It is the mid-1980′s. Savings & Loan institutions are failing at an alarming rate. So many are insolvent, in fact, that the Federal Savings & Loan Insurance Corporation (FSLIC), the deposit insurer of thrifts at that time, is running out of money to close insolvent thrifts. What does FSLIC do? It seeks out purchasers, who will buy, or recapitalize, a failing thrift. To entice such purchasers, FSLIC agrees to grant valuable financial inducements to the purchasers, including “forbearances” in counting bad loans against capital requirements, or allowing “goodwill” to count towards capital requirements.

The program worked well — several hundred “deals” were struck, in which insolvent institutions were taken over by purchasers who were given the many incentives. Thus, FSLIC did not have to close those institutions.

Happy ending to the story? Not by a long shot.

In 1989, Congress passed the Financial Institutions Reform, Recovery and Enforcement Act (“FIRREA”). Among other things, FIRREA immediately took away all the incentives FSLIC had given to the purchasers of insolvent thrifts. With the incentives taken away, many S&L’s were immediately insolvent, since suddenly all bad assets did count against capital, and goodwill could not be counted toward capital. Millions of dollars were lost by those who were initially given the FSLIC promises.

Lawsuits were, of course, filed, commonly, known as “Winstar” or “Goodwill” litigation. In United States v. Winstar (hence, the “Winstar” reference), the Supreme Court ruled that FIRREA breached the forbearance agreements FSLIC had given. However, the litigation proceeded for years on the issue of the amount of damages the Government had to pay, if any.

Fast forward to Summer, 2009. The headlines declare the Federal Deposit Insurance Corporation (FDIC) is now low on funds, since once again banks are failing at an alarming rate. Once again, the headlines say the FDIC wants to “attract” buyers of failing banks (and more here). To do so, it is willing to offer deals and incentives. (Sound familiar?) One such incentive may be to soften regulations on allowing private equity firms to buy failing banks. Traditionally, the FDIC was wary of private equity buying banks, for fear they will engage in more risky lending, or only be a short-term investor in an industry that many believe requires stability.

The FDIC Board will soon decide how it will address its problem of the depleted deposit insurance fund, and the increased number of bank failures. Other proposals are being considered in addition to the private equity solution. But with history as our guide, any prospective purchaser willing to accept “inducements” in purchasing a failing bank, should be very cautious, or at a minimum recognize its risks.

For nearly two years, the credit markets have been tightening, making it difficult for consumers and businesses to get credit for purchases and operations.  Several financial institutions declared bankruptcy or were on the brink of failure.  The federal government has used a variety of strategies to prevent a full-scale financial meltdown, including slashing interest rates, lending money to financial institutions, buying “toxic assets” and investing public monies in automobile companies.  This week, President Obama announced a second tactic to support the American economy:  preventing another banking crisis from occurring. 

It is an indisputable fact that one of the most significant contributors to our economic downturn was a unraveling of major financial institutions and the lack of adequate regulatory structures to prevent abuse and excess. A culture of irresponsibility took root from Wall Street to Washington to Main Street. And a regulatory regime basically crafted in the wake of a 20th century economic crisis — the Great Depression — was overwhelmed by the speed, scope, and sophistication of a 21st century global economy.

To read the entire remarks, click here. 

The plan proposes new regulation on financial firms and heightened protection of consumers with regard to purchase of financial products.  The Federal Reserve (“Fed“) will get significant new powers to regulate and oversee a wide variety of financial institutions, including stress tests of companies “too big to fail” like AIG and Lehman Brothers and regulation of parent companies and all subsidiaries, including unregulated units and those based overseas.

Executive pay and complex financial products will receive more scrutiny. 

A new agency to be called the Consumer Financial Protection Agency will have broad authority over consumer-oriented financial products, such as mortgages and credit cards. This agency would work with state regulators.

The Securities and Exchange Commission (“SEC”) would have broader powers to regulate hedge funds and venture capital funds. 

For a detailed summary of the plan, click on this Wall Street Journal Article. 

More details need to emerge before the plan can be adequately reviewed, but even the broad outline raises some questions:

• Is the SEC able to monitor/regulate hedge funds and venture capital funds?  Arguably, it did a poor job of catching the Bernie Madoff fraud. 
• What checks will be on the Fed’s power?  It is one of the least open and transparent agencies now. 
• Why does this proposal not restore some of the restrictions on banking contained in the repealed Glass-Steagall Act, which created the Federal Deposit Insurance Corporation (“FDIC”) and implemented a variety of checks on banks and financial institutions?

It is going to be very interesting to review this new regulatory scheme as the details emerge.  How do you feel about these changes?

According to the Detroit News, General Motors reversed the closing of 41 of the 2,100 dealerships originally targeted to be closed as part of GM’s bankruptcy and restructuring. 

GM has listened to appeals from hundreds of dealers, and has allowed 41 so far to remain open.  This is in stark contrast to Chrysler, which received Bankruptcy Court permission to close 25% or 789 dealerships although it had no dispute or appeals process of any sort. 

A group of influential members of Congress, including House Majority Leader Steny Hoyer, D-Md., introduced a bill last week to try to force GM and Chrysler Group LLC to keep dealers open. The Automobile Dealer Economic Rights Restoration Act of 2009, would restore the economic rights of automobile dealers to protect jobs, workers and small-business owners. It has 40 House co-sponsors, although it is unclear whether Congress has any power to change the Chrysler closings. 

A House Energy and Commerce subcommittee chaired by Rep. Bart Stupak, D-Menominee, has held hearings on the closing dealerships and heard from GM CEO Fritz Henderson and Chrysler President James Press.

It has been reported that Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, is considering a similar bill in the coming weeks. Sen. Bob Corker, R-Tenn., has a separate bill that would make closing dealers financially whole by forcing automakers to buy back unsold parts and inventory.

The problem with this legislation is that federal bankruptcy law trumps state contract law by allowing existing contracts to be “rejected” by the Debtor, with Court approval.  This is exactly what happened to the Chrysler dealers.  Chrysler filed a motion to close certain dealers because it would strengthen Chrysler’s economic position, testimony was presented, and the judge ruled to grant the motion.

For more information, see the article in the New York Times.

The full Supreme Court Tuesday decided not to hear the merits of a challenge to the sale of Chrysler assets to a group comprised of Fiat, the US, Canada and the Chrysler Auto Worker Union Retirement Trust.  The unanimous court, in a two-page-opinion, lifted the temporary stay granted by Justice Ruth Bader Ginsberg on Monday, and stated that the challengers had not met their burden of proof that their grievances merited the court’s attention.

A group of Indiana pension funds and consumer groups who opposed the sale of Chrysler had filed an emergency motion with the U.S. Supreme Court, asking that the sale be “stayed” or put on hold while they continue their attempts to block it.  The pension funds owned a small portion of Chrysler’s secured debt and claimed the sale was unfair to secured lenders. Under the sale, the pension funds will receive just 29 cents on the dollar, less than unsecured creditors like the United Auto Workers Union.  The consumer groups contend that the sale doesn’t sufficiently address warranties of existing Chrysler, Dodge and Jeep products. 

After the ruling, Chrysler issued a statement saying the sale will close “very shortly.” The New York Times reports the deal is scheduled to close at 9 a.m. today.  Fiat shares were up as much as 3 percent early Wednesday morning. 

Also Tuesday, the Bankruptcy Court approved Chrysler’s motion to terminate 789 dealer franchises immediately, which Chrysler contends would significantly cut costs.  Scores of dealers had opposed the closings. 

The Wall Street Journal calls the Supreme Court decision a victory for the Obama administration:

The high court’s move marks a victory for the Obama administration and its ambitious plan to remake the American auto industry by pushing both Chrysler and General Motors Corp. through quick and painful restructurings under Chapter 11 bankruptcy.

But the order is a setback for a group of Indiana pension funds and others who maintained the government’s heavy-handed treatment of creditors in the case could chill private lending to distressed firms and alter the rules of bankruptcy reorganizations.

The Court’s decision appears not to provide advance clearance for any other government rescue plan — such as the similar administration-backed bankruptcy of General Motors.  It also does not rule on the constitutionality of using federal bailout funds to rescue a private company.

Bloomberg reports that Magna International Inc., Canada’s largest auto-parts supplier, is in talks with General Motors Corp. about acquiring the Saturn brand as the automaker shrinks operations, people familiar with the discussions said.

Bloomberg states that other potential buyers are Penske Automotive Group, Inc and private-equity firm Black Oak Partners, Inc.

GM announced earlier this year that it plans to eliminate its Saab, Hummer and Saturn brands, and shrink the models offered under the Pontiac brand as part of a restructuring plan submitted to the federal government.

MAKE THE MOST OF TROUBLED TIMES.

After serving on a recent panel with three local entrepreneurs at our local American Marketing Association luncheon. I thought some of the themes and ideas that were discussed at that lunch belong on this blog, because I firmly believe that small businesses, privately owned businesses,  - businesses started, owned and run by entrepreneurs, are the most dynamic source of growth and stability in our country today.

Out of that discussion, I came back to my office with six good reasons to be entrepreneurial right now. The first three reasons were in my last post here. The final three reasons that we discussed are:

#4—There may not be any direct evidence for this yet, but it stands to reason that if people are not investing in the stock market or in real estate, then there is money “on the sidelines” as they (used to) say on Wall Street.  So maybe it’s not a bad time to go looking for angel money.  Venture money will be tougher, however, because existing venture funds are reserving large blocks of their capital to support their existing investments.  You will be sledding uphill (even more than usual) to try to tap into a venture fund with a new idea.  Think “friends and family” and the local investors that you can sometimes reach through your professional advisors.

#5– Many successful businesses have been started in times as bad or worse than this.  I call this the “Frank Sinatra effect.”  In other words, “if you can make it now,  you’ll make it anyhow.”  This isn’t just wishful thinking.  If you start your business in difficult conditions, you are a lot less likely to make some of the mistakes (mostly of excess) that brings down small companies.  Overspending on things that really don’t matter, expecting business to come your way, as opposed to going out and getting it, etc.  Basically if you are the kind of person who would start a business now, you are probably highly motivated.  Channeled correctly, that motivation will build a strong base and a lean operation, and you will really prosper when things improve.

#6–It’s a good time to be small.  It’s a tired analogy, but it’s easier to turn a speed boat than an aircraft carrier.  Your new business will be small and nimble, and you will not have the baggage of old ways of doing things, obsolete mission statements, embedded costs of long term contracts, etc. to prevent you from adapting quickly to changes.  Take full advantage of this and outmaneuver your larger competitors.  Even a relatively small business with 50 employees will find it difficult to reposition as quickly as a solo or even a 10 person organization.  Just the internal communication process of getting everyone clear on the new direction in a company with dozens of employees can be a daunting task.  You won’t have to waste your energy on that if you are small.  You can just do it.  That allows you the luxury of making and recovering from mistakes quickly.  Your mistakes are your best teachers, as long as you see them for what they are and move on quickly. 

I could go on, but I think you get the picture.  Of course it still takes the requisite gut check, a buy-in from your family, and objective input from your trusted advisors.  In my next post, I’ll discuss some of the critical steps that you cannot skip if you expect to succeed and survive.  No they don’t all involve lawyers, but I will certainly show you how smart use of legal counsel can greatly enhance your prospects for success. 

Here is a link to an article in Harvard Business Review in a similar vein: .http://ow.ly/1QcG

BTW, hat tip to my fellow panelists:

Ed Gooding, Owner of The Merge Computer Group

Connie Hom, Owner of Buckingham Greenery

Darrell Jervey, Owner of Worth Home & Commercial Products

SEE OPPORTUNITY IN TROUBLED TIMES.

Recently, I was fortunate to be on a panel with three local entrepreneurs at our local American Marketing Association luncheon. The topic was ” Start a Business? In THIS Economy?!?” On the panel with me were:

Ed Gooding, Owner of The Merge Computer Group
Connie Hom, Owner of Buckingham Greenery
Darrell Jervey, Owner of Worth Home & Commercial Products

Some of the themes and ideas that were discussed at that lunch belong on this blog, because I firmly believe that small businesses, privately owned businesses, – businesses started, owned and run by entrepreneurs, are the most dynamic source of growth and stability in our country today.

A colleague of mine, Carl Johnson, (the original organizer of the greater Richmond Companies to Watch program sponsored by the Venture Forum) summed up some local evidence in support of that statement. Quoting briefly from his e-mail:

“Another epiphany that struck me was that of the 43 companies selected, (ed. as “Companies to Watch”) to my knowledge, only one has gone under and it resurfaced with new management (Switch Beverage). These are supposed to be those “risky startups”, the commonly quoted “9-out-of-ten new businesses will fail.”

“I was rummaging through some old files tonight and found a list of ‘Richmond’s Top 50 Area Employers’ for 2000. These are supposedly the safe jobs. Companies included were Circuit City, Reynolds Metals, White Oak Semiconductor (Quimonda), Heilig-Meyers, LandAmerica, formerly Richmond-headquartered companies Crestar, Trigon, SuperValu, American Home Products, Overnite Transportation and current downsizers Capital One, Media General and GE Financial Assurance.”

Interesting when you bring all that history together in one paragraph. But if that were not reason enough to start a business when things are tough, here are the first three of six good reasons that we discussed.

#1– There are a lot of smart people available for you to hire. Layoffs and downsizing, and even liquidation of some of our largest local companies have put a lot of talent on the street. Take advantage of it!

#2– You can probably get a great deal from a landlord these days. Unless you are a totally virtual company, you’ll need a place to hang your hat. In case you haven’t noticed, there are still brand-new office buildings going up (for example, in Central Virginia’s Short Pump area) and existing buildings have empty space. Landlords are eager to get new tenants. From their perspective, a new business, with fresh capital behind it is a better tenant than an older business, which may be struggling with the downturn.

#3– Although most of the stimulus plan and T.A.R.P. funds are targeted at large companies and governments, the SBA has announced some programs designed especially for the small business. They’re worth investigating, if you need start up capital. Call anyone in our Business Recovery Group, and we will be happy to direct you to the right programs and offices.

There’s a really good Peter Bergman article today at the Harvard Business Review site on some of the same issues. I’ll finish my post with part two in a few days. Meanwhile, do you agree that it can be one of the best times to start a business, or are you more pessimistic?

President Obama and Treasury Secretary Timothy Geitner announced Monday that $15 billion of the Troubled Asset Relief Program (TARP) will be committed to the Small Business Administration (SBA) so that the government can purchase SBA-backed loans from the banks that have originated them. The SBA FAQ is here. SBA lending has crashed with all other lending lately, and this initiative is aimed at increasing the credit available to small businesses.

SBA loans generally are offered to small businesses that can’t get loans through normal lending channels. The SBA guarantees the loans to local lending institutions. Clearly, small businesses are the backbone of the American economy. They provide much of our jobs, growth and wealth.

Will directing funds to guaranteeing small business loans really help these small businesses who need it the most? Many commenters to the Washington Post and Business Week stories on this initiative are leery. The Wall Street Journal claims these loans help the wrong kinds of businesses; most growth and jobs will come from “knowledge” businesses such as engineering firms, software development, consultants or biotechnology, while SBA funding is difficult to obtain for these types of companies without inventory, equipment, real estate or other tangible assets.

Many small business owners are more concerned about the hidden impact of proposed new taxes on health benefits, energy and income.

What do you think? What do small businesses need now from the government and the rest of us?

(originally posted at NCLawLife.com)