July 11, 2013
That U.S.-based daily newspapers are struggling isn't exactly a breaking story. High profile bankruptcies among outfits like the Tribune Co. and of widespread layoffs or jobs cuts have been around for a while. Many held onto the belief that small and mid-sized papers might be stable because they were providing more localized stories not necessarily splashed all over the internet like those from the biggest, name-brand papers in America, but that comfort may not continue to hold true given the changing dynamics of newspaper business models.
As the shift toward media websites rather than print copies continues, the use of pay walls for content access is gaining traction among more and more newspaper companies, especially the big players. While this may work for the big guysâ€”granted, it will take time to retrain a consumer base that has been given free access to news coverage by the vast majority of outlets trying to post the first "scoop" for more than a decadeâ€”smaller entities will struggle with this new online pay model.
Mohan Subramaniam, MBA, DBA, associate professor of strategic management at the Carroll School of Management at Boston College, said the reasons for this concern revolve around resources, or a lack thereof, to invest in new technology and, perhaps more importantly, to convince enough readers to pay for access. Many small and mid-market newspapers rely heavily on upstart journalists fresh out of college, not marketable writers with national-level credibility. "You need something special now in that industry, like access to big-name, star writers and columnists like Dan Shaughnessy or Paul Krugman...something exclusive," Subramaniam said. "Small papers can't get involved in this. It's very scary to invest in the model if you are small because you don't have the reach to attract those big names or even the big advertisers needed for a pay service."
As for the long-held belief that smaller newspapers provide the localized stories the big fish have little interest in, those stories can now be found with increasing regularity in community blogs with varying levels of credibility, as well as through its traditional competition, local radio and television. That's not even getting into problems with advertising revenue as the economic recovery continues to advance at a level just above idling.
Subramaniam warned that those supplying to this industry segment should investigate their debtors' financials and start looking at their ratios and things like working capital as well as the type of advertisements and/or the long-term viability of survival. "You can't predict when, but many of them will die or be taken over," he said.
- Brian Shappell, CBA, CICP, NACM staff writer
Dr. Mohan Subraminiam was an instructor at NACM's recently concluded Graduate School of Credit and Financial Management (GSCFM) held from June 17-27, with first-year students to return next June to complete the program. NACM is now accepting applications for first-year students for the June 16-26, 2014 session. To find out more about this program, and the experts who teach there, visit the GSCFM web pages at www.nacm.org.
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The nation's three main banking regulators adopted a rule this week that would require the largest U.S. banks to hold twice as much high-quality capital in reserve as they would under Basel III.
Following the Federal Reserve's vote last week to institute the less stringent requirements of Basel III, banking regulators doubled down on the framework's non-risk-weighted capital requirements and decided to also institute a larger supplementary leverage ratio on the eight largest financial institutions in the U.S. When the proposal takes effect in 2018, Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo will be subject to a 6% leverage ratio, which governs how much they can borrow to fund their business.
In essence, whereas under Basel III these banks would only have had to hold 3% of their total assets in reserve in the form of Tier 1 equity capital, under the proposal adopted by the Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) they will have to hold twice that much.
The move only deepens the controversy between Basel III's greater allowance of risk-based reserve requirements and U.S. regulators' insistence that banks hold capital regardless of the risk level of their lending. Having to hold 6% of total assets in reserve means exactly what it says, and banks will have to hold that amount of capital no matter how low-risk their assets are. For example, safe assets that banks hold for liquidity like U.S. treasuries or central bank reserves will have to be accounted for in the 6% leverage ratio, and, perhaps most alarming for exporters, trade finance transactions, which have a historically low default rate, will also have to be accounted for in the leverage ratio.
All in all, the blanket-sweep, non-risk-weighted approach to the leverage ratio could threaten credit availability across the board, particularly internationally, as banks in other countries will only have to hold half as much reserve capital as their large U.S. counterparts.
Needless to say, the banking industry was displeased with the Fed, the OCC and the FDIC, particularly after the Fed approved a more modest proposal, one it referred to as a "final rule," last week. "Just when there appears to be some agreement on international capital standards, U.S. regulators are proposing to undermine the whole exercise under a mistaken belief that doubling capital requirements will have no impact on credit availability or the ability to hedge risk," said American Bankers Association President and CEO Frank Keating in a statement. "This proposal goes beyond Basel III to impose a more difficult standard on our nation's internationally active banks, one that would make them less competitive with their European counterparts by making U.S. loans...more expensive to offer. Raising capital is not without costâ€”it means higher funding costs for loans and that fewer loans will be made."
- Jacob Barron, CICP, NACM staff writer
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Despite efforts to curb corruption, as well as an increasing media spotlight on related cases, acts like bribery continue to accelerate throughout the world, according to a study by the firm Transparency International (TI).
TI's Global Corruption Barometer (GCB), released this month for the first time in over two years, found one in four people, about 27% of those polled, reported paying a bribe within the last 12 months. More than half of those surveyed viewed the problem as worsening and another quarter saw conditions as stagnant in the 107 nations included in the study. The findings showed that the necessity for bribes is having an impact on people trying, and often failing, to start private-sector businesses throughout the world, or to efficiently operate a business not already in favor with major politicians or existing global corporations. TI also noted that an Ernst & Young survey alleged one in five has lost business to a competitor who paid bribes.
"Recent scandals prove that corruption in business doesn't always bring profits, yet bribery persists," TI noted in the report. "Corruption distorts markets and creates unfair competition. Companies often pay bribes or rig bids to win public procurement contracts. Many companies hide corrupt acts behind secret subsidiaries and partnerships, or they seek to influence political decision-making illicitly."
The study named Fiji, Algeria and Norway as the three nations where corruption has the biggest impact. The latter is curious considering that neighbors like Denmark, Finland and Sweden all placed in the top five best nations in TI's Corruption Perception Index (CPI), released late last year. Also curious is that Russia, well known for deep corruption at many levels of business and politics, was not listed on the GCB "most affected" list for either business or politics.
Among those on the GCB "most affected" list in political corruption were the United States, Germany and Canada, which all placed in the top 20 in the 2012 CPI, as well as Brazil, Mexico, the United Kingdom and India. The latter, as it continues to lose luster after years as a top emerging economy, fell into the worst grouping statistically regarding the percentage of respondents who reported paying bribes in the past year (50%-74.9%). The only countries that exceeded 75% were Sierra Leone and Liberia.
- Brian Shappell, CBA, CICP, NACM staff writer
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Retailers and card networks continue to go tit-for-tat on lawsuits in the ongoing fight over credit card interchange fees.
First, in mid-June, Visa filed a case against Wal-Mart in order to essentially bind them to the terms of the $7.25 billion antitrust settlement between retailers and Visa and MasterCard that is still being negotiated in federal court in the southern district of New York. In its complaint, Visa aimed to bar the world's largest retailer, one of nearly 8,000 that have already opted out of the previous settlement, from filing future price-fixing claims against Visa for how they set the fees paid by merchants whenever a customer pays by credit card. A provision that would keep companies that are party to the settlement from engaging in just that sort of behavior is one of the major sticking points driving merchant opposition to the proposal.
In its complaint, Visa said that it filed the suit to prevent "the continuation of endless, wasteful litigation between the parties," and that the company "seeks finality in its dispute with Wal-Mart." Under the terms of the still-pending settlement, retailers that opt out can file their own lawsuits over the interchange fees. Visa has argued that Wal-Mart "has made plain" that it will exercise that option, but for its part, Wal-Mart has said publicly that they're still evaluating whether to file their own suit.
If Wal-Mart did exercise its rights under that provision of the settlement, it certainly wouldn't be the first company to do so. More recently, just before the end of June, a group of around 30 retailers, including Amazon and 7-Eleven, filed their own lawsuit against Visa and MasterCard, rejecting the agreement for, again, the fact that its penalties are too low and it grants Visa and MasterCard far too much freedom to raise interchange rates in the future.
"Once Visa and MasterCard acquired substantial market power over merchants, they maintained it by forcing merchants to pay even higher interchange fees to continue to fund these price-fixing schemes," said the retailers in their complaint. Other similarly-minded groups have already filed their own lawsuits, including CVS Pharmacy and another group led by Target and Macy's.
While this drama plays out on the national stage, at a state level, several legislatures are moving to ban surcharging altogether, meaning merchants will be unable to pass on their credit card processing fees to their customers located in the states where these measures are enacted. So far, the 11 states already with surcharge bans are California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, Texas and, as of April, Utah, which enacted a limited year-long ban that applies only to transactions of $10,000 or less.
The push for this type of legislation is being driven directly by the debate between retailers and the payment card industry over who has to pay processing costs. In addition to the aforementioned 11 states that already ban surcharging, now nearly 20 additional states are considering new legislation governing payment cards.
- Jacob Barron, CICP, NACM staff writer
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Statistics for May indicate that German exports dropped by nearly 2.5%, marking the biggest dip in three-and-a-half years. Some experts point out a silver lining in that the increase in imports means German consumer demand is high. However, the troubling question remains as to how long such consumer behavior will last if Germany's businesses begin to struggle to sell products abroad with the EU and China both facing slowing growth rates, and, as a result, start paying creditors in a less timely fashion.
Meanwhile, an industry that certainly doesn't need any fallout from EU debt problems worsening, or even a slight dip in demand is solar power. Germany has been one of the foremost countries championing the energy source and the companies that produce the necessary components. However, similar to the recent situation in the United States, supply on the part of manufacturers is out of line with demand in an industry known worldwide for deep slowdowns during times of weak economic growth at home or with major trade partners. In addition, as Germany tightens its fiscal belt because of problems with its EU partners, officials announced plans to drastically cut subsidies to solar producers for the power they generate within five years.
These issues, when added to existing competition from solar products and services originating from Asia, should have creditors to Germany's industry keeping a watchful eye on their debtors, especially since two solar-related companies started the process of declaring insolvency just this last week.
- Brian Shappell, CBA, CICP, NACM staff writer
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U.S. and Chinese officials met in Washington this week for the fifth annual Strategic & Economic Dialogue between the two countries, and the predominant economic issues on the meeting's agenda appear to be the same as always: China's restrictions on U.S. investment and unfairly protectionist trade policies.
Other items are new to the 2013 agenda. Though it's been an issue for more than a decade, this year's allegations of hacking by the Chinese government into U.S. government and corporate networks inflamed discussion about cyber security, an issue that has only been further complicated by the recent revelations surrounding National Security Agency (NSA) leaker Edward Snowden. To put it mildly, both sides have some explaining to do. Also new to the agenda is how the U.S. and China plan to contain the nuclear provocations of North Korea under its brazen young leader, Kim Jong-un.
But the priorities for U.S. trade, as laid out by a cadre of lawmakers, look remarkably familiar. In a letter to the Obama Administration, House Ways and Means Committee Chairman Dave Camp (R-MI) and Ranking Member Sander Levin (D-MI), along with Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Orrin Hatch (R-UT), seemed to recognize that their concerns were the same as they had been going into prior Dialogues.
"As we have written to you before, we remain very concerned that China has haltedâ€”and in many cases reversedâ€”its market reforms. China must move away from an economic model dominated by state-owned enterprises (SOEs), trade-distorting subsidies and economic protectionism," said the letter. "We also remain very concerned about China's forced localization practices that condition market access on whether U.S. companies turn over their intellectual property. In addition, China's discriminatory 'indigenous innovation' policies continue to harm a broad array of American companies."
The letter continues by mentioning China's inadequate commitment to intellectual property rights, its continued currency misalignment and its regulatory barriers to U.S. agricultural exports. "Continued progress on these issues is vitally important to ensure that U.S. companies, farmers, ranchers and workers are competing on a level playing field in China and to demonstrate that China's new leadership is committed to improving the U.S.-China economic relationship," the letter concluded.
In his opening remarks at the Dialogue, Treasury Secretary Jacob Lew sounded a lighter tone, broadly welcoming China's market-oriented reform commitments while outlining what the U.S. expects from its relationship with China in the same terms as lawmakers. "As the world's two largest economies, too much is at stake for us to let our differences come in the way of progress," he said. "For the United States, this means an economic relationship where our firms and workers operate on a level playing field and where the rights of those who participate in the global economyâ€”including innovators and the holders of intellectual propertyâ€”are preserved and protected from government-sponsored cyber intrusion."
- Jacob Barron, CICP, NACM staff writer
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