July 22, 2010
President Barack Obama signed the sweeping Dodd-Frank Wall Street Reform and Consumer Protection Act into law on July 21. The enactment of the bill, named after its chief democratic architects, Sen. Christopher Dodd (D-CT) and Rep. Barney Frank (D-MA), caps off a months-long struggle to fulfill one of the president's campaign goals and reform the nation's financial system in the hopes of preventing another economic crisis.
"Wall Street rigged the game. Big bankers gambled away our money. When they lost their risky bets, they came crying to the taxpayers for help," said Senate Majority Leader Harry Reid after final Senate approval of the bill. "Without this reform, we would be inviting it to happen all over again."
Reid's reaction was perhaps the most enthusiastic of any following the bill's approval. Even Dodd, for whom the bill was named, described it as "not a perfect bill," while others outside the government declared the bill either a mild success or an abject failure. "The Dodd-Frank financial regulation bill should not be called 'financial reform,'" said Jon Berlau, director of the Competitive Enterprise Institute's (CEI's) center for investors and entrepreneurs. "Instead, it should be called what it is: pages and pages of massively costly, counterproductive and possibly unconstitutional mandates on nearly every type of business, except for those government-sponsored enterprises at the root of the crisis," referring to the bill's lack of programs dealing with Fannie Mae and Freddie Mac.
"The Dodd-Frank Wall Street Reform and Consumer Protection Act does contain some key reform provisions that bankers have long supported," said American Bankers Association (ABA) President and CEO John Yingling, adding, however, that "While its core provisions provide needed reform, it is overloaded with new rules and restrictions on traditional banks that did not cause the financial crisis."
Here are a few highlights of the bill's myriad provisions:
- Sarbanes-Oxley Exemption: Companies with a market cap under $75 million will be exempt from the Sarbanes-Oxley Act's Section 404(b), which would require third party audits of a company's internal controls. The provision was opposed by some officials and the Center for Audit Quality (CAQ), but survived the negotiations intact.
- Interchange Fees: The bill charges the Federal Reserve Board with, among many other things, issuing new rules on interchange fees, including the possibility of caps on said fees. Additionally, merchants will now legally be able to offer discounts to customers using cards that are cheaper for them to accept and be able to set minimums for card transactions.
- Credit Ratings Agencies (CRAs): Red-headed stepchildren of the financial crisis though they remain, the big CRAs got off pretty easy in the bill. Rather than facing any real impending regulations, the industry instead awaits a two-year study of its conduct by the Securities and Exchange Commission (SEC) and a specific office within the SEC that the bill also creates. After that period, and if no one has any better ideas, the SEC would have to devise and implement a plan to create a panel that assigns certain CRAs to certain issuers of asset-backed securities, thereby reducing the risk for conflicts of interest. The industry would also be far more vulnerable to legal liability should they give high ratings to risky investments.
- Consumer Protection: One of the bill's most controversial provisions creates a new consumer bureau to regulate mortgages, credit cards and other financial products. Working as part of the Federal Reserve, the Consumer Financial Protection Bureau would have the authority to write broad rules for various products offered by lenders. Critics of the new regulatory agency, of which there were many, argued that its new regulations could potentially even further reduce the availability of credit to consumers. Auto dealers and pawnbrokers are exempt from the bureau's regulation.
- Resolution Authority: The government, specifically the Federal Deposit Insurance Corporation (FDIC), would have the authority to wind down failing firms using money fronted by the U.S. Treasury. Any taxpayer money used, however, would be paid back through an agreed-on repayment plan. Additionally, the bill creates a new council that will monitor systemic risks throughout the financial system and make recommendations to regulators about how those risks can be alleviated.
More than anything, the bill seems to heap a great deal of responsibility onto the nation's financial regulators. Most will have to conduct new research or design new rules for a wide array of different problems. And while the passage of the bill itself is big news, the real story may be the rules that will be seen, and felt, in the years to come from regulators empowered with new authorities.
Jacob Barron, NACM staff writer
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July has marked a tough month for Visteon Corp. officials in their ongoing attempt to exit bankruptcy as a judge in a key U.S. court has blocked the Michigan-based auto supplier's move to cease offering health and life insurance benefits to more than 2,000 retired workers. The ruling, and whether it holds up, could prove of significant importance to companies with high levels of retiree responsibilities going forward.
A Third Circuit U.S. Court of Appeals panel led by Chief Judge Theodore McKee ruled this month that Visteon's move to cut off such benefits was done too hastily and without a sufficient attempt at reaching an agreement with affected former employees. The ruling overturns two lower court rulings allowing the stoppage of benefits by Visteon, which claims it is being financially crippled by such entitlements. McKee wrote:
"On appeal, the union argues that the plain language and legislative history of U.S.C. 1114 compel exactly the result the district and bankruptcy courts avoided. The union claims that Congress intended to restrict a debtor's ability to modify or terminate, except through the U.S.C. 1114 process, any retiree benefits during a Chapter 11 bankruptcy proceeding, regardless of whether the debtor could terminate those benefits outside of bankruptcy. Based on the plain language of U.S.C. 1114 (as well as its legislative history), we agree."
Visteon, a former division of the Ford Motor Co. until it went on its own in 2000, stopped all payments for retiree benefits at issue in this case in May, though retirees were able to continue their company health insurance by paying for COBRA coverage. It is likely the company will take another pass at eliminating or drastically reducing the costly retiree benefits either after it emerges from bankruptcy proceedings or even as the arduous proceedings continues. McKee's decision appears to open the door for the latter as long as Visteon makes a good faith effort to negotiate with the retirees' representatives:
"The court will grant a motion to modify retiree benefits only if it finds that the trustee has made a proposal satisfying these requirements, the authorized representative has refused to accept it without 'good cause,' and the â€˜modification is necessary to permit the reorganization of the debtor and assures that all creditors, the debtor and all of the affected parties are treated fairly and equitably, and is clearly favored by the balance of the equities.'"
The decision came as Visteon continued to face a strong effort from its creditors' committee to prevent its emergence from Chapter 11. Visteon filed court documents this month calling for an investigation into some of the committee's conduct, which the company believes may have violated Bankruptcy Code solicitation and voting provisions, during proceedings.
Brian Shappell, NACM staff writer
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Credit scoring is often thought of as a black box of numbers and equations developed by overeducated geeks in dimly lit rooms. It's also been touted as the solution to virtually every credit process from credit approvals to collections.
What it all boils down to, however, is risk. Credit scoring exists to make risk easier to manage. "The goal of all these tools is to make a prediction," said Vernon Gerety, Ph.D. in his presentation at this year's NACM Credit Congress. "You're trying to predict the future. I want to risk rate this client and communicate to this organization how that account should be treated."
Accurately measuring risk and establishing how a potential or current customer is most likely to behave require data of which there tends to be little shortage in today's world. Gerety noted, however, that the onslaught of data, along with the rise of the Internet, has come at the cost of more traditional methods of risk management. "What technology has really done for us is provided access to a lot of data," he said. "You can find out almost anything about anybody, but it's almost to a point where the data has become overwhelming."
While scoring may not be a cure-all for all credit department woes, it does allow credit professionals to make something more of the data they have. "Let's find the value of that data and turn it into information," said Gerety. "It's an eye-opening analysis. It allows an organization to think differently about their customers and it's a way to maximize your returns."
To learn more about the application of credit scoring to your customers, join Gerety for his upcoming NACM teleconference, "Credit Scoring," on July 28 at 3:00pm EST. Gerety, an expert in risk management solutions with more than 20 years' experience, will uncover both the positive attributes of credit scoring and the pitfalls that come from its misapplication. His presentation will also place a special emphasis on how current economic conditions have impacted credit quality, and how credit scoring applications are impacted by cyclical economic conditions.
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Jacob Barron, NACM staff writer
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Irish eyes are indeed not smiling as one of the big three ratings agencies started the week by downgrading the nation's credit rating amid ballooning debt and sparse potential for economic growth through mid-decade.
Moody's Investment Services served up the news that it was cutting Ireland's government bond rating, to a still somewhat solid Aa2 rating, for the second time this summer citing the following:
- The government's gradual but significant loss of financial strength, as reflected by the substantial increase in the debt-to-GDP ratio and weakening debt affordability (as represented by interest payment to government revenue).
- Ireland's weakened growth prospects as a result of the severe downturn in the financial services and real estate sectors and an ongoing contraction in private sector credit.
- The crystallization of contingent liabilities from the banking system, as represented by a series of recapitalization measures and the need to create the National Asset Management Agency (NAMA), a government-created special purpose vehicle that is acquiring impaired loans from banks.
Moody's intimated that ongoing uncertainty trumped the fact that Ireland has long been known for having a wealthy and flexible economy with considerable institutional strength, all of which puts it on massively better footing than Greece, a fellow "PIIGS" nation, along with the struggling/high-debt European nations Portugal, Ireland, Italy and Spain. The ratings agency even hedged its bet, noting it could turn on a dime, so to speak, with its assessment of Ireland.
"At the Aa2 rating level, the upside and downside risks are evenly balanced. If the GDP growth trend were to exceed Moody's expectationsâ€”with a quick resumption of domestic credit flow and a supportive global economic environmentâ€”then the government's debt metrics could stabilize earlier than is currently being assumed," said Moody's Vice President/Senior Credit Officer Dietmar Hornung.
It's been widely speculated that additional downgrades are unlikely for the foreseeable future for Italy and Spain. And, for their part, ratings agencies Fitch and Standard & Poor's did not cut Ireland's rating, as the trio has for most if not all of the other PIIGS nations at least once during the spring/summer.
Still, the drop in the Irish rating does appear to fit into predictions that ratings agencies would react with extreme caution, at times possibly overreacting to credit concerns, because the big three's respective reputations were impaired so badly due to their well-documented poor performance during the economic boom years in the United States and abroad.
"They've become much more conservative, and that's likely to stay for a while," said NACM Economic Advisor Chris Kuehl, Ph.D. of Armada Corporate Intelligence. "Everything is getting downgraded. You've seen downgrading of several countries, which has irritated the Europeans. They have been stung for being too positive, so they're going the other direction."
Brian Shappell, NACM staff writer
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President Barack Obama recently put South Korea on the shortlist for free trade approval, at least informally. As part of his administration's Export Council, Obama urged speedy approval of a free trade agreement (FTA) between the U.S. and South Korea, and recommitted to his State of the Union goal of doubling exports over the next five years.
Reaction from the nation's business leaders was largely positive, but somewhat muted. The U.S. currently has FTAs pending with Panama and Colombia, in addition to the one with South Korea, and many wondered why Obama pushed a firm timeline for approval of Korea's FTA, while stopping short of doing the same for Panama and Colombia.
"As chief executives of many of America's leading manufacturing, agricultural and service enterprises, we applaud and share your goal of doubling U.S. exports in the next five years as you outlined in your State of the Union address. As you work to move this initiative forward, we strongly welcome your announcement that you will seek Congressional approval of the Korea-U.S. Free Trade Agreement after the November G20 summit," said the Emergency Committee for American Trade (ECAT), an association comprised of CEOs from some of the nation's largest companies in a letter to the president. "In addition, we urge decisive and quick action with respect to both the Colombia and Panama trade agreements."
Lawmakers, most notably Senate Finance Committee Ranking Member Chuck Grassley (R-IA), were a bit less ingratiating in their response to the president's announcement. "I was glad to see President Obama finally commit his administration to working out the issues he has identified as the impediment to finally implementing our pending trade agreement with South Korea," said Grassley. "At the same time, there is no reason why implementation of our stalled trade agreements with Colombia and Panama cannot be put on the same timeline. All it would take is a commitment by the president. Yet, President Obama has just offered 'as soon as possible' when it comes to Colombia and Panama. Based on what we've seen thus far from this administration, I'm afraid that 'as soon as possible' may not be seen as 'possible' for several more years to come," he added.
The most notable issues still stalling the South Korean FTA are concerns about lopsided trade in the auto and beef industries.
Jacob Barron, NACM staff writer
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After more than a month in the news, the vuvuzelas and, more importantly, the World Cup soccer competition have gone quiet in South Africa. Though the nation's hosting of the massive event went off without a hitch and drew rave reviews, the question remains whether the effort will do anything to boost South Africa's profile and prowess in the international business community. Expert outlooks remain about as divided as the French and English national soccer teams.
NACM Economic Advisor Chris Kuehl, Ph.D., of Armada Corporate Intelligence, initially noted the nation may have been the biggest winner in the competition, even as its national team failed to qualify for the tournament's elimination stage. "Few had confidence that they would pull this event off, and they did," said Kuehl. "There will be complaints as to how much money was spent, but the reaction from fans was positive, the reception was hospitable and there were no incidents. This put South Africa on the map for many."
The hopeful outlook was echoed by many in the days after the July 11 final, though even Kuehl himself more recently noted that it's too early to tell with certainty and there's little hard evidence to go on that South Africa's improved profile will lead to lasting economic progress. As South Africa returns to post-Cup normalcy, estimates for strong growth over the next couple of years must contend with the reality of a worldwide recession. It's certainly possible, yet difficult. Kuehl pondered "Do these sporting events lead to real development or is this like a sugar rushâ€”a burst of energy followed by a big letdown?"
Meanwhile, Hans BelcsÃ¡k, president of S.J. Rundt & Associates, is among experts who have remained skeptical of the World Cup's true positive impact from jump. Historically, the true long-term economic impact of hosting a grand-scale event, such as the World Cup or the Olympics, is very much overstated.
"The fact that the games went on without any problems helps their prestige, but I'm not sure it's going to have much of an economic impact," said BelcsÃ¡k. "A huge amount of money went into things South Africa has little use for, like huge stadiums that will probably sit around empty. It cost a lot for South Africa, and it will take a long time to figure out just how much. It'll probably be a net loss in the end." That's not to mention the bevy of issues weighing heavily on the nation that include a very weak world market for the raw materials it exports and moral scandals surrounding flamboyant President Jacob Zuma. BelcsÃ¡k notes, "These issues have not gone away."
A new report unveiled by the Organisation for Economic Co-operation and Development (OECD) also expressed long-term concerns for South Africa, despite its own predictions for favorable economic growth in the second half of 2010 and most of 2011. OECD notes the World Cup afterglow has many obstacles to contend with: a massive need for better education, reform of union-dominated public-sector employment and job opportunities for a large portion of the population, most notably young black South Africans contending with unemployment exceeding 50% in their demographic.
"Despite a strong macroeconomic policy framework, job creation and productivity growth remain too low to underpin sustained rapid GDP per capita growth. The overarching challenge for South Africa is to boost its trend growth rate and create jobs," said the report.
Brian Shappell, NACM staff writer
A new report is being touted by Senate leaders as proof positive that more monetary assistance is needed to help the nation's small businesses.
Released by the U.S. International Trade Commission (ITC), "Small and Medium-Sized Enterprises: U.S. and EU Export Activities, and Barriers and Opportunities Experienced by U.S. Firms" indicates that European small- and medium-sized enterprises (SMEs) exported about $250 billion more than their U.S. counterparts in 2005. Insufficient access to financing, complex regulations and rising transportation costs were cited as the largest roadblocks keeping U.S. SMEs from increased international success.
Exports have routinely been prescribed as the cure for the nation's struggling smaller firms, and the report puts even more pressure on lawmakers to do something about it. "America's economy loses out on billions of dollars each year because small businesses are unable to capitalize on foreign markets," said Sen. Mary Landrieu (D-LA), chair of the Committee on Small Business and Entrepreneurship. "Less than 1% of our nation's 27 million small businesses export, while small and medium businesses account for almost 40% of European export sales."
"Simply put, millions of small firms must have access to overseas markets in order to thrive and grow our economy, and they must have the tools and resources to acquire the skills necessary to engage with foreign partners," said Sen. Olympia Snowe (R-ME), ranking member on Landrieu's committee. "As such, it is critical that we act swiftly to pass legislation I introduced with Chair Landrieu to boost small business exporting and place us squarely on the road to doubling American exports within five years."
Landrieu and Snowe introduced the Small Business Export Enhancement and International Trade Act in December 2009, which was geared toward improving loan access and increasing counseling programs for small exporters. That bill, however, was folded into the Small Business Job Creation Act, which is currently under consideration in the Senate.
Jacob Barron, NACM staff writer
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