Warehouse Fire

And as if CIT's clubbing of its bondholders weren't bad enough, here comes news that Colonial Bank is cooked.  A Federal court has frozen its assets.

Colonial Bank is a major source of warehouse lines of credit, which basically means that it's a place mortgage banks go for revolving credit to originate loans.  The number of sources for warehouse lines has diminished drastically in the last two years, and the loss of Colonial puts a big hole in a shrunken market.  Even before this, it looked like there would be a 20% shortfall of warehouse lines relative to mortgage demand.  Now?  It could easily shoot through 25%.  The good news is that, as mortgage rates go back up, demand will go down, so there will be a new equilibrium.  It won't provide much in the way of "green shoots" for our "recovery", though.

What Small Business Financing?

Any small business owner can tell you that financing is tight.  A lot of lenders have disappeared, and the ones that are still around have locked the vault.  If what's going on with CIT Group is any indication, in spite of all the recent smiley faces, things aren't going to improve soon.

CIT Group provides a broad range of financing for businesses.  In a very real sense, the retail sector would cave in without CIT, because it provides financing for a substantial chunk of the vendors for the major retailers.  And we know what the economy would loook like if retail went any further south.

By Spring, CIT was one of the few left standing in this area.  Then it started to sink too, and it seemed headed for Chapter 11.  At the last minute, its bondholders agreed to bail it out.  Not much of a choice on their part, really; they could either fork over more or lose what they had.  But now the bondholders are being asked to give up more.  CIT has a tender offer on the table for about $1 billion of bonds maturing Monday.  The tender expires tonight, so we're sitting around waiting to see what happens.  CIT is offering the bondholders a 12.5% haircut, down from the 20% haircut initially offered but still significant.

How does this affect you?  Bondholders provide the capital that makes loans possible.  If banks are requiring both bailouts and haircuts of their capital sources, how many of those capital sources are going to decide it isn't worth it?  And what do you think that will do to loan availability?

Bankuptcy is an option, but...

Bankruptcy is hot in Utah right now.  Filings for the first half of 2009 were up 62% over the first half of 2008.  Given the way the economy is, this is no great shock, but what's a little more surprising is that Utah rates so high in its filing rates (e.g. 9th in Chapter 13 filings).  A pair of professors at BYU, Lars Lefgren and Frank McIntyre, seem to have figured out why: Filing rates are higher in states that have less protection for debtors, especially protection from wage garnishment.  Makes sense.  If creditors are grabbing your paycheck, you need to do something about it, and if bankruptcy is all you can do about it, that's what you do.

That doesn't mean a head-long rush to the bankruptcy court is a good idea, though.  I've seen too many cases where the debtor waited until the roof was falling in before seeking counsel and then insisted on the attorney filing the petition immediately if not sooner.  Such cases seldom end well.  For a lot of reasons.

First, if you're a consumer debtor, you can't just jump into bankruptcy.  You have to take a debt counseling class to get through the door.  Then there's also a detailed analysis of your income, expenses, assets, liabilities, and such.  These things simply take time.  If you're a business debtor, you don't have to take the class, but believe me that the extra analysis of your business affairs required more than makes up for any time gained there.

So what can happen if you rush things?  Well, if there were 100 things that could go wrong, you could think of maybe 50 of them.  And there are a lot more than 100 things that can go wrong.  And you don't need anywhere near 50 to create a disaster.  Most problems consist of numbers that don't add up and need corrected, resulting in increased expense and delay, and coming under the trustee's whithering glare that can burn a hole in battleship plate.  Sometimes the consequences get more exotic and severe.  For example, in the Mount Holly Club bankruptcy, a major creditor is moving to dismiss because it alleges the company didn't get proper, member approval to file.  Oops, did someone miss a step?  We'll see.

Just remember, in bankruptcy as in business as in life in general: Proper Planning Prevents Poor Performance.

With Friends Like This

The Republican Party is ostensibly the party of business, and it certainly has burnished that image in Utah.  Which makes you wonder just what Rep. Carl Wimmer is trying to prove with his campaign against the federal health care initiatives.

In case you hadn't noticed, if you're a small business, health costs are a big burden.  If you provide health insurance, you already know what I mean.  But the burden is there even if you don't.  First, if you don't provide health insurance, you're competing for talent with those that do, and guess who wins.  Second, if you aren't providing health insurance, chances are your employees don't have any, which makes it more likely they'll get sick and either miss work altogether or (worse) show up to work sick.  Third, lack of health insurance imposes a hidden tax on all of us that I call The Bankruptcy Tax.  In spite of the current downturn, the single biggest cause of personal bankruptcy remains medical bills (And a significant cause of several, recent corporate bankruptcies has been the increasing burden of medical costs on pension plans.).  Have you ever had to write off bills because the customers filed bankruptcy?  Chances are it was medical bills that drove them there.

So before you start screaming about "socialized medicine" and "federal interference", take a look at the costs the current system is imposing on you.  They're big.

Which leads me back to wondering just what Wimmer is trying to prove.  Maybe he's trying to distract attention from his "special relationship" with Rick Koerber.

Is This Any Way to Run an Education System?

By any, objective measure, Utah has its peculiarities.  Perhaps none are so glaring as its treatment of schools, in spite of a lot of lip service being paid to kids and their education.  Among the many oddities, I shall point out these: 1) Although we have burgeoning subdivisions full of burgeoning families, schools have no authority to ensure that developers set aside land for schools; 2) as the Canyons-Jordan debacle shows, sections of school districts may secede without any say from the rest of the district (or other districts that end up having to pay equalization money); and 3) you can just about open up a school out of the trunk of your car.

Witness the Bob Jones tandem train wreck, the John Locke Academy and the School for Autistic Healing.  A real estate developer, Jones was flying high until the market turned.  He used his cash flow to finance the schools, and by most reports, they were good facilities.  But then the market did turn, and the money ran out, and the schools crashed and burned.  Parents were left scrambling for alternate schools, especially tough for special needs kids, and often after having paid tuition up front for educations that now would never happen.

I can't say Jones is blameless in this.  He looks like yet another Utah glad-hander who stretched everything well beyond the breaking point.  But I have to ask, "Where's the bonding?  Where's the back-up plan?"  The quick and dirty answer is that they don't exist because there is nothing in Utah law requiring them.  Our Glorious Legislature is very keen on making it easy to provide "alternatives" to public schools, but it doesn't want anyone to be responsible when those "alternatives" go belly-up.  Anyone, that is, except the public schools, which must now scramble to find places for all these kids.