July 28, 2009
While the inaugural House Judiciary hearing on the ramifications of the bankruptcy filings of General Motors Corp. (GM) and Chrysler, LLC focused on the actual ramifications, the final two in the three-part series focused more on why those storied proceedings happened the way they did. More than just covering the actual effects of the automaker bankruptcies on the American economy, the two hearings held last week on July 21 and 22 gave senior officials from both the Obama Administration's task force on the auto industry and the companies themselves a chance to explain themselves.
"Today is the opportunity for the task force to answer critics of its plan," said House Judiciary Subcommittee on Commercial and Administrative Law Chairman Steve Cohen (D-TN) in his opening remarks at the hearing on July 21. "I am particularly concerned about the effect this will have on minority dealers." Cohen's concern for the effect of the bankruptcies on minority-owned dealerships was the result of the subcommittee's first ramifications hearing, and was addressed by nearly every witness in some form or fashion. Other issues raised and later rebuffed by witnesses included the long-term threat these bankruptcies may have on capital markets, which came from the other side of the aisle, most notably Subcommittee Ranking Member Trent Franks (R-AZ). "Viable companies don't slash and burn the rights of their secured bondholders knowing that this issue of new corporate bonds is key," he said. "Why and how did you not see that the administration was devastating the long-term future of our bond markets—markets that the administration must rely on to pay back the debt placed on this country?"
Ron Bloom, chief of the Obama Administration's auto industry task force, was the sole witness for the first hearing, but themes in his testimony echoed throughout the second one as well. "Only a few months ago, these companies came to the government with insolvency," said Bloom, responding to Republican criticisms about unfairness in the distribution to Chrysler and GM's creditors. "The president could only justify lending them taxpayer money if the companies fundamentally restructured their businesses, which meant concessions from all their stakeholders." While this has been a painful process, as Bloom admitted, the result is that the two companies are now back in shape and poised for growth. "In just a few months, the companies have emerged stronger and more capable of competing," he said.
The fact that this process was driven by the automakers themselves, rather than the Obama Administration, was reiterated by other witnesses, but the most common theme of the hearings was that the alternative to this process was liquidation for both companies, which most agreed would've been untenable, both for the economy and, more specifically, for dealerships. "I know that several of you and your colleagues have raised specific problems, but had the president not stepped forward, GM and Chrysler would've liquidated, and all of their dealers would have liquidated," said Bloom. "This has been difficult, but the sacrifices being made stand alongside the substantial sacrifices being made by thousands of retirees, creditors and communities across the country."
"In a better world, the choice to intervene would not have occurred, but the administration's actions saved a painful liquidation," he said. "Completely avoiding these costs would've required an unacceptably large amount of taxpayer resources."
Other witnesses agreed, including GM's Vice President and General Counsel for North America Michael Robinson. "I know this has been controversial, but without our nation's support, we would not have had this second chance," he said. "As those familiar with bankruptcy law know, this is a painful process that spares no particular group." Referring to dealerships, Robinson, like Bloom, referred to the liquidation alternative. "With respect to GM dealers, we cannot go through this without reshaping our dealership network and it is important to note that of our 6,000 dealerships, we were able to retain 4,100," he said, noting that, in addition to retaining these dealerships, the bankruptcy proceeding also allotted $600 million in assistance to closing dealerships. "[In a liquidation] most dealerships are typically rejected with no assistance."
When asked by Rep. Franks why the company came to government for money in the first place, Robinson answered, "The capital markets had dried up and there was no way to borrow money. As the facts have been revealed, there were no other options."
Jacob Barron, NACM staff writer
After the Storm: Bankruptcy and Credit in the Wake of Chrysler and GM
After months of discussion, criticism, government funding and management posturing, two of America's automotive titans, Chrysler LLC and General Motors Corp. (GM), filed for protection under Chapter 11 of the U.S. Bankruptcy Code, in late April and early June, respectively.
The reasons for both company's lamentable fiduciary positions are well-known now, but whereas any other company in any other industry that made the same mistakes would've filed for Chapter 11, redrawn its business model, renegotiated its contracts, pursued its preferences and, with any luck, clawed its way back into solvency, the enormity of the American auto industry, as well as its previous reliance on taxpayer finance, has led the U.S. government to intercede in these landmark cases, engineering what was intended to be a swift, "surgical" bankruptcy for use in extreme circumstances such as these. The question that remains, however, is whether or not this is a one-time occurrence, or a precedent denoting a marked change in bankruptcy procedure.
To read more about the potential long-term effects of the government's foray into the Chapter 11 process for both Chrysler and GM, be sure to read the related article in the July/August 2009 issue of Business Credit magazine. Click here to get your subscription started today.
The United States agricultural economy has taken a beating the last couple of quarters. The beginning of 2008 started off as a record-breaking year and ended with a dire downturn that threatens to sink sectors such as dairy, while meat exports tumble down the chute. But according to Secretary of Agriculture Tom Vilsack, the results of a USDA economic analysis show that cap and trade legislation will, in the long term, produce a crop of economic benefits that will overshadow increased input costs.
"Climate change has enormous implications for farmers, ranchers and forest landowners," said Vilsack. "Drought, more intense weather events, forest fires and insect and disease outbreaks are just some of the potential effects of a warming climate that could subject landowners and rural communities to enormous potential costs."
The USDA has conducted an economic analysis of the recently passed House legislation on climate change. Vilsack stated that the agriculture sector will benefit directly from allowance revenues allocated to finance incentives for renewable energy and agricultural emissions reductions during the last five years of the American Clean Energy and Security Act (ACES) of 2009's outlined cap and trade program. According to USDA analysis, funds for agricultural emissions reductions are estimated to range from $75-100 million from 2012-2016. The analysis also found that the legislation's creation of an offset market will create opportunities with annual net returns to farmers ranging from $1 billion per year from 2015 to 2020, and then increasing to approximately $15-20 billion per year in 2040 to 2050.
"So, let me be clear about the implications of this analysis," said Vilsack. "In the short term, the economic benefits to agriculture from cap and trade legislation will likely outweigh the costs. In the long term, the economic benefits from offsets markets easily trump increased input costs from cap and trade legislation."
He added, "What does this mean for the individual farmer? A Northern Plains wheat producer, for example, might see an increase of $.80 per acre in costs of production by 2020 due to higher fuel prices. Based on a soil carbon sequestration rate of 0.4 tons per acre and a carbon price of $16 per ton, a producer could mitigate those expenses by adopting no-till practices and earning $6.40 per acre."
The National Farmers Union (NFU) is also on Vilsack's side. The association believes that the greenhouse gas emission reductions coupled with the provisions to mitigate increased energy costs of the ACES legislation offer the most potential. The NFU released a report last year that if 20% of electricity in the United States came from renewable resources, the benefits to rural landowners would be in the ballpark of half a billion dollars, just from wind energy leases. Another $25 billion would come via biomass crops.
"Enacting legislation to address global climate change will be one of the most significant challenges and opportunities for this Congress to undertake," said NFU President Roger Johnson. "Balancing environmental goals with consumer and economic impacts will be difficult. Yet, the chorus of those calling for action continues to get louder."
Josiah Pierce, a family forest owner, speaking on behalf of the American Forest Foundation and the Forest Climate Working Group said that the right incentives and markets need to be in place to achieve the full benefits and potential of legislation.
"Today, U.S. forests sequester and store 10% of our annual U.S. carbon emissions," said Pierce. "The U.S. Environmental Protection Agency estimates that we can double this to 20%, providing one-fifth of the nation's carbon solution, if the right markets and incentives are in place. This is a solution that is right here in our backyards that we can put to work today."
Matthew Carr, NACM staff writer
Advanced Issues in Financial Analysis
As the downfall of the subprime mortgage industry indicated, credit extended to unworthy customers frequently turns out to be profit lost, which is why the first stage in credit extension, the customer review, is so important. By being able to effectively analyze a customer's financial information, a well-trained credit professional can save their company a great deal of stress by being able to spot a customer that will or will not pay back what it owes. For a convenient, thorough look at how to go even deeper into a customer's financial documents, be sure to join DJ Masson, Ph.D., CTP in his upcoming NACM-sponsored teleconference, "Advanced Issues In Financial Analysis," on July 29 at 3:00pm EST. Using his considerable expertise, Masson will discuss how to specifically get the most out of a customer's documents and also offer solutions to common issues that come up in the analysis process. To learn more, or to register, click here.
Over the last several years, Capitol Hill has considered many different programs and measures geared toward reducing the nation's tax gap, the $345 billion in legally owed but never collected annual taxes. A 3% withholding tax on all local, state and federal contracts, rigorously opposed by NACM, which has been enacted but consistently delayed, now is set to take effect in 2012. Additionally, an Internal Revenue Service (IRS) program, whereby the commission used private collectors to enforce tax compliance, was implemented and eventually shut down due to privacy concerns, among others.
Efforts to reduce this disturbingly large loss of annual tax revenue continue, however, most recently in the form of a new report by the Government Accountability Office (GAO) that suggests the IRS expand a program requiring taxpayers to demonstrate federal tax compliance before receiving a state business license. The report, requested by Senators Max Baucus (D-MT) and Chuck Grassley (R-IA), chairman and ranking member of the Finance Committee, respectively, identified an IRS arrangement with California as the basis for how federal-state cooperation can improve tax administration and illustrated the potential success for use of this program in other states.
"Checking to ensure that taxpayers seeking a business license are up to date on their tax obligations is a common sense approach to improving tax compliance," said Baucus. "These are taxes already legally owed, so it's not raising taxes on anyone. Partnering with state authorities could begin to reduce the burden on honest taxpayers who shoulder the billions of legally owed but unpaid dollars every year and help to fund priorities like health care."
The GAO's study found that the IRS collected nearly $7.4 million in employment taxes during 2006 and 2007 as a result of its collaboration with California. The program itself only cost the IRS $331,348, representing a 22:1 return on investment. In its research, the GAO contacted officials in every state and in the District of Columbia and identified numerous other opportunities for similarly successful business licensing arrangements to be implemented.
"This program has made a big difference in compliance with federal employment tax obligations in California," Grassley said. "It seems to have done so without costing a lot of money or taking up other state and federal resources. As the report recommends, it makes sense for the IRS to approach other states and spread the word about this idea. Taxpayers should pay what they owe, not a penny more or a penny less."
Jacob Barron, NACM staff writer
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With the U.S. agricultural sector reeling from a hard fall from last year's highs, there's an onus to salvage exports and find some sort of cushion. When the virus H1N1, better known as the "Swine Flu," first grabbed headlines with the fears of pandemic, the U.S. agri-business fought for rescue and demanded that the more popular moniker of the disease be dropped. Now, with China, the United States and other countries in a standoff over environmental agreements, the heated trade debate between two of the world's super powers and the battle over H1N1 concerns have bubbled back to the surface.
Earlier this month, the U.S. Meat Export Federation (USMEF) released pork and beef export numbers for May, the first month that reflects the harshest impact of H1N1 fears. The figures were bad, but, according to USMEF, not as dire as was originally expected. Year-to-date quantity of U.S. pork exports was down 14% in total, led by significant drops of 56% to Hong Kong and 78% to China. Pork-plus-pork variety meat exports in total slid 9% from April to May.
USMEF President and CEO Philip Seng explained that 2008 was a peak historic year for U.S. pork exports, a feat that wasn't anticipated to be repeated, even before the emergence of H1N1.
Unfortunately, despite the separation of fact from fiction—that U.S. pork exports are nothing to fear—China, Russia and more than a dozen other countries continue to block U.S. pork. Several international entities, such as the World Organization for Animal Health, the World Health Organization and the Food and Agriculture Organization of the United Nations, have stated again and again that there is no scientific basis for imposing trade restrictions because of virus fears; H1N1 is not transmitted through food. The pork ban is just another piece in the ongoing trade battle between the U.S. and China. China currently imposes a ban on U.S. beef because of bovine spongiform encephalopathy fears, while the U.S. has a ban on Chinese poultry that continues to foster complaints from China to the World Trade Organization.
Congress is adding fuel to the fire by getting ready to make a decision on the 2010 agriculture budget, which will also include the continuation of the ban on Chinese poultry. Garnering some suspicion of retaliation, China recently imposed a ban on U.S. poultry products, particularly chicken feet.
China is the U.S.' fourth largest agricultural goods market, representing $12.2 billion last year, though dominated by soybeans, cotton and hides.
With Chinese officials in Washington, D.C. this week, legislators like Senator Chuck Grassley (R-IA) want President Barack Obama to address these bans directly and push for China to open its doors to U.S. pork and beef. "The United States and China benefit by operating under a rules-based trading system, which in turn relies upon the determinations of internationally recognized organizations," Grassley wrote the president. "Such organizations have examined the scientific evidence and have concluded that U.S. pork and beef is safe and may be traded safely."
Matthew Carr, NACM staff writer
Outposts and Allies: Politics, Money and Moral Dilemmas in International Trade
Nations change. "Ally" and "enemy" are rotating labels anointed with each shift in leadership. There is a future awaiting the world where Kim Jung Il will be no more—regardless how supreme of a title he grants himself—just as Chairman Mao Zedong's hard line dissolved in China. North Korea will one day have its own Deng Xiaoping who will be followed by a further line of reformers. But that is "some day." Now, the United States is face to face with one of the most contentious modern trade debates: Cuba.
A Castro is still in power, but the United States and the rest of the world see ample opportunities in a market that has long been closed. Read more in the July/August issue of Business Credit magazine. Don't have a subscription? Get one here.
The International Accounting Standards Board (IASB) recently announced changes to IFRS 1, First-time Adoption of International Financial Reporting Standards, that address concerns raised about retroactively applying the standards in certain instances and further aim to grease the wheels of IFRS adoption.
Specifically, the amendments exempt entities using the full cost method of IFRS accounting from having to retroactively apply the standards to oil and gas assets. Additionally, the most recent changes also exempt entities with existing leasing contracts from reassessing the classification of those contracts in accordance with another rule, IFRIC 4 Determining Whether an Arrangement Contains a Lease, when the application of their national accounting requirements, like U.S. generally accepted accounting principles (GAAP), would produce the same result. According to the IASB, these changes are aimed specifically at making the adoption of IFRS easier for first-time users and ensure that entities applying the standards will not face an undue cost or effort in the transition process.
The amendments came as a direct result of the responses the IASB received to an exposure draft published in September last year, and were supported by a large majority of respondents. The exposure draft in question also contained proposals related to certain activities subject to rate regulation, but the board decided that those proposals, which underwent revisions following the comment period, would be part of a separate, new exposure draft titled Rate-regulated Activities, also recently released.
Both amended documents, IFRS 1 First-time Adoption of International Financial Reporting Standards and Rate-regulated Activities, are available on the Board's website (www.iasb.org).
Jacob Barron, NACM staff writer
Distressed Business Services
Many of NACM's Affiliates are involved in a national network to provide assistance in the rehabilitation (if possible) or liquidation (if necessary) of businesses in severe financial difficulty.
While courts can take several months or more to get a reorganization plan started, NACM Affiliates can assist in getting a plan approved in as little as 30 days. Most helpful is the knowledge that experienced professionals are ready to step in at the most difficult time. NACM Affiliated Association staff members can serve as secretary to creditors' committees, provide other needed advisory services and are fully aware of the prevailing laws and regulations relevant to each situation.
Click here to learn more about NACM's Distressed Business Services.
The woes of the American economy continue to shift, and have even unsettled the epic approval rating of President Barack Obama. Trillions of dollars have been mainlined into the system, but recovery has been rocky and progress has been slow. The ongoing debate of what the government should implement to ease the risks and repair its broken oversight efforts took to the stage last week during the Senate Committee on Banking, Housing and Urban Affairs hearing on systemic risk. Just the day before, Committee Chairman Christopher Dodd (D-CT) took aim at Federal Reserve Board Chairman Ben Bernanke during the Semiannual Monetary Policy Report to Congress.
"Positive indicators seem to be stuck at the top," said Dodd. "And we all work for the American people. When can they expect the recovery that they have funded? When will working families see their rally? Their pay raise? Their jobs stabilized?"
Dodd charged, "If the success of our government's attempts to get our economy back on track were to be measured by executive compensation or large financial institutions' bottom lines, then perhaps today would be a day to celebrate the success of all that has happened over the last several months. After all, leading economists believe that these indicators are signs that we have averted utter catastrophe, and suggest that a recovery may be imminent."
Dodd has been a vocal proponent for securing small business assistance. His comments to Bernanke stressed that recovery won't be real until it is eventually felt by Main Street businesses, not just the Wall Street powerhouses. But the overall concern in moving forward continues to be identifying and wrangling systemic risk. Since January, the Banking, Housing and Urban Affairs Committee has had numerous hearings on the topic and the overall modernization of the financial system. At the hearing on Thursday, the subject of debate focused on increasing the authority of the Federal Reserve or establishing a new entity specifically charged with watching "too big to fail" institutions.
"The economic crisis introduced a new term to our national vocabulary—systemic risk—not words we use much, not words I recall using," said Dodd. "It is the idea that in an interconnected global economy, it's easy for some people's problems to become everybody's problems."
The White House wants to greatly expand the powers of the Federal Reserve to identify, regulate and supervise all financial companies considered "systemically important." There would also be a Financial Stability Oversight Council of regulators that would serve in an advisory role and that these "systemically important" companies would be allowed to fail, but in a soft-landing outcome that wouldn't drag down the entire financial system.
"I believe that it would be legislative malfeasance to simply tell a particular regulator to manage all financial risks without having reached some consensus on what systemic risk is and whether it can be regulated at all," said Ranking Committee Member Richard Shelby (R-AL), who expressed concern about creating a false sense of security in the markets. "If market participants believe that they no longer have to closely monitor risks presented by financial institutions, the stage will be set for our next economic crisis."
Shelby believes that expanding the powers of the Fed is a dangerous proposition, as the mixing of monetary policy and bank regulation has resulted in "taxpayer-funded bailouts and poor monetary policy decisions."
"Giving the Fed ultimate responsibility for the regulation of systemically important firms will provide further incentive for the Fed to hide its regulatory failures by bailing out troubled companies," charged Shelby. "Rather than undertaking the politically painful task of resolving failed institutions, the Fed could take the easy way out and rescue them by using its lender-of-last-resort facilities or open market operations. Even worse, it could undertake these bailouts without having to obtain the approval of Congress."
Additional concerns about systemic risk come via the fact that instruments like exchange-traded funds, mutual funds and their ilk hold approximately 25% of U.S. companies' outstanding stock, 45% of commercial paper and 33% of municipality issued tax-exempt debt.
"The ongoing financial crisis has highlighted our vulnerability to risks that accompany products, structures or activities that may spread rapidly throughout the financial system and that may occasion significant damage to the system at large," testified Paul Schott Stevens, president and CEO, Investment Company Institute (ICI). ICI is a proponent of establishing a new systemic risk regulation council comprised of senior federal regulators and fears the White House approach of granting more powers to the Fed is ill-conceived. "Significantly, it fails to draw in a meaningful way on the experience and expertise of other regulators responsible for the oversight of capital markets, commodities and futures markets, insurance activities and other sectors of the banking system."
Stevens added, "Finally, by expanding the mandate of the Federal Reserve well beyond its traditional bounds, the administration's approach could jeopardize the Federal Reserve's ability to conduct monetary policy with the requisite degree of independence."
Securities and Exchange Commission (SEC) Chairman Mary Schapiro noted that there needs to be a government entity dedicated to oversight of systemic risk, and that the Fed could perform that role or a new entity could be founded, though she felt the oversight council's powers should be broadened with members from a wide range of federal agencies.
"This array of perspectives is essential to build a foundation for the development of a robust regulatory framework better designed to withstand future periods of market or economic volatility and help restore investors' confidence in our nation's markets," said Schapiro.
She said, "We have learned many lessons from the recent financial crisis and events of last fall, central among them being the need to identify, monitor and reduce the possibility that a sudden shock will lead to a market seizure or cascade of failures that puts the entire financial system at risk."
Matthew Carr, NACM staff writer
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It is now easier for construction companies to work on federal government construction projects. In June, an industry-wide coalition, ConsensusDOCSTM, published a new contract agreement written to specifically address the complexities of federal subcontracting. At a time when the stimulus and other federal construction programs are rapidly expanding, general and specialty contractors will benefit from using the first standard subcontract to address new complex contractual rules and regulations for federal government projects.
"With America looking to the construction community to rebuild our economy and restore our hope, the last thing we want is contractors being excessively burdened by complex rules and regulations," said Tom Kelleher, Senior Partner in Smith, Currie & Hancock LLP and chair of the national coalition of associations that wrote and endorse the new standard contract. "The new ConsensusDOCS federal subcontract will keep needed construction projects from getting tangled up in red tape."
The new document, known as ConsensusDOCS 752 - Subcontract for Federal Government Construction Projects, addresses the terms and conditions needed for subcontractors and contractors to comply with Federal Acquisition Regulations, Kelleher noted. He added that the contract also addresses new legal and ethical requirements pertaining to the legal status of employees, complying with ethics rules, as well as federal Prompt Pay Act requirements.
Kelleher added that the document was written, reviewed and approved by a team of professionals representing every part of the construction process, including contractors, subcontractors, owners and sureties.
"There is no need to reinvent the wheel every time someone wants to engage a subcontractor or work as a subcontractor on a federal government construction project," Kelleher said.
ConsensusDOCS contracts are the first and only industry standard contracts written and endorsed by 22 leading construction organizations. Offering a catalog of more than 90 contract documents covering all methods of project delivery, ConsensusDOCS contracts utilize best practices to represent the project's best interests. Endorsing organizations represent designers, owners, contractors, subcontractors and sureties. For more information or to download excerpted samples, visit www.ConsensusDOCS.org.
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