Tuesday, January 03, 2012

How Not To Stimulate The Economy

This is just wrong on so many levels.

And if it is allowed to stand on small business credit cards, how long until they try it with personal credit cards and lines of credit?

Los Angeles Times:

Bank of America severing some small-business credit lines

Bank of America is demanding that some small-business customers pay off their credit line balances all at once instead of making monthly payments.
By E. Scott Reckard, Los Angeles Times

January 3, 2012

Bank of America Corp., under pressure to raise capital and cut risks, is severing lines of credit to some small-business owners who have used them to stay afloat.

The Charlotte, N.C., bank is demanding that these customers pay off their credit line balances all at once instead of making monthly payments. If they can't pay in full, they are being offered new repayment plans for as long as five years, but with far higher interest rates than their original credit lines had.

Business owners complain that BofA's credit squeeze is abrupt and could strain their small companies and even put them out of business. The credit cutoff is coming at a time when the California economy can't seem to catch a break, and bucks what the financial industry says is a new trend of easing standards on business loans.

One such customer, Babak Zahabizadeh, was told in a letter that the $96,000 debt carried by his Burbank messenger service must be repaid Jan. 25. A loan officer offered multiple alternatives over the phone that Zahabizadeh called unaffordable, including paying off the debt at 12% interest over two years. That's about $4,500 a month, nearly 10 times his current interest-only payment.

Zahabizadeh, known as Bobby Zahabi to his customers, said he has cut the staff of his Messengers & Distribution Inc. to 80 from 200 to nurse his business through tough times.

"I was like, 'Dude, you're calling a guy who's barely surviving!' " he said. "My final word was that I can double my payment — but not triple or quadruple it. I told them if they apply too much pressure they're going to push me into bankruptcy."

The capped credit lines stem from a corporate overhaul launched by Brian Moynihan, who became Bank of America's chief executive in 2010. He promised to address losses caused by loose lending and rapid expansion by reining in risks and shedding investments deemed non-core.

BofA spokesman Jefferson George said a "very small percentage" of small-business customers have been affected by the changes. He would not provide exact numbers except to say it wasn't in the hundreds of thousands. Some of the affected businesses had been customers of other banks that Bank of America acquired, but most were BofA customers from the start, George said.

"These changes were explained in letters to customers, and they were necessary for Bank of America to continue prudent lending to viable businesses across the U.S.," he said.

The bank still has 3.5 million non-mortgage loans to small businesses on its books. The affected business owners were notified a year in advance that their credit lines were being called, George said, although Zahabi and several others said they had not received the early warnings.

The changes also include added annual reviews of borrowers and annual fees, and often reductions in the maximum amount of credit. George said the aim was to reduce Bank of America's risks and to bring the loan terms in line with more stringent standards imposed after the 2007 mortgage meltdown and 2008 credit crisis.

Scott Hauge, president of the advocacy group Small Business California, called the credit cuts "a tragedy" for longtime BofA clients left vulnerable by years of struggle in a sour economy.

"If small businesses are going to lead the way out of the economic doldrums we now face in this country, they must have access to capital, not only to hire more people but to protect the jobs they are currently providing," Hauge said.

Bank of America was a leader in the banking industry's abortive attempt to impose debit card fees. But it appears to be a laggard in tightening business lending standards. Most other banks, having tightened lending standards in the aftermath of the financial crisis, had eased credit last year as competition for small-business customers heats up, bank analysts say.

"Everyone … is targeting commercial and particularly small-business lending as the real focus area for growth," said Joe Morford, an analyst in San Francisco for RBC Capital Markets.

While Bank of America is advertising its own commitment to small businesses, it needs to send another message to its government supervisors because it has less of a capital cushion against losses than major rivals, said FBR Capital Markets bank analyst Paul Miller.

Restricting credit lines "is a way to show the regulators they are serious about addressing risks," Miller said. "Bank of America is under great pressure, especially with another round of [Federal Reserve] bank stress tests coming up, as the regulators say: 'We want you to tighten up.' "

The analysts said all banks monitor business customers and restrict credit on a case-by-case basis. But they said they were unaware of any other large bank systematically capping credit at this time.

Customers interviewed by The Times said they could understand how the turbulent economy might result in some restrictions. But they complained that the credit cutoffs threatened to undo businesses they shepherded through the downturn by slashing costs, hoping to expand when brighter days return.

Several small-business owners indicated that they had nearly used up all the available credit on their Bank of America lines. However, George said maxing out the lines wasn't a major factor in the bank's reevaluation of the credit terms.

Kathleen Caid's Antique Artistry Studio in Glendale sells elaborately beaded, Victorian-style shades that she makes for lamps, chandeliers and sconces. She said she had understood that her $85,000 credit line would remain in place "as long as I wasn't in default," and she hadn't missed any payments.

Caid and her husband, Tim Melchior, a video producer with a Burbank media company, insist they are not in serious financial trouble despite having laid off her eight full-time employees and downsized her business space by two-thirds during the recession.

Yet Bank of America says that her credit-line debt, totaling $80,000, is due in May.

"I wouldn't have run it up if I knew what was in store," she said, adding that she would be speaking to an attorney and other banks about her options.

9 comments:

Unknown said...

Hi midnight.
Saw it also this morning things are getting real bad at Bank of America it seems,.... lets get all we can out of the customer before going over the cliff?

midnight rider said...

I think they're already over the cliff and trying to grab any vine they can to break their fall. . .

Epaminondas said...

Any INSTITUTION on the too big to fail list should be DESTROYED and small entities PROMOTED in their place to soak up that demand.

NOT JUST BANKS

Any business TOO BIG TO FAIL,

HAS

FAILED

If a concern like GE COUNTS on no taxes and a $3.2 billion refund including all the support resources that go into ENSURING this occurs as a continuing way of doing business instead of R&D, THEY HAVE FAILED.

Break them all up.

Kredyty Hipoteczne said...

All of these stimulos packages just make whole economy worst then it was before. It just gives temporary boost that wears off within few months. It is a fake fix for long term problem.

Anonymous said...

all of your points are well and good but speaking as a small businessman who has had various lines of credit for my business I cant imagine running up the standing debt some of these people have done.

no way could I spleep well at night with that sizable ax hanging over my head.

and when ive used mine they were to fund short term goals which had a calculated expected payout at the end of a particular money making situation.

in other words, relatively short term

funded a specific project which at its conclusion was a known quantity with very little risk and would pay out not only enough for covering the draw on the line, but produce a profit.

nebulous use of a credit line for expenses just to survive is a really bad idea.

ive allways had success with the simple idea that the use of the credit should instead be restricted to funding a money maker. like a bridge to a profitable short term result.

funding expenses is a bridge to no where.

for example:

back in the 90's I would use my line of credit to go to the santa fe state police auction and buy cars which I knew I could clean up buff out and sell for triple my money within 2 months then I would pay off the line of credit and pocket my profit after expenses and salary.

in the present I use line of credit to purchase supplies for known jobs which have been sold and after the finish and final payment I pay off the credit line.

what I dont do is pay the insurance or the light bills and grow that mountain with no payout in sight.

Pastorius said...

Rumcrook,
That's some great, basic advice.

I took on a large amount of debt on a line of credit to float payroll. My payroll gambit did not pay off.

When it became clear to me the payroll problems were endemic and the situation was not going to get any better, I dissolved my partnership in the business and hightailed it out of there.

I am still carrying that debt four years later.

I have a feeling many people who are carrying credit line debt such as this woman and myself, are doing so because we began the recession believing our gambles were going to pay off as they always had previously, only to find ourselves in a situation with which we have no previous experience. That is, attempting to do business in a virtual depression.

Now, the reality is, I work for someone else, make far less money, and still carry my debt around like a ball and chain.

Your advice is the advice of someone who has continued to win during the depression. Good for you. I got hit by a confluence of circumstances right at the beginning of the current depression (summer/fall 2007) and my life has never been the same.

In retrospect, I think to myself, should I/could I have done differently. I answer that question differently almost every time I ask it of myself.

Anonymous said...

Pastorius youve gotten knocked down but not out.

every failure ive ever had is a learning experience that was important in going forward. I wouldnt trust some one who has never failed.

ive had a lot of successful ventures but ive had some stinkers too.

I have loved smoking cigars since the 80's hence my online name, rumcrooks were a favorite cheap cigar of mine, when the craze really got huge at the tail end of the 90's I wanted to have a small retail business selling cigars. it flopped because the bubble was about to burst, and I should have understood business mania bubbles I had studied them. so that loss was kinda of embarrasing.

well when I was flipping homes I used that lesson to my advantage and confidently bid on houses I wanted to renovate becuase the signs of disapation hadnt arrived. I moved into another business prior to the bust because I knew the crazy numbers in housing were unsustainable and everyone and thier dentist cousin thought they could renovate a home and flip it for a fast profit.

so I guess what im saying is dont be too hard on yourself and dont be gun shy about being in business again just be gun shy about using credit to pay the bills the next time.

Pastorius said...

Thanks for the encouragement. At this point, I don't have much maneuverability, so I won't be going back into business for myself any time soon.

But, being the kind of person I am, I can not imagine that I won't get back on the horse eventually.

Anonymous said...

not a problem. im not a rocket scientist or a savvy business guru, just another guy out there trying to survive. we all need a little encouragement sometimes.