Category Archives: CRE


Deutsche Bank Pleads Guilty to LIBOR Manipulation

By Charles H. Green

Ending a seven-year investigation of at least one bank, Deutsche Bank pleaded guilty to criminal charges of purposely manipulating the London interbank offering rate (LIBOR) in collusion with several other banks, and has agreed to pay an eye-popping $2.5 billion fine. In addition to the cash penalty, the bank accepted the conviction on criminal charges and discharged several employees. Barclays and USB have already settled cases against them, while prosecutors are still in discussions with other banks being scrutinized.

By arbitrarily manipulating interest rates these banks harmed millions of transactions Deutsche Bankparticipants globally, in that the LIBOR rate underpins trillions of dollars in mortgages, student loans and other commercial debt.

As reported by the New York Times, Leslie R Caldwell, head of the Justice Department’s criminal division, said “Today’s resolution of the Libor investigation with Deutsche Bank is in some respects the most significant one yet,” The Justice Department coordinated the investigation along with authorities in Washington, London and New York.

The case spotlighted the collusive elements of Wall Street trading desks, where rival banks have occasionally joined forces to manipulate financial benchmarks. It also foreshadows looming actions against banks suspected of teaming up to manipulate the price of foreign currencies, people briefed on the matter said, with the Justice Department planning to announce guilty pleas from at least four banks — Barclays, JPMorgan Chase, Citigroup and the Royal Bank of Scotland — by next month.

“Financial markets function properly only if customers and competing banks have confidence that they are untainted by fraud and collusion,” said William J. Baer, the head of the Justice Department’s antitrust unit, adding that “the unprecedented size of the penalty” demonstrates just “how far from that bedrock principle Deutsche Bank and its traders strayed.”

The investigation into whether the LIBOR was rigged started in 2008 with a single investigator at the Commodity Futures Trading Commission (CFTC), and later spread to criminal and regulatory agencies around the globe. Deutsche Bank’s settlement is jointly with the Justice Department’s criminal and antitrust divisions, New York Financial Supervisor, CFTC and the Financial Conduct Authority of Britain.

As part of the deals, the bank will install an independent monitor, the first such requirement in a Libor case. More broadly, the authorities ordered the bank to dismiss seven managers suspected of involvement in the wrongdoing, all but one of whom are in London. They were among 29 employees suspected of playing a role, most of whom have already left the bank.

“We deeply regret this matter but are pleased to have resolved it,” said Jürgen Fitschen and Anshu Jain, the co-chief executives of Deutsche Bank. “The bank accepts the findings of the regulators.” The bank had hoped to pay less than $2 billion, and while the deal will provide some closure to this investigation, they will not end the bank’s legal problems. Deutsche Bank is also ensnared in the foreign exchange investigation. And it is suspected of violating United States sanctions against countries like Iran.

The size of the fine and other penalties reflected the breadth of wrongdoing that authorities uncovered, while regulators denounced the bank’s lax oversight of traders and failure to respond to warning signs of misconduct. In addition, Deutsche Bank intentionally dragged its feet in responding to demands for information for more than two years and accidentally destroying some evidence.

The manipulation was conducted between 2005 and 2011 and involved employees in London, Frankfurt, New York and Tokyo. “Markets do not just manipulate themselves,” said New York’s state financial regulator Benjamin Lawsky. “It takes deliberate wrongdoing by individuals.”

Manipulation of LIBOR, an average of how much banks say they would pay to borrow from one another, struck a nerve with government authorities. As a benchmark for trillions of dollars in credit-card loans and other financial instruments, LIBOR is a cornerstone of the financial marketplace. Read more at

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Strong Dollar Negates the Benefits of Cheap Oil

by Ravinder Kapur

Two significant developments in the world economy in 2014, the fall in oil prices and the rise in the dollar, were expected to greatly influence consumer spending and corporate performance in the current year. As reported recently by the New York Times, lower oil prices, which were expected to boost the economy by lowering gas costs and thereby increasing disposable income in the hands of consumers, have not yielded anticipated results as yet.

However, the strengthening of the dollar has negatively impacted the financial Dripperformance of many exporters and resulted in several major corporations announcing a fall in profits from overseas operations. Hence, while the gains expected from lower gas prices have not materialized, the negative impact of a robust dollar is already apparent.

Consumer spending, excluding gas station sales, in March was up 4% from a year earlier. While this may seem to be a direct result of the higher disposable income due to depressed oil prices, a comparison with increases in consumer spending in the year ended December 2014 at 5.5% and 4.7% for the year ended July 2014, the month when oil prices started declining, indicates that consumer spending is yet to reflect the impact of lower gas prices.

In fact consumers seem to have diverted their surplus due to lower gas prices into savings which have increased from 4.7% of income in the July – December, 2014 period to 5.7% in January and February. While this is beneficial in the long term, the immediate result is reduced spending which is depriving the economy of the boost that it could have received.

Companies with extensive overseas operations and export earnings have borne the brunt of the negative impact caused by the rising dollar. Proctor & Gamble, 3M and General Electric recently announced that their earnings have been significantly hit due to the dollar’s rise. The first quarter’s profits of publicly traded companies are expected to decline by 3.3% over the last year, the greatest fall since the global financial crisis. The rising dollar could also have other negative consequences including a reduction in exports, increased imports and a consequent drop in manufacturing and jobs. Exports are already down 1.4% in the months of January and February as against the same period last year.

While an increase in consumer spending as a result of lower oil prices and the consequent increase in purchasing power may yet come about, reduced company profits due to a strong dollar are already a reality. It remains to be seen whether the impetus the economy receives from the anticipated jump in consumer spending can overcome the negative impact of the rise in the dollar rate.

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Paulson On China’s Financial Reckoning: “Not If, But When”

By Charles H. Green

Former U.S. Treasury Secretary Henry Paulson offers some analysis about America’s superpower rival China, in his forthcoming book “Dealing With China: An Insider Unmasks the New Economic Superpower.” Paulson is no stranger to the subject, having served as CEO of Goldman Sachs, one of the first American companies to seek ties with China more than 20 years ago.

The book was reviewed in NYTimes’ DealBook recently, and they pointed out the crux of Henry PaulsonPaulson’s analysis on page 340: “Frankly, it’s not a question of if, but when, China’s financial system,” he writes, “will face a reckoning and have to contend with a wave of credit losses and debt restructurings.” Paulson’s frank assessment comes from a seasoned executive that has long been a bull on China and has deep friendships with its senior leaders, who could frown upon his straightforward comments.

Obviously, Paulson knows something about financial crises, having been at the helm of the U.S. economy during the 2008 financial collapse, the worst financial crisis since the Great Depression. He also knows plenty about China, its politics and many of the players behind it, more than most Westerners in fact, from his time at Goldman Sachs.

What does this mean for commercial lenders?

A Chinese financial crisis, even a relatively small one, would be contagious, given the rise of China’s global connectivity on all continents. The effects might be especially felt in the United States, which provides a large market for their manufactured goods, host their tourists and tacitly counts on them to hold the second largest cache of U.S. Treasury debt of any foreign government.

Fears of a slowdown in China in recent months have led to jitters about the trajectory of the American economy, as GNP has slowed there from 12% annually to about 7.5% in fiscal year 2014.

Paulson stresses that a crisis is not inevitable, and that he believes one can be averted if officials make the right policy decisions. But his anxieties about China have an unnerving similarity to the financial crisis in the United States, and his warnings demand attention.

He worries that in China “the trigger would be a collapse in the real estate market,” and told the NYTimes that China is experiencing a real estate bubble. He noted that debt as a percentage of gross domestic product in China rose to 204 percent in June 2014 from 130 percent in 2008.

“Slowing economic growth and rapidly rising debt levels are rarely a happy combination, and China’s borrowing spree seems certain to lead to trouble,” he wrote.


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How Relevant is Data in Small Business Lending?

By Amaresh Gautam

Big data and data analytics are terms that are used often in the news these days and Harvard and MIT are actually offering short term programs on them. Leading consulting firms like McKinsey are rapidly incorporating data analytics methodologies into their way of doing things, while yuppies are changing their career paths so they can ride on the gravy train of big data.Moving target

As defined by the Financial Times, ‘big data’ is the term used to describe the huge volumes of data generated by traditional business activities and from new sources such as social media. And not surprisingly, the question confronting many sectors of commercial lending today is whether insights can be derived that is pertinent and useful about small business lending from various sources of metadata.

In theory, the quick answer is “yes.”  There is a lot of insight that can be derived from data about small and medium enterprise (SME) lending. Lenders can use technology to assess loan risk, and a more robust assessment of risk will enable them to give more capital to small businesses, thus improving the access to working capital for SMEs. Different sources of data can be used for such analysis, for example the hard data of transaction lending and the qualitative data of relationship lending. Data can be also be used to derive macro level trends and comparisons in SME lending across states, countries and continents.

However to reach a level where such insights from data can be derived, both the quality and quantity of data needs to be improved. According to an OECD report, “Financing SMEs and Entreprenuers 2015: An OECD Scorecard,” there is a lack of harmonization in the definition of an SME. They conclude that improvement would be realized by the adoption of standardized SME tables for collection of data, more transparency in data collection processes, and frequent publication of results of data collection on non-performing SME loans.

The report also encourages the governent to increase their data collection processes.With a little help from government, data analytics can have a big positive impact on small business lending in the near future.

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U.S. Lags in Economic Development Comparison

Part 2 in Series

By Ravinder Kapur

The World Bank’s study, Doing Business in 2015, is a survey that ranked the United States poorly on three criteria essential for small businesses, with a position of 41 (last year 43) out of 189 countries for dealing with construction permits, 61 (58) for getting electricity and 29 (30) for registering property. The bank’s historical data demonstrates that an economy can maintain a high level of performance and growth if the government can put into place rules that facilitate the conduct of business without hindering the private sector.

The survey results indicate that the World Bank considers the framework for doing Econonoc Developmentbusiness, insofar as the three basic requirements being analyzed in this article are considered, sorely lacking in the U.S.

Commenting on the best approach to promoting the private sector the survey says, “Removing administrative barriers and strengthening laws that promote entrepreneurship and creativity-both of which are within the power of governments to do-can set an economy on the path to greater prosperity and development. There is compelling evidence that excessively burdensome regulations can lead to large informal and less-productive sectors, less entrepreneurship and lower rates of employment and growth.”

A comparison of dealing with construction permits between countries has been done by tracking the procedure, time and cost to complete all formalities to build a warehouse including obtaining necessary licenses and permits, completing required notifications and inspections and obtaining utility connections. The countries which do best in this criteria with relation to others are Hong Kong (only 5 procedures to be followed), Singapore (it takes only 26 days to complete the procedural requirements) and Qatar (no fee is required to be paid to the government).

The comparative data for the U.S. indicates a slower pace followed by officialdom (78.6 days) because they have more procedures to follow (15.8 procedures). In addition, in the U.S. there is a cost of 1% of the warehouse value to be paid for various fees and permissions.

Getting electricity in the U.S. entails completing 4.8 procedures and takes all of 89.6 days. The benchmark for number of procedures is set by Germany and South Korea where there are only 3 procedures to be followed and South Korea also tops the list for number of days required at 18.

Property registration criteria measures the procedures, time and cost required to be incurred for this critical factor in conducting a business. The legal ownership of property provides an incentive to the owner to make further investment in the form of buildings or warehouses. Additionally, being the legal owner of a property allows the owner to raise finances. While the United States has improved its ranking by one notch to 29 this year, an analysis of the sub-criteria show that 4.4 procedures are required to be completed and this takes an average of 15.2 days while costing 2.4% of the property value.

The countries which have most successfully addressed this essential bureaucratic function are Georgia, Norway, Portugal and Sweden (only a single procedure is required to transfer property), Georgia, New Zealand, Portugal (only1 day is required) and Saudi Arabia (no cost to be incurred).

The World Bank’s data, which considers only inputs from New York and Los Angeles in the case of the U.S., is unequivocal in its view that certain areas which are vital to promote entrepreneurship in the country could be improved upon and made less cumbersome.

See Part 1 of this series,”U.S. Ranking Slips for ‘Best Place to do Business.”

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National Foreclosure Inventory Drops for 40th Month

By Ravinder Kapur

CoreLogic reported that foreclosure inventory witnessed a 27% fall in one year and now stands at 553,000 units (1.4% of all homes with a mortgage), down from a level of 761,000 (1.9% of mortgaged homes) in February, 2014. This reduction represents a consistent decline over a 40-month period and has resulted in the foreclosure inventory reaching a level of one-third of what it was at the bottom of the housing cycle.

There was also a marked reduction in the number of completed foreclosures in February, Core Logic2015 to 39,000, down from 46,000 in the same month last year. However, the current level is still much greater than the average of 21,000 foreclosures per month in the period between years 2000 to 2006.

There is a wide variation in the foreclosure inventory in February, 2015, between the states. The highest levels are found in New Jersey (5.3%), New York (4%), Florida (3.4%) and Hawaii (2.8%) while Alaska (0.3%), Nebraska (0.4%), Montana (0.5%), North Dakota (0.5%) and Minnesota (0.5%) have the lowest levels. Reduction in foreclosure inventory across states also exhibits a diverse pattern with the largest year-over-year decreases recorded by Florida (-46.4%), Maine (-42.2%), Idaho (-38.2%), Connecticut (-35.5%) and Illinois (-34.7%).

Wyoming and the District of Columbia actually witnessed an increase of 14.8% and 32.6% respectively in foreclosure inventory levels in the period from February 2014 to February 2015.

The current foreclosure rate (foreclosures as a percentage of all homes with a mortgage) in states where lenders must provide evidence to the courts of delinquency (judicial foreclosure states) continued to be high at 2.4% as compared to states where lenders can issue notices of default directly to the borrower (non-judicial states) where the rate was 0.7%. The national foreclosure rate stood at 1.4% in February, 2015, the lowest since March, 2008.

Judicial states had a peak foreclosure rate of 5.3% in February, 2012 while non-judicial states had reached a high of 2.8% in January, 2011.

The continued decline in national foreclosure inventory is accompanied by the number of seriously delinquent loans dropping to 4% of all mortgages, a reduction of 19.3% from a year ago. This is the lowest rate since June, 2008 and represents 1.5 million loans. While the national foreclosure rate of 1.4% is a drastic improvement over the past, it is still a far cry from the level of 0.6% which was the norm in the period 2000 – 2004.

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Apartment Building Predicted to Cool in 2015

By Charles H. Green

Last summer, we described how the apartment construction industry was in the midst of a boom, but this week the Scotsman Guide reports that multifamily saw a significant drop in new building permits in March. They read this change as an early indicator that the pace of apartment construction might be cooling.

While Atlanta is showing signs of ‘full stream ahead,’ with cranes blanketing the skyline in Apartmentsmost directions, some markets like Washington, D.C., are already showing signs of being overbuilt.

The article points out that such a slowdown of permits doesn’t mean the apartment market is slowing yet. Apartments, which led the housing recovery after the Great Recession, continue to exhibit strong strong demand, despite the wave of apartment building since 2013. This supply is largely driven by the number of young people who are moving out.

“There are a lot of young people,” said Ryan Severino, senior economist and director of research at Reis, in the Scotsman article. “Gen Y is so huge. There are roughly 45 million people in the United States between the ages of 20 and 29. That’s the ages when most tend to be renters and not homeowners.”

The money is still pouring into apartment projects as investors and lenders are still bullish on rental growth, which has remained fairly solid as vacancies have stayed down. Just down the street from my Atlanta office, half of a city block was razed on a prime corridor in midtown adjacent to legendary Piedmont Park for the construction of yet another residential apartment tower.

What does this mean for commercial lenders?

But, Reis predicts that even the most diehard optimist in multifamily will be tested this year. Even though the national vacancy rate has remained essentially flat since the end of 2013, despite a period of heavy building, they predicted that vacancies could rise and rental growth could slow down after an estimated 240,000 new apartments come online in 2015.

Construction is an important sources of business and jobs for much of the small business sector, as small contractors, suppliers, manufacturers and other service providers make up an important part of the food chain. The growth in the multifamily construction sector has been pivotal to a general pickup in the U.S. economy overall, which has included the expansion of small business loan growth.

Intentionally tempering this growth in order to make it more sustainable is hard to do, but some credit discipline might be a small sacrifice today in order to not let this market overheat too soon.

Read more at ScotsmanGuide.

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Barrier to Success–SMEs Burdened w/Tax Complexities

by Ravinder Kapur

The National Small Business Association’s (NSBA) recently issued annual taxation survey finds that the vast majority of firms, a full 85%, cannot file their federal tax return on their own and pay a tax practitioner or accountant to do it for them. For 59% (up from 53% last year) of organizations the most significant challenge presented by federal taxes is the administrative burden it puts on them. Consequently, over a third of small businesses spend 80 hours per year and pay upwards of $5,000 as accountant’s fees.

Sixty-seven percent of firms say that federal taxes have a “significant to moderate impact”

Image courtesy of

Image courtesy of

on their regular business operations and 59% say that the availability of credits and deductions also impact their business decisions to a similar extent. The most utilized deduction by small firms is that provided by Section 179 – however, the uncertainty of the continued availability of “tax extenders” under this section is a major grouse of business owners.

Sixty-nine percent of firms use the tax benefits under the extenders umbrella, but the unpredictable nature of the extensions and the passing of retroactive tax extender bills puts the small firms in a quandary regarding the deductibility of expenses every year.

Small firms find the complexity of payroll taxes a significant drain on their time and resources. Consequently, a majority of businesses with five employees or more, use an external payroll company at an average cost of $6,000 per year. Despite this expenditure, a quarter of businesses still need to spend six hours per month on the administration of payroll taxes. Of those firms that do their payroll processing on their own, 21% spend more than 6 hours on this activity, while 9% spend in excess of 10 hours.

The NSBA is of the view that tax reform is urgently needed to address the stress and frustration that it creates for small businesses. The complexity of adhering to the 70,000 page U.S. Tax Code is a major drain on the time and resources of firms. Seventy percent of small businesses support a proposal to reduce both corporate and individual tax rates and also reduce business and individual deductions.

The current form of the tax code creates an unfair advantage for large corporates at the expense of small businesses. The NSBA ‘s chief priority for the 114th Congress is to ensure that corporate tax reform includes a workable small-business solution.

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SBA 7(a) Authorization Boost Clears Senate Committee

By Charles H. Green

The U.S. Small Business Administration’s flagship 7(a) guaranteed loan program is doing very well this year, and as reported here recently, is on track to break all previous dollar volumes in this fiscal calendar. Through the end of March, the 7(a) program loan approvals totaled just south of $10 billion for the first six months of FY 2015 (see chart). At this pace, the program will outstrip its funding authorization before September 30, as happened in FY 2014.

The Senate has already begun to act thanks to a funding measure introduced by  Sen. Gary Introduction to SBA 7(a) Loan Guaranty ProgramPeters (R-MI), titled the Small Business Lending Reauthorization Act of 2015, which would increase the 7(a) program’s authorization level to $20.5 billion for FY2015 and $23.5 billion for FY2016. In program is presently authorized for $18.75 billion. This bill’s co-sponsors include Senator Jim Risch (R-ID) and Cory Gardner (R-CO) and  Jeanne Shaheen (D-NH). This bill cleared the Senate Small Business and Entrepreneurship Committee this past week.

Peters’ legislation is timely for the agency and participating lenders, and if approved by the full Congress and president, will allow the program to meet the industry’s projected loan demand without having to ask for an emergency increase, as was required in September, 2014. Since the 7(a) program is funded entirely through fees paid by borrowers and participating SBA lenders, the increase of this authorization means there is no subsequent cost to taxpayers.

As reported by the Business Journal, Tony Wilkinson, president of the National Association of Government Guaranteed Lenders (NAGGL) said, “This high loan volume is an indication of a growing small business economy that still cannot find long-term financing from today’s conventional market and so must turn to the SBA 7(a) loan program.

Wilkinson told the Journal that the committee’s vote to raise the loan authorization level was “an important first step towards ensuring that small businesses can continue to receive these loans.”

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U.S. Ranking Slips for ‘Best Place to Do Business’

Part 1 in Series

by Ravinder Kapur

The annual study, “Doing Business 2015,” conducted by the World Bank has found that the United States ranks 46th (41st in 2014) among 189 countries for starting a new business, 41st (41st in 2014 ) for enforcing contracts and 16th (15th in 2014) for trading across borders. These three criteria, along with seven others (to be analysed in subsequent articles), have resulted in the overall position slipping to the 7th place from a more respectable 4th in 2014.

The abysmal showing at 46th position for ease of starting a new business is a result of the Doing Business in 2015measurement of four criteria:

  • Number of procedures required to start a new businesses;
  • Time required to complete these procedures;
  • Cost to be incurred;
  • Minimum capital requirement;

The benchmarks for these four parameters are set by Canada and New Zealand (number of procedures), New Zealand (time required), Slovenia (cost), and Australia and Colombia (minimum capital).

When a country’s economy does not grow at a fast enough pace or if the employment numbers are not satisfactory, the usual response is to look for a fiscal stimulus or for the central bank to increase liquidity. The slow economic growth may also be attributed to an overly generous welfare program or its opposite. However, the ‘Doing Business’ survey of the World Bank takes a view that in addition to these factors, it’s important to consider the working of the “nuts and bolts” of the economy.

As explained in the survey, “The laws that determine how easily a business can be started and closed, the efficiency with which contracts are enforced, the rules of administration pertaining to a variety of activities— such as getting permits for electricity and doing the paperwork for exports and imports—are all examples of the nuts and bolts that are rarely visible and in the limelight but play a critical role.”

The ‘enforcing of contracts’ criteria measured in the study is composed of the procedures required, the time taken and the cost to be incurred in fulfilling this basic business requirement. Here, the United States is at a position of number 41, reflecting the slow legal system in the country. The leader for this measure, Singapore, takes a mere 120 days on an average to enforce a contract, as against 420 days for the U.S.

Trading across borders for US businesses (16th place in the list of 189) is comparatively easier than for most countries. However, here too there is a lot of catching-up to be done with Singapore, Hong Kong and Korea, which top the list.

While the World Bank Doing Business survey may not be the final word on the ease of conducting business in the U.S., it is a useful indicator of the areas in which the country needs to improve.

Note – The ‘Doing Business’ Survey used New York and Los Angeles, and their respective market attributes, as representative of the U.S. for the purpose of contribution data for this survey.

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