July 1, 2010
On Monday, the Supreme Court upheld the constitutionality of the Sarbanes-Oxley Act (SOX), leaving the landmark financial reporting legislation largely unchanged.
In its 5-4 ruling, the Court left the legislation's reporting requirements untouched, choosing instead to focus on the controversial manner in which the Public Company Accounting Oversight Board's (PCAOB) members are chosen and dismissed. The PCAOB is handpicked by the Securities and Exchange Commission (SEC), but the plaintiffs in Free Enterprise Fund v. Public Company Accounting Oversight Board argued that such a step reduces the board's accountability and that PCAOB members should instead answer to the president.
Writing for the majority, Chief Justice John Roberts noted that PCAOB's original structure also violated the Constitution's Separation of Powers clause. "The president cannot take care that the laws be faithfully executed if he cannot oversee the faithfulness of the officers who execute them," said Roberts. "The consequence is that the Board may continue to function as before, but its members may be removed at will by the Commission." Prior to the ruling, PCAOB members could only be fired with cause.
SOX's proponents feared, and its opponents hoped, that any change to the law would essentially invalidate it, since SOX was passed without a "severability clause," meaning that, technically, if certain portions of the law are declared unconstitutional, the entire law must be declared as such. However, the Roberts Court has historically gravitated toward small, incremental rulings, and did so again in this case, choosing to rule against only one portion of the Act rather than all of its 11 titles.
In the end, however, both SOX opponents and supporters declared victory in the case.
"The Center for Audit Quality (CAQ) is pleased that the U.S. Supreme Court's decision will allow the continued operation of the PCAOB without any changes or legislative action," said CAQ Executive Director Cindy Fornelli. "This narrow decision clearly severs the PCAOB board member removal process from the rest of SOX and reaffirms all provisions of the law except for the power to remove the board members."
"The Free Enterprise Fund beat the proverbial Goliath," said Competitive Enterprise Institute (CEI) attorneys Hans Bader, Sam Kazman and CEI Financial Policy Director John Berlau in a statement. Bader and Kazman were co-counsel on behalf of the plaintiff, who in addition to the Free Enterprise Fund, also included Nevada accounting firm Beckstead & Watts, LLP. "The board's lack of accountability under the Constitution is reflected in its flawed rules. For example, the board's 'internal control' mandate costs companies $35 billion a year and has auditors going over trivial minutiae such as the possession of office keys and the number of letters in employee passwords," they said. "Meanwhile, in the nearly eight years of its existence since SOX was passed in 2002, the PCAOB has done little to address auditing rules for off-balance sheet entities that were the core Enron accounting problems and that flared up again to hide debt at Lehman and other financial firms."
"The PCAOB's mandates and possibly other sections of Sarbanes-Oxley may now be subject to legal challenge," said Kazman, Bader and Berlau. "We look forward to working through the courts and/or Congress to correct the flawed rules from an unconstitutional body that have been holding our economy back."
As noted in Laura Redcay's story on NACM's Credit Real-Time Blog, SOX is by no means out of the woods just yet. A measure in the pending financial reform bill, which is currently easing its way toward enactment, would exempt small businesses from some controversial SOX reporting requirements.
Jacob Barron, NACM staff writer
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As a Third Circuit bankruptcy judge approved the sale of a newspaper publisher's assets this week, lingering concerns remain over the implications of his previous decision to disallow credit bidding in an auction that was part of the Chapter 11 process.
U.S. Bankruptcy Judge Stephen Raslavich this week approved the plan to allow Philadelphia Newspapers LLC to exit Chapter 11 bankruptcy. The publisher's main assets, the Philadelphia Inquirer and Philadelphia Daily News newspapers, have been sold to a creditors group led by Angelo, Gordon & Co., as well as a division of Credit Suisse. Though owed considerable money from the outgoing ownership group, the same judge told the creditors they could not use the owed money as part of its offer through an increasingly popular credit-bidding tactic. While clearly unhappy with the decision, the creditors eventually won an auction on April 28 with a bid totaling nearly $139 million, $105 million of which was in cash.
The decision has left some in the industry and several bankruptcy attorneys with concern, as multiple attempts at credit bids have been disallowed in other Chapter 11 proceedings in recent months. Wanda Borges, Esq., Borges & Associates LLC, characterized it as shocking that the Third Circuit would rule against a secured creditor trying to use a credit bid. "That decision scares me," said Borges during a session at May's Credit Congress in Las Vegas. "Credit bidding can be a wonderful thing."
Former NACM-National Chairman Val Venable, CCE believes the process of credit bidding, despite some vocal opposition to the maneuver, should be preserved as a viable option. "I think the more options that are left open, the better," said Venable. "The whole purpose is to reorganize and rehabilitate the debtor. Any time avenues are cut off before they're formally vetted and everything has been explored is a bad thing."
Still, Venable said there have not been enough cases banning credit bidding to warrant any kind of industry-wide panic to date. "If it becomes a trend, I would be concerned," said Venable. "But, at this point, it's too early to say it is a trend."
In the Philadelphia Newspapers case, Angelo, Gordon & Co. originally planned to use debt owed to it by Philadelphia Newspapers as a large part of its offer, instead of cash, to buy the publisher. The credit bidding method has become increasingly common in the present era of fast-paced and/or pre-negotiated bankruptcies. However, credit bidding has created controversy because some attorneys and experts, such as Standard & Poor's, believe the practice can be used to force an owing party to sell faster and for a lower price than desired because of leveraged threats by creditors. S&P claims the process essentially "sets a floor price to an auction" and discourages a "robust auction process."
Brian Shappell, NACM staff writer
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While the international market still faces many challenges on its ever-lengthening road back to recovery, most notably from the threat of a weakening euro, it still offers a world of opportunities to businesses here in the U.S.
The issues in the Grecian economy, which have shaken the European Union (EU) and its flagship currency, could end up harming U.S. exporters, mainly because a drop in the euro would make European goods more affordable to international buyers. It's the same thing that's happened to the U.S. over the last few years; a weaker dollar looks and sounds bad, but is a major boon for exporters whose goods become more competitive on the global stage.
Even if the euro falls though, and U.S. exporters face challenges from their European counterparts, there's good news on the other side of the world, as China recently announced that it would let the Yuan appreciate on a limited basis. The Chinese market continues to boom, and many complained that its currency policy was reducing the ability of international firms to compete in the country, because it favored Chinese firms over outsiders. However, the most recent news ahead of the Group of 20 (G20) meeting showed that China was willing to be much more flexible on the issue and open to the idea of more imports coming into the country.
Many companies are starting to take advantage of this development and others around the globe, but risks still exist in every corner. In many instances, it may still be profitable for companies to insure the credit they extend to customers in other countries, and reduce their risk while still making the sale.
To learn more about the process of insuring receivables, join Buddy Baker on July 7 at 3:00pm for his NACM teleconference, "Using Credit Insurance." Baker, a well-known regular speaker at NACM events and expert on credit insurance, will deliver his presentation as part of NACM's "Added Advantage" teleconference series, which offers attendees a full 90-minute presentation on one specific topic. Baker's teleconference will reference case studies and guide attendees on how to effectively leverage credit insurance as a way to contain risk, improve credit-decisioning, expand sales and increase financing.
For more information, or to register, click here.
Jacob Barron, NACM staff writer
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Reports of commercial real estate's demise may not have been greatly exaggerated, as statistics unveiled by the Washington, D.C.-based Mortgage Bankers Association (MBA) appear to suggest.
MBA's quarterly study tracking the performance of commercial mortgages, the Commercial/Multifamily Delinquency Report, found that economic instability and weakness continues to impair the construction segment more than other industries. The study found the first-quarter delinquency rate for commercial mortgage backed securities (CMBS) jumped to its highest rate since the category was initially tracked in 1997, and the quarterly rate for other groups rose to their highest levels since the 1990s, in some cases even earlier. The following is a breakdown of delinquency rates based on investor groups:
- CMBS: 7.24% (30+ days delinquent or in REO)
- Life company portfolios: 0.31% (60+ days delinquent)
- Fannie Mae: 0.79% (60+ days delinquent)
- Freddie Mac: 0.24% (60+ days delinquent)
- Banks and thrifts: 4.24% (90 or more days delinquent or in non-accrual.
MBA noted the five groups comprise more than 80% of commercial/multifamily mortgage debt outstanding. "Weakness in the economy has continued to weigh on commercial properties, which in turn weighs on mortgages they back," said Jamie Woodwell, MBA vice president of commercial real estate research. "Economic growth, specifically in the areas of jobs and consumer spending, will be key to stabilizing the commercial property and mortgage markets going forward."
The negative news takes a little wind out of the sails of those encouraged by an uptick in confidence noted in a National Association of Home Builders' survey less than two weeks prior. The trade association's Multifamily Market Index found that, especially among developers of condominium and mixed-use properties, confidence increased significantly, by 14 points on a scale of 100, in June. Said builders/developers expected significant gains in occupancy by late 2010, which would provide the impetus for new and delayed commercial real estate projects to gain steam for the first time in several years.
How much damage to already fragile capital investors' confidence levels the latest MBA statistics will do remains to be seen.
Brian Shappell, NACM staff writer
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Another week, another measure proposed to aid the nation's still ailing small businesses.
Senate Finance Committee Chairman Max Baucus (D-MT) and Senate Committee on Small Business & Entrepreneurship Chair Mary Landrieu (D-LA) recently released their draft of the Small Business Jobs Act, a bill aimed at easing capital for smaller firms, stimulating investment and promoting entrepreneurship.
The bill would encourage investors to put their money into smaller firms by allowing them to exclude the gains from the sale of certain small business stock from their income for tax purposes if the stock is held for more than five years, which would allow smaller businesses to access more private capital. The legislation would also reduce taxes for small businesses by allowing them to carry back general business tax credits to offset their tax burdens from the previous five years.
Also included in the legislation is the establishment of a $30 billion Small Business Lending Fund, which would be open to small community banks to encourage them to increase lending to smaller customers. A similar measure was also recently approved by the House, as was a State Small Business Credit Initiative, which is also included in the Baucus and Landrieu bill.
"Small businesses are the engine of our economy and need to be a critical focus of our job-creation efforts. Helping small businesses helps get Americans back to work," said Baucus. "Working together, we crafted our bill to promote entrepreneurship and investment in small businesses and provide small businesses with the vital access to capital they need to create jobs."
"Every day, headline after headline goes to big business layoffs and losses, but in reality it is the small businesses and their employees that are bearing the brunt of this crisis," said Landrieu. "Since the start of the economic downturn, 80% of the country's job losses came from small businesses. It is time to turn our attention to the small businesses and entrepreneurs to get Americans back to work. By providing some cost-effective and commonsense changes to lending, contracting and technical assistance programs, we can build on successful programs implemented in the Recovery Act to help small businesses keep their doors open."
The bill would also increase the cap on small business loans by $5 billion in the first year following its enactment, and would refinance commercial real estate debt into long-term, fixed-rate loans.
Jacob Barron, NACM staff writer
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A new analysis by Onvia reveals some states excel at attracting Recovery Act project funding and quickly awarding it to contractors, while others lag far behind on both measures. Alaska, North Dakota, Wyoming and New Hampshire placed at the top of the "Gold" category in Onvia's analysis, while Virginia, Ohio, Georgia, Missouri and Nevada placed in the lowest end of the "Laggard" category.
The analysis reviewed the per capita stimulus funding received by the 50 states for projects from the Recovery Act, and the speed with which the funds have been awarded to contractors that create the private sector jobs needed to do the work.
Top level findings:
- Connecticut and Massachusetts scored the highest velocity of projects actually awarded to contractors using Recovery Act funding, with 37.7% and 36.5% of funds received within the state awarded to contractors, respectively. South Carolina had the lowest velocity, 0.2%.
- North Carolina attracted the most Recovery Act project dollars per capita ($7,125), followed by Alaska ($2,482), Montana ($1,523), Colorado ($1,469) and New Mexico ($1,418). New Jersey and Florida attracted the least per capita ($700 and $710, respectively).
- Alaska did the best combined job of attracting and awarding Recovery Act project funds—placing it at the top of the Gold category. Others in this category include North Dakota, Wyoming and New Hampshire. Virginia led the Laggards category—states that attracted the fewest project funds per capita and were slowest to award them. Others in this category include Ohio, Georgia, Missouri and Nevada.
- Michigan, where the unemployment rate was the highest at 14.3%, ranked in the Laggard category with $821 project dollars received per capita, with just 14% of those projects actually awarded to contractors. Nevada, which also had one of the highest unemployment rates, was also in the Laggard category at $733 per capita and 9.4% awarded.
An interactive diagram of the findings is available at http://promotions.onvia.com/pages/chart/arra_velocity.html. The findings were culled from Onvia's data through March 2010, roughly one year since stimulus money began flowing to the states.
"Onvia's analysis shows the bulk of the Recovery Act project funds have yet to make their way all the way through the system to the contractors and subcontractors that do the work and create private sector jobs on Main Street. However, some states are far more efficient than others," said Mike Pickett, Onvia CEO. "We believe the second half of 2010 will see a substantial acceleration in the velocity of contract awards. Businesses that want a part of the emerging gBusiness marketplace should be following these projects now and preparing for a wave of contract awards in the second half of the year."
As of June 17, 2010, Onvia was tracking roughly 72,000 Recovery Act projects valued at $200 billion, of which 23,000 projects totaling $66 billion had been awarded to contractors.
The slowdown in the economy over the past several weeks has been chronicled in a variety of ways: retail sales fell, the housing market sank to levels not seen in close to two years, the financial markets stumbled in reaction to one global threat after another and the Credit Managers' Index (CMI) is slumping dramatically as well—from May's 55.9 to 54.1 for June—for the same reasons affecting much of the economy. Sales levels have dipped all the way back to numbers not recorded since the end of last year. The last time sales registered below 60 was in December 2009 when it hit 56.7. It is now at 59 after being as high as 65.7 as recently as April. This decline is consistent with observations made on consumer activity in general. Personal income may have risen by a somewhat respectable 0.4%, but spending has only increased by 0.2% and that is a far cry from the 3% growth registered in the first quarter of the year.
Other signals are also suggesting economic distress. Although there was a consistent rate of new credit applications, the number of applications granted fell to a point not seen since December 2009. Comments within the credit community suggest lending and credit have tightened considerably in the last few weeks and months. There was not as much activity in negative factors, but there was significant expansion in the number of credit applications rejected as well as accounts placed for collection. "There is simply a sense that stress has reentered the system in a big way and that is consistent with the kind of data that started to emerge in the consumer sector over the last month," said Chris Kuehl, Ph.D., NACM economic advisor, who prepares the CMI for the National Association of Credit Management (NACM). "This is a trend the CMI began to note in the May numbers and now the indications are that this is accelerating."
There are two factors that have been hanging over the financial community the last two months and both have started to show movement. "It will be interesting to note what happens with factors like credit extension as well as credit applications as these issues are dealt with to some degree," said Kuehl. "The banks have been close to paralysis waiting for the financial reform picture to clarify and it appears that some of the smaller and regional banks escaped the most onerous burdens. That may allow them to loosen up and start to make more money available, but much depends on whether these same banks have been able to contend with their remaining non-performing loans. There is also the fact that FDIC insurance has been extended to $250,000, which is retroactive to January 2008. This additional burden will force the FDIC to collect more money from banks to pay for the insurance and that could well serve to stall lending yet again."
The consumer has not yet engaged in the economic recovery and is stalling the rebound dramatically. Spending levels will not recover until there is some confidence restored in the consumer and that will require improved jobless numbers and some solid recovery of people's financial position; these appear to be off some time in the future.
"If there is any good news in this month's data, it is that the other negative factors have not yet manifested," said Kuehl. There has not been an increase in disputes or bankruptcies and there has even been a decline in the dollar amounts beyond terms. "The sense is that most companies avoiding getting overextended again and the return of the more cautious credit environment have meant that companies are not getting into as much financial distress as they had in the past. They are simply not growing at a pace that will allow much economic gain in the short to medium term."
The full report, complete with tables and graphs, and the CMI archives may be viewed here.
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