eNews June 23, 2011

June 23, 2011

News Briefs

  1. Data Security, Breach Notification Bills Hit Both Chambers of Congress
  2. Bankruptcy Roundup: WaMu, Harrisburg, Rhode Island, Borders
  3. Ex-Im Urges Action in 2011 Competitiveness Report
  4. Fed Stays the Course Despite Slowing Growth Rate
  5. Senate Committee Aims at Reducing Fraud in SBA Programs
  6. Brazil Earns Another Credit Rating Upgrade


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Data Security, Breach Notification Bills Hit Both Chambers of Congress

In response to recent, high-profile security breaches, lawmakers on Capitol Hill are currently considering two separate data protection and breach notification bills. If either bill is eventually enacted, it would establish a federal standard for data security, and largely do away with the patchwork of 47 state laws currently governing the issue.

Sens. Mark Pryor (D-AR) and John Rockefeller IV (D-WV) recently reintroduced legislation submitted in previous Congresses, called the Data Security and Breach Notification Act. The bill would require businesses and nonprofit organizations that store consumers' personal information to put strong security features in place to safeguard sensitive data, alert consumers when this data has been breached and provide affected individuals with the tools they need to protect their credit and finances.

"The consequences of data breaches can be grave: identity theft, depleted savings accounts, a ruined credit score and trouble getting loans for cars, homes and children's education are just some of the effects. In today's economy, we simply cannot let this happen," said Rockefeller. "Companies that maintain vast amounts of consumer information need to have effective safeguards in place to keep sensitive consumer information secure."

In the House, Rep. Mary Bono Mack (R-CA) recently introduced the Secure and Fortify Electronic Data Act, or SAFE Data Act, which would do many of the same things the Pryor and Rockefeller bill would, although in addition to mandating security protections, the bill would also require companies to notify law enforcement within 48 hours after the discovery of a breach and notify consumers 48 hours after taking steps to prevent further breaches and grant authority to the Federal Trade Commission (FTC) to govern nonprofits for the purposes of the Act.

Bono Mack, in a statement on her bill's discussion draft, noted that nonprofits "often possess a tremendous amount of consumer information, and they have been subjected to numerous breaches in the past," adding, "at the same time we want to work with those affected, as well as the FTC, to make sure any new regulations are not burdensome for small businesses—especially during these difficult economic times."

The SAFE Data Act, even in its infancy, has faced harsh criticism from Rep. Henry Waxman (D-CA), ranking member on the House Committee on Energy and Commerce. "The bill we are considering today is based on our bipartisan House bill from last Congress," he said, noting that the bill was enacted by the House but never considered by the Senate. "There are some new provisions in the...draft that strengthen last Congress' bill...Unfortunately, there are many more changes that weaken last Congress' bill."

Specifically, Waxman noted that allowing companies to wait until "after taking steps to prevent further breaches" to notify customers is too unspecific and gives companies as much time as they want before notifying customers. The new bill also deleted several provisions from the previous bill that applied specifically to data brokers, which are companies that aggregate personal data about individuals and make a profit selling that information.

While both of these bills are primarily aimed at companies that sell to average consumers, like retailers and banks, the provisions could sweep in companies that sell to sole proprietors; that rely on consumer data, in addition to business data, when making a credit decision, or traffic in personal information for various purposes.

Stay tuned to NACM's eNews and blog for further updates.

Jacob Barron, NACM staff writer

CMI Survey for June Closes on Friday

The Credit Managers' Index survey period for June closes this Friday, the 24th, at Noon (EST). Take the survey now!

Bankruptcy Roundup: WaMu, Harrisburg, Rhode Island, Borders

The three-year epic saga that has been the bankruptcy proceedings for Washington Mutual, the largest bank failure in U.S. history, finally appeared to be at its finish about a week ago...and then all of the sudden, not so much. WaMu's proposed bankruptcy reorganization plan, which seemed at one point to be gaining momentum, was foiled by a group of shareholder objections. The main complaint by members of the committee of equity security holders was not uncommon in recent reorganizations: that preferred stockholders were getting too big a piece of the pie on the backs of those with common stock. The reorganization plan's next hearing, originally slated as a confirmation hearing, is scheduled for early July.

The city of Harrisburg will fall into bankruptcy unless it sells most of its assets—that is the general tone of a state-commissioned report looking into Pennsylvania's capital city and its woeful financial position. The commission, part of the state's attempt at a rescue plan, suggested steps that include a public worker wage freeze, property tax increases and the sale of a trash incinerator. The massive Harrisburg Resource Recovery Facility project was planned by officials to be a money-generator for the city, but instead has left the city near financial ruin with hundreds-of-millions in associated debts. Still, there are some Harrisburg officials who are both resistant to filing bankruptcy or to selling off city-owned assets like the incinerator and key land parcels—a recipe for a significant credit default disaster, some analysts believe.

Though much smaller in size, the seemingly imminent bankruptcy of Central Falls, RI has generated interest of late, particularly after Moody's Investor Services cut its credit rating and hinted at a high likelihood of default for the municipality. Central Falls is faced with a shrinking income tax base coupled with what is becoming an elephant in the room for many cities and states in the nation: the draining cost of honoring pensions for retired employees. It has been projected that Central Falls will run out of money to operate early in the next fiscal year, which begins in July.

Barnes & Noble found out the hard way that watching one's main competitor (Borders) slide into bankruptcy does not equate to the "to the winner go the spoils" adage. Barnes & Noble's fourth-quarter (through April 30) earnings statement revealed it did not meet its quarterly target and lost nearly $60 million for the period, much worse than analysts expected and greater than the loss in the same quarter one year ago ($34 million). Company officials laid the blame on the Borders bankruptcy status, saying it was hard for many of its branches to compete with liquidation sales at more than 200 stores of its counterpart for a time. Barnes & Noble also noted that some losses are attributable to investment in the e-book segment of the industry, which is challenging companies that have relied primarily on the sale of traditional, paper books.

Brian Shappell, NACM staff writer

MLBS UPDATE: Recent Changes Made to Bond and Claim Notice Requirements on Virginia Public Construction Projects

During its 2011 Session, the Virginia General Assembly passed two important changes to bond and claim requirements on Virginia Public Construction Projects, according to Greg Powelson, director of NACM's Mechanic's Lien & Bond Services (MLBS). House Bill 1951, effective July 1, 2011, raised the minimum amount required for bid, performance and payment bonds; the new minimum contract amount increased from $100,000 to $500,000 for non-transportation construction projects. "If the bond requirement is waived on projects between $100,000 and $500,000, the prospective contractors must be prequalified," said Powelson. "This means that subcontractors and vendors on non-transportation construction projects under $500,000 should not assume that a bond is in place and should investigate that issue before agreeing to payment and credit terms."

Senate Bill 1424, also effective July 1, 2011, reduces the time within which lower tier subcontractors and vendors must provide notice to the contractor, from 180 days to 90 days. Therefore, any claimant that has a contract relationship with a subcontractor or vendor, but no contract relationship with the contractor, may only pursue a payment bond claim if it first gives written notice to the contractor within 90 days from the day on which the claimant performed the last of the labor or furnished the last of the materials for which it claims payment.

To learn more about this change, and to stay up to date on any future changes to state construction and lien laws, visit MLBS here.

Ex-Im Urges Action in 2011 Competitiveness Report

When it comes to export financing, the United States and its G7 counterparts are lagging way behind emerging economies like China, India and Brazil.

That's what the U.S. Export-Import Bank (Ex-Im) found in its 2011 Competitiveness Report, released last week. According to Ex-Im Chairman Fred Hochberg, this year's report was the first to include an in-depth look at the export credit practices being used by developing economies, and it showed that they're years ahead of the U.S. and other developed nations in terms of how they encourage export activity.

"When we look at export financing, China, India and Brazil provide more support to their exporters than the G7 nations (Canada, France, Germany, Italy, Japan, the United Kingdom and the United States) combined," said Hochberg. "And this trend has hit a tipping point." In order for the U.S. to lead the world in exports, the nation must address market distortions, find additional ways to capitalize on global market opportunities and tackle domestic issues that hinder global competitiveness, he added.

In a speech to the Center for American Progress (CAP), Hochberg specifically noted that state-owned lending enterprises, like the Chinese Development Bank and others, offer below-market financing options to Chinese companies that aren't available in the U.S., including credit lines as high as $30 billion, said Hochberg citing one example. This allows those companies receiving such lucrative financing deals to reduce their cost of capital and then offer financing terms to their buyers that are far more favorable than those offered by any similar U.S. company.

"This financing model not only affects the bottom line of companies trying to compete, but it also affects the bottom line of our economy—particularly as exports play an increasingly important role in our economic recovery and job creation," said Hochberg. "The reality is opaque state-directed capital allows foreign governments to target their financing at specific sectors and companies, while aggressively grabbing market share in an attempt to dominate a market."

Hochberg recommended that the U.S. leverage institutions like the World Trade Organization (WTO) and the Organization for Economic Cooperation and Development (OECD) to enforce rules against state-created advantages and also to revise the guidelines that govern typical terms and conditions for state-based financing. "We need to reorient both the public and the private sectors around the importance of manufacturing and exporting," he added. "To have long-term success, companies—large and small—must target the 95% of customers that reside outside the United States."

Jacob Barron, NACM staff writer

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Fed Stays the Course Despite Slowing Growth Rate

The Federal Reserve's message coming out of its latest two-day economic policy meeting Wednesday was similar to two of its other economic policy summits in the last three months: that the economic recovery is continuing at a "moderate" pace, though it's one that has slowed from that of earlier this year and late in 2010. And it's certainly off from the more optimistic forecasts from 2009 and early 2010 for a robust recovery by this point.

The Fed's Federal Open Market Committee (FOMC), as expected, left the target for the federal funds rate unchanged at a range between 0% and 0.25%. It determined that the "exceptionally" low rate is warranted for an extended period into the future as the economic recovery continues to fail in its attempt to kick into a higher gear. What was more of a debate by analysts heading into the announcement was whether the Fed would stay the course on its assets purchases. Chairman Ben Bernanke did commit to finishing the Fed's plans; but did not unveil any new stimuli.

"The committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings," the Fed's announcement noted. "The committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate."

The Fed blamed the slowdown to the still expanding growth rate on obvious factors: higher food and energy prices as well as supply chain disruptions tied to the Japanese disaster. However, the Fed hailed the return of household spending and business investment as well as stable expectations for longer-term inflationary pressures, though it admitted there has been an increase regarding the latter in recent months.

Brian Shappell, NACM staff writer

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Senate Committee Aims at Reducing Fraud in SBA Programs

Prominent lawmakers are urging the Small Business Administration (SBA) to strengthen its anti-fraud and anti-waste efforts.

In a hearing in the Senate Committee on Small Business and Entrepreneurship, Senators Mary Landrieu (D-LA) and Olympia Snowe (R-ME), chair and ranking member of the committee, respectively, framed the effort to combat inefficiencies, waste, fraud and abuse at the SBA as an economic imperative. "There can be no clearer impetus for us to find ways to eliminate inefficiencies, duplication and waste across the government than the current economic crisis," said Snowe, who cited a recent Government Accountability Office (GAO) report which found that 80 economic development programs, 19 of which belong to the SBA, were rife with duplication and waste.

"In our current fiscal climate, it is critical that we examine every taxpayer dollar our government spends and utilize our nation's small businesses to spur private sector job growth," she added.

Landrieu suggested that if certain SBA programs cannot be improved to reduce waste and inefficiency, then they should be considered candidates for elimination. "Unfortunately, we live in an imperfect world, where fraud and waste exist in programs intended to help small businesses, but we still must work to rid programs of these inefficiencies," she said. "We have identified several programs that aren't performing to their full potential, or have problems with their operation. I will work with the SBA to improve these programs. If improvement is not possible, we must eliminate them to safeguard the good programs at the SBA."

The hearing took place just after Landrieu, Snowe and fellow Sen. Chuck Grassley (R-IA) sent a letter to Attorney General Eric Holder, seeking an explanation for why the Department of Justice (DOJ) has declined to prosecute cases that were referred from the SBA's inspector general. More than 20 identified cases of theft, conspiracy, corruption, embezzlement and other criminal acts found to have defrauded both the SBA and the American taxpayer were ignored by the DOJ between October 2010 and March 2011.

Jacob Barron, NACM staff writer

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Brazil Earns Another Credit Rating Upgrade

One of the Big Three ratings agencies took time out of what has been a busy year of finger-wagging at the United States and several European nations over debt levels to give another upgrade to one of the world's most noted emerging economies. And despite fears of inflationary pressure and widespread hints of a potential credit bubble there, the outlook for Brazil looks "positive" in the agency's eyes.

Moody's Investors Service upgraded Brazil's government bond ratings to Baa2 from Baa3, as well as the nation's foreign currency ceilings. It also gave the nation a "positive" ratings outlook.

Moody's noted Brazil presently carries strong fundamentals that are no more than moderately susceptible to financial event risk (such as the aforementioned credit boom some consider similar to the one that eventually leveled the U.S. economy), has a perceived willingness from officials "to reverse expansionary policies and adopt a conservative policy stance" and demonstrates declining government debt ratios.

"High economic strength stems from large and relatively diversified productive and export bases," according to Monday's announcement. "Policy continuity as well as a government debt structure associated with moderate exchange rate, rollover and interest risks are integral elements of Brazil's sovereign credit profile. Prospective elements are encouraging. Our baseline expectation is for relatively favorable and more sustained economic growth in coming years."

The upgrade comes on the heels of another thinly veiled warning to the United States from Moody's earlier in June that it was considering a near-term downgrade on rising default risk. While admitting the risk of default remains low, the ratings agency remains keenly interested in and concerned with high U.S. debt levels as well as the political morass leading to gridlock on the debt ceiling issue.

Previously, Moody's handed yet another downgrade to Greece, of late being compared in reliability to sub-Saharan Africa nations, in April. It noted that an increasingly likely Greek default could wreak havoc on the economies of several European Union nations. This is especially so for fellow PIIGS nations Ireland, Portugal and, to a slightly lesser extent, Italy.

Brian Shappell, NACM staff writer

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