November 10, 2011
The Senate approved H.R. 674 today, clearing the 3% withholding repeal bill's path to passage.
The bipartisan vote included measures to repeal the 3% tax, which would otherwise go into effect on most government contracts starting in 2013, and to enact a jobs plan that offers tax breaks to businesses that hire recently discharged veterans.
While the House must still approve the final bill before it can be signed into law, support remains strong, and full passage is likely.
While originally some minor discontent was expected among Democrats for H.R. 674's pay-for provisions, which take a small swipe at the health care reform bill, the bill as approved by the House has been largely non-controversial. However, Senate Majority Leader Harry Reid (D-NV) was reportedly also looking for a way to attach penalties to the final version of H.R. 674 for contractors that aren't tax compliant, but the details of his proposal remain vague.
Both the veterans jobs proposal and the 3% repeal enjoy widespread support on the hill, as noted by Senate Minority Leader Mitch McConnell (R-KY). "This week, Senate Democrats finally agreed to move ahead with two of these bipartisan proposals: a repeal of the 3% withholding rule that will ease the burden on government contractors, and a veterans bill that not only helps returning servicemen and women find jobs, but which also helps those who hire them," said McConnell. "Neither of these bills is going to solve the jobs crisis, but they'll help a lot of Americans who deserve it. And they'll go a long way in showing the American people that there's plenty we can agree on up here."
NACM congratulates the Senate on approving this important legislation, and welcomes the imminent end of the 3% withholding tax, which NACM has opposed since its enactment. Stay tuned to NACM's blog for more updates.
Jacob Barron, CICP, NACM staff writer
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Just one week ago, economist Ken Goldstein of The Conference Board intimated that the media's attention on problems with Greece's debt and political leadership was merely foreshadowing a much bigger story of problems in Italy. Well, market-watchers and mainstream media hacks can effectively cue the trite "Rome is burning" sound bite as Italy's prime minister has essentially lost his power base amid evaporating support from some previously close allies over the handling of the nation's debt problems.
Days after costs for borrowing in the Italian bond market have soared to their worst and most expensive level since 1997 on repeated and intensifying calls for Prime Minister Silvo Berlusconi to step down, the Italian leader confirmed he would do just that. Berlusconi said he will step aside if/when the debt reform package is passed by the Italian Parliament.
The last straw, unless the often defiant leader pulls an about-face, came in a routine budget vote on Tuesday. More than half of the lawmakers in the Italian Parliament abstained from voting, indicating Berlusconi's lost majority power over the government even as he said, at the time, he would not resign. While NACM Economist Chris Kuehl, PHD noted that Berlusconi has been close to ouster before on various public embarrassments and scandals only to survive, this one rings differently because of the loss of some of his top supporters.
"The fact is that, this time, his real opposition is coming from within his own coalition," said Kuehl, who added that the likely transition will be difficult as "none of them trust each other" and that a culture of "crony capitalism and corruption" remains widespread in Italy, much like Greece.
That said, Goldstein told NACM on Tuesday that the new austerity measures, and more severe ones at that, need to be enacted quickly. Still, he is confident in Italy's ability to come through the other end of this debt crisis without doing too much collateral damage to other EU nations and the global recovery.
"The Italians are very adaptable," he said. "They will grumble and maybe have some general strikes, but will buckle under austerity. This crisis will pass more easily than Greece." Goldstein suggested that the bigger question, and one that's not far behind, will be talk about the euro as a currency and the 1 trillion euro bailout fund. "That's next week's headline and market headache."
Meanwhile, after much prodding and a massively failed attempt to sabotage the EU's newest Greek bailout, Greek Prime Minister George Papandreou finally has confirmed a readiness to step aside as leader in deference to a unity government with shared power among his party and the opposition. It's just about the first positive news for the markets since the EU bailout plan was unveiled late last month. Its market-calming, investment-boosting potential was scuttled within a couple of days by Papandreous efforts to look good and stay powerful with angry Greek voters uninterested in making additional sacrifices to quell the nation's runaway debt.
Brian Shappell, NACM staff writer
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Many weeks ago, it seemed Jefferson County, AL officials and its main creditors on a sewer renovation project that has sucked its coffers dry had enough of a framework for a deal to help the community avoid filing for Chapter 9 bankruptcy. But then, the prospects for such a deal were gone and the largest municipal bankruptcy in the history of the nation has now gone on the books.
Jefferson County Commissioners voted 4-1 Tuesday evening to declare bankruptcy. Alabama Gov. Robert Bentley confirmed publicly that a deal with creditors that could have renegotiated upwards of $1 billion of the $3 billion in debt tied to the sewer renovation had fallen through before the decision. The Chapter 9 filing, which lists the county's debts in excess of $4 billion, is nearly double that of the well-documented filing in Orange County, CA nearly two decades ago.
Creditors seemed to throw at least a temporary lifeline to Jefferson County in the form of a renegotiation plan this summer. However, county officials and the creditors were reportedly hundreds of millions of dollars apart on terms, and officials made it known they would not agree to waiving Chapter 9 filing rights under any agreement. Even Bentley noted earlier this summer on multiple occasions that Chapter 9 was "a very strong possibility," though his statement on the matter on Tuesday could best be described as sheepish or humbled. Still, the governor subsequently publicly chided Jefferson County officials for not getting the deal with creditors done and openly fretted over the impact it could have on municipal borrowing costs throughout the state.
The Jefferson County filing—perhaps a harbinger of things to come amid cities struggling with bad investments, shrinking tax revenues and, notably, pension/health care entitlements—follows those of Harrisburg, PA and Central Falls, RI in recent months. At least a half-dozen municipalities have filed for Chapter 9 bankruptcy protection in 2011.
Bruce Nathan, Esq. of Lowenstein Sandler PC said the dust needs to settle before anyone can predict the impact on other municipalities and creditors, both in Alabama and throughout the country. Nathan did note that, based on events of the past month, there appeared to be significantly less political opposition in the weeks and months leading up to the filing.
"This one may actually go much more smoothly than Harrisburg," Nathan predicted. "Notice how much opposition Harrisburg got. The mayor opposed it; the state opposed it. I don't think you're going to see this here from the political establishment."
Brian Shappell, NACM staff writer
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Exporting companies know that banks are an essential part of the process. They provide security and information for sellers of all sizes looking to take advantage of the, in some places, booming international market and weak dollar. But as the Basel Committee on Banking Supervision implements the third iteration of their capital requirement regime, dubbed Basel III, the result could be a mass international exodus on the part of banks from the business of financing trade transactions.
Many in the exporting and banking industry are already familiar with Basel II, the committee's previous international regulatory framework for banks. "Basel II really went in relatively painless," said John Ahearn, global head of trade at Citigroup, Inc. "Most European banks embraced Basel II pretty well. Now we get to Basel III and the world starts to change."
The major shift that could lead many banks to exit the trade financing market is in what's considered capital. The Basel regimes establish what a bank has to keep in reserve in relation to its lending and, as the definition of capital expands under Basel III, banks are required to hold more money in reserve in order to be in compliance, and their costs go up.
Basel III also includes a leverage ratio as a backstop to its other risk-weighted capital requirements. In essence, banks will have to maintain a certain amount of reserve capital to maintain the proper leverage ratio, regardless of how risky the assets are and regardless of whether or not the asset is on- or off-balance sheet. While some sellers might consider trade finance a high-risk endeavor, to banks it's a famously low-risk affair, so having to calculate a leverage ratio, without accounting for how surefire a trade financing transaction might be, increases the bank's costs.
"I think you are going to see a pretty large exodus of banks out of the trade business," said Ahearn, noting that this is already taking place, as banks rid themselves of these types of assets. "They're not just selling transactions; they're selling entire portfolios. What's going to happen is that there's going to be a conversation about 'what is a core business for my bank, and what is not?'"
While this threatens the availability of export financing, a larger problem could arise in the form of a secondary market for these sorts of transactions. "From a regulator's point of view, you're taking all this business in a highly regulated market, and moving it out of that market and into an unregulated market," said Ahearn, drawing a parallel between this and the negative role that non-traditional lenders played in the subprime lending crisis. "It's not that hard to figure out the equation, and people can see how well this asset class performs. This is a very good asset class and they don't necessarily need to be provided by a bank."
Jacob Barron, CICP, NACM staff writer
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The robust recovery of the commercial real estate sector continues to be haunted by the ghosts of the downturn, though conditions do seem to be moving forward well enough, said members of a Marcus & Millichap webinar panel this week. Additionally, without the hubris and misleading positivity of boom years' activity, the present pace might be even better received.
Marcus & Millichap officials called late 2011 into much of 2012 a "transitional phase" for commercial real estate. It's one where they are predicting mild growth that is "short of exciting...but nonetheless positive," as described by Hessam Nadji, managing director of the firm's Real Estate Investment Services division.
Nadji noted that there have been encouraging signs for job stability, more part-time positions are becoming longer-term; consumer spending is up, especially among auto-related products; and the business community didn't panic when the United States suffered a ratings downgrade months ago. Additionally, the pace of activity in the sector rivals that of 2003, a pace then considered very strong before the boom changed expectations. However, concerns about political gridlock may stymie growth until after the 2012 election and the need to work off overhang from companies that have been looking to downsizing since the downturn but couldn't find takers.
"A lot of businesses have been sitting on extra space and at this point in the recovery, we're still burning through that extra space," said Nadji. "A lot of companies are still looking to downsize."
Another issue is that commercial delinquency rates are up substantially, rising to near 10% in many markets.
Marcus & Millichap rated the following, based on vacancies, as the best office markets: New York, Washington, DC, San Francisco, Los Angeles and Portland. Top industrial markets were San Francisco, Denver, Los Angeles, Orange County and Milwaukee. Metropolitan Ohio markets, Fort Lauderdale and Austin were among the worst five markets in both office and industrial categories, according to the firm.
Brian Shappell, NACM staff writer
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C4F: Employment Connections for the Business Credit Community
Statutorily speaking, 23% of all federal contracts are required to go to small businesses, but this doesn't always happen.
As the unemployment rate continues to get comfortable around 9%, lawmakers have recently undertaken a series of efforts to remedy this shortfall, and ultimately increase small businesses' access to federal dollars, hopefully spurring job creation in the process. In a recent hearing, the culprit keeping federal contracts out of the hands of ready and willing small businesses was the often challenging procurement process.
"With national unemployment stalled at 9%...we should be removing the barriers and complexity from the procurement system so that small businesses in our communities have the opportunity to compete and win federal contracts," said Rep. Mick Mulvaney (R-SC), chairman of the House Small Business Committee's Subcommittee on Contracting and Workforce, who hosted the field hearing in his home state, where unemployment is two percentage points higher than it is nationally. "Making it easier for small firms to get their fair share of contracting opportunities will spark job growth in our communities and ensure that taxpayer dollars are used as efficiently as possible."
Witnesses testified about the difficulties they've faced in their attempts to win federal contracts and receive payment after they've landed them. "Why aren't small businesses receiving at a minimum the percentage of business as described by this government?" asked William Aycock, president of Aycock Construction LLC. "Let me say that it is not because of a lack of local labor force, but the lack of the opportunity."
The troubles for small businesses don't end once they've won a contract either, as Bill Lynam of Lynam Construction noted in his testimony. Sometimes it's bad enough to keep them from even bidding on these opportunities. "Our experience, and others,' has been that the SBA (Small Business Administration) 8(a) contractors ignore the payment regulation of the federal government," he noted. "Contracting officers do not seem to be motivated to ensure that these regulations are followed. Most local small businesses cannot survive with the payment practices that are commonplace to these contractors."
Jacob Barron, CICP, NACM staff writer
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