Small Business Lending Fund Bill Passes Senate – but will it Work?

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The U.S. Senate passed H.R. 5927, a bill to create a Small Business Lending Fund, by a 61-38 vote.  The House of Representatives, which previously passed a similar bill, is expected to pass the Senate’s version next week.   A key component of the bill is to create a $30 billion fund that the government would invest in independent community banks to encourage lending to small firms.  The bill also contains a number of additional tax incentives to encourage capital formation, including elimination of capital gains taxes on the sale of qualified small business stock that is acquired after 3/15/10 and before 1/1/12.

Community banks are commonly defined as banks with less than $1 billion of assets, representing over 91% of all FDIC-insured institutions at the end of 2009. Community banks are generally believed to have closer relationships with small business owners, as a group they have had lower charge off rates than larger institutions (not having gotten as exposed to mortgage backed securities), and they have cut back less on lending than their larger competitors during the recession of 2007-2009.    To the economic strategists of the Obama administration, community banks are the good guys, and if injecting $30 billion of capital into the community banks would help pull the U.S. out of the current economic malaise, it would be doubly sweet.

I hope the Small Business Lending Fund works the way it is supposed to, but I am skeptical.  If Congress passed a bill to invest in independent bookstores, to sell greater numbers of books – despite competition from Amazon, Barnes & Noble superstores, and eBooks – with the hope that increased independent bookstore sales could stimulate the U.S. economy, it would be plain to all that it was bad policy, because the long term decline of independent bookstores is so widely understood.  Community banks are in long term competitive decline, suffering from lack of scale economies, higher cost of funds, and general lack of competitiveness.   While Citibank was “too big to fail”, community banks aren’t, and they recently have been failing in record numbers, even after a decade of industry consolidation.   The risk to the Small Business Lending Fund is that some community banks will choose not to participate in the program, while others may accept the government investment, and if business conditions stay bad, may hold onto the funds to strengthen their own balance sheets, rather than increase lending to small businesses.  Further, there’s nothing in the bill that improves credit worthiness of small businesses, nor the desire of small businesses to borrow, at a time when consumer spending and business conditions are so weak.

I also checked on this question with economist John Dunham, partner at John Dunham & Associates, who responded that “the recent recession came about as a result of too much borrowing, not to little.  While the TARP program was probably a good idea at the time because it provided confidence and stability to the banking system.  It was not designed as a way to increase the number of business loans nor did it. ”

Mr. Dunham went on to add:  “Businesses, like consumers are realizing that there is a cost to debt and have been deleveraging and looking for alternative means to fund expansion.  This is why loan traffic is down.  The $30 billion fund to community banks will not encourage businesses to demand more loans, and will do little to encourage banks to seek out risky projects to loan money to.  In fact, I don’t see any difference between this pot of money and the existing Small Business Administration Loan Guarantee Programs.  Some of the smaller tax incentives will increase small business profitability at the margin so could potentially encourage additional investment and hiring.  However, I personally doubt that small businesses will start borrowing until both the business and regulatory climates improve.”

Taverna Kyclades is Doing Everything Right in Astoria

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A recent visit to Taverna Kyclades, located at 33-07 Ditmars Boulevard in Astoria, Queens left me thinking that they may be the most profitable restaurant of its size I’ve ever seen.   From a business perspective, they seem to be doing everything right:

  • No Empty Tables – The food is delicious, the seafood is as fresh as can be, and the prices are very fair, which draws new and repeat customers from Queens, Manhattan and beyond.    Their “no reservations” policy lets  the hostess efficiently seat customers on a first come, first served basis, with no empty tables.  If you arrive after 5:15pm on most nights, plan to wait outside on the sidewalk, or stroll up and down Ditmars Boulevard, while you wait to get a call on your cell phone.
  • Doing More With Less – I would estimate that the dining area represents 75% of the restaurant’s square footage – maybe more considering they have summer seating in an enclosed area on part of the sidewalk. The kitchen turns out an amazing amount of food considering its size.  At 6:30pm on a weeknight, we had to wait to get glasses of water until the dishwasher was emptied, all of the clean glasses were already being used by other diners.  Taverna Kyclades bring in seafood fresh every day from the fish market, and they are located next to the Astoria “Farmer’s Market”, so they are probably working on no more than one day of inventory.  The restaurant is open 7 days per week, and an average of 11 hours per day.
  • Accurate Pricing – When I saw that the spinach pie was priced at $5.80, it showed me that someone at Taverna Kyclades really understands their costs, and is trying their best to make the product a great value for their customers.  Red Snapper, Sea Bass and Striped Bass are “Market Pricing,” which means the restaurant can offer them, and still not lose money when supplies are scarce.   Lunch specials are available, which guarantees that customers will start lining up pretty much at the noon opening.

Check out Taverna Kyclades next time you are near Astoria, you’ll love it!

Will Italian AP Exam be Reinstated?

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The “Wall Street Journal” reported that Margaret Cuomo, sister of NY Attorney General Andrew Cuomo, is leading efforts to get the College Board to reinstate the Italian Advanced Placement, or AP exam, which it announced (in January, 2009) would be cut, “due to low numbers and financial losses.”

The College Board, or more formally the College Entrance Examination Board, is a not-for-profit organization representing 5,700 colleges whose mission statement reads as follow:  “To connect students to college success and opportunity. We are a not-for-profit membership organization committed to excellence and equity in education.”

According to a College Board spokeswoman, the Italian AP exam incurred cumulative losses of $1.5 million for the four years it was offered, the “WSJ” reported.  The number of students who took the exam was 1,600 in 2006, the first year it was offered, growing to 2,300 in its final year, but still short of the College Board’s target of 5,000 student test takers per year.  By way of comparison, in addition to the widely-taken Standard Achievement Test, or SAT, the College Board offers advanced placement tests.  Spanish is the most widely taken language AP test, with over 110,000 test takers in 2009.

The College Board charges students $86 to take an AP exam, so doing the math, and assuming that there were a total of 8,000 Italian AP exams administered over the four year period, it would seem that the College Board has pegged the four-year cost for the Italian AP program at approximately $2.2 million, or around $275 per exam administered.

It is hard not to be cynical about the decision to drop the Italian AP exam given the organization’s ample profits and investments.  The College Board’s 990 statement, which is available at Guidestar.org shows that for the fiscal year ended 6/30/2008, the non-profit College Board had revenues of $621 million, which exceeded expenses of $582 million by more than $39 million.

If the College Board had somehow come up with a way to cut back just 2% on the $17 million it spent for travel and the $10.7 million for “conferences, conventions and meetings” it could have used those savings to fund the loss incurred by the Italian AP exam.

Or looked at another way, the annual loss on the Italian AP exam was less than 1/10 of 1% of The College Board’s combined cash on hand of nearly $58 million, and investments in securities of $317 million as of 6/30/2008.  Why exactly does a not-for-profit need to have $317 million of investment in securities and how is the College Board using those funds to advance its mission?

Maria Costa, an Italian teacher at Fiorello H. LaGuardia High School who had 44 students take the Italian AP exam last year called the situation a “bad soap opera,” the “WSJ” reported.  “In the end, it’s the kids who pay the price,” said Ms. Costa.

Lehman Brothers Examiner’s Report Reveals Inaccurate Disclosure

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The Lehman Brothers Bankruptcy Examiner’s report is out, and anyone interested in knowing more about the reasons behind the largest bankruptcy in U.S. history should at least take the time to read the Executive Summary.  Much of the initial press coverage has focused on Lehman’s use of “Repo 105” transactions to reduce reported net leverage,  for example, from 13.9 to 12.1 for the end of the second quarter of 2008.   An even bigger gap between reality and what was reported to the public is noted just a page or two later in the Examiner’s Report:  “By Sept 12 [2008], two days after [Lehman] publicly reported a $41 billion liquidity pool, the pool actually contained less than $2 billion of readily monetizable assets.”  By understating its leverage, and overstating its liquidity, Lehman Brothers misled the rating agencies, government officials and the investing public.  The Examiner’s report is shining a much needed spotlight on what happened, and why, and may result informer Lehman officers being held accountable for their roles.

“The Firms that Should be Borrowing Aren’t There”

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A National Federation of Independent Business November ’09 survey indicated that while one-third of respondents worry about weak sales, only 4 percent of small-business owners viewed financing as their top concern, and only 10 percent reported problems getting a loan.   “It has been 35 years since businesses were this reluctant to boost inventories or consider capital expenditures,” stated William Dunkelberg, the NFIB’s chief economist; “the firms that should be borrowing aren’t there.”  In a similar vein, Camden Fine, the CEO of the Independent Community Bankers of America told the “Washington Post” in December 2009 that community banks have got “plenty of money to lend,” and the problem was a lack of demand from business.

According to the Federal Deposit Insurance Corp., the volume of small business loans on banks’ balance sheets at the end of the second quarter of 2009 was $761 billion, down 2 percent from a year earlier.  While weakened and cautious banks are getting blamed by many journalists and politicians for cutting off credit to small businesses and delaying the nation’s economic recovery, the NFIB survey results suggest that cautious small business owners are also a major factor.