September 22, 2009
After several discussions, roundtables, debates and proposals, the U.S. Securities and Exchange Commission (SEC) recently voted unanimously to issue several rules aimed at more harshly regulating U.S. credit rating agencies. Specifically, the proposals will bolster oversight of Nationally Recognized Statistical Rating Organizations (NRSROs) by enhancing disclosure and improving the quality of issued credit ratings.
Among the many blamed for the subprime mortgage crisis and financial meltdown, none have been more ripe for increased regulation than NRSROs, whose failure to properly identify risks and propensity to create harmful conflicts of interest led to inflated ratings of financial products that subsequently had to be downgraded, causing hundreds of billions in losses at banks and investment firms. In its quest to ensure that such misdeeds never occur in the future, the SEC's rules and proposals require greater disclosure among NRSROs, aim to increase competition in the industry, which is dominated by only three different firms, and help to address conflicts of interest by illuminating the practice of rating shopping, whereby a firm will seek ratings from multiple agencies in order to get the highest grade.
"These proposals are needed because investors often consider ratings when evaluating whether to purchase or sell a particular security," said SEC Chairman Mary Schapiro. "That reliance did not serve them well over the last several years, and it is incumbent upon us to do all that we can to improve the reliability and integrity of the ratings process and give investors the appropriate context for evaluating whether ratings deserve their trust."
Certain items were approved by the SEC while several others were simultaneously proposed and made available for public comment. Among the adopted were rules that will provide greater information on ratings histories and will grant competing agencies access to the underlying data necessary to provide unsolicited ratings on structured finance products, as well as an amendment to the SEC's rules and forms that will remove certain references to credit ratings by NRSROs. Among the proposed elements were amendments to strengthen compliance programs by requiring annual compliance reports and enhancing disclosure of potential revenue-related conflicts of interest, and new rules that would require firms to disclose the practice of rating shopping.
While 10 credit rating agencies are listed with the SEC as NRSROs, the three dominant raters are Moody's Investor Service, Standard & Poor's and Fitch Ratings, whose business is expected to be largely affected by the new proposals. Parties interested in commenting on the new rules or proposals can visit the SEC's website (www.sec.gov) for more details.
Jacob Barron, NACM staff writer
Bouncing Back from Disappointment
The current economic crisis has given many different people of many different professions a reason to feel disappointed. Whether it's a good account that's suddenly gone off the rails or simply the loss of important staff members who have been laid off, credit professionals have not been insulated from the wrath of the economic collapse and the personal havoc it can wreak on one's life and business. Still, credit professionals need to be resilient in the face of adversity and are often required to bounce back and get back into the game as quickly as possible. Resilient people do more than rely on positive thinking and luck. They experience just as many challenges as everyone else, and sometimes more. Yet, they have developed effective coping skills that allow them to survive and thrive during adversity. To learn how to develop this skill set for yourself and encourage it in others by challenging inflexible thinking, asking solution-oriented questions and responding proactively, join Susan Fee M.Ed., L.P.C. for her upcoming NACM-sponsored teleconference, "Bouncing Back from Disappointment," on September 30 at 3:00 pm EST.
To learn more, or to register, click here.
The financial meltdown may have fizzled to an end earlier this year in the eyes of the federal government and the economic analysts at-large, but local governments are still awaiting recovery's arrival. Coming out of recessionary periods, local governments, such as cities and counties, historically rebound at a far slower pace, and the intensity of this latest economic downturn caught many local governments off-guard.
A survey conducted by the International City/County Management Association (ICMA), "How It Plays in Peoria: The Impact of the Fiscal Crisis on Local Governments," found that 80% of respondents reported anticipated shortfalls worse than imagined, and most reported the shortfall greater than the cuts made in the 2009 fiscal year budget. States like Maryland are looking at quickly widening budget gaps of up to $2 billion, while states like California are looking at shortfalls several times larger. Grappling with budget crunches, local governments are having to leave vacant positions unfilled, defer capital projects, implement cuts in expenditures, increase fees for services, eliminate or significantly reduce travel budgets, freeze salaries and enact furloughs, and this is far from the end.
"In general, we think that the recession has ushered in permanent changes in governing at the local level," said Elizabeth Keller, deputy executive director, ICMA. "Almost 70% of our respondents reported that the changes that they have implemented represent a new way of doing business and will continue beyond the fiscal crisis."
With major employers buckling across the country, the impact is vaporizing revenues for cities and counties. Even more difficult is that local governments somehow have to manage and implement "safety net" programs to help those in need, whose numbers are increasing because of the crisis. "If local governments are not able to sustain employment along with the private sector, we continue on in a downward spiral," said Ron Carlee, county manager, Arlington County, Virginia. "Until unemployment stabilizes, we're going to have significant challenges in recovery. In the end, local governments can't walk away from people that are hungry or homeless or facing some other crisis that land on our doorstep. We are the ones that end up having to deal with it, one way or another."
The financial crisis' impact is particularly poignant for Arlington County in northern Virginia since it is not dependent on manufacturing or financials but on federal government and government services. Home prices in the area skyrocketed during the mid-decade boom years, and the falloff since has been painful.
"We did see a very high mark-up in property values, so, of course, a correction was due at some point, but it's gone far beyond a market correction at this point," said Carlee. "On residential markets, some jurisdictions are seeing further declines of 10% for the next assessment period, and we are on an annual assessment period. What is of particular concern is the commercial market."
The lack of credit availability and the increase in capitalization due to high equity demands have shuttered most new development activity or exchange of commercial property in the region. Declines in commercial property values are expected to sink another 10-18%. And the results ripple from the private sector to the public. Last year, northern Virginia local government offices cut more than 700 jobs and Carlee expects further layoffs well into FY2011.
Just across the Wilson Bridge in Maryland, many city governments are facing budget gaps near 3%. Like most, the bulk of city revenue, approximately 65%, comes from property taxes. With housing values down from the peak just two-and-a-half years ago, Maryland cities have been forced to reduce public works projects and services like police aid. Payrolls are being targeted such as in Prince George's County, where it has been announced that 125 employees will be laid off on November 1st.
"Cities in Maryland are for the first time seeing a furlough of employees," said Scott Hancock, executive director, Maryland Municipal League. "City staffs are being 'right-sized.' We have had a number of municipalities take advantage of this opportunity to 'right-size' and figure out whether they are providing services that cities and towns should be providing and are expected to provide in this economy."
He added, "There will not be a return to normality. What we have is a new normal as a result of these changes."
In areas of the country more dependent on manufacturing jobs, the outlook is even worse. In Peoria, Illinois, unemployment has jumped from 5-6% in the fall of 2008 to 12% this year as Caterpillar, Inc. began downsizing at area plants. The result has been the single largest year-to-year jump in unemployment in the state of Illinois. In Salina, Kansas, unemployment has nearly doubled to 6.5% from the normal range of 3.5% to 4%. Further west in Washoe County, Nevada, municipalities are struggling as sales receipts, which account for a third of the county's general fund revenues, have declined in 33 of the last 36 months, with double digit declines in the last 13 consecutive months. Washoe has reduced its staff by 500 positions and, as other city and county managers lamented, when local governments are forced to reduce staffs, the governments are unable to successfully manage programs. In Washoe County, the staff for the Building Enterprise Fund has been reduced from 36 to 11.
"The inability to get funding from the commercial credit market is really where the huge barrier lies," Carlee said. "The stimulus money is going to be helpful, I think, primarily on the fringes of public works projects out there, but it's going to be spotty. The stimulus money is across a very wide range of programs, spread all across the country." Carlee believes stimulus funds will be more of a "band-aid" than a driver for recovery.
Matthew Carr, NACM staff writer
It's Credit Words Time!
It's time to submit your credit stories for this year's Credit Words Contest. Earn cash and roadmap points if you're a winner and roadmap points if we publish your story. It's been a really tough year; we know you have stories to share about how you've made it through the worst business environment you may have ever seen. This is just one topic of many so be creative.
Submission deadline is November 2. Read contest rules and get more information about the contest in the September/October issue of Business Credit, or by clicking here.
While indicators continue to edge slowly upward and the U.S. looks to Washington for a solution to the employment problem, the U.S. Chamber of Commerce has recently suggested reliance on alternate sources of economic prosperity, most notably exporting and trade expansion. "We could try to dig ourselves out of this hole by inflating the currency, or we can fuel recovery, jobs and deficit reduction through a massive surge in exports," said U.S. Chamber President and CEO Tom Donohue at an event marking the 50th anniversary of the Michigan Chamber of Commerce. "The question is whether we will have the policies and the leadership to make vigorous trade expansion our choice. On that score, we have reason to be concerned."
In his keynote address, Donohue argued that despite his and his association's belief that a major surge in exports is the best path out of recession, an air of isolationism now permeates the halls of Congress and the White House and threatens to stall meaningful reforms as the rest of the world's economies pass by America's. "At a time when our global competitors are making preferential deals that give their workers and companies a competitive advantage over ours, America is sitting on the sidelines. At a time when we should be looking outward to attract talent, welcome tourists and lure capital and investors, many Americans and policymakers want to turn inward," he said. "And at a time when we must stand up to the new isolationists who apparently don't believe that Americans can successfully compete in the world, many of our leaders seem stuck somewhere between vacillation and silence."
Specifically, Donohue advocated establishing a national goal of doubling U.S. exports within the next five years. "That means passing the trade agreements with Colombia, Korea and Panama. It means successfully concluding the Doha Round, which could boost the worldwide economy by $700 billion," he said. "These agreements are the best way to level the playing fieldâ€”to make trade fair for Americans." Additionally, Donohue noted that existing trade agreements should be rigorously enforced by the current administration and new firms should be more openly invited to participate in the exporting process. "More than a quarter-million small- and medium-size companies already exportâ€”and they account for nearly one-third of all U.S. sales abroad. With advances in global logistics, Internet communications and service providers...smaller companies now have tremendous opportunities to sell to foreign markets," he said. "Government has a role to play in helping these companies get the tools, training, financing and partners that they need to sell overseasâ€”and we support robust federal trade promotion programs."
"By improving trade facilitation regimes and the global supply chain, we can help address the increased cost in trade financing by reducing the cost of moving goods and services," he added.
A full copy of Donohue's speech can be found here.
Jacob Barron, NACM staff writer
Speaking Proposals for Las Vegas
NACM is currently accepting speaking proposals for the 114th Credit Congress & Expo in Las Vegas.
Join us in the City of Lights from May 16-19, 2010.
The deadline for proposals is September 25, 2009. Proposals must be made online. To submit yours, click here.
The country might be hard-pressed to find someone who isn't tired of the recession and the downturn in the economy. Americans' need to return to "normalcy" was seen a couple weeks ago as the back-to-school retail numbers, while not perfect, were at least positive for the fact that major mall retailers saw the smallest sales declines in months. Consumers are beginning to show that they are weary of frugality and want to spend, even though unemployment and bankruptcies continue to rise. As NACM reported, the nation can expect an early kick-off of the winter holiday shopping season as retailers try to lure tentative consumers back to stores to spend those dollars they have so doggedly guarded.
Looking at the economy as a whole, the U.S. Commerce Department's Census Bureau reported this week that retail and food service sales for August rose 2.7%, which was much better than the 2.0% increase private analysts had anticipated. The numbers were heavily boosted by the federal government's "Cash for Clunkers" program, as motor vehicle sales leapt 10.6%. When taking that program out of the equation, sales excluding motor vehicles increased 1.1%, while sales excluding motor vehicles and gasoline rose a more modest 0.6%. In retail trade sales, the U.S. saw an increase of 3%, which is an encouraging sign as retailers fight in the opposite direction after four straight quarterly declines in sales.
For President Barack Obama, it reiterates his Administration's mantra over the last couple months that the efforts set in motion by the American Recovery and Reinvestment Act (ARRA) have averted disaster and are beginning to show returns.
"Even excluding the strong growth in motor vehicle sales, which was a result of the successful 'Cash for Clunkers' program, this significant increase in consumer spending shows that the Recovery Act and President Obama's other economic initiatives are succeeding in putting the brakes on the recession," said U.S. Commerce Under Secretary for Economic Affairs Rebecca Blank. "Accelerated stimulus spending in the second half of this year will create jobs and further stimulate our economic recovery."
The $351.4 billion in retail and food service sales in August provides momentum to the ongoing optimism about the economy, though it is still 5.3% below August 2008 and total sales from June to August are 7.6% below the same period last year.
Further brightening the mood is the fact that the U.S. current-account deficit decreased to $98.8 billion in the second quarter, which is the smallest deficit seen since the fourth quarter of 2001. The goods and services deficit fell from $92.4 billion in the first quarter to $83 billion in the second, while the deficit on goods slid down from $124 billion to $115 billion. U.S. international services trade continued to see a surplus, which increased from $31.6 billion in the first quarter to $32.5 billion in the second.
Meanwhile, the residential housing figures for August also moved in the right direction.
There are lingering fears from some economists that recovery will be "W"-shaped, with another downturn awaiting the nation on the horizon, and the economic situation in general is not without its critics. "Since President Obama took office, over 3 million Americans have lost their jobs, including 2.5 million people since his stimulus took effect," said House Republican Whip Eric Cantor (R-VA). "At the time of its passage, the administration argued that the stimulus would not only halt job loss, but create jobs and get the economy back on track in the short term." Cantor pointed out that neither has yet to occur.
Matthew Carr, NACM staff writer
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A recent hearing in the Senate Judiciary Committee focused on the hardships currently facing the nation's dairy industry, which, according to committee chairman Patrick Leahy (D-VT), currently stands on the brink of collapse. Focusing specifically on Leahy's home state of Vermont and the surrounding region, the hearing examined the causes of the dairy industry's now lamentable condition, the volatility of milk prices and the industry's structural problems that have exacerbated the crisis.
"The severity and urgency of this crisis cannot be overstated," said Leahy. "Not just here in Vermont, but across the country, our bedrock dairy industry is on the brink of collapse. So many of our dairy farmers who had hoped to pass their farms on to future generations are now weighed down with loans and are losing money every day. They feel those dreams slipping quickly away."
A combination of reduced consumer demand for milk products and widespread consolidation in the industry are two factors to blame for the dairy industry's struggles. Leahy also referred to the gap between the price consumers pay for milk products and the price paid to farmers as a major source of problems for the industry. Earlier this year, the prices paid to farmers for milk dropped by more than a quarter from January to February, while during the same period, consumers saw store prices cut by only 6%. "This hurts both farmers and consumers, and suggests a much larger problem with competition and consolidation within the market," said Leahy. "When consumers are in the grocery store they don't realize that less than 40% of what they spend on a gallon of milk makes its way back to our dairy farmers."
"Farmers are doing all the work, they are taking all the risk, and they are making investments that span not just lives, but generations. They put their all into their farms, and all they ask is a fair price to keep their farms going. That's only fair, and that's only right," he added.
The committee heard testimony from two panels of experts, the first consisting of two Washington regulators and the second consisting of actual dairy farmers from the northeast. The two regulators present were Christine Varney, assistant attorney general for antitrust at the Department of Justice (DOJ), and Dr. Joseph Glauber, chief economist for the U.S. Department of Agriculture (USDA). Just last month, the DOJ and USDA announced that they'd be holding their first-ever joint workshops to discuss competition and regulatory enforcement in the agriculture industry, a move applauded by Leahy, who believed these issues hadn't been taken seriously enough by both departments in the years prior to the dairy industry's collapse.
Full copies of each witness' testimony can be found here.
Jacob Barron, NACM staff writer
Industry Credit Groups
Credit groups are an effective management tool. They permit credit professionals of different companies servicing the same customer, regardless of industry or trade, to compare information on collection history and provide a forum for the exchange of data as to the most recent payment practices. The purpose of exchanging information is to help group members segregate fiction from fact, so competent and realistic credit decisions about a customer can be made.
Managed and operated by NACM Affiliates nationwide, NACM-Canada and FCIB internationally, credit groups:
- Provide unparalleled networking opportunities
- Assist in the exchange of credit information on common customers
- Facilitate the receipt and analysis of information to make unilateral credit decisions
- Provide a forum to discuss the latest developments on credit department procedures,
equipment and other credit management functions
- Support the discussion of account information and delinquent account reports
- Adhere to federal antitrust guidelines
Click here to learn more about NACM credit groups and find the group for your industry.
As the nation tentatively continues forward with recoveryâ€”whether it be a full turnaround or the first part of an unwanted "W" trendâ€”the construction sector continues to try and rid itself of a laundry list of laments. Building permits ticked upward in August at a seasonally adjusted rate of 579,000, a 2.7% increase over July, but were still more than 32% below the same period in 2008. Housing starts also increased slightly in August over July by 1.5%, but completions were again down 5.5% and both figures were more than 25% below the numbers seen at this time last year.
From the federal government's perspective, the industry is heading in the right direction as housing permits are up 16% from a low in April, which is good news after a plummet of 78% between September 2005 and April 2009.
"Housing permits and starts have risen substantially above their earlier lows this year," said U.S. Commerce Secretary Gary Locke. "The upturn in housing activity and the recent gains in retail sales and industrial production demonstrate considerable progress toward recovery. More stimulus spending in the coming months should help spread growth to other sectors of the economy."
Unfortunately, many local governments are anticipating further declines in property values and commercial construction, further pilfering their already barren budgets.
With construction sector unemployment more than twice the national average, it is also worth noting that construction costs increased in August as the price for materials used in all types of construction inched upward a combined 1.1%. Fortunately, costs are still light years away from those seen just a year ago. Ken Simonson, chief economist for the Associated General Contractors of America (AGC), said that the increases were in large part due to a significant 17% leap in the price of diesel during the month of August, as well as a 6.8% rebound in steel prices and an 11% increase in the price of copper.
After hitting peaks in 2008, prices for materials like diesel, asphalt, steel and copper have tumbled for much of 2009 as commodity markets and demand tanked. For example, according to the AGC's product price index (PPI), the price for diesel is still 41% below August 2008 while the price for most metal materials are down between 10% and 35%. Despite the increases in material prices seen during the month of August, the price for major material components like diesel, copper and steel have already receded since the end of month.
Though construction is searching for solid footing in its effort to rebound, faced with the challenge that commercially available credit has been decimated in the sector as real estate loan delinquencies are at record highs, the overall trend for construction costs remains negative. Compared to the high costs of August 2008, the cost of construction is down nearly 7.5%, which Simonson believes makes for an attractive bargain.
"Prices haven't been this competitive for construction services in a long time, but once the domestic and global economy heats up, they are likely to rise again," said Simonson. "Public officials and private developers should act now to cash in on what is clearly a limited-time sale for construction."
Matthew Carr, NACM staff writer
Look for the "A" Players
You need the "A" players. They're the most qualifiedâ€”the most productive peopleâ€”in your organization. And, for any open positions you have, you need them fast because any interruptions in staffing can mean missed deadlines, a breakdown in operations and loss of productivityâ€”consequences you can't afford.
You'll find the "A" players at Careers in Commercial Credit, Collections & Finance (C4F), the online resource for the people who are educated and experienced in your related field, and who are looking for the opportunities you can provide.
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C4F: Employment Connections for the Business Credit Community
Most financial executives plan to maintain their current accounting and finance staff levels in the fourth quarter, according to the Robert Half International Financial Hiring Index. Eighty-four percent of chief financial officers (CFOs) interviewed said they will take no hiring actions before the end of the year. Four percent of respondents expect to add full-time employees while 10% foresee cutbacks, up from 8% who forecast personnel reductions last quarter.
Additional findings, including historical comparisons and data for more than 40 major metropolitan areas, are available at www.roberthalf.com/PressRoom.
"Organizations appear to be exercising caution before adding full-time staff until there are signs of a sustained recovery," said Max Messmer, chairman and CEO of Robert Half International. "At the same time, companies recognize that carefully chosen accounting and finance professionals are critical to their efforts to manage what remains of the recession and also to take advantage of growth opportunities once conditions improve."
Added Messmer, "Some firms are finding they have cut staff levels too deeply in an effort to reduce costs and are bringing in temporary professionals to help meet business demands."
Despite current unemployment levels, CFOs continue to report challenges finding highly skilled professionals for certain functional areas. Twenty-five percent of financial executives said accounting positions are the most difficult to fill, while audit and operational support roles were each cited by 19% of respondents.
Accounting and Finance Hiring: By Region
The West North Central states are projected to experience the most active hiring in the fourth quarter. However, even in this region the overall sentiment among CFOs is that staff levels will remain constant: A net 2% of survey respondents anticipate adding full-time accounting and finance employees while 90% expect no change.
"The economy has shown signs of stabilization in parts of the West North Central region, and some companies, recognizing the stronger pool of available candidates, are hiring to upgrade the skills of their teams," Messmer said. "In particular, companies continue to focus on achieving cost savings and seek tax, cost and staff accountants."
Accounting and Finance Hiring: By Industry
The finance, insurance and real estate industry is projected to see an increase in accounting and finance hiring. A net 6% of CFOs in the sector said they plan to add staff in the fourth quarter.
Source: Robert Half International
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