vulnerabilities to money laundering.”
“It shouldn’t be a big surprise that a huge pot of honey attracts a lot of flies,” said Tom Coburn of Oklahoma, the senior Republican on the Senate Permanent Subcommittee on Investigations, which is also examining the program. “I would guess that 20 investigations, while a good start, is only the tip of the iceberg.”
“That’s an appalling record,” Barbara Roper, director of investor protection for the Consumer Federation of America, said of the 20 criminal investigations. “In the midst of this crisis from which they are being bailed out, the same people who created this mess are apparently still breaking the law. What is it with these people?”
Indeed. What is it with these people?
© 2009 – 2010, editor. All rights reserved.
Category: Reputation Management, Sin & Spin
