September 2, 2010
The National Association of Credit Management (NACM) has sent a new letter to Sen. Sheldon Whitehouse, the culmination of a series of meetings among staffers in Whitehouse's office and members of NACM's Government Affairs Committee.
The letter specifically addresses S. 3675, the Small Business Jobs Preservation Act, a bill sponsored by Whitehouse that would create a new bankruptcy procedure for small businesses. NACM originally received a draft of the bill on the day of its introduction in late July 2010, and has since analyzed the legislation for its potential impact on unsecured trade creditors. Resulting objections apply to portions of the bill that undermine aspects of the Bankruptcy Code that serve as creditor protections.
"NACM greatly appreciates the chance to work with your office and with others on S. 3675, the Small Business Jobs Preservation Act, in order to make it as beneficial as possible to small businesses and the economy at large," said NACM in the letter. "However, in its current form, we have found numerous provisions that we believe would do more harm than good for both the debtors and creditors involved in bankruptcy cases, as well as for the greater American economy."
Specific objections were made to sections in the bill that would make the new small business procedure elective, prevent creditors' committees from forming without a court order, and allow only debtors the right to submit plans for reorganization. NACM also took issue with a number of the bill's changes that would violate the absolute priority rule, which is the concept that no value goes back to the estate until creditors have been made whole.
The letter also offered NACM another opportunity to make its case for preference reform, the centerpiece of its legislative agenda this Congress. "NACM continues to maintain its position on preference reform, which is that the burden of proof for a preference claim should be shifted from the creditor to the debtor or trustee," said the letter.
"Philosophically, the current preference statute considers creditors guilty of receiving a preferential payment until they can prove themselves innocent, violating a fundamental tenet of American jurisprudence: that individuals are innocent until proven guilty. Shifting the burden of proof to the trustee would align the preference statute with this fundamental concept and, moreover, would also be consistent with the goal of S. 3675."
Jacob Barron, NACM staff writer
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After languishing for much of the summer on California's dreaded "inactive" listingâ€”where bills typically go to dieâ€”a bill designed to increase the difficulty of filing bankruptcy for municipalities facing serious financial troubles has returned to the State Assembly's agenda with just more than a week left in its session.
Assembly Bill 155, introduced by Tony Mendoza (D), would require any bankruptcy filing by a municipality to undergo a review by the California Debt and Investment Advisory Commission (CDIAC). In its original form, AB 155 would've barred municipalities from filing bankruptcy without commission approval. A softened version of the bill still would encourage municipalities' financials to be reviewed by the commission, now largely serving in an advisory role as the law would allow local governments to disregard its findings. It also now includes the caveat that municipalities could opt for a state audit, circumventing a CDIAC review. Backers say the bill will help increase transparency as to the true state of the books for California municipalities. The same lawmaker who suspended the legislation, Sen. Mark DeSaulnier (D), resurrected it in late August.
"The reputation of that [state audit] office is unblemished, and they have demonstrated time and time again that they have the professional skills and experience needed to thoroughly review local finances," said DeSaulnier. "It only makes sense that the public have the benefit of this kind of expert third-party impartial review prior to a city or county filing for bankruptcy...this will allow cities to move forward with complete control of their decision-making, while also providing the public a respected and trustworthy independent review of the city's finances." The lawmaker went on to refute published reports predicting that audits would take as long as 90 days or, in extreme cases, four months. The timing raised the ire of bill opponents concerned that such a wait could devastate a municipality on the brink of complete insolvency and its residents who are dependent on critical services.
Critics also allege the measure amounts to a masquerade in an attempt to cancel or alter strong union contracts, leaving public employees open to potentially significant changes in pay and benefits. California's budget crisis has been widely discussed nationally amid the ongoing national and global recessions, and its reach extends throughout the state. To date, Vallejo is the only California city to file for bankruptcy. However, rumors have been rampant in other communities, most notably Los Angeles, that using bankruptcy as a means to get out from underneath their creditors and properly reorganize is generating support. Still, AB 155 opponents argue that widespread use of municipal bankruptcy is unlikely because of long-term ramifications, including the theory that such a move equates to political suicide for many municipalities' top policymakers.
Though picking up steam, the proposed municipality changes are no slam-dunk for enactment as time in the present session is short and the possibility of a gubernatorial veto looms.
Brian Shappell, NACM staff writer
eNews Story Update
Following last week's posting of the eNews story about the ongoing legal spat between MGM Mirage and the general contractor on its massive CityCenter project in Las Vegas, "MGM Mirage Sidestepping GC to Make Nice with Subcontractors," new information warranted a update/reposting of the story on the NACM website. NACM has now spoken with subcontractors and MGM Mirage sources who sat in on a meeting with the two parties, without the general contractor (Perini Building) that filed $492 mechanic's lien filed against MGM Mirage. The upshot could have the subs getting money much quicker than had been feared in recent weeks. Check out our blog page at NACM.org to view the story and in the future as news breaks on a variety of important industry topics. NACM also regularly posts short updates on our Twitter accountâ€”You can find us under the moniker "NACM_National."
Despite noting the pace of the economic recovery had slowed noticeably, Federal Reserve Chairman Ben Bernanke clung to optimistic signs in some sectors, while noting that the Fed still has plenty of tools to help stave off a double-dip recession.
Bernanke did his best at Friday's Federal Reserve Bank of Kansas City Economic Symposium to quell growing fears of the recovery's sluggishness in recent months. Still, markets response largely could be seen as an overreaction, said Xiaobing Shuai, senior economist for Chmura Economics & Analytics.
"I think his speech on the slowing economic recovery just officially confirmed what the economic indicators have telling us in the past few weeksâ€”the recovery is slowing; housing and labor markets are very weak," said Shuai. "I think the financial market expected something more optimistic from him, but did not get it. I don't think anything is too new in that regard."
Shuai said what was a surprise was the detail Bernanke went into in describing the various responses the Fed could undertake should economic problems grow. The move is a thinly-veiled attempt to try to boost market confidence or at least keep panic at bay.
"We have heard people talking that the Fed is running out of its tools to stimulate the economy, especially with the funds rate at near-zero for so long," Shuai said. "He is telling the market and the public that they do have more options."
Bernanke highlighted business sector investment as one bright spot during his speech. However, he did note such increases might slow through year's end, though remaining at a "healthy pace," and suggested that investment in the commercial real estate area is one of the two most dangerous obstacles preventing better economic growth (the other is employment numbers):
"Although output growth should be stronger next year, resource slack and unemployment seem likely to decline only slowly. The prospect of high unemployment for a long period of time remains a central concern of policy. Not only does high unemployment, particularly long-term unemployment, impose heavy costs on the unemployed and their families and on society, but it also poses risks to the sustainability of the recovery itself through its effects on households' incomes and confidence."
Bernanke defended the Fed's policies, including keeping interest and borrowing rates near historically low levels, and noted that inflationary and deflationary pressures have yet to creep into the economic picture enough to date to change course. He also strongly intimated that the Fed's Federal Open Market Committee would continue to help prop up a near-term rebound, slight or stout, any way possible. Still, striking a balance on economic policies remains difficult for the Fed at present, in part because of the differing needs of various sectors. Even within the business sector, there is a bit of a tale-of-two-cities conundrum to address:
"Generally speaking, large firms in good financial condition can obtain credit easily and on favorable termsâ€”moreover, many large firms are holding exceptionally large amounts of cash on their balance sheets. For these firms, willingness to expandâ€”and, in particular, to add permanent employeesâ€”depends primarily on expected increases in demand for their products, not on financing costs. Bank-dependent smaller firms, by contrast, have faced significantly greater problems obtaining credit, according to surveys and anecdotes. The Federal Reserve, together with other regulators, has been engaged in significant efforts to improve the credit environment for small businesses...There is some hopeful news on this front: For the most part, bank lending terms and conditions appear to be stabilizing and are even beginning to ease in some cases, and banks reportedly have become more proactive in seeking out creditworthy borrowers."
Conference Board Economist Ken Goldstein said that uncertainty, especially for small businesses, is unlikely to change any time soon because of the deep hole in which the housing market remains. Goldstein noted small businesses are much more beholden to the trends of housing because they provide services to that market such as equipment rentals and repairs, storage, insurance and sales among many other activities, not to mention their dependence on local consumers who are notably more conservative amid home value and employment concerns.
"In all these ways, they are more exposed to the ups and downs of the local housing market," Goldstein said. "And while housing isn't getting worse, it's still at least a year from getting better."
Brian Shappell, NACM staff writer
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Following a year-long review, President Barack Obama recently announced his administration's plan to reform the nation's Cold War-era export controls. In a speech to the Department of Commerce's Annual Export Controls Update Conference in Washington, D.C., Obama argued that fundamental change was necessary in four general areas of the nation's current export control system: "what we control, how we control it, how we enforce those controls and how we manage our controls."
"For too long, we've had two very different control lists, with agencies fighting over who has jurisdiction. Decisions were delayed, sometimes for years, and industries lost their edge or moved abroad," said the President. "Going forward, we will have a single, tiered, positive listâ€”one which will allow us to build higher walls around the export of our most sensitive items while allowing the export of less critical ones under less restrictive conditions."
Certain export items require licenses, depending on the nature of the product, how it can be used, who is receiving it and where the item is being sent. This process has often beguiled many potential exporters and arbitrarily inhibited the sale of many harmless items to overseas customers. "In the past, there was a lot of confusion about when a license was required. It depended on which agency you asked," said Obama. "Now, we will have a single set of licensing policies that will apply to each tier of control, bringing clarity and consistency to our system."
Additionally, Obama noted that all agencies will transition to a single IT system that manages export control licenses. Currently, this process involves multiple different IT systems and, in some cases, paper forms and applications.
The announcement drew cheers from the U.S. Chamber of Commerce, an often vocal adversary of the Obama Administration. "By modernizing America's antiquated export controls, the White House is seizing an opportunity to enhance U.S. national security and economic competiveness at the same time," said U.S. Chamber Senior Vice President for International Affairs Myron Brilliant. "Stronger export controls may be warranted for the 'crown jewels' of U.S. military technologies, but U.S. export controls today cover too many products that lack a significant military application or are readily available from other countries."
"U.S. small and mid-sized companies will welcome these reforms because overly complex export controls sometimes deter them from even trying to sell their goods abroad," he added.
Jacob Barron, NACM staff writer
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Fueling concern that a double-dip recession may be moving from a longshot to an even-money possibility, the Commerce Department unveiled its revision of second-quarter gross domestic product (GDP) statistics, and it wasn't pretty.
Commerce's revision revealed GDP growth tracked at just 1.6%, more than one-third off the 2.4% pace initially reported for the quarter and less than half of the growth rate present in the first quarter. Driving the lackluster growth numbers, at a time that in previous years had been predicted as the turning point in a robust economic rebound period, was the growing imbalance in trade. Commerce confirmed that imports spiked by the largest total in about 26 years during the latest quarter, and the overall trade imbalance settled at its worst ratio since just after World War II. The most positive impact on GDP numbers, however, came from business sector investments, up by more than 20%, in areas such as equipment and infrastructure. Granted, such an increase is part and parcel with procrastination from companies that were slow to make needed replacements during the bleakest point of the economic downturn.
Gus Faucher, director of Moody's Economy.com, noted the 1.6% figure was poor, but not altogether unexpected for those who've been paying attention. And while disappointing, the significant downward revision shouldn't be the prime driver of market and consumer panic over the potential for another recession, warranted or otherwise.
"We're not going to have a double-dip because of the trade imbalance," said Faucher. "The trade balance is something around the edges. Consumer and industrial spending will decide that." He added that stronger GDP growth remains unlikely without significant improvement in the labor markets.
Still, the poor import-export ratio in the United States isn't an issue that's going away any time soon. Faucher noted that repairing the growing trade imbalance requires a number of factorsâ€”this includes top U.S. product destination Europe "getting its act together" economically and improved exporting expansion in emerging economies such as Brazil and Indiaâ€”and is not something that can be turned around in the short term or likely even in the medium term.
"There are limits to what the U.S. can do," he said. "There will be more opportunities to export, but that's a process that will play out over years and decades." In essence, don't hold your breath that the Obama Administration's rose-colored platformâ€”that exporting will cure most of the ills of a slow recovery for small and medium businessesâ€”will live up to its billing.
Brian Shappell, NACM staff writer
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Although the commercial real estate sector is leveling off in some ways, it's still struggling through the recession's leftovers. However, this has translated into a buyer's market for businesses looking for rental space, and landlords have taken a number of steps to get customers moving in as quickly as possible.
A new report by the Society of Industrial and Office Realtors (SIOR) indicated that vacancy rates are beginning to bottom out, but rents remain depressed and subleasing space is high. The SIOR index, which measures 10 attitudinal variables, rose by 2.8% points to 41.0 in the second quarter of 2010, marking the third consecutive quarterly improvement after a three-year drop. The index still sits well below the 100 mark, which indicates a balanced commercial market.
Still, the survey indicated that 57% of respondents expected further improvements in the office and industrial sectors in the third quarter. Also on the bright side of the data, low prices and a slim customer base have made it much easier for expanding businesses to find office space for rock bottom prices.
"Vacancy rates are beginning to level off in some sectors, but rent discounts and moderate levels of landlord concessions are widespread," said Lawrence Yun, chief economist for the National Association of Realtors (NAR). "This is very much a tenant's market, which is quite favorable for businesses that are considering expansion. It's also encouraging that there is a modest improvement in the sentiment of commercial real estate practitioners."
Development in the sector remains overwhelmingly flat. All regions in the SIOR survey reported low investment activity, with a whopping 88% of respondents indicating that investment in their market was virtually nonexistent.
NAR's latest Commercial Real Estate Outlook also indicated that vacancy rates in the office sector are expected to increase mildly between the second quarter of this year and the second quarter of next year, easing later in 2011. In the industrial sector, on the other hand, vacancy rates are expected to decline into the second quarter of 2011, then continue to ease modestly as the year progresses. Rent is expected to decrease mildly in both sectors.
Jacob Barron, NACM staff writer
The trend in data this past week was hardly encouraging, resulting in another chorus of pronouncements regarding an imminent return to recession. The housing market remains in the doldrums, GDP numbers were revised down in reaction to the worsening trade deficit numbers and there was a decline in the markets. In the midst of all this gloom comes the latest iteration of the Credit Managers' Index (CMI) and it is looking much like a beacon of hope. Over the last several years, the CMI, issued monthly by NACM, has proven over and over that it is somewhat prescient when it comes to bigger economic trends. The precipitous decline in the CMI in June and July 2008 presaged the overall collapse of the economy three or four months later. The index started to gain as early as October 2009, followed by the rest of the economy, which showed some recovery by the end of the year (5% growth for the quarter). Worsening conditions began to appear in the CMI as early as May this year followed by the economy as a whole in June and July.
"The good news coming from the August CMI is that the index showed some modest recovery, which was more dramatic in the manufacturing sector than in services," said Chris Kuehl, Ph.D., NACM economic advisor. "If the past is any prologue, this may signal some slow improvements in the overall economy within the next month or two. This optimistic assessment is tempered by the fact that the service sector remains weak and, given the size of this sector in the U.S. economy, as a whole remains a significant drag on overall recovery."
The improvement in the indexâ€”from 53.0 to 53.3â€”stems from small adjustments in areas that traditionally signal distress. The number of accounts placed for collection improved, invoking a number of suggestions as to why this was the case. Part of the reason, Kuehl noted, is that many of the weakest creditors have now exited the systemâ€”they have folded. There is also some renewed patience on the part of creditors according to survey respondents' comments: a willingness to work with accounts because improved business conditions may be on the horizon. The natural preference is to get paid by a customer and keep them in the system. Having to resort to collection usually means the relationship is destined to deteriorate. There is now a growing sense that patience may be rewarded should the economy stage any sort of turnaround in the coming months.
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