Category Archives: CRE


Economic Recovery is Being Hampered by Income Inequality

By Ravinder Kapur

Recovery from the Great Recession has been slow because the vast majority of Americans experienced low household income growth and therefore had restricted spending power. At the same time a small minority at the upper end of the income distribution scale, who spend a much lower portion of their earnings, experienced an accelerated growth in income.

A recently published article in Newsweek argues that total demand in the economy is at Minimum Wagesleast 10% below the level it would have been if the current income distribution was at the same level as it was in the early 1980’s. Income inequality has been building up since then but household demand remained strong till 2006 on the back of  buildup of debt. But after 2006 lending to households collapsed and led to a corresponding slowdown in demand.

The article was written by by Barry Z. Cynamon, visiting scholar at the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis, and Steven Fazzari, professor of economics at Washington University in St. Louis, and was based on research they conducted on the subject of rising income inequality and U.S. household demand over several decades.

Their research demonstrated that, “…the annual growth rate of household income slowed markedly in 1980 for the bottom 95% of the income distribution, while income growth for the top 5% accelerated at the same time. The result was the widely discussed rise of income inequality.”

Despite the rising inequality of income levels between the top 5% and the bottom 95% of households, demand continued to rise up to 2006, fueled by debt. With the curtailment of household borrowing from 2007 onward, the growth in demand petered off and the researchers offer their findings on the net result: “Household demand in 2013 was a stunning 17.5% below its pre-recession trend, with no sign of recovering back toward the trend.”

According to Cynamon and Fazzari, the best way to boost demand is to give household spending a boost by raising the minimum wage and reducing the tax burden of low and middle income households. The U.S. economy’s production base is resilient and capable of meeting the increased demand. They conclude that, “…the need to address inequality is not just a matter of social justice; it also is important to get the economy back on the right track after more than seven years of stagnation.”

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Regulators: Oil Company Loans Are Substandard

By Ravinder Kapur

The preliminary results of a joint national examination by U.S. regulators of the portfolios of major banks indicates that a large number of loans issued to oil and gas companies are substandard. The Shared National Credit review process in earlier years was in agreement with the banks’ own ratings, but this year regulators have taken a divergent view and downgraded these companies.

The Wall Street Journal reported that the substandard tag indicates a borrower’s doubtful Oil Industrycapacity to repay and restricts banks’ from granting enhanced facilities. This will result in a new set of problems for these beleaguered companies as they will find it difficult to access funds from banks and would need to turn to more expensive sources, such as equity or bonds.

The Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. have warned that the continued slump in oil prices could result in large losses for banks. Banks lend based on the value of the oil and gas deposits that companies hold and low energy prices over an extended period have resulted in the reduction of this collateral.

Banks with large exposures to the oil and gas sector include Wells Fargo & Co., J.P. Morgan Chase & Co. and Bank of America Corp. Wells Fargo Securities analysts have informed clients in a note, that among the companies they track, only 30% of the expected 2016 oil output has been presold at above-market prices, as compared to 56% of crude production that was hedged in the current year.

While the warning by regulators is justified, it may result in an increased level of defaults by oil and gas companies, which would create more problems for the banks.

The fall in oil prices has helped bring down the American industry’s cost of production, especially for energy-intensive companies. But it has put oil and gas companies in a difficult position and the extent of defaults in this sector will become more apparent over time.

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Sales in Private Stores Show Steady Increase

By Ravinder Kapur

In the last 12 months sales by private retailers have increased by 6.6%, with smaller retailers (whose sales average less than $10 million per year) growing between 5% and 8%, and larger retailers with sales exceeding $50 million averaging an even greater growth of 9.5%.

Retailers have also seen average increases in net profit margins from 2.6% to 3% in the Moving targetsame period, with those retailers who have less than $10 million in annual sales growing their margins from 2.7% to 3.2% while larger retailers have maintained their margins at 2% for the last five 12 month periods.

A recent article in Forbes, based on an analysis of financial statements by Sageworks, a financial information company, states that bigger retailers reported higher sales growth rates than the smaller companies over the last five 12-month periods. The survey was limited to users of Sageworks products.

Commenting about this trend, Sageworks’ analyst Libby Bierman said, “While we don’t know definitely why that’s the case, it would make sense that the larger private retailers have more marketing dollars and more marketing resources to be able to grow revenue quickly and more effectively. Some examples may be a bigger web presence or more advertising compared to some of the mom-and-pop shops that may be included in the smaller retail averages.”

Interestingly, the buoyancy shown by smaller retailers in the Sageworks’ survey, where these firms have reported increased sales and net margins, contrasts with a recent National Federation of Independent Business (NFIB) survey, which reported a sharp fall in its Small Business Optimism Index in June.

This index, which monitors the opinion of small businesses on various issues including “earnings trends” and “now a good time to expand” had registered declines in practically all its components. Bill Dunkelberg, NFIB’s chief economist said, “June terminated a promising string of improvements in owner optimism during the first months of the year. While it is not a disaster or signal of a looming recession, it is a disappointing sign that economic growth on Main Street is not set for a strong second half of growth.”

While retailers across the board are doing well at present, the smaller players do not seem to be confident that the trend will continue for the rest of the year.

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Big Banks, Small Banks & the Law

By Charles H. Green

If you’ve followed this column for long, you’ve undoubtedly read my bellyaching about a personal sore subject, namely the mind-numbing inequality in the application of the “law” as it relates to large banks and their employees, versus small banks and theirs. As baffling as that sounds, trust me as a seasoned industry observer to assure you that it’s very different.

Since the financial crisis, this long-suspected condition has only become more clear due to Bankseveral factors. Namely, the buying public has been largely up in arms about the financial bailouts, and wanted some blood in exchange. Part of the rulemaking assembled to deal with the crisis also armed the government with new and improved rules to combat genuine fraud and corruption. One example was by expanding the “False Claims Act” to cover federal loan guarantees, targeting those lenders filing claims for reimbursement, not the underlying borrowers who defaulted on loans.

And, for all the chorus of jeers around the Troubled-Asset Relief Program (TARP), the program landed its own Special Inspector General as a watchdog for the government’s interests over the thousands of Main Street banks that were bailed out under the program.

Hang ‘em high

The results? A field-day for prosecutors of all stripes. Thousands of bankers–community bankers, that is–have been indicted, prosecuted and imprisoned for a variety of financial sins. Some, in fact, were guilty of blatant theft, collusion, or misappropriation, borne of a fraudulent intention to personally enrich outlier bankers and their compatriots.

Others were guilty of the pitiful sin of lying about the true strength of the bank’s financial condition in a genuine effort to save it from insolvency, without the motivation of personal gain. But many of the bankers in that latter case ran out of luck before the bank’s money did, and discovery of their actions led to criminal indictment.

No one disputes that community bankers have gotten the overwhelming brunt of the personal effects of this prosecutorial muscle flexing. Big bank regulatory violations, fraud and overt criminal acts have largely been resolved with eye-popping fines paid out as the cost of doing business.  And make no mistake that record-breaking profits since this crisis have easily covered these costs without even the bank’s board reprimanding management. But community bankers wind up in the slammer.

No where is this divide more evident than in two wildly contrasting stories that emerged last week that make this point crystal clear:

The first was that British regulators dropped their investigation and declared they would take no further action against Bruno Iksil, the storied “London Whale,” whose high-flying derivative contract speculation cost JPMorgan $6.2 billion in losses. In addition, the bank paid out another $920 million in fines for misrepresenting their financial position related to these losses and not having adequate controls in place to prevent their staff from overvaluing assets.

The second was about the acquittal of a Brooklyn community bank, which had been charged with 184 counts of mortgage fraud by New York City’s District Attorney, Cyrus Vance, Jr.,  after self-reporting suspected improper lending among its staff related to 31 loans sold to Fannie-Mae.

Big fish, little fish

Beyond the irony of how these two banks were treated in the eyes of the law, the individual bankers at the heart of the “crime” were both apparently white-hats trying to do the right thing.

According to the NYTimes, Iksil was far from being the “rogue trader,” portrayed in early news coverage, and emerges in government documents and people familiar with the evidence as a conflicted figure on the trading floor. While troubled by conscience, he tried to please the bosses who pushed him to undertake the risky derivatives trading that proved his undoing and caused the great losses. Then, as the losses mounted, he repeatedly warned his colleagues that they should be more forthcoming about their extent, to no avail.

“Four regulators in two countries investigated this thoroughly and came to the same conclusion, which is that it wasn’t appropriate to pursue any charges against Mr. Iksil,” said Jonathan B. New, his lawyer, a partner at BakerHostetler. “He cooperated fully with every investigation, and the actual facts speak volumes. The facts are often lost in the initial publicity.”

Added Jonathan R. Barr, another BakerHostetler partner, “He was never a rogue trader. The trading strategy was approved and directed by higher-ups. Making him the face of this scandal was very unfair.”

Which begs the question as to why some of JPMorgan’s higher-ups were never investigated or charged with directing such risky trading or trying to conceal the results?

Tiny bank’s surreal trip through fraud prosecution

Contrast that story with a small bank. In the heart of New York’s Chinatown, the Vera Sung, Director of Abacus Federal Savings Bank, had questions about a residential mortgage loan closing mid-December 2009, around the extra checks that were requested to be distributed to the borrower. The bank’s loan officer was witnessed outside the closing room talking furtively with the borrower, and based on Ms. Sung’s suspicions, the deal was called off.

What soon became apparent was that she had stumbled on a fraudulent scheme involving false borrower income verification and documentation. The bank’s investigation quickly determined that there were many questionable loans already booked, and the loan officer was fired shortly afterward. The discovery put an end to the scheme at the bank, but was the beginning of a five-and-a-half-year odyssey through the New York State criminal justice system

Bank officials uncovered the fraud, fired the mastermind, investigated and reported it to regulators and provided New York prosecutors with over 900,000 pages of documents. Yet by May 2012, this 31-year old bank was under indictment by a grand jury.  As reported in the NYTimes, the 184-count indictment against the bank and 11 former employees, the Manhattan district attorney said Abacus participated in “a systematic and pervasive mortgage fraud scheme” that resulted in the sale of hundreds of millions of dollars of fraudulent loans to Fannie Mae, the national mortgage security packager.

Prosecutors cited 31 loans issued from May, 2005 through February, 2010. Among the charges were conspiracy, grand larceny and falsifying business records. Facing indictment and the threat of long prison sentences, eight Abacus loan department employees entered guilty pleas and agreed to cooperate with the district attorney’s investigation.

But in June, after a 19-week trial, a Manhattan jury exonerated the bank and its top two officials, Yiu Wah Wong, its former chief credit officer, and Raymond Tam, former supervisor of loan origination. The jury threw out every one of the charges.

The bank spent more than  $10 million to defend itself and had to post $10 million in collateral to Fannie Mae after the indictment. While Abacus continued servicing the loans Fannie Mae had already bought, its lending capacity was vastly diminished because Fannie Mae would no longer buy any new loans.

Kevin R. Puvalowski, the bank’s lawyer (Sheppard Mullin Richter & Hampton) characterized the prosecution as a trip through Bizarro World, a comic strip universe where everything is turned on its head. “When I was listening to this trial, I couldn’t help but thinking how backwards this prosecution has been from the very beginning,”

Who, for example, was the government’s star witness against the bank? It was the loan officer fired by Abacus when the fraud was discovered. As part of a plea agreement he struck with the Manhattan D.A., he provided testimony in the case and at trial, but the jury seemed unwilling to believe a man who had been terminated for being dishonest.

Even more perplexing, was that Fannie Mae, which had bought the 31 purportedly fraudulent Abacus loans, did not lose any money on them. Rather, trial transcripts show, by early May 2015 Fannie Mae and the investors who bought securities containing the loans had earned $2.5 million in interest. Nineteen of the 31 loans have been paid off and the rest are current, court documents show.

The victim in this case was Abacus itself. The bank’s Fannie Mae contract already required it to repurchase any loans that didn’t meet Fannie Mae’s quality requirements.

The prosecutors’ claim that the bank was driven by “greed” resulted in a modest $123,000 in servicing fees on the loans.

What do you think? Comment on this page or write me at

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Some Tailwinds Against the Economy

By Amaresh Gautam

There were a few indicators in the minutes from the Federal Reserve’s Open Market Committee meeting that tougher times may be ahead for American economy in the near future, or at least, the hangover from the Great Recession continues. Primary among their concerns is the decline in consumer spending. Healthy levels of consumer spending are critical, as much of the projected growth in 2016 and 2017 hinges on the assumptions of high level of consumer spending.

At the time of the April meeting, the annualized increase in consumer spending was hot airestimated to be unexpectedly weak in the first quarter following the strong gains in the second half of 2014. But revised statistics were released later that suggested that the consumer spending was better than earlier estimates.

On one hand, many fundamental factors determining consumer spending remain positive, such as low interest rates, modest gains in wage and salary income, and stronger household balance sheets. At the same time, there are concerns that consumers have not increased their spending as much as expected in response to the drop in energy prices; a rise in savings rates may induce more cautious behavior among households.

There are also concerns about developments in Greece and China. Concerns about Greece reaching a mutually beneficial agreement with their creditors, and the future rate of growth in emerging economies, particularly China, seem to be ominous prospects that are still not fully understood.

The Greek crisis may still derail the European economy, which will have spillover effects for Americans. Other concerns are related to the apparent weakness in productivity growth recently, and whether they would reverse or continue. On the one hand, a rebound in productivity growth in coming quarters might restrain hiring and slow the improvement in labor market conditions. On the other hand, if productivity growth remained weak, the labor market might tighten more quickly and inflation might rise more rapidly than anticipated.

Small business lenders have a vested interest in these developments, because Main Street businesses are generally on the front line of changing trends, and bear the brunt of changing economics from household purses first. Keep an eye on these developments in the near future.


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Banks Lose Ground to FinTechs in Small Business Financing

By Ravinder Kapur

Banks have severely restricted lending to small businesses since the Great Recession, with alternative lenders taking up the slack, although at much higher APRs. A recent Forbes article states that while only 22% of applications by small businesses to banks are approved, the comparable percentage for institutional investors is 60%. Even the approval rate of 22% is a great improvement over the time in June 2011, when the success rate of small businesses’ loan applications to banks hit an abysmal level of 8.9%.

Small business borrowers have moved away from banks for a variety of reasons, not least Uber financeof which is the aversion of banks to extend finance for lower amounts. The appraisal and processing costs incurred by a bank are the same whether a loan is for $50,000 or $1,000,000. On the other hand, many online lenders specialize in financing smaller businesses, and their speed and the convenience they offer make them extremely attractive for these borrowers.

But does this mean that small business borrowing will gradually move away from the banking system altogether and make it irrelevant? In an American Banker article titled, “Reports of Banking’s Death Are Greatly Exaggerated,” they point out that the fintech start-ups cannot function without the active support and infrastructure that is offered by the banking system.

A survey of 4,522 small business owners conducted by Barlow Research Associates (May, 2015) found 86% of respondents saying said that when choosing a new bank, branch convenience is the most important factor and not technology. But of the business people surveyed, 50% of those who were planning to change their primary bank cited “lack of personal attention” as the main reason.

As online lenders grow in size, the most successful ones will be those who can forge strong ties with traditional banks. While banks will provide the large scale resources and institutional clout, fintechs will be in the best position to cater to the changing needs of borrowers with their innovative credit decision techniques and speed.

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Traditional Lenders Need to ‘Get Smart’ About Technology

By Charles H. Green

Two loud thuds hit my email box recently, which got me to thinking about the state of marketing and technology in the traditional, bank-dominated commercial lending industry. One was a monthly newsletter I get from an acquaintance in the banking world, who consults with banks about a variety of lending and sales issues. The other was actually two articles from Gallup about some interesting demographics they learned and were sharing.

The first of the two Gallup surveys offered an interesting portrait of American consumer Emailbehavior. Based on their work, Gallup concluded that most (72 percent) Smartphone users check their phone at least hourly. Hourly! This news comes as no surprise to any parent who handed their teenage child a Smartphone. But while this survey is skewed toward younger users, it is by no means exclusively the lair of the hipsters. Repeatedly checking phones ‘a few times an hour’ was reported by 33% of 50-64 year olds.

The second Gallup survey concluded that 46 percent of Smartphone users “can’t imagine life without it!” Recall that the Smartphone was introduced less than a decade ago.

Are lenders missing business due to antiquated technology/marketing ideas?

What the combination of this news means to me is that a) most consumers are getting their messages over the phone these days, and are watching for it often–I’ve been told that about 60 percent of all email is opened on a phone; and b) this technology is not going anywhere soon, as it has quickly become indispensable to nearly half of these users, and I expect will grow.

Enter the bank consultant mentioned above, whose down-to-earth newsletter comes out regularly with some really good advice that’s garnered from his observations, uniquely developed from a long career in this industry. He’s been sending out this newsletter for about a decade to a slow-growing list of folks he meets around the country.

But it looks like what newsletters looked like in 2005. Opening it on a laptop comes off with a stilted view, without graphics, that is obviously aged. On your phone, it’s like trying to read hieroglyphics–too small, and not expandable without becoming much too large. No good for the iPad either, which is another growing technology that many folks turn to when reading mail or surfing the net.

Don’t get me wrong–this story is not intended to be critical or dismissive of my friend’s newsletter–at least he’s sending out something. There are still lenders out there blasting out tombstone ads, well past the time, from anyone’s point of view, when anyone actually cares that you closed a deal. No one does, trust me.

But what this newsletter does is exactly what is central to a good digital marketing strategy–it offers something to the reader for the effort of opening it. Good, sage advice intended to contribute something to the toolbox of his prospective clients or referral sources, which is much better that another screeching ad saying “I need some business!”

Some bankers have it right

Every year, there are younger people coming into the business world that need to get our messages, and every year, some of our peers are moving on up  to embrace newer, more effective technology. Your messaging has to remain current in terms of what you say, how you say it, and how you deliver it. Lest you become a dinosaur.

Not sure exactly what I’m talking about? Check out the handiwork of CenterState Bank, Correspondent Division here. Led by Chief of Strategy Chris Nichols, the bank publishes a series of monthly emails that offer thought-provoking ideas and information that can enhance how well bankers do their job.

Their technology-savvy messages are representative of solid digital marketing that wins business, and as importantly, doesn’t irritate anyone or waste time.

So what are you doing to ‘get out the word?’

What do you think? Comment on this page or write me at

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Small Business Optimism Index Falls Sharply in June

By Ravinder Kapur

The NFIB’s Small Business Optimism Index fell 4.2 points in June, bringing it to a level of 94.1 which is well below the 42 year Index average of 98, and a full 5.4 points below the pre-recession (1974-2007) average of 99.5. Additionally, in June, nine of the ten components of the index were below their May level while the tenth component showed no movement as compared to the previous month.

While practically all the components of the index showed a downward movement, the NFIBsharpest fall was recorded by “earnings trends,” which recorded a 10 point decline. This could be attributed to the inability of small businesses to raise prices in the face of rising labor costs. A net negative 17% of small businesses showed higher earnings.

Bill Dunkelberg, NFIB’s chief economist said, “June terminated a promising string of improvements in owner optimism during the first months of the year. While it is not a disaster or signal of a looming recession, it is a disappointing sign that economic growth on Main Street is not set for a strong second half of growth. The weakness was substantial across the board, showing no signs of a growth spurt in the near future.”

The other major components to show declines in June were “plans to increase inventories” (8 points), “expect economy to improve (6 points), “current job openings” and “now a good time to expand” (5 points each). The negative trend indicated by small business owners in all these critical areas points to lower growth on Main Street in the months to come.

The National Federation of Independent Business conducts a monthly survey among its members and the current survey is based on 620 usable responses from a sample of 3938 small business owners.

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Sovereign Debt Crisis–Not the First Time

By Amaresh Gautam

Funny how the public’s financial memory is short. These days, their gaze is on the Greek debt crisis and its repercussions. By now, all of the armchair economists have developed their own theories about ‘who’s to blame,’ and whether the richer European nations should bailout their financially ill-disciplined cousin state. While there are plenty people voicing sharp opinions over the internet, few people are pausing to consider the long history of sovereign debt defaults.

If they did, many might realize that such financial defaults have happened and more often

In 1953, Hermann Josef Abs, center, signed an agreement that effectively cut West Germany's post-World War II debt in half. Credit Associated Press (NYTimes)

In 1953, Hermann Josef Abs, center, signed an agreement that effectively cut West Germany’s post-World War II debt in half. Credit Associated Press (NYTimes)

than not, they follow a similar pattern. What pattern? For starters, all of these major debt overhang problems have been solved by deep debt writedowns on the part of creditors, who discount the obligation balance and agree to accept less than face value for satisfaction of the loans.

And another fact is that the longer it takes for creditors to cut the debt, the larger the writedown will be in order to get the loan resolved. These loans are generally not solved by softer measures, like repayment extensions or lower rates.

Another fact that keeps getting ignored is that Germany, which is taking a decidedly ‘bad-cop’ role in the Greek crisis, itself was very much in a similar situation after WWI and WWII. Particularly after World War Two, Germany benefited immensely from significant writedowns on the credit used as reparations for damages it caused.

And, just a factual is that after these debts were lowered, the German economy took off and has rarely slowed down since. Some people may call out the Germans for this apparent hypocrisy, however the bigger lesson here is that history offers some of the best tutorials of how to manage many situations, but is often ignored or forgotten.

The Germans are citing a risk of a ‘moral hazard,’ of Greece walking away from legal obligations as an argument against additional bailouts. Their reasoning is that if Greece is allowed to get off lightly after its financial misbehavior, what sort of example does that establish for other European nations in the same situation, such as Portugal or Spain. But wouldn’t their own history refute this reasoning?

Greece may have suffered just about enough. Unemployment rates are ridiculously high, pensioners are impoverished and banks are tettering on being closed permanently. That may be enough of a lesson for other nations to not get so aggressive on borrowed money in the years ahead.

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Fracking Revolution Will Boost American Manufacturing

By Ravinder Kapur

U.S. industrial electricity prices are now 30% to 50% lower than those of other major exporters, according to a calculation by Boston Consulting Group (BCG), and this has led to a rise in productivity by energy-intensive American industries such as steel, aluminium, paper and petrochemicals. In the last few years, cheaper energy has prompted various industries to allocate $138 billion towards new U.S.-based investments.

A recent report in Fortune points out that fracking in the U.S. has resulted in the country Frackingbecoming energy independent and contributed to a large extent to the fall in energy prices. The resultant gains by American manufacturing companies have given them a cost advantage of 10% to 20% over European economies, and average costs are higher by only 5% as compared to China. Going forward, BCG estimates indicate that by 2018 the U.S. would have a 2% to 3% cost advantage over China.

An article appearing here in September, 2014 (“Lenders Fill’er Up-Reigniting Growth With Oil & Gas“) described the benefits to the country’s economy because of the gains due to fracking and the large investments and new employment that would generated. A recent study by PriceWaterhousCoopers projected 1 million additional jobs by 2025 due to the benefits of affordable energy and demand for products used to extract natural gas.

The American fracking industry is ahead of the world by 15 years according to Harvard Business School’s Michael Porter. There are 101,117 fracked wells in this country as compared to 258 in China.

What does this mean for commercial lenders?

The resurgence of the American manufacturing industry, specifically steel, chemicals, aluminium and paper will have a downstream effect and bankers will see an increased requirement for funds as new facilities are developed, new equipment is purchased and businesses gear up and expand because of the increased supply chain development.

In fact lenders in the oil and gas producing states have already seen an upsurge in demand for finance since 2011, and this growth is now expected to spread to states with energy intensive industries.

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