eNews December 13, 2012

December 13, 2012

News Briefs

  1. Exports, Business Confidence Spiral Downward
  2. Judge Rejects Merchant Appeal of Visa, MasterCard Settlement
  3. Z-Score Creator: EU Legislation on Raters an 'Unfortunate Precedent'
  4. HSBC Settles Money Laundering Charges with Record Fine
  5. Bankruptcy Roundup: Supreme Court, Hostess, Vitro SAB
  6. Commercial Chapter 11 Filings Buck Trend, Jump 23% in November


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Exports, Business Confidence Spiral Downward

There's no way to dress it up nicely: a near $7 billion drop in exports between September and October and a trade deficit now significantly exceeding $40 billion is abysmal news for the U.S. economy and its small- and medium-sized businesses. It's yet one more blow to business confidence that was already faltering thanks largely to partisan gridlock among federal lawmakers.

The U.S. Census Bureau and Bureau of Economic Analysis unveiled unsettling trade statistics this week showing total October exports of $180.5 billion and imports of $222.8 billion, a goods and services deficit of $42.2 billion. The revised deficit figure was $40.3 billion in September. The $6.5 billion drop in goods and additional $300 million decrease in services exported for October represents the largest total exporting slide since January 2009.

The United States has plenty of company though as powerhouses like Germany and China each copped to disappointing export numbers of their own as continued massive debt problems continued throughout the European Union and, to a lesser extent, in other parts of the world. In the latter, exports are now growing at an annual pace of just 2.9%, while in October the pace was at 11.6%, said NACM Economist Chris Kuehl, PhD, who noted China's growth-driving export capabilities are in a rare place of looking "sickly."

"The Chinese remain dependent on the global consumption of their output, and that means that China will never get that far ahead of the nations it sells to," Kuehl said. "In order for China to resume growth of 8% or 9%, there will have to be some solid recovery in the U.S., Europe and Japan."

News of lower trade levels should do little for U.S. business confidence, which is not far from the historically poorest levels, as statistics unveiled this week by the National Federation of Independent Businesses (NFIB) illustrated before the new numbers could even be a factor. The NFIB Small Business Optimism Index dropped 5.6 points in November to a level of 87.5. The monthly index has been lower only seven times since its inception in 1986. The drop can't even be blamed on "Super Storm" Sandy, as the East Coast states affected most by the storm and its aftermath were excluded from this month's numbers to avoid event-based distortions.

"The storm had a significant impact on the economy, no doubt, but it is very clear that a stunning number of owners who expect worse business conditions in six months had far more to do with the decline in small-business confidence," said NFIB Chief Economist Bill Dunkelberg. "Nearly half of owners are now certain that things will be worse next year than they are now. Washington does not have the needs of small business in mind. Between the looming 'fiscal cliff,' the promise of higher health care costs and the endless onslaught of new regulations, owners have found themselves in a state of pessimism."

The only significant subset of the index that rose was in the "Plans to Increase Employment" category, which was up 5%. By comparison, the key category "Expect Economy to Improve," and one measuring potential for positive "Earning Trends," each declined in excess of 30%.

- Brian Shappell, CBA, NACM staff writer

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Judge Rejects Merchant Appeal of Visa, MasterCard Settlement

Merchants hoping to overturn the preliminary approval of the Visa and MasterCard interchange settlement were dealt a blow this week when a judge rejected their appeal.

A federal appeals court in Manhattan denied the request of a group of retailers, led by Home Depot, to grant their appeal expedited status, which would have resulted in a quicker hearing and decision on the appeal. The rejection means that opponents won't be able to challenge the settlement further until after it receives final, rather than just preliminary approval.

The merchants making the motion had argued that expedited proceedings were necessary because presiding Judge John Gleeson had granted an injunction making them part of the settlement group and eliminating their rights to opt out of the agreement or bring future legal action against it. Such an argument failed to convince the federal appeals court, and now merchants must wait until after the agreement is fully approved before they can appeal again.

A final approval hearing is set for September of 2013.

Gleeson granted preliminary approval to the settlement on November 9 over the noisy objections of hundreds of merchants. The $7.2 billion deal includes a $6 billion payment to merchants, and temporary reductions in interchange rates. It also gives merchants the right to pass on their interchange fees to their card-using customers via surcharge, a provision that takes effect 60 days after the date of preliminary approval.

Chief among the opposition's concerns with the settlement is that it adds no transparency to the process by which Visa and MasterCard set their interchange, or "swipe," fees. Furthermore, although the settlement's $7.2 billion price tag would make it the largest antitrust settlement in U.S. history, merchants have argued that the settlement is too small, considering that since the case was first brought to court in 2005, Visa and MasterCard have collected more than $350 billion in interchange fees.

The agreement also releases Visa and MasterCard from future lawsuits against any anticompetitive practices stemming from interchange rates. By a twist in the settlement's language, this provision is the only portion of the agreement of which merchants cannot opt-out.

- Jacob Barron, CICP, NACM staff writer

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 Z-Score Creator: EU Legislation on Raters an 'Unfortunate Precedent'

Free flowing, timely and accurate information has an impact on business and credit on a level that is hard to overstate. It's why the move by the European Union to limit when and what the so-called "Big Three" credit ratings agencies can say regarding sovereign ratings is an issue worth watching closely.

An EU council has approved draft legislation that restricts the timetable in which any of the three—Moody's Investors Service, Standard & Poor's and Fitch Ratings—could release news of sovereign credit ratings of any EU member. The regulations would also empower investors with the right to take legal action against the agencies if financial losses could be tied back to vague measures of gross negligence or malpractice on the agencies' part.

New York University's Ed Altman, PhD, who will be making an encore appearance at NACM's Credit Congress in May 2013 at the behest of association members, called the EU's move an unnecessary form of information censorship.

"I don't know if it's 'dangerous,' but it is certainly an unfortunate precedent to restrict them from giving their opinion," Altman told NACM. "Just how much it will weaken their (ratings agencies) influence, I don't know, but it certainly won't help."

Altman noted there has been a lot of pushback against ratings agencies, not just in Europe, but with the U.S. banking system looking for alternatives as well. Whether this precedent will increase the anti-ratings-agencies pushback remains to be seen. He does, however, believe the move makes issues between the agencies and the governments they rate "overblown now."

"I think they are legitimately concerned with what they perceive as unjustified power on the part of the ratings agencies, but I think the market knows their track record and will evaluate based on their own information as well as what the ratings agencies put out," he said. "This is all totally unnecessary."

The three credit ratings agencies were criticized heavily for their ratings of both companies and countries, especially EU members, during the run-up to the worst global recession in more than a half a century. In addition, European leaders continued their criticism as the agencies routinely lowered ratings of, and put on warning, high-debt nations including all of the PIIGS (Portugal, Ireland, Italy, Greece and Spain)—all of which have regularly revealed deep-rooted fiscal issues. EU officials allege the timing and content of such downgrades unnecessarily exacerbated problems and have made recovery significantly more difficult.

- Brian Shappell, CBA, NACM staff writer

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HSBC Settles Money Laundering Charges with Record Fine

Britain-based banking giant HSBC will pay a record $1.92 billion in fines to settle charges that it severely violated anti-money laundering regulations.

As part of a deferred prosecution agreement (DPA), HSBC admitted that it violated the Bank Secrecy Act, the International Emergency Economic Powers Act and the Trading With the Enemy Act, and agreed to forfeit over $1.25 billion—the largest forfeiture ever in a case involving a bank. HSBC will also pay $665 million in civil penalties, bringing the total cost to $1.92 billion.

Banks and financial institutions are governed by several anti-money laundering laws, but many of these regulations can apply to exporters too, especially those promulgated under the USA PATRIOT Act. The entire scenario illustrates the importance of knowing one's customers and keeping an eye out for suspicious behavior.

HSBC's egregious lack of oversight allowed billions of dollars from drug-related criminal enterprises to enter the U.S. financial system. From 2006 to 2010, the Sinaloa Cartel in Mexico, the Norte del Valle Cartel in Colombia and other drug traffickers laundered at least $881 million in illegal narcotics trafficking proceeds through HSBC Bank USA. "These traffickers didn't have to try very hard," said U.S. Assistant Attorney General Lanny Breuer in a statement. "They would sometimes deposit hundreds of thousands of dollars in cash, in a single day, into a single account, using boxes designed to fit the precise dimensions of the teller windows in HSBC Mexico's branches."

In total, HSBC Bank USA failed to monitor over $670 billion in wire transfers from HSBC Mexico between 2006 and 2009, and failed to monitor over $9.4 billion in purchases of physical U.S. dollars from HSBC Mexico over the same time period.

Furthermore, from the mid-1990s through at least September 2006, HSBC knowingly allowed hundreds of millions of dollars to flow through the U.S. financial system from banks located in countries subject to U.S. sanctions, most notably Cuba, Iran and Sudan. "On at least one occasion, HSBC instructed a bank in Iran on how to format payment messages so that the transactions would not be blocked or rejected by the United States," said Breuer.

The DPA extends for five years, meaning that if HSBC fails to comply in any way with the terms of the agreement within that period of time, the Department of Justice can press criminal charges against the bank. "We accept responsibility for our past mistakes," said Stuart Gulliver, group chief executive at HSBC. "We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organization from the one that made those mistakes."

- Jacob Barron, CICP, NACM staff writer

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Bankruptcy Roundup: Supreme Court, Hostess, Vitro SAB

In the same year it made a huge decision regarding the practice of credit bidding in bankruptcy auctions, the Supreme Court of the United States declined to look at a case involving what happens to trademarks in bankruptcy proceedings.

The case in question was Sunbeam Products Inc. v. Chicago American Manufacturing, and the last significant ruling came out of the Seventh Circuit Court of Appeals. That court noted there were differing rulings on the issue, but that failed to persuade the high court to pick up the issue this week. According to an American Bankruptcy Institute analysis, the circuit ruling held that when trademark licenses are rejected in bankruptcy, the licensee does not automatically lose the ability to use them. In essence, "a licensor's breach does not terminate a licensee's right to use intellectual property...when a contract is rejected in the context of a bankruptcy, a breach is established, but the other party's rights remain in place."

Lowenstein Sandler PC's Bruce Nathan, Esq. told NACM that the decision is bad for debtors because, if the market gets hot for the trademarked product, the debtor can't necessarily take advantage of the potential higher royalty rate. He noted the ruling is good for intellectual property licensees.

The much covered Hostess bankruptcy case will likely result in a few major changes to the industry or the Bankruptcy Code. Battles between the owners that have been painted as somewhat inept and union workers that dug in for a better deal raged on for a lengthy period, but the well-known snack maker will not be emerging from a Chapter 11 filing. Nathan calls the collapse sad, but unsurprising, as well as something that can be pegged on a lot of deeper problems, rather than being one sided. Among them, Hostess was financially overleveraged, its product line was not selling, and it couldn't keep pace with the higher cost of raw materials.

Nathan noted that, while there has been a lot of media attention on the case, changes to the Bankruptcy Code are unlikely, even with the bad press incurred after it was discovered that executives gave themselves sizable bonuses before the latest filing and shorted pension payments.

"This is getting a lot of play because of sentimentality for the Twinkie brand, but it's not going to prompt any significant bankruptcy reform, in my opinion," Nathan said. "The problem at the end of the day is the bonuses are a drop in the bucket to the billions involved. Look how overleveraged this company was. This wasn't the Bankruptcy Code failing."

Meanwhile, in a case with deep implications for U.S.-Mexico trade relations, the U.S. Bankruptcy Court in Dallas has put 10 subsidiaries of Mexican-based glassmaker Vitro SAB into involuntary bankruptcy. The judge, Harlin Hale, also gave credence to allegations that the subsidiaries schemed to block U.S. collectors from collecting debts.

Hale is the same judge who denied enforcement of Vitro's Chapter 15 reorganization plan approved in court in the Mexican city of LĂ©on. Although typical for a judge to affirm such plans out of respect, Hale believed the decision "manifestly contrives" U.S. bankruptcy policy and the interests of American bondholders and trade creditors. An appeals court in Louisiana upheld Hale's original decision in late November.

- Brian Shappell, CBA, NACM staff writer

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Commercial Chapter 11 Filings Buck Trend, Jump 23% in November

Bankruptcy numbers as a whole continued their year-over-year decline last month.

According to data provided to the American Bankruptcy Institute (ABI) by Epiq Systems, Inc., the total number of bankruptcies filed in the United States. in November was 86,946, marking a 12% decrease from the 98,534 filings registered in November 2011. Total filings in November 2012 also represented a decrease from October, as cases fell by 14% from October's total of 101,307.

This trend was present in total commercial filings too, as the 4,199 filed in November 2012 represented a 19% decrease from the 5,216 filings during the same period in 2011, and a 13% decrease from October 2012. The 82,747 total noncommercial filings for November also marked an 11% drop from the November 2011 noncommercial filing total of 93,318 and a 14% drop from October's 96,507 filings.

The only category bucking the downward trend, however, continued to be commercial Chapter 11 filings. The November 2012 reading for commercial Chapter 11s registered increases in both year-over-year and previous-month comparisons. The 664 commercial Chapter 11s filed last month were a 10% increase over the 601 commercial Chapter 11 filings in November of last year, and a 23% increase over the October 2012 total of 542.

This marks the second consecutive month where commercial Chapter 11 filings increased. November's significant 23% jump could reflect a number of businesses seeking to reorganize as a result of the damage caused by Hurricane Sandy.

- Jacob Barron, CICP, NACM staff writer


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