Credit Crunch Hitting Small Businesses Hard

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Only half of small businesses that tried to borrow last year got all or most of what they needed, while in the mid-2000’s 80% got the loans they needed, according to the National Federation of Independent Businesses.   As reported  by Emily Maltby in the 6/21/2010 “Wall Street Journal,” possible explanations range from over-zealous bank examiners to small business owners turning more cautious in the face of a weak economy.  In mid-June, the House passed a $30 billion initiative for community banks to borrow from the government’s TARP fund at low rates, which may help stimulate small business lending, if and when the Senate passes the bill.

Even without passage of the initiative, “community banks are still lending,” notes Wharton lecturer and small business expert Robert Chalfin.  Community bank loans to small businesses are only down slightly in 2009 to about $680 billion outstanding, from about $700 billion in 2007, according to the Bureau of Labor Statistics and the American Bankers Association.

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.

Why Businesses Go Bankrupt: Movie Gallery – The Sequel

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Movie Gallery filed for bankruptcy on February 2, 2010, announcing plans to close 760 stores. The company had previously filed for bankruptcy in October 2007, emerging from Chapter 11 in May 2008, with private equity firms Sopris Capital Advisors and Aspen Advisors as its primary owners. Movie Gallery’s website is asking consumers with rented movies in their possession from stores that have closed to return them “in a reasonable time frame” to one of the 1,906  stores that will remain open.

Lessons Learned:  Movie Gallery’s first bankruptcy was attributable to the unmanageable debt they took on in their acquisition of competitor Hollywood Video for $1 billion in 2005. The second Movie Gallery bankruptcy is due to bad fundamentals for bricks and mortar movie rental locations – even worse than anticipated by the two private equity firms who took it out of its first bankruptcy.  (Retail movie rental is turning out to be such a weak business that market leader Blockbuster is once again at risk of bankruptcy. ) The private equity firms would have done better to put their money in shares of Netflix, which has increased from $39/share in May, 2008 to a current price of nearly $70/share.

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.