Editor's note: You can view part one of this article here: Financial Crisis 101: The Way It Works.
When the lead singer from Rascal Flatts complained to Bruce Springsteen how hard the music life was on his marriage and asked for advice, The Boss famously quipped, “If Mama ain’t happy, ain’t nobody happy.”
If you read part one of this article, you'll understand when I say, same thing with the banks. The landscape is changing, the banks liquidity is drying up, ain’t no one gonna be happy for a while.
Here’s what that means. There is a direct impact and an indirect impact.
The direct impact comes from the liquidity drying up. There’s no cash. With no cash, there’s a credit crunch. And the first people to go down on one knee are business owners who use lines of credit to make their businesses run. These are manufacturers who have seasonal lines, or heavy equipment owners who need to purchase the equipment first before they on-sell it. Just a few examples of which there are many.
Others already affected are those using a line of credit on their house to fund shortfalls in their business. Banks are finding ways to cut off the excess amount not already lent. So you could find your liquidity drying up as well. If banks, that are wobbling on that thin line of lending/capital ratio mentioned previously, can limit the amount they’ve lent by canceling unfunded commitments, they’ll do it, because then they won’t have to put up any more capital. It’s in their best interest to do so.
For anyone on Biznik who has unutilized lines of credit, don’t panic. Just review which institution you have it with. A strong institution, likely all is good. If it’s a second tier institution reporting major losses in the last two quarters, call your banker and ask about whether the bank is foreseeing making any changes to its lending policies, particularly unfunded commitments. Ask if they’ve ever called a MAC clause before. MAC is short for ‘material adverse change’ and was put in loan documents to protect the bank on any contingency they hadn’t thought of. Extremely rare to call a MAC clause, but it happens. Check to see if you have one in your document. Basically anyone who has a relationship with a bank that they count on needs to review their documents and understand their risks.
The indirect impact affects all of us, but in many different ways. If you sell to the people in the small business market (definitions vary widely but generally considered to be the $1 million to $5 million in revenue market), or middle market, ($5 million to $75 million), review your revenue concentration. If a significant portion of your sales comes from upstream or one or two customers, schedule a lunch, during which you discuss the market happenings and talk about the health of their company, and ask if you can do anything. No need to be surprised if this company comes back at some point and announces major cutbacks. Same goes for your credit extension policies. How long do some companies take to pay you? Should you wait that long? Should you ask for a retainer upfront?
If you don’t sell upstream, if your customers are mostly individuals versus companies, times are challenging right now too. There will be pullback, and that means prospecting should move up a level in terms of the amount of time you spend on it every week. Not networking, not marketing, but prospecting, the active task of reaching out to NEW people and putting yourself in front of them. These are calls; they’re in-person visits. The sales cycle is elongating and the tails are dragging out. I’ve seen some research estimate that it should be about 60% of a good salesperson’s time each week! 3 days a week, calling, researching, and speaking to people! Sure kicks the butt of my maybe three hours a week, so I will be doing more as well.
I offer these few tips as a way to be pro-active with your business, a way to feel a little more in control and to take steps to prepare. Hopefully, it will be an antidote to the crazy-making media frenzy we seem to face daily.
Last words: if others are hit directly by this situation, offer them a hand up. Find a way to help. The only way any of us will get through this, is if we all get through it together.
Learn more about the author, Kelleen Griffin.
Great article Kel!
There are certainly tough times ahead, and I agree that we can all get through it together. As always, it is very important to help others all we can.
In this regard, in my real estate business I work with a number of investors who help homeowners get out of bad situations they may find themselves in. It does feel good when someone is helped out of a bad situation that seems impossible.
Kelleen, thank you once again for your infinite wisdom. I am so thrilled that while your passions are best utilized in your current ventures, you draw on your amazing experience to share this with so many who are confused.
Thank you for being another voice of reason.
Regards.
@Joe. I just ran into a neighbor here in Kirkland, the lights have mysteriously gone out in the buildings over here on Kirkland Ave, and so we all come out of our caves and chat. He was telling me that their mortgage lending unit did over $50 million in mortgages just last week. I was floored! He said it's really hard to tell people that right now is a great time to buy, but it is. It is also a time to find folks like you to help if the situation has deteriorated. Thanks Joe, it's good to know people who will help!
@Debbie, aw shucks. :) Seriously, thanks for the great comments. Looking forward to your session next week at the Village. Should be inspiring and uplifting to listen to someone knowledgeable talk about what's good right now.
Sorry to hear about your lights Kel - does that mean you have your computer on a generator? ;-)
Glad to hear there are loans being made, but as a real estate broker, I cannot and will not say that this is a good time to buy real estate locally - unless you have personal reasons making it necessary. In my humble opinion, the local real estate market is still priced way beyond reason and there is a great deal of "adjustment" to be had.
Still the same, this type of market does offer a lot more opportunities for savvy investors. Those opportunities should continue to grow in number over the next 2-3 years.
Great stuff! See the People, make the deal.
Great followup. We've already been in a recession and the tide has been pulled way back locally. It's going to be odd to see just how high it does fully retract.
We're always trying to explain to those with resources that they really need to step up and broadcast loud and clear in this time. The more a brand retracts the less stable it is after this all washes.
Not sure if I approve of the passing package but lets just add more rock to the roll and move forward as quickly as possible. I'm ready for a saner tomorrow, that's for sure.
Being a Real Estate broker here in Maine we need to get out there more. I am joining on line networking groups such as LinkedIn and others. Getting our name out there is the need. I also am getting out there to let people know I am still here and see if they have any questions. It is most important to keep our faces out there.
Kelleen, Great article. Your description of the banking mess is concise and right on. I believe in the proverb that “one will reap what they sow”. As a mortgage banker, I find myself on the front lines of the "mortgage crisis" everyday, attempting to reassure clients that the sky is not falling and Armageddon is not just around the corner. I appreciated Joe's comments concerning the right time to buy. There are some real estate deals now, and more are surely on the horizon. However, my advice to clients is to be careful, not over extend their finances, and be content to live within their means.
Contrary to all of the news reports, there are still some good loan programs available. As a potential borrower, I suggest that one ask questions of your lender, discuss worst case scenarios, and proceed with caution.
Kelleen,
This was a great follow up. Understanding the problem is only part of the puzzle. Thank you so much for offering ideas on ways to move forward. We as so lucky to have Biznik where we can all come together and shore each other up.
Good job.
Thanks Kellen,
Both of your articles were very helpful.
For anyone who may have missed it, Terry Gross had an amazing interview (as usual) on this whole subject with a chap named Steve Fraser last night.
Check it out at:
http://www.npr.org/templates/rundowns/rundown.php?prgId=13&prgDate=10-1-2008
Cheers,
Scott
Thanks Kelleen...both of your articles helped my understanding of the situation more.
This is a pretty scary time for small businesses like mine that are offering a product that is viewed as a "non-essential" -- custom picture framing. I am trying to support smaller locally owned businesses right now while we all wait to see how this big mess turns out. I know the investment I have in my business may seem like peanuts to some of the big-time wheeler-dealers, but it's a lot on the line for me and mine.
The info on credit lines w/suppliers is very true. We're definitely seeing it in our industry. I have an extremely strict policy to take deposits for orders to keep the cash flow moving through our company and pay our suppliers in as timely a fashion as possible. The hardest part is not just paying for COGs as we go, but just covering overhead when sales are this down.
Support Your Local Small Business or we'll become a World of Wal-Marts!
Sincerely, Molly
Honestly Kellen we can't do anything about it. The only thing we can do is move on find way for us to be productive in our own way. We might be involve but do have some say to it no. But it make sense to what is your point of view.
Kellen,
Enjoyed your articles and glad to hear from someone who could confirm the details related to banking gaffes and the resulting predicament.
The need for the bailout was imminent to prevent the trickle down effect that are most deeply felt by small businesses and individuals.
Subprime loans should have been addressed at the state level. Instead, mass volumes of these highly leveraged and volatile instruments leaked into the IMF (Int'l Monetary Fund).
Our problems (here in the US and abroad) are systemic and the signs were not addressed timely, nor correctly until the situation became pronounced (i.e., the collapse of our financial markets).
The bigger concern (now that the subprime issue is being address) will be to reduce the effects of the credit bubble. This is going to require a lot of 'give' from those who 'took' excessively. (I don't know too many people who enjoy having teeth pulled by the dentist :)!
Thanks for your plain-language take on the financial situation, Kelleen. As a REALTOR and small business technology trainer, I especially like your mentioning the importance of prospecting. It's wise to have systems in place -- including prospecting -- for everyday, and to help get through rough patches, all of us, together.
Great, practical, and gracious follow-up, Kelleen - particularly your parting comments. In any serious scenario, our best "insurance" and "stock" are webs of relationships which are healthy and diverse. The longer we stay away from "bunker mentality" the better off we'll all be.
I want to thank all of you for your fantastic comments. Thank you. The truth is, for me, I have been lifted up by all of the responders here. One person, after another, recognizing the need to help each other, to stave off fear, and say, 'count me in! I want to be a part of the fix.'
I am closing out this week with confidence and a bright spirit, knowing that I am part of a great community.
Last, there are some insightful comments here and also in the first article. so many people came forward with valuable insight. The discussion on mark to mark accounting rules, for example. A fantastic article can be written on the pros and cons of changing this accounting rule. Securitizations as a financial instrument, should it be allowed? How about all the add-ons to the bailout, to get it to pass? There's a lot more to discuss, and here on Biznik.com I rely on all of you to get me smart, quick!
Thank you and have a terrific weekend, Kelleen
There's always an expansion and contraction of credit. It's like the tidal flow of the ocean. There's always a similar rise and drop and rise and drop in business confidence and consumer confidence. This gets magnified by the media, but it would be happening even if they weren't spotlighting it. I have heard bits and pieces of the direct-lending websites that act as clearinghouses for people seeking and making loans. Wouldn't they provide a lot of liquidity, if we learned to use them? It's like E-Bay. You can buy or sell anything on E-Bay but you have to know how to use it.
Kelleen, Thanks for two most timely and truly great articles explained in plain English. Although I have been A CEO of the Bulgarian "Bank Consolidation Company" and my signature at 1992 was worth 5 billion U.S.$, your up today know how on banking is superb to mine and reading through your articles was a practical learning experience that I enjoyed tremendously. However at least from my level of personal bias and relative incompetence, Wall Street and the stock market, which all its varieties could be perceived as a well designed Pyramid, which kept on going and functioning while some necessary order , let us say the ratio- 20/80% was taken care of. The 20% were the sharks of different calibrates, and the 80% left were the tiny fish who fed the sharks, but the sharks on their side had the responsibility to take care of their food and its quality. It is a well known fact that in the U.S. some people play on the market, sometimes betting just 20 $(bucks). Both the economy and the financial system that are intertwined and interdependent could be perceived as an altogether successful socio- economic experiment that was to dominate the world after the collapse of the Soviet Union (classified as the empire of the evil, maybe not without any reason). Unfortunately the U.S., which the late Erick From, used to state in his "Anatomy of Human Destructiveness", love to play games they can't win by definition. So when they were left without a real opponent with whom to consider, they decided to outsmart themselves, falling into the trap of pursuing the mirage of the "Limitless freedom", one of the "Creator's(GOD)" smartest traps and jokes! "Now that we don't have to take care of given necessities, we can feel free to create "New Realities",was a statement that came from one of President's G.Bush, advisor's. By assuming that the sky was the limit, anything began to seem possible! I was completely amazed by the way the world started to function! Now and then someone came up with something scary of what is ahead and Alvin Toffler did not make an exclusion. . One could be right right to feel pessimistic about eastern teachings and wisdom, since the only thing that they really offer is some sort of personal therapy to stay cool and achieve some personal comfort no matter what happens with or against our will! They don't solve objectively anything in principle outside your aura, which is the sad part of the story. But are there objective solutions entirely dependent from us or are we manipulated in a strange way by some unknown trance dental powers that are using us to conduct their own game something , that has has nothing to do with human moral, values, reasoning,etc.??? A lot of things that happen strike me as impossible for the ' human brain' with all it's limits to consciously conduct, design, invent,etc.
Christianity with all it's updates is hardly the answer, neither any other religion can deliver the 'missing link', for the time being. But life without any religion can be very dangerous:'Dostoevsky used to state, that once you assume the absence of GOD, anything no matter how disgusting becomes POSSIBLE'. Science and Politics are the main FAILURES of the 20'th Century,that heavily relied on them for solutions. So I started to get truly annoyed with our civilization as a whole entity.
Then recession started to knock on our doors more and more often until finally, the economy ran out of control and "Complexity Theory", accompanied by 'relativity', 'quantum mechanics', 'chaos', 'catastrophe theory', 'uncertainty and risks', 'industrial and natural hazards' and 'human bias', greed, kleptomania, irresponsibility,wishful thinking and total lack of long range strategic visions resulted in a frightful phenomena-'The system slipped out of any reasonable control and was left on auto -pilot mode of flight.' A bit earlier than 2002, as Kelleen had sensed and realized the fact. Unfortunately it was not a bicycle to repair and no living Guru, financial genius or whatsoever could coin up an adequate remedy, but this is another story.
Naturally when so many DEVILS assemble together - HELL has to pay the BILLS!!! Yesterday our great financial wizards
who can Predict-Nothing, as well as Prevent even less than anything- but only inflict Harm, told us that the Lehman Brothers had perished with
dignity,leaving Meryll Lynch in a situation in which as the word goes -'We will pray forever!." If you are curious enough,see:www.mediapool.show/
?storyid=143645, Bulgarian interpretations of the phenomena. But, take it easy-here come the 2 - Nobel Price Winners, that reassure us that the long range perspectives are very encouraging! There is no reason,'The Wise Gays" argue that IF(????) the Eastern countries manage their economies well(???), continue
to educate their population as brilliantly as usual and keep open to the rest of the world(Do what ether Bush or Putin preach), they don't see any reason why
we shouldn't be able to succeed in totally ruining our economy, digging for unlimited wealth under the bottom line! We also have an option to give Warren Buffet a 2billion$ dinner for some priceless advice! His 'Majesty'-the Market has to muddle out of the crisis all by himself (Cosmic consciousness), while the stability of the money flows has to be regained by a purely political Decision and Will (Now you have a clear explanation, why I am so exited about decisions, no matter clever,stupid, human or non-human).Ex: It rains because it rains.And this encompasses an understanding off all the interactions that happen between raining, evaporation, air cur renting knowledge and when it is noise ans so forth. Satisfied?- This is Wisdom: evaluated understanding!
In my latest article on "The 'LEHMAN' FINANCIAL crises in the U.S.", I
wrote that only 1 % of the whole population of the U.S., consisting of
JEWS and WASP(White ANGLO -SAXON Protestants), are running the big
financial show. This 1 %, gets more income than the rest 40% on the
line. Maybe I am ,stupid but I fail to comprehend WHY the ordinary
American voter has to give his vote faithfully not for his own benefit,
but in favor of this 1% financial and political elite, whose interests - any
possible Government of the U.S., has to defend as it's top priority
delegated from the sky above "US"??! Until not long ago it was 'funnily
assumed', that the limitless prosperity of this so called "ELITE" was
quarantining the wellbeing of the rest 90% of the population. Suddenly
it turned out that this is not the case whatsoever! Even more- when "The WISE
Folks-1%," win - they are supposed to pick up everything -'The winner
takes it all!'. When they loose - The Taxpayers have to pay their Bills!
It is as simple as that! And we are supposed to watch this theater being
played right in front of our eyes from the back seats and clap until our
hands start to ache from Democracy!
WOW! I forgot, that after all we all are part of an 'Organization'!
And here is a definition I truly like and am willing to share it with the rest of our great informal community.
An organization is like a tree full of monkeys, all on different limbs at different levels. Some monkeys are climbing up, some down. The monkeys on top look down and see a tree full of smiling faces. The monkeys on the bottom look up and see nothing but assholes.
I only wonder what Kelleen will respond to all my "important nonsense' ,ala "Why does water run downhill?" Interestingly enough, if one asks a pure operational scientist,'Does water run downhill because it chooses to or because it has to?" he would answer "Neither." It simply does. I find this delightful, since even most Zen Buddhists would agree with him on this point.
Kelleen, Its me again. Banking is banking,but where do you see the place of banking supervision? There is an essential question here begging for an answer: If some of the people involved in the banking system have made deals, operations,etc., who have turned out to be losing their client's money,since the combinatorics failed: Isn't it ' Fair' for the ones that lost their money because of their faith in the banking institutions to claim back the money commissions they paid for the ' successful' banking operations in which they were cheated in? Lastly no matter of the "Virtual specifics of most financial operations" in dealing with plain paper, instead of money in the classical sense of the world: Where after all did the real money that was lost vanish? I am asking these questions, because of the interdependency of everything created by out of our "Great Brains",since now in this financial environment , one can loose money, from cyber -crimes occurring out of falsely manipulated information(The losses of Apple for illustration),etc. I am far from thinking that this is the end of the world but the most important thing now is to keep our heads clear and cool, as to mobilize and pull ourselves out of a very dramatic situation facing mankind. In this collapse of prices where one can purchase an immense variety of property, who do you perceive as the potential winners , ala the swiss bankers after the great depression in the 1930's ?
Kelleen, One last question. The team I work with was claiming that !,U.S.,$ does not exceed the covered cost of 5 cents. So in all the speculations that were realized, was a conscious cheating and trading with useless papers, not the real assets that are liquid , ,totally neglecting the interdependency of different industries, hoping in the acceleration for a future income never to be born- the result being what ironically is understood by scientific research: A research where the costs are real but the final results is image nary! Now after all this occurred it is the turn of the European currency to get hurt overpricing it in the near future to come. I am saying this that Western Europe+allies is the most stable and reliable economy left,that could be predicted,compared even to Russia and China,that remain essentially unpredictable. Am I missing something?
Thanks again for the easy-to-understand articles on this complicated issue. I agree that it's time to start thinking more about getting through this mess and move past finger pointing. Perhaps the two prospective presidential nominees could do the same? I have confidence in the American economy and American people that we will pull through this without too much suffering.
Phil, "Without changing our patterns of thought, we will not be able to solve the problems we created with our current patterns of thought." -Albert Einstein. Explanations lie outside the system. Defining the nature of the economy system is the first step to understand how to manage it: 1) The whole has one or more defining properties or functions. 2) Each part in the set can affect the behavior or properties of the whole. 3)There is a subset of parts that is sufficient in one or more environments for carrying out the defining function of the whole; each of these parts is necessary but insufficient for carrying out this defining function. 4) The way that each essential part of a system affects its behavior or properties depends on(the behavior or properties of) at least one other essential part of the system. 5)The effect of any subset of essential parts on the system as a whole depends on the behavior of at least one other such subset. There are several key take aways from this list that can be applied to the management of the economy, broadly speaking. First it is necessary to understand what the defining function or functions of the overall system are and how the individual parts of the system act together to achieve this defining function. Second, it is important to understand which parts of the economic(+financial) system are essential for the overal functioning of the system and which are not. Third, it is the interaction of the parts of the system that define its overall function, not the performance of the individual parts taken alone. Fourth, improvement of individual parts of the system alone may actually degrade the performance of the entire system. Systems theory provides a theoretical foundation and approach for managing the economy, which is concerned with optimizing the design and development of an overall system as opposed to optimizing the components. Taking action in advance to prevent or deal with disasters is usually worthwhile, since the costs of doing so are inconsequential when measured against the losses that may ensue if no action is taken. The beginning of knowledge is the discovery of something we do not understand.It's never what we don't know that stops us .It's what we do know that just ain't so. I also have confidence in the American people, but to state that you will pull through the mess created, without too much suffering, reminds me of the saying:"Half of our mistakes in life arise from feeling where we ought to think, and thinking where we ought to feel." By the way it all depends. George Bush once said-"Just as a strong America means a safer world, We have learned that a safer world means a stronger America." I hope that I didn't bore anyone! Cheers for a better Future!
Kelleen, Something very interesting, that pleads for your professional opinion! It also reinforces my conviction that "Interactive Complexity" is still not well understood and can't be handled by computer programs for the time being. Amid all the fallout from the financial turmoil, one group has yet to feel the accusing finger of blame: the analysts who built the computer software that drove the derivatives markets that, in turn, drove the financial collapse. Since the Big Bang of the 1980s, large amounts of stocks and shares - and derivatives of them - have been traded automatically by computers rather than by humans. These so-called "algotrades" accounted for as much as 40% of all trades on the London Stock Exchange in 2006; on some American equity markets the figure can be as high as 80%.
The people who write the algorithms that drive the software are called quantities analysts, often referred to simply as "quants". They are generally physics and mathematics graduates working in risk management - calculating whether a given deal is a good idea - and derivatives pricing, which entails putting a figure on trades that in effect bet on other trades. It's enormously complex, which is why only the quants could understand it - if, that is, they did. History now suggests they didn't.
The rise of the quants has mirrored the automation of the financial markets; and as many of the newer markets, such as swaps (a sort of insurance) and derivatives, have been unregulated, the quants who have been responsible for developing the hugely complicated systems that in the end brought many of the western world's banks to their knees. As Richard Dooling wrote in the New York Times: "Somehow the genius quants - the best and brightest geeks Wall Street firms could buy - fed $1 trillion in subprime mortgage debt into their supercomputers, added some derivatives, massaged the arrangements with computer algorithms and - poof! - created $62 trillion in imaginary wealth."
Those algorithms were based on risk assessments that were seriously flawed, based only on the risk to the market at that moment, rather on cold, hard empirical data about a person's ability to pay and what would happen if a lot, rather than a few of them, stopped. As George Dyson (son of the quantum physicist Freeman) wrote in Edge last week: "The problem starts, as the current crisis demonstrates, when unregulated replication is applied to money itself. Highly complex computer-generated financial instruments (known as derivatives) are being produced, not from natural factors of production or other goods, but purely from other financial instruments." What is also becoming clear is that the financial markets are far more automated than ever before. There is a growing sense that much of this was made by machines, with the quants feeding the beast ever more intricate lines of code. Dooling has a growing conviction that we are now at the mercy of a financial system based on "arrangements so complex only machines can make". It seems we are at the mercy of the machine. Kelleen, Silence lies in the ocean, while words flow through the river. The oceans waits for YOU, don't wait for the river. Look to the ocean and watch its message.It will come, it will come. Regards, Mike.
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