Category Archives: CRE

CRE

Credit Unions to Expand Business Lending

By Ravinder Kapur

Proposed changes by the National Credit Union Administration (NCUA) will allow credit unions to increase lending to business by doing away with the requirement for borrowers to personally guarantee repayments and also by removing the current stipulation that loan value cannot exceed 80% of the collateral security offered against the loan. An article in the American Banker reports that the proposal is a draft and the NCUA will accept comments for 60 days before preparing a final version.

Currently, if a credit union wants to waive the personal guarantee requirement for making NCUAa loan, it has to take permission from the NCUA. Approval is also required if the loan amount exceeds certain caps. Despite these restrictions, business lending by credit unions has increased sharply over the last decade and seen a near fourfold increase to reach a level of $51.7 billion by 2014.

The changes will seek to further boost business lending by credit unions by increasing the amount that can be loaned to a single borrower and also by removing the limit on an institution’s lending towards construction and development activities. However, the statutory limit for business lending of 12.5% of the credit union’s total assets would remain in effect.

Jim Nussle, president and chief executive of the Credit Union National Association, has said that there is a need to address the statutory cap issue as more than 1,000 credit unions are at or near this limit. In March, Representatives Ed Royce (R-CA) and Gregory Meeks (D-NY), introduced the Credit Union Small Business Jobs Creation Act in Congress., which seeks to lift the cap on business lending by credit unions to 27.5% of total assets. Another bill, the Credit Union Residential Loan Parity Act, seeks to exempt loans secured by non-owner occupied one to four-family houses from counting against the cap.

These bills have been opposed by the American Bankers Association, who have written to the House Appropriations Committee stating, “Banks are taxed while credit unions are tax subsidized. This critical distinction should guide all consideration of credit union powers expansion initiatives.”

The spread and reach of credit unions gives them an immense advantage. If they have greater flexibility in their lending norms and are able to make quicker decisions, they can rapidly expand their share of the business lending market. Of course, there would be a need to closely monitor borrower defaults.

The NCUA reported that since 2010, poorly managed business lending contributed to at least five credit union failures, costing its share insurance fund $141 million. Larry Fazio, director of the NCUA’s office of examination and insurance said about the proposed changes, “They will change the conversation so examinations can focus on the people, policies and systems needed to do business lending safely.”

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Our Kingdom for a Bailout

By Amaresh Gautam

When an economy suddenly goes into recession, the public’s initial panic invariably gives way to anger. There’s a tendency to find a scapegoat, someone to blame for the fiasco. In the Great Recession, the blame landed on Wall Street banks that made complicated financial products that no one understood, which eventually collapsed under the weight of their collective weakness.

The greedy corporations, who used such products to lower their borrowing costs or worse, AIGobtain funding that economically should have not been available, got a lesser part of the blame. Similarly, credit agencies, which continued to give healthy ratings to these derivative products long after their uncertain risks were exposed, also got a limited portion of the blame.

The anger was particularly severe against those financial institutions that were bailed out by the government, albeit relatively few were actually responsible for the mischief. Hundreds of smaller banks were caught up in the crisis and suffered without really contributing to the root causes of the crash. But the public rightly were incensed that the government socialized the risks (and resulting costs) of the evil deeds of these private financial corporations, who stood to profit alone from these operations when they succeeded.

In defense of the government, it’s worthy to note that the bailout proceeds weren’t handed out randomly without qualification, strict conditions, and a significant cost. The thousands of banks that received funding through the Troubled Asset Relief Program (TARP) agreed to accept several operating conditions that restricted the use of the funds, submit to additional reporting requirements and pay expensive dividends for use of the funding that staved off an under-capitalized balance sheet.

Much like injured people must pay for an ambulance ride to the hospital, all funding distributed to rescue the financial sector had strings attached to ensure that there was an appropriate price paid for the benefit of the rescue. Given the circumstances and risks, the cost should have been appropriately high, but how high is a matter of opinion.

Now, after some seven years, a U.S. judge has found that the treatment meted out by the government to insurance company A.I.G. was too harsh. According to the court, the government behaved like a loan shark, forcing A.I.G. to accept severely harsh conditions, although otherwise the company would have likely defaulted on their insurance contracts, and not been able to pay out settlements on the cascading level of claims on their credit default insurance book.

A.I.G. needed a bailout, and in order to save it, the U.S. Treasury Department and Federal Reserve required that the company issue the equivalent of 80 percent of their common stock in exchange, a disproportionately large part of its kingdom for the money. Whether that was a reasonable price to pay in the face of collapse into bankruptcy might lie in the eye of the beholder.

In the court of the land, the plaintiff’s view that the government did behave too harshly won the day, but in the middle of the financial crisis, the popular sentiment was such that a similar treatment to other financial institution would have certainly been cheered by the taxpaying public. And that divided outlook leads to a bigger question–what is the federal government expected to do in the next recession, which will come sooner or later?

Part of the government’s behavior will be dictated by the financial regulatory reforms that were rolled out in the aftermath of the crisis. However, a larger part of the government’s response to next crisis will be dictated by the popular sentiment that prevails during the recession, which will most likely consist of anger directed somewhere.

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EX-IM Bank Will Expire, But Return

By Charles H. Green

Ok, so my headline today is a combination of news of the day and a prediction of the future. Congress has in fact recessed for the July 4th holiday and will not return into session until afterwards, so the EX-M Bank charter will expire at midnight tonight (June 30th). No lightning storm, best intentions or even the Supreme Court will change that fact now.

But mark my words, the EX-IM Bank will rise from its brief place in the ashes and be Krashreinstated, with full authority retroactively granted. House Financial Services Committee chair Rep. Jeb Hensarling (R-TX), the leader to kill the EX-IM Bank, may be relishing this victory for the moment, but the larger truth is that the Republican Party is at war with itself over this issue.

And once again, as with the budget, deficit ceiling, and trade policy, this fight boils down to traditional, business-oriented establishment Republicans and the newer, insurgent Tea-Party members, whose rise to power has been fueled by mostly libertarian interests.

Why am I so sure the Establishment will win and the EX-IM Bank resumes its normal operations? One word: jobs.

The trouble with the extreme right-wing of the Republican majority is as old as the party itself. While Democrats over time have largely viewed their party as a big tent, with room for everyone’s interest, their inevitable conflicts were usually settled behind doors in smoke-filled rooms. Republicans consider themselves “principled,” but really have been more about interests representing the status quo. They have always felt safe excluding plenty of people, so long as nothing disrupted ‘business as usual,’ especially big business.

Don’t believe me? Listen to the business community’s interest in most social issues, such as civil rights, gay marriage and religious ‘freedom.’ They want no part of the divisiveness brought on through the discrimination promulgated by those who tell others how to live their personal lives.

But with conservative politicians, there are a lot of differing ideas as to what “conservative” really means, and which notion of ‘conservative’ is the correct one. The Tea Party arose through the amalgamation of many narrow interests, each of which individually were actually misaligned with a majority of the Grand Old Party, such as the ‘limited government’ crowd, fundamentalist Christians, libertarians, and social bigots.

While none of these extreme ideals were necessarily strangers to the GOP, they were tolerated to build a majority for the Establishment, who viewed big business as boss. Read “American Theocracy” by Kevin Phillips for an unadulterated description of how these interests convalesced into the Republican Party. And Phillips should know–it was his idea in support of electing Richard Nixon.

While the numbers and fervor of the Tea Party were welcome, their ideological extreme views and tactics have upset business as usual in Congress, and has disrupted previously non-controversial tools of governing that both parties cooperated on in order to run the country.  Like what? The debt ceiling, the Highway Trust Fund, flood insurance, the military-industrial complex, trade policy and many other mundane agencies, policies and practices that were rubber stamped for decades. Count the EX-IM Bank in that list.

The reality? Our federal government was founded for business, and it is in the business of protecting, promoting and promulgating business. Many of the original colonies had no interest in a central government, but knew that the collective force of the colonies were needed to establish a safe environment to conduct business. Think of trading with other countries, fighting pirates to protect trade vessels, guard ports, issue patents and provide courts to settle disputes between merchants from different colonies. The federal government’s operations were originally financed with tariffs on imported goods.

The extreme right’s interpretation of the Constitution generally reads that our government should be limited to what’s described in it verbatim. That’s nice philosophy, but a more pragmatic view might acknowledge that 1) most Americans disagree in thousands of unique instances; 2) we wouldn’t have microwave ovens or the internet were that ever strictly adhered to, nor entered WWI, WWII, Korean War, Vietnam War, etc.; and 3) for over two centuries, the ‘cat’s out of the bag’ as to that line of reasoning.

With the EX-IM Bank, there’s a more compelling, if pragmatic, case to make: trade competitors in every major developed economy in the world provide export financing for their manufacturing sector, including China, whose financing over the past two years exceeded our EX–IM Bank’s total volume over the last 80 years.

Hence, the Establishment Republicans will have to push back others in their caucus to reverse the lapse of the EX-IM Bank charter in the face of what big business wants–led by a coalition of more than 46 business trade associations–who finance many Republican campaigns and have a strong interest in the robust availability of export financing.

Said one conservative standard bearer (and presidential candidate), Lindsey Graham (R-SC), “Conservatives have declared war on the EX-IM Bank: It’s been ideologically ‘unpure.’ But until you get the Chinese, the Germans and the French out of the EX-IM business, I’m not going to unilaterally disarm.”

What do you think? Comment on this page or write me at Director@SBFI.org.

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To Err Positively is Human, Also Being an Economist

By Amaresh Gautam

It is human nature to err on the side of the optimism., and the trait is even praised at many places. Employers want employees with a positive mindset. Books, like “The Secret,” vouch for the power of positive thinking. The tendency to err on the side of optimism is the reason why there are so many start-ups, while statistically it doesn’t even make sense to start a company.

Rationality is almost an ideal. Psychologists know that people’s happiness depends on Optimismsome sort of positive delusional bubble, which should not be burst unnecessarily.  Economists are supposed to a rational lot, however, they too have a tendency to err on the side of optimism. That explains why so many predictions about the recovery of American economy are proving false with passage of time.

The string of soft data in the first quarter of 2015 raises concern about U.S. economy’s recovery. Foreign cross currents, declining oil prices and a more cautious domestic consumer all suggest that economic growth may drag along for a while longer than most people thought was a reasonable prediction. There have been improvements in the labor market, but perhaps market watchers would be better off waiting for some more positive signals from the same.

They should also wait and see if the Fed’s Open Market Committee (FOMC) will be able to move steadily towards the two percent inflation target. The FOMC’s current stand is that it will not stick to any pre-set policy, but rather act according to the signals it receives. While that sounds like the pragmatic thing to do, such a stance could lead to more volatility.

Small business lenders should pay close attention to FOMC communications in the coming months, as they try to make sense of the data signals to finalize some sort of policy response. Lenders are wise to remember that economists, like other humans, tend to err on side of optimism, even if they are the best brains working for the government.

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GE Capital to Retain $90 Billion Financing Unit in Sell-off

By Ravinder Kapur

In April GE announced that it was selling off its massive financing arm, GE Capital, to escape being classified as a ‘systemically important financial institution’ (SIFI), and to concentrate on its core business of manufacturing capital goods. However, a recent report in The Economist, highlighted that the company will be still be keeping the $90 billion unit. which finances its medical equipment, power generation gear and airplanes.

Financing is a key element of the package that many capital goods manufacturers offer GEthose customers who do not have the ability to buy outright on attractive terms. GE was one of the first companies to realize this and owes a large part of its success to this strategy, known in the trade as ‘captive finance’ unit.

When an airline announces the purchase of planes from Boeing, the transaction may actually be a sale to GE Capital, which then leases the planes to the airline. GE has an added benefit in the deal, as 85% of Boeing planes have engines that are manufactured by either GE or one their joint ventures.

A large number of the medical scanners manufactured by GE, a product in which it is a market leader, are on lease to hospitals and other institutions that do not have a practice of buying such equipment outright. When the company introduces a new model, it takes back the outdated unit and replaces it with the upgraded version. Meanwhile, the old unit is leased to another institution. The financing arm plays a key role in this chain of transactions.

GE is making rapid progress in selling off parts of its $500 billion finance company. It recently put a $40 billion portfolio of corporate loans up for sale. Earlier in April, as reported by BloombergBusiness, GE had entered into an agreement with Blackstone Group LP and Wells Fargo & Co. to sell most of its real estate portfolio for $23 billion. In a letter to shareholders prior to the company’s annual meeting, the company’s chairman Jeff Immelt said, “GE is an industrial company first and foremost. GE Capital must enhance our industrial competitiveness, not detract from it.”

The financing unit, which the company valued at $82.5 billion at the end of last year (implying a return on capital of 8.4%), lags behind the industrial operations, which earn 14%. As reported by the Financial Times, GE has set a target of reducing the share of earnings from financial services from the level of 42% last year to 25%. The steps taken by the company to avoid SIFI status may also result in improved returns for its shareholders.

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Mills: Alternative Lenders Rescue SME Finance

By Ravinder Kapur

Loan volumes to small businesses dropped precipitously by 18% during the recession and have not recovered since, despite growth in the economy and employment. The number of community banks, which traditionally supply 40% of loans to small businesses, fell from 14,000 in the early 1990’s, to 7,000, and their tally continues to decline. This has had a marked negative effect on small firms as 48% of loan applications by them to community banks are approved as compared to 13% of applications to big banks.

Traditional banks, which are the chief source of capital for small businesses, are reluctant Karen Mills, Harvard Business Schoolto extend finance as they find it uneconomical to extend small loans. Nerdwallet spoke with former SBA Administrator, Karen Gordon Mills, about the options available to small business owners who require finance and whether it was advisable for them to take loans from the growing number of alternative lenders.

Speaking about the role played by online alternative lenders, Karen Mills said, “…their growth is rapid, but they are still only a small portion of the total market. It’s actually quite an interesting case study. It’s an instance where entrepreneurs are actually stepping in and driving innovation to solve a problem for other entrepreneurs and small business owners. And, they are doing what entrepreneurs do best–they are disrupting. And in this case disruption is happening in an industry that hasn’t changed much in the last 30 years.”

Accessing loans from the online platforms of alternative lenders is much simpler and faster than getting them from banks. An additional advantage is that there is much less paperwork involved and a potential borrower can complete the process and get a decision online. While the rate charged by these alternative lenders is usually higher than that of banks, many small businesses value the speed and simplicity of the lending process and are willing to pay a higher cost of capital for it.

But Karen Mills advises small business owners to exercise due caution when taking loans from alternative lenders, “Last, look at what others have to say about the online lenders you’re considering. You really do need to comparison shop and learn from other small business owners’ experiences. Be sure you have mapped out a realistic forecast that allows for all the loan costs and makes sense for your business.”

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Good Idea, Wrong Denomination

By Charles H. Green

I’ve always presumed that the U.S. Postal Service makes a lot of money selling stamps that will never be used to post a letter. In fact, I suspect that they are quite prolific in honoring plenty of personalities, politicians, flowers and other views of the flag, all for the benefit of philatelists (stamp collectors) everywhere–and the largess of all that revenues without the resulting services being required to fulfill. [My recent favorite was a Jimi Hendrix commemorative.]

But the U.S. Treasury Department has been much more reserved about changing the $20 Tubmancurrency or coinage. Other than the $2 bill and Susan B. Anthony dollar coin, both of which were intended to benefit the money supply, but largely acquired and hoarded, there has been an extensive commemorative coin series that were sold with the expectation that they would never enter the circulation (albeit, they are legal tender).

Over the past 10 years, most of our coinage has been redesigned with multiple faces, particularly nickels and quarters, again, probably to boost hoarding of the different regional designs. The $5, $10, $20 and $100 bills also have new designs intended to thwart counterfeiting.

But now comes the $10 redesign idea, where it’s been decided that a woman should also grace our paper currency, and I for one, am fine with the idea and agree that this notion has been overlooked for decades. Let’s honor one or more of the many women who’ve played pivotal roles in our nation’s history and development of our society.

But I don’t agree that anyone, of either gender, should displace Alexander Hamilton on the $10 bill.

Hamilton was the nation’s first Secretary of Treasury, and more so than anyone, deserves to grace our currency for his significant achievements in moving to form the first nationalJimi Hendrix bank, organized our new nation’s tariffs, and even promote a unified national paper currency . While we honor several leading politicians, Hamilton was as much the leading banker of our nation.

The idea of replacing or sharing Hamilton’s place on the ten dollar bill also ignores the larger question: how in the hell had Andrew Jackson’s image ever landed on U.S. currency?

Jackson despised the idea of a central bank and especially hated paper currency. Making good on his campaign promises, he allowed the charter of the Second National Bank to lapse during his first term as President, and is credited with much of the economic chaos that followed, starting with the Panic of 1837. Perhaps placing him on the $20 bill was in retribution.

But a much smarter idea for altering our currency would be to elevate a fitting replacement from among a list of the dozens of women who have made monumental impacts on the direction of our nation. And who knew? There’s already a grassroots effort to do just that. WomenOn20s.org launched a campaign to raise awareness of the idea and held a poll to determine who the public believes should be honored. The winner? Harriet Tubman. I’m including the other top nominees below to illustrate how changing the face of our $20 bill might look on a larger scale.

For me, just end the painful reminder of the financial disaster brought to this nation by Andrew Jackson once and for all.

What do you think? Comment on this page or write me at Director@SBFI.org.

Harriet Tubman $20

 

 

 

 

 

 

Eleanor Rossevelt $20

 

 

 

 

 

 

Rosa Parks $20

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Regulation Arbitrage–Gaming Reform to Beat It

By Amaresh Gautam

Should banks be regulated tightly or should they be allowed to function according to the dictates of the free market? That question and the debate around it are as old as another debate–is it the business of the government to intervene in business? But in the case of banking, this debate is a little more emotionally charged. Furthermore, the popular opinion sways from one side to another depending how vivid a past recession remains in the public’s memory.

When a recession is fresh on the minds of the citizenry, banks invariably share some of the Can of Wormsblame of the most recent fiasco and are seen as a necessary evil of sorts. However, when the recession is long passed, and not fresh in the current discourse, banks are gradually seen as a vital cog in the economic engine, who are performing the key function of monetary intermediation, that is converting short term deposits into long term loans.

The effects Great Recession and the roots of the housing bubble–fed from decades of deregulation, bank consolidation and abusive financial dealing–led policymakers to adopt the Dodd-Frank Act, a cure-all morass of regulation for the entire financial system. At that point, the popular sentiment was that the freewheeling banks had done a lot of damage to the economy and the regulators should clamp down on them.

The result was a sprawling piece of legislation that created multiple new policy-making bodies tasked with monitoring and regulating the economy. It stipulates ways to dissolve banks without bailouts in the event of a crisis. The law also created the Consumer Financial Protection Bureau, as well as increased regulation of hedge funds and other shadow banking channels.

However the big question still remains unanswered–where should the fine line of regulating banks be drawn. Lengthy, complex regulations have an after effect–they make the implementation of the same regulations more difficult to administer, allowing room financial institutions to indulge in a commonly referred to strategy of “regulatory arbitrage,” which delays, dodges, undermines and ultimately defeats the intended consequences of the regulations.

It seems that even though thousands of some of the best financial minds in the nation, who collectively have considered the best way to find a reasonable middle ground, have not created a regulatory mechanism that will work in good as well as bad times. While Dodd-Frank may be a comprehensive legislative answer, bankers seems to have already have thwarted it by gaming the system, and using it’s massive size against it.

The present need is a simpler, realistically implementable regulatory framework that doesn’t snuff out the financial capacity it’s trying to protect. Smaller commercial lenders, who face higher risk as regulations increase, should probably be prepared to see further regulatory evolution, particularly when the economy returns to a recession.

 

 

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House Appropriates $23.5 Billion 7(a) Program for 2016

By Charles H. Green

Let the good times roll? The SBA’s flagship 7(a) program’s loan approval is climbing steeply this year on a monthly basis, and is on track to break all prevous lending records. As of the end of May, the agency had already approved $13.47 billion of guaranteed loans, more than $2 billion ahead of the same YTD point in FY 2014. In fact, this sum is more than the total SBA 7(a) volumes for the entire program years in 2008, 2009 and 2010.

The House Appropriations Committee passed a funding bill that was approved last week SBA 7(a) Loan Guarantee Programby a 30-20 vote, which provides $853 million for the SBA’s operating budget, and raises the authorization 7(a) loan program to $23.5 billion next year. That represents a significant jump of 25% over FY 2015’s authorized level of $18.75 billion. This sum is the gross volume, including the lender’s non-guaranteed portion as well, and 7(a) loan defaults are entirely funded by program fees charged to borrower and lending, while no taxpayer subsidies are needed.

The bill also authorized $7.5 billion in 504 loans in FY 2016, a level far above the current volume, which may be interpreted that there is expectation that the refinance privileges will be restored before the beginning of the next fiscal year. Loans under the 504/CDC program are primarily used to finance owner-occupied commercial real estate, and have lagged in FY 2013, 14 & 15 after a brief period (FY 2012-13) where commercial real estate could be refinanced with program dollars. At the end of May, the program had been used for $2.71 billion YTD, only the second month this year that its volume had exceeded the aggregate sum lent YTD in 2014.

This legislation will be considered by the full House in the coming weeks, and must be  reconciled with the corresponding appropriations bill is passed by the Senate before it’ s enacted.

What do you think? Comment on this page or write me at Director@SBFI.org.

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Grexit–Two Sides to the Coin

By Amaresh Gautam

Unless you’ve been in solitary confinement for the past seven years, it’s been hard to avoid at least the headlines about the financial turmoil in Greece, and the 2010 bailout required by European Union states (EU), the European Central Bank (ECB) and the International Monetary Fund (IMF), aka the ‘Troika.’ Today this story continues like a tragedy Greece is known for, with the Greek economy in shambles, largely due to the draconian measures demanded by creditors in exchange for the two separate bailout rounds.

To complicate matters more, in early 2015 the government changed control to factions Drachmademanding an end to the severe budget austerity that has left the country with more than a 30 percent unemployment rate. While the government is operating on a small surplus before debt payments, the new coalition has demanded to renegotiate repayment terms in order to provide moe local funding to restart economic growth without all the painful effects on the economy that the country has suffered under to date.

But today, it looks more likely than ever that Greece will exit the Euro without a new deal with creditors, the possibility of which has been labeled the “Grexit.” Greece wants a third bailout on improved terms and conditions, and are refusing to accept continuation of the status quo. Greece accepted previous bailout packages with severe conditions that wound up making matters much worse than a debt default would have.

Hence the rise of the current government in Greece, which came into power by criticizing the bailout packages and their incumbent austerity. That explains why the current negotiations are getting extended and face a hard deadline of June 30th. It’s going to be much more difficult for the current administration to accept anything less than the demands they’ve made, which ushered them into office.

A default of the current interest payments due by the June 30 deadline would leave Greek banks shutoff from further support of the ECB, and in the short term, severe consequences in their economy. And, that severity could only be answered quickly by converting their economy back over to their original currency, the Drachma.

Why should commercial lenders care about Grexit?

On one hand, there are investors like Charlie Munger, who are critical of the bailout package that’s been granted to the Greeks. He compared Greece to a drunken brother, with whom you cannot do business. While it’s true that Greece got drunk on too much debt, so did many Americans just before the sub-prime crisis. And remember back then, the biggest argument for saving  American banks with taxpayer’s money was that ‘not saving them would have even been worse for the taxpayer (aka ‘too big too fail‘).’

It’s fair to point out here that much of the blame for the Greece economic fiasco lies with the aggressive lenders–principally German–who leveraged the Greek economy so highly, writing loans worth $43k per citizen for construction projects.

A Greek exit from the Euro would be a negative blow for the currency, which has fallen 30 percent in last 12 months against the dollar, and will slow American exports further. It can also have negative affects on the U.S. lending market as clients in manufacturing, exports and hospitality may suffer. Reason and politics often do not go hand in hand, and commercial lenders should prepare themselves for such a scenario (Grexit) that may be all the worse for everyone concerned.

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