Loan Scheme Delivers Blow to Small Businesses

Tisto Chapman, an owner of a Powerhouse Gym in Burbank, Calif., said that in August he paid a St. Louis broker thousands of dollars to help him obtain a bank loan to upgrade his facilities and refinance debt. It seemed like a no-lose proposition, in part because the broker, Richard Saddler, promised to refund him the $12,500 fee if the loan didn’t materialize, Mr. Chapman said. Mr. Chapman later learned that Mr. Saddler had been indicted on three counts of wire fraud. Mr. Saddler pleaded guilty in March and is scheduled to be sentenced July 1. He declined to comment for this article.

The scam that Mr. Chapman said he was victimized by is common, government officials said, adding they have been receiving more complaints about such crimes in recent years.

“Advance-fee loan schemes,” as the swindle is known, have been around for years. Self-described loan brokers demand upfront payments for loans that never materialize.

But the scam has intensified since the financial crisis, as banks tightened lending standards, making it more difficult for small businesses to obtain financing.

In 2013, there were a record 53,833 complaints about advance-fee loans and credit arrangers filed by entrepreneurs and consumers to the Federal Trade Commission, up from 43,070 in 2012 and 44,504 in 2011, according to the government agency.

Entrepreneurs tend to get duped by advance-fee scams because they are confident in their ideas and can overlook some of the red flags that should scare them off, according to consultants and white-collar-crime lawyers.

Some small-business owners are targeted via email, while others become victims when they look online for lenders after being turned down for conventional financing.

via Loan Scheme Delivers Blow to Small Businesses – WSJ Article by Sarah Needleman & Ruth Simon .

Testing the Mettle of Too-Big Banks

Goldman Sachs’s decision to sell its metal-warehouse business is a reminder to investors just how much sway regulators have over the biggest banks through their power to set capital requirements.

Investors in the biggest banks in the U.S. are no strangers to the power of capital regulation, of course. The annual “stress test” process has made it abundantly clear that regulators control not only how much capital can be returned to shareholders but whether the return takes the form of buybacks or dividends. At most, banks get to choose the timing of those returns.

But capital regulation does more than determine dividend and buyback levels. It also determines the basic cost of doing business for the biggest banks—and influences just what sort of business they will do.

Goldman, which picked up metal-warehouse operator Metro International Trade Services just four years ago, decided to sell the business after regulators in the U.S. began to mull a capital surcharge on the physical-commodities businesses of big banks. Capital charges also likely played a role in J.P. Morgan Chase’s move to sell its physical-commodities and warehousing business.

That is because rules directing banks to fund their physical commodities businesses with a greater level of capital raise the required return hurdle for those businesses. Given a sufficiently high capital charge, regulators can make any business unattractive. Just as Chief Justice John Marshall once said that the power to tax is the power to destroy, the power to apply capital surcharges is the power to trigger divestment.

This isn’t necessarily bad news for investors. Keep in mind that capital surcharges are meant to match up with the risk of the assets to which they apply. If a business is capital intensive, it is because regulators think it is particularly risky. To the extent that regulators get it right—far from a sure thing—they are doing investors a favor by revealing which areas might be too risky for the amount of revenue they generate.

If regulators get things wrong, though, investors can suffer. Risks can build undetected and banks can be pushed away from businesses with good risk-adjusted returns.

For investors, the lesson is relatively simple. Capital regulation now squeezes at both ends of the business of the biggest banks—from the generation of revenue to the return of capital. And the costs of being too big to fail will keep mounting.

via HEARD ON THE STREET: Testing the Mettle of Too-Big Banks – WSJ Article by John Carney

Big Banks Can Do More With Less Leverage

Race to the top, anyone? U.S. bank regulators on Tuesday shrugged off concerns about creating an uneven playing field and approved a new rule imposing tighter strictures on big firms’ use of borrowed money.

These will likely exceed what will take effect elsewhere, notably in Europe. But this doesn’t have to be a liability for U.S. banks. Higher levels of capital allow banks to better withstand shocks. So while leverage constraints may damp returns on equity, they reduce the risk borne by shareholders and creditors. That can actually be positive for both share and debt prices.

In Europe, by contrast, high levels of leverage are one reason investors continue to doubt bank strength.

True, safety has a cost. Regulators estimate the eight largest U.S. banks combined will require around $22 billion in additional capital to meet the new, 5% leverage threshold at the bank-holding-company level. At banking subsidiaries, subject to a 6% hurdle, big banks will need a further $38 billion.

The tab may be higher thanks to a proposal that would count off-balance-sheet credit derivatives in measuring bank assets. That could hit hard at J.P. Morgan Chase, JPM +0.14% the biggest large-bank holder of these instruments.

Regulators estimate this change would require an additional $46 billion, bringing the capital shortfall to $68 billion across the eight big firms. At the bank subsidiaries, it would require an additional $57 billion—bringing the total to around $95 billion.

Meanwhile, commendably, regulators resisted calls to exempt cash held at central banks from the leverage-ratio calculation. While this argument had some merit, a chief virtue of a leverage rule is that it doesn’t depend on judgments about the risks of different assets. Even a well-intentioned exemption could have been a first step on a very slippery slope.

Come the next period of financial turmoil, investors aren’t likely to cry over the fact that U.S. banks have stronger balance sheets than competitors around the globe.

via HEARD ON THE STREET: Big Banks Can Do More With Less Leverage – Article by John Carney

Factory-Job Rebound Produces Winners, Losers

Manufacturing in Mobile R1
MOBILE, Ala.—The U.S. has added about 650,000 factory jobs since their numbers rebounded after the recession, putting manufacturing workers at 12.1 million and reversing a long decline in such jobs. But uneven growth has created regional disparities in the nation’s overall economic recovery.

Mobile County is among the winners.

Shipbuilder Austal Ltd.’s facility here is busy seven days a week as workers piece together enormous aluminum sheets in a space the size of 13 football fields. It has added thousands of jobs since 2008 and plans more, thanks to huge U.S. Navy contracts.

Airbus Group and BAE Systems PLC, too, are adding factory jobs here. Mobile County created more manufacturing jobs than all but 15 U.S. counties after September 2009, and such jobs were up 31% in the county.
U.S. factory-job gains—driven by a range of factors from cheaper domestic energy to the auto-industry recovery—have concentrated in pockets since the recession, particularly in the Southeast and Midwest, a Wall Street Journal analysis of Labor Department data shows. Gains often have clustered in places like Mobile where taxes are low and unions are relatively weak.

“There is a national manufacturing renaissance that is modest,” he says. “But there is extreme variation across regions and metropolitan areas.”

Of the 2,737 counties the Journal analyzed, 1,695—about 62%—reported gaining at least one net manufacturing job from 2009 to 2013. Job numbers fell in 1,029 counties. The analysis excluded about 400 counties for which comparable data weren’t available.

Some Midwestern counties are especially booming from the vehicle-market recovery, for example, as are some in the South. Recreational-vehicle makers in Elkhart County, Ind., have hired more as sales rebound. Auto plants have added jobs since 2009 in Macomb County, Mich., Rutherford County, Tenn., Troup County, Ga., and elsewhere.

Demand for civilian aircraft has created jobs in places such as Charleston County, S.C, where Boeing Co. BA +0.70% began 787 Dreamliner production in 2011. Biomedical manufacturing has added jobs in Orange County, Calif.

Mobile’s contrast in fortunes with Syracuse since the recession illustrates some common patterns: Often, companies have added jobs in states with “right-to-work” laws—which allow workers in unionized workplaces to opt out of paying union dues—and where taxes are relatively low, in counties where state and local governments provide large incentives and strong vocational education, and in places with access to ports or other transport hubs.

Mobile County, population 414,000, lies along Alabama’s Mobile Bay. It lost jobs in industries like shipbuilding and petrochemicals as the economy slowed. In 2010, things began improving. Of the counties the Journal analyzed, Mobile County ranked 16th in net manufacturing-job creation since 2009. It added 4,421 such jobs, for a total of 18,810 in September 2013.

Alabama’s average state and local tax per capita for 2011—the most recent year available—was 8.3% of income, compared with a national average of 9.8%, says the Tax Foundation, a nonpartisan think tank. And 10.7% of Alabama’s workers were union members in 2013, federal data show, below the 11.3% national average and much lower than in Northern states such as New York, Illinois and Ohio.

A key element of Austal’s pitch to the Navy was training. Alabama’s government promised to sponsor training for Austal workers because most job seekers didn’t have shipbuilding experience, says Mike Bell, vice president of operations. Alabama’s workforce-training agency built a $12 million training center next door.

via Factory-Job Rebound Produces Winners, Losers – WSJ Article by Cameron MWhirter, James R Hagerty & Tom McGinty.

Factory-Job Rebound Produces Winners, Losers – WSJ – PDF

Paul Ryan: Let Big Banks Fail

Almost six years after the financial panic, Rep. Paul Ryan (R., Wisc.) is calling for an end to the federal bailout regime codified in the Dodd-Frank law of 2010. Mr. Ryan advocates instead an “enhanced bankruptcy alternative” for giant banks that run into trouble.

A Journal editorial explains the House Budget Committee Chairman’s new plan to balance the budget over a decade “largely through spending restraint and entitlement reform. He would not raise taxes, and in the best news he includes an economic growth dividend from reducing the deficit.” And diving into the plan’s details reveals even more good news for taxpayers.

The Ryan budget takes aim at current law, under which the Financial Stability Oversight Council chaired by the Treasury secretary can save a stumbling giant from bankruptcy by placing it under the care of the FDIC’s so-called “orderly liquidation authority.” In this scenario the FDIC maintains discretion to give bank creditors a better deal than they would get from a bankruptcy court.

Addressing this FDIC authority, the Ryan budget states: “This resolution calls for ending this regime, now enshrined into law, which paves the way for future bailouts. House Republicans put forth an enhanced bankruptcy alternative that—instead of rewarding corporate failure with taxpayer dollars—would place the responsibility for large, failing firms in the hands of the shareholders who own them, the managers who run them, and the creditors who finance them.”

Assuming the plan passes the House, it will signal that Republicans remain unwilling to accept the major post-crisis reforms enacted by the Democratic Congress of 2010. And should Republicans win a Senate majority in November, with the possibility of Sen. Richard Shelby chairing the banking committee, the expansive taxpayer backstop enjoyed by giant financial firms could be in jeopardy.

via Ryan: Let Big Banks Fail – Article by James Freeman

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