Friday, June 06, 2014

Meet the New Scam

Same as the old scam.  I've been catching up on reading about the current markets, and as usual I'm left shaking my head.  First I see that collateralized loan obligations (CLOs) are taking off.  CLOs are basically securities backed by bundles of loans to low-rated companies that the companies have given collateral for.  Effectively securities backed by "secured" junk bonds.  But this time it's different!  Unlike the pre-crash CLOs, these new CLOs have more financial support from the issuing banks and stricter collateral requirements.  Says who?  Says the folks selling them, that's who.  Which is exactly whose word we took before.  Think I'm being cynical?  Think again.  The new commercial mortgage-backed securities, which also supposedly have these new safeguards built in, are showing increasing defaults.  The only improvement over last time is that the ratings agencies don't seem to be going along.  Nevertheless, the usual suspects (such as Citigroup and Goldman Sachs) are cranking these messes out, often utilizing methods that leave you wondering just when you fell down that rabbit hole.  We're going to crash it all again folks.  It will be soon, and it will be worse.

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Wednesday, March 12, 2014

Financing Small Business

Went to a presentation recently where funding sources made presentations to small business owners on how to seek capital.  A couple of things struck me.  First, few if any of the owners had any knowledge of cross collateralization (where your collateral on one loan also becomes collateral on another loan with the same lender) and cash collateralization (where your bank accounts and receivables are collateral for a loan).  In the first instance, you can pay off the first loan and find your assets are still encumbered because they have been cross collateralized on another loan.  In the second case, your lender for all practical purposes owns your revenue stream.  One of the main sources of quick cash a small business has is factoring its accounts receivable, i.e. selling or borrowing against its outstanding accounts.  Both cross and cash collateralization, which are quite common in small business equipment loans and lines of credit, block a business's ability to factor its accounts.

Second, I noticed that most of the owners had been approached about SBA loans, but none had heard about what a nasty collection outfit the SBA is.  You know all those protections you think you have.  You don't have them against the SBA.  I have a client right now whose monthly Social Security check is garnished because she cosigned an SBA loan with her husband.  She didn't understand a bit of it at the time and understands no more of it now.  I could get her out of it with a bankruptcy, but she's been told that's immoral (Yeah, right, as opposed to having a 75-year-old stroke victim cosign a loan.  Some set of values we have these days.  But I digress.).

The moral of the story is, yes, there is money available for your business, but it will cost you, and if you don't read the fine print (or have somebody like me read it for you), it will cost you far more than you can handle.

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Thursday, January 16, 2014

Our Current Boom

So everything is going great guns with the economy, but there aren't any jobs, and no one is making more money.  So how does this shark keep swimming?  Simple.  Debt.  Those pursestrings the lenders tightened up in 2007 got relaxed in 2011 and have just kept loosening, with inevitable results.  Just check this article citing the latest CardHub Debt Studies.  Credit card debt went down $1 billion in 2009, up a modest $2.2 billion in 2010, and then up an average of $41.2 billion each of the last three years.  In other words, the current consumer boom is being fueled by a tsunami of debt, and the average schmuck is already up to his earlobes.  So much for the bankruptcy downturn.  We're just never going to learn.

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Wednesday, November 06, 2013

Blockbuster on the Rocks

Well, I suppose it was inevitable: Dish Networks has pulled the plug on Blockbuster.  Changing markets and business models left the movie rental stores in the dust.  This means a lot more dark space in a lot of strip malls.  Another chunk of the service sector gone, along with its jobs, such as they were.  I think I'll keep my Blockbuster card as a memento of a bygone era.  Still have my Hollywood Video card squirreled away somewhere.

Add to that the fact that oldest daughter just informed me the store she works in is closing.  Not only can we not manufacture anything anymore, we apparently can't even sell or rent anything.  I keep seeing reports that the economy is recovering, but that only seems to apply to the Over-a-Quarter-Mill-Per-Year crowd.

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Wednesday, August 21, 2013

New Life for Lehi?

The saga of the Lehi Roller Mills is in the process of concluding.  As I reported previously, the Mills filed Chapter 11.  It has turned into a planned liquidation, and Judge Mosier has approved the sale of all the assets to KEB Enterprises.  "KEB" stands for "Kenneth E. Brailsford," who founded and made a mint from several of the MLM companies that are Utah County's sole claim to having an economy.  Some of us also remember a quarter-century ago when the SEC nailed him on a penny stock scam.  But that was then, and now he's into philanthropy and civic projects.  He claims he's going to keep the mill open.  My response is, "Pull the other one."  Let's set up a betting pool on how fast the site turns into either Freeway View Condos at the Mill or Gardner Village South.

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Saturday, August 03, 2013

This Car Needs Polished, Let's Junk It

...or, Typical Austro-Chicago Logic.

This is cross-posted from a discussion at Credit Slips.

Omri Ben-Shahar of the University of Chicago Law School has fired the latest round in the US class wars in a paper alleging that clauses in consumer sales contracts mandating arbitration (usually in a distant jurisdiction) and barring class action suits are good for consumers because litigation costs are actually regressive taxes that are passed along to consumers whether the consumers reap any benefits or not.  Looks like more of the Austro-Chicago rubbish that got us into this mess.

1. A firm can't pass litigation costs through if its competitors don't have them.  It would put the firm at a competitive disadvantage.  Given that, how can litigation costs become a tax, as opposed to an expense incurred by firms that do shoddy work?  Are the shoddy firms to be shielded from these expenses to the detriment of not only consumers, but competitors?  Further, if it isn't just a firm but an industry that is engaged in bad practice, regulation is warranted, but the Austro-Chicagoans can't have that.  So they come up with the oh-so-logical proposal that shoddy firms be allowed to externalize their costs on consumers and competitors, which frankly is par for their course.
2. Markets aren't a unified mass, even for a particular product.  They are segmented, and you can't identify market forces and effects if you don't bother to properly map the market you're examining.  Ben-Shahar ignores this little nicety.  In other words, Ben-Shahar has created a model that doesn't reflect reality terribly well but does deliver the results he wants.  Quelle surprise.
3. Contrary to Ben-Shahar's version of reality, arbitration routinely costs more than litigation, especially if proceeding under panel rules and a choice of forum clause.  Couple such clauses with a loss of class action rights, and the average consumer has zero access to justice.  And if you couple that with nonregulation, shoddy operators have carte blanche.
4. And contrary to the slack Adam Levitin gives him, Ben-Shahar knows full well that this piece will be used as a pseudo-intellectual foundation for anti-consumer legislation similar to how Reinhart and Rogoff were used to justify austerity.

Ben-Shahar has identified, at most, minor problems that need minor corrections. In other words, the car needs polished. But since the car is counter to the Austro-Chicago faux pure market dogma, it must be junked.  The Austro-Chicagoans love to preach about "rights," but I'm compelled to quote "The Princess Bride": You keep using that word; I do not think it means what you think it means.  Were the Austro-Chicagoans to have their way, rights would be nothing more than what the holders can afford to enforce.  Rights would be something only the rich could afford. To paraphrase "Lord of the Rings": The way is shut.  It was made by 1%ers, and 1%ers keep it.  The way is shut.

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Friday, May 17, 2013

Glaedelig Syttende Mai!

Happy Norwegian Independence Day!