Archive for August, 2010 »

CDO’s helped the economic crisis develop

Back in 2006 CDO’s where the hottest thing in investments and banking. The individuals working on CDO’s would make millions based on how many they sold. And they sold extremely well. Small banks, pension funds, all kinds of investment firms wanted them.

CDO’s are collateralized debt obligations from a risky, large pool of people that ultimately make the entire cost of lending cheaper for the economy as a whole. In this case, the debt obligations came from sub-prime mortgages. The banks separated the pool of debt repayments into multiple streams of investments, which created products that a much larger group of investors would be interested in purchasing. For the banks it was an exciting and profitable new way to take risky assets and reinvent them into a whole new investment product that everyone wanted.

Billionaire investors such as Warren Buffett and the IMF’s former chief economist Raghuram Rajan warned that CDO’s spread risk and uncertainty about the value of the underlying assets more widely, rather than reduce risk through diversification. The actual risk remained high, although the sale pitch to investors was the risk was properly mitigated and safe.

As time went on investors started to question why these sub-prime mortgages where being approved with lower and lower credit standards. No matter how much the banks wined and dined the investors it was too late. They were no longer interested in CDO’s and taking on the risk. The banks where left holding huge amounts of these toxic assets with no one to invest in them.

Why are banks still not lending?

Even though there has been constant urging by Washington for banks to start lending, it simply has not happened. The reality is Washington bureaucrats and politicians are making it impossible for banks to actually lend. It all comes down to risk.

With so many new regulations and laws being formulated it has become nearly impossible to mitigate risk when it comes to business and consumer loans. Banks simply can’t nail down a proper risk assessment with how much Washington has been meddling in the credit markets. Bank examiners have been obsessively cautious on how they value bank assets. This has put a demand on increased bank revenues and, as a result, a decrease in lending practices.

It’s great that Washington has been attempting to tackle the economy, but they need to start creating stability and confidence in their economic policies and methodologies for the banking industry to start lending again.

Financing for Small Businesses 3rd Quarter 2010

Start-ups and small businesses have traditionally had difficulty raising capital through outside sources and, for new companies, the chances of getting a bank loan is close to zero. Most banks today won’t even consider lines of credit or loans for companies that have been in business less than 3-5 years. There is some hope considering The Federal Reserve published results of its survey of senior loan officers found large banks eased lending terms from April to July across most types of borrowing.

The problem is even with this, start-ups haven’t built up adequate credit history and banks are just not willing to give money to companies with no credit history. Without adequate money coming in, it is difficult for a small business to maintain payroll and pay its bills.

No wonder we keep reading the statistic that 85 percent of business start-ups fail in the first five years. Some research has indicated the reasons for these failures are a lack of funding and poor planning. These facts combined with today’s economy makes small business financing more important than ever.

Well, there are ways for small businesses to avoid funding issues and find alternatives for obtaining business financing. One method is receivables financing, also known as receivables factoring and invoice factoring.