The first two provisions of the Credit Card Accountability, Responsibility, and Disclosure (“CARD”) Act of 2009 went into effect Thursday, August 20, 2009.  The CARD Act is designed to protect consumers from unfair and deceptive practices by credit card companies. 

These provisions are:

1. 21-day grace period.  Beginning on August 20, credit card issuers must mail your bill at least 21 days before it is due instead of the current 14 days.  This gives consumers who pay attention a little more time to get their payment in on time. 
2. 45-day advance notice of interest rate increases.  Also beginning on August 20, credit card issuers will be required to give consumers at least 45 days notice about interest rate increases, instead of the current 15-day advance notice requirement. This allows consumers additional time to contact credit card issuers or to move balances – if consumers open and read these notices. 

The bulk of the protections go into effect in February 2010, with a few final changes coming in July 2010.

According to the White House, the key elements of the CARD Act are:

• Bans Unfair Rate Increases
• Prevents Unfair Fee Traps
• Plain Sight /Plain Language Disclosures
• Accountability
• Protections for Students and Young People

 The CARD Act will also limit over-limit fees, apply payments over the minimum payment to the balance with the highest rate, and spell out more clearly how long it will take a consumer to repay a debt.  ,

The Center for Responsible Lending has looked at credit card issuer practices since the legislation was proposed and found that while issuers are voluntarily implementing some of the CARD provisions, they are also suddenly cutting credit limits and raising all sorts of fees.  Some of these practices will be forbidden next year. 

What are your recent experiences with credit?  Have your accounts been closed, credit limits been lowered or additional fees imposed?  Are you able to get business credit?  If so, we’d love to know who’s interested in doing business.

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.

In Wednesday’s Business Week, Ben Steverman’s anaylsis of the possiblities of upcoming bankruptcy activity indicates that filings, rather than slowing as the economy gains its footing again, will instead swell with the failure of numerous entrepreneurial and high-debt companies. His opinion is that this will be due largely to the continuing spin-down in consumer demand and tight credit markets.

I don’t know if Mr. Steverman is right, but the fact is his article concerns me. Granted, I could just look forward to another busy sixteen to eighteen months. After all, business failures contribute to the activity in my practice. But the part of me that is hopeful about our financial system and small business in general wonders if another long and sustained decline in employment and the lost wages, profits and taxes that those jobs represent will cause our government to borrow even more against our country’s future and add inflationary pressure to the other effects of the recession from which we suffer.

On the other hand, maybe the doom and gloom that Business Week predicts will be made less credible by the recovery of financial standing by large businesses which have slashed debt and costs as a survival strategy. How are you feeling about your business’s prospects over the next year or so?

“We may be seeing the beginning of the end of the recession,” President Barack Obama said yesterday in Raleigh.  Indeed, parts of the country are starting to experience some economic stability, according to the latest figures issued by the Federal Reserve, but the Fifth District of Virginia, North Carolina and  South Carolina remains weak. 

Eight times a year in anticipation of the Federal Reserve Board’s meetings, each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources. Commonly known as the Beige Book, this information is summarized by District and sector and an overall summary of the country’s economy is given. 

On balance, economic conditions in the [Richmond] District remained weak in June and early July. Retail and services firm revenues continued to shrink, and contacts reported falling wages and steady or declining employment levels. Price growth in the service sector was slow. Commercial real estate activity softened further, with declining rents, increased concessions, and rising vacancy rates in some markets. Commercial lending activity continued to decline as loan demand remained subdued and some institutions reported tightened credit standards. Meanwhile, residential real estate contacts gave mixed reports about housing activity. Residential lending slowed as the slight increase in purchase loans was offset by a drop in demand for refinances. On a brighter note, manufacturing activity continued to strengthen in recent weeks as contacts reported increased shipments, new orders, and capacity utilization, and a moderation in the employment decline.

The other significant economic news is that new house sales increased nationally by about 11 percent, the steepest increase in more than eight years, as buyers apparently took advantage of low interest rates and a federal tax credit for first-time home-buyers. 

How is your business weathering the recession and recovery? What programs would help your business?

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.

Now that the Bankruptcy Court has approved the sale of Chrysler’s assets to a consortium of buyers lead by Italian carmaker Fiat, the next major issue is which Dealer Agreements will be assumed and which ones will be rejected. 

On May 17, Chrysler filed a motion (the “Rejection Motion”) in the Bankruptcy Court seeking authority to reject almost 800 Dealership Agreements.  Under the Bankruptcy Code, Chrysler can review dealer agreements on a dealer-by-dealer basis, to consider if it makes sense in its “business judgment” to continue with current pending contracts, such as dealer agreements.  If, in Chrysler’s business judgment, a contract has more burdens than benefits, it is allowed to reject that contract.  A rejection of a contract is a breach of that contract, but the other party to the contract is only left with filing a claim in the bankruptcy case.  

For all of the dealer agreements that Chrysler does not reject, they will, as part of the sale of assets to Fiat, et. al., assume the agreements and assign them to the new owners.  This means the contract remains in effect, and is binding on the dealer, and the new owners of Chrysler. 

Car dealers whose agreements are rejected (the “Affected Dealers”) are at risk of losing everything, severely affecting local jobs and economies.  If the Court approves Chrysler’s Rejection Motion (the hearing on this motion is this week), Affected Dealers will no longer be able to sell their new inventory with manufacturer warranties, offer rebates or incentives, or use the Chrysler, Jeep or Dodge trademarks on their dealerships. Many will essentially become used car lots, with new vehicles being sold as used. The dealers who sold exclusively Chrysler, Dodge or Jeep products (rather than selling Jeep and Nissan, for example), many at Chrysler’s insistence, will be the hardest hit.

Affected Dealers have filed 197 responses to the Rejection Motion, including objections, statements, briefs, letters and separately filed declarations.

Generally, these responses argued that the rejections violate certain antitrust laws; the rejections were based upon bad faith, discrimination or other improper considerations; Chrysler failed to satisfy the traditional business judgment rule for various reasons, such as cost analysis; the Court should consider the harm to the Affected Dealers from rejection (and deny the rejection because of it) rather than relying solely upon the Chryslers business judgment; and the Affected Dealers are not getting their day in court and are not getting due process .  Chrysler filed a response to the objections, claiming that the issues raised by the Affected Dealers are inconsequential, because it is Chrysler’s “business judgment” that counts and, even if flawed, it must prevail, unless there is “bad faith, whim, or caprice.” Chrysler further urges the Court that it should not “balance the equities” between the losses by the dealers, and Chrysler’s need to reject franchise agreements.

Affected Dealers did have the opportunity to enter into an “accommodation” with Chrysler in which Chrysler promised to try to help dealers redistribute the existing inventory, parts and special tools/equipment.  Nothing specific, is promised, however, and dealers still would still have to accept substantial discounts on vehicles.

Evidence on these issues was taken yesterday.  If necessary, oral argument on the motion will be today.

Meanwhile, the Senate Committee on Commerce, Science and Transportation is reviewing Chrysler’s decision to close 789 dealerships and GM’s decision to close 1,100 dealerships.  According to the Washington Post:

Because the federal government is slated to own most of General Motors and 8 percent of Chrysler, some of the senators said they have a responsibility, as major shareholders do, to review company decisions.

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?