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Archive for the ‘Treasury’ Category

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Dark Days Ahead

Monday, July 12th, 2010

Last week, our nation celebrated its independence, but the liberties so carefully constructed by our founding fathers are threatened by the economic dangers that lie ahead. Freedom cannot thrive in a country so deeply divided.  Most Americans believe government no longer works for them. Under every imaginable economic scenario, this nation faces dark and humbling days ahead. The manner in which we react to this hard truth will determine who we, as a people, will become after this tenure of transformation. We can listen to the banter of partisan rhetoric: the slant, the criticism and the dichotomy of political theories or we can choose to become activists. Very few Main Street Americans can translate the argument between small and big government, for and against rising taxation and whether or not jobs can be created through trade agreements into the immediate needs of their lives. What they do know is that each Thursday the reports from the Bureau of Labor Statistics deliver more bad news proving that our beloved country is in crisis and that our people are suffering.  Most troubling to me, however, is the absence of urgency from our elected officials to provide and implement an effective action plan for job creation.

 

More than thirty million unemployed and under-employed Americans (and their family members) feel helpless, desperate and abandoned by Washington politicians who focus their partisan gamesmanship on issues other than the only one that matters most to them—their jobs.  In the past several months, the issue of unemployment has almost entirely centered on the extension of jobless benefits in Congress.  While I do believe that assistance for those in need is humanitarian and necessary, it is imperative that we accept these benefits for what they are – a temporary band-aid on a much larger systemic infrastructure problem - not the rapid job creator Speaker Pelosi claims them to be.       

 

This month, one year ago, I made my last of many visits to Treasury to present a plan designed to sustain and create jobs. I believed then, as I do now, that an economic recovery is not possible until we can curb the tide of unemployment.  Job losses cannot be stemmed until the liquidation of small and mid-sized enterprises (SMEs), which employ 80% of the American workforce, are halted.  Industry in this country must be embraced and accepted as the necessary foundation of our economy. The most direct and rapid solution to sustain and create employment is to incent private enterprise to originate and monetize rescue-financing loans for struggling SMEs and capital starved industrial companies.  We are now painfully aware that neither large banks nor community banks will provide such loans.

 

My rescue loan plan (RLP), as presented, accessed unutilized TARP funds set aside for the PPIP (Public Private Investment Program) Legacy Securities Program. Treasury originally intended $100 billion of TARP funds be used for PPIP programs but, only $30 billion was allocated and less was actually tapped for a plan that was ill conceived and underdeveloped. The RLP would have used $30 billion for equity and debt investments. The program’s blueprint was carefully designed to access structures previously announced and required no additional funding from Congress. The RLP would have saved jobs the old fashioned way, by lending money to companies that without funding would otherwise shut down and liquidate, leaving their employees without salaries and benefits .Without jobs, Americans lose the all important hope for a bright and prosperous future.

 

Unfortunately, the offer of my time and patented portfolio construction models, upon which my Patriarch platform has thrived, seemingly fell on deaf ears. At the time of my visit to Treasury in July of 2009, 1 in 3 unemployed persons were jobless for 27 weeks or more.  Less than one year later, in June of 2010, those individuals made up more than 45% of unemployed persons.  Immediate and early action to stop the bleeding and address the daunting but surmountable obstacles to job creation were overshadowed by the more politicized issues of healthcare and financial reform. 

 

Questionable Wall Street practices and synthetic financial instruments such as credit default swaps hunger for regulation.  However, at the risk of repetition in works of my recent past - the heart, soul and salvation of our nation have never, and will never, reside on Wall Street.  The disconnect between Wall Street and Main Street grows increasingly vast and any economic revival will lie in the recovery and resonance of cities and districts beyond southern Manhattan.  Immediate and aggressive action is needed from our elected officials to address the epidemic of unemployment.  It is a disease whose source must be analyzed and treated to provide long and lasting solutions.  The infrastructure of this nation has been badly injured.  Manufacturing jobs have been reduced by more than 9 million since the start of the decade.  Small and mid-sized businesses struggle to access the necessary working capital to survive.  Healing the plague upon the nation will begin with facing and addressing the truth.  We need an antidote to end the plague of joblessness and that solution rests with helping America’s struggling small and mid-sized businesses.  I hope Washington will hear our call.  America’s future depends on it.

Posted in Economy, Financial Crisis, Obama, SME Rescue Loans, Treasury, Wall Street, ppip, small business, unemployment | 1 Comment »

A Year Later — My Clarion Call to America Left Unanswered

Tuesday, November 3rd, 2009

From the Huffington Post (Nov. 2, 2009)

A Year Later — My Clarion Call to America Left Unanswered

By Lynn Tilton

One year ago, in response to a Treasury Plan to rescue large banks without mandate for lending, I rose defiantly from my comfort zone below the radar screen to speak my mind and deliver “truth” to America.  My fears, unfortunately since confirmed, was that Tarp-infused banks would use Treasury-injected capital to heal internal wounds left by lax controls, leverage upon leverage and abuse of synthetic instruments, leaving small and middle market businesses  without resources for recovery.

I argued that financial engineering had long distorted the value of our markets and seduced Americans into a false security of increasing GDP, dismissing the need for value creation through production of goods and delivery of services. I foretold that middle market manufacturers, the unsung heroes and hope for this nation, would be rendered prime casualties of the credit crisis and appealed for a national commitment to sustain the nation’s core economic base.  At the time, I had proposed a Provisional Federal Bank to lend directly to deserving businesses.  My call was early, my premise sound, my concerns verified but my solution ideologically rebuffed.  As such, unemployment became the defining force of our nation leaving the engine of job creation without fuel for production.

Amidst the unraveling of the American dream in its sudden transcendence to nightmare of foreclosures, layoffs and the destruction of our financial institutions, never once did I witness the direct delivery of truth to Americans. The potential damage to Main Street and warnings of expected job losses were quashed under the guise of containing fear. Truth, albeit cold and hard, is the starting point on the path to recovery and renewal.  With truth, the unknown vanishes, panic and fear subside and the long journey home can begin.  In contrast, Americans were left to believe that they could sit back confident of receiving the trickle-down benefits of financial institution salvation and stability. But banks never lent, much of our SME community did not survive and 26 million Americans are unemployed. Many Americans remain shocked and stunned by the precipitous unraveling of their family lives—no clarion call was sounded for them.

On Thursday of this week, the markets and the White House celebrated the end of the worst recession since World War II. The American government reported that GDP, a broad measure of the U.S. economy, had risen 3.5% on an annualized basis in the third quarter of 2009.  However, any analysis of the variables readily highlights the potency of temporary government stimulus in that growth, with largest components of spending strength reflected in car purchases and new home building, two agendas broadly supported by federal programs.  But before we commence any celebration, it should be clearly noted that consumer confidence declined in October and that unemployment continues its rise with no anticipated immediacy of relief. Christine Romer, lead White House Economic advisor, warned on Thursday that unemployment will remain “severely elevated” throughout 2010.

Main Street Americans remain confused by the conflicting data, seeking answers to the timing and type of recovery that brings relief to their despairing lives.  It is impossible for Main Street to unravel the data, signs of recovery or actions best taken to share in the relief that envelops Wall Street and corporate America.  And so I return to my entreating treatise of last year and ask again, when will we deliver truth to Americans?  When will we accept that people are paralyzed by the “unknown” and seek to fully understand the dichotomy between the recovery they hear and desolation they recognize?

We are living in “interesting times” and the road to resurgence will be long and fraught with obstacles.  A plan for economic recovery that comforts and assuage fears will necessitate focus on job creation and available credit to small and mid-sized enterprises. To bridge the great divide- the casualty of last year’s TARP focus- we will need honest assessment of damage, executable solutions that defy political objections and a clarion call for patience and discipline among Americans who must slowly rebuild their lives.  This passage starts with delivery of “truth” so that jobless and hopeless Americans clearly understand their long hard journey just now begins.

This country has long been a meritocracy founded upon education and work ethic, a nation in which each one of us could overcome the circumstance of birth to live the American dream. This is not a time in our nation’s history for panic, self-pity, entitlement or complacency; it is a time for discipline, hard work and cooperation. But it is also a time for truth, change and recognition that we cannot leave Main Street America behind.

In the words of Winston Churchill, “In war as in life, it is often necessary when some cherished scheme has failed, to take up the best alternative open, and if so, it is folly not to work for it with all your might.” We must never forget the inextricable link between great power and great responsibility; when much is given, much is expected. The path to economic recovery begins with truth.

To read the Clarion Call……http://www.patriarchpartners.com/Lynn_Tilton_WashPost_NYT.pdf

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Posted in Economy, Financial Crisis, Obama, SME Rescue Loans, Treasury, ppip, small business | No Comments »

Obama’s Small Business Plan: Recognition of the Problem is a Critical First Step, But Much More is Needed

Tuesday, November 3rd, 2009

From the Huffington Post, October 27, 2009

Obama’s Small Business Plan: Recognition of the Problem is a Critical First Step, But Much More is Needed

By Lynn Tilton

The plan announced last week by President Obama to encourage lending to small businesses, in its recognition of the severity of the problem, is a noble first step. However, if we are truly committed to the salvation and revival of America’s small and mid-sized businesses and to saving and creating jobs, a more comprehensive plan is required. The Obama plan, while well intentioned, places the onus, in its entirety, on community banks to restart lending.  In theory and political pacification, this might make sense, but in practice, it will never work. And we are out of time. The plan we place forth now must offer an immediate and effective solution or permanent unemployment will plague us for decades.

Community banks have not been able to ride the full force and effect of TARP and other government programs. They struggle under the weight of large non-performing home loan mortgage and commercial real estate portfolios, with the rates of defaults showing no sign of deceleration.  Most community banks fight for their own survival, and regardless of incentives, are in no position to provide resources or inure the detriment of risks inherent to lending to small businesses, many in liquidity crises. Moreover, many community banks will be wary to accept the reporting requirements and conditions attached to TARP funds. The Independent Community Bankers of America, its primary trade association, immediately expressed concerns following Obama’s announcement.  “It’s uncertain how many community banks will use the program given the current examination environment and the conditions Congress has imposed on TARP funds,” Cam Fine, president and CEO of the ICBA said in the release.

We need a plan that is designed to ensure funds will reach small and mid-sized enterprises (SMEs) directly and with requisite sense of urgency. More than 70% of America’s work force is housed in SMEs and the liquidation of these businesses continue daily because they have no access to the basic working capital loans needed to operate their businesses. SMEs are the backbone of our economy, and they are in desperate need of support. Permanent unemployment will reach epidemic levels if finding a solution to continued job loss is not our nation’s priority. The SME Rescue Loan Program (RLP), my proposal to address this crisis, provides a qualitative and tactical plan founded in a patented quantitative solution that protects taxpayer dollars. For more information, see www.smerescueloans.com.

Earlier this summer, I proposed the RLP as a natural expansion to the Public–Private Investment Partnership (PPIP) under TARP. The existing PPIP, announced a year ago, was established by Treasury to purchase toxic assets from bank balance sheets. With time, it has grown evident toxic assets are neither the major danger to our economy or obstacle to new lending.

The RLP is designed to address the current threat to our economy within the construct of Treasury’s original plan. The RLP is drafted to support origination of new loans to those SMEs that cannot access traditional bank lending.  Because it is based on an existing program, the RLP can be implemented with rapidity.  And by reliance on private investment managers, who demonstrate the risk profile for troubled credits, rather than community banks, probability for success is exponentially enhanced.

A year ago, the implosion of credit markets began as a Wall Street crisis but rapidly spread to Main Street, paving a path of destruction. Credit markets seized and the global economy appeared to stand on the precipice of collapse.  Governments intervened with myriad programs designed to slow the pace of damage.  These programs succeeded, to varying degrees. Although grave risk of impending financial collapse may be behind us, the economy remains fragile. The fall-out from the crisis of last autumn has given way to new and dangerous threats of extremely high unemployment and permanent job losses, a prospect more frightening than others to Main Street Americans.  Absent an immediate rescue, unemployment could peak in excess of 12 percent with underemployment levels approaching 20 percent, exacerbating demand destruction and further economic deterioration.

With each passing day, the schism between Wall Street, Washington and Main Street widens. The American people grow increasingly incredulous with the complacency of Washington leadership.  Spreading optimism, in the face of Main Street hopelessness, is an affront that will no longer be borne. Wall Street buoyancy adds insult to injury, and Americans will not accept Wall Street bailouts founded upon taxpayer dollars with no meaningful action to save American jobs. We have a plan that initiates rescue financing and saves jobs in a manner that can be immediately effective by means of a combined private and public sector solution. The time to act is now.

Click here for more by Lynn Tilton at the Huffington Post.

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Posted in Economy, Financial Crisis, Obama, SME Rescue Loans, Treasury, ppip, small business | 3 Comments »

The Lending Gap Pierces a Hole in Heart of America’s Economy

Monday, October 19th, 2009

The Federal Reserve’s recent upbeat policy statement missed a major threat to the economy that small and middle market businesses across the country understand well: banks are not lending. Despite easy credit and trillions in bailouts, there still remains a vast divide between the “haves” of Wall Street and corporate America who have benefited from the spoils of taxpayer largess and the “have-nots” of small and midsize enterprises (“SMEs”) that have long been the source of a majority of American jobs. As the CEO of a distressed private equity firm, each week I review the requests of dozens of SMEs that are unable to attain loans. Without access to capital, many companies that might otherwise survive have had no choice but to liquidate. As this progression evolves, jobs are lost, technology and tribal knowledge are destroyed and America’s depressed industrial base erodes further.

Last month marked the tenth straight month of declines in commercial lending. Since the crisis commenced, commercial lending has plummeted by 12% — this equates to an average of 1% each month. Never before during the post-war era have we witnessed a retrenchment in commercial lending so sustained and so severe. By some estimates, lending has contracted at the most rapid rate since the Great Depression. And it’s getting worse. Last month marked the largest one-month drop in lending in half-a-century and September’s outlook is little better. In the first two weeks of September, commercial lending has already declined almost one full percent. The latest Congressional Oversight Panel TARP report, released last month, too, does not portend well for our future. That report illustrates a nose-dive of 43% in new commitments for commercial and industrial lending at large infused institutions during the months between October 2008 and this summer.

Small and middle market companies, especially those that are “the maker of things,” depend on working capital loans from banks to operate their businesses in the ordinary course — to finance inventory purchases and to fund payroll and other operating expenses. In every business there are timing differences between the spend of capital to manufacture and deliver a product or service and the payment for those goods or services by customers. Battered by a perfect storm of declining revenues and a dearth of credit, companies that in previous recessions would have achieved workout solutions and forbearance from banks, or rescue financing from alternative lenders, are shutting their doors and terminating workers.

Alarmingly, with more than thirty bailout programs offered by Washington since the crisis began, not one addresses directly the dearth of lending to SMEs. Policymakers have found comfort in their delusion that an artificially supported Wall Street will transcend to magical solutions for the rest of the economy. We have spent trillions of taxpayer dollars to execute that chosen strategy, and yet, one year later, the financial crisis continues to gorge a gaping hole in the heart of our economy. Until we face the undeniable truth that the conventional banking system remains too damaged to resume its rightful role as the lubricant of commerce, a real recovery has no chance to take root.

The good news is that this problem is easily addressed. We already have a construct for a public-private program intended to purchase toxic assets from the balance sheets of banks. The model that Treasury established for the Legacy Securities Public-Private Investment Partnership could easily be modified to encourage private investment managers to originate new loans to SMEs. The program would target only those companies that have been unable to access traditional bank lending and would be a temporary measure to plug the lending gap while injured banks recover. The program could be more than fully financed with unused funds already set aside for public-private investment programs. As such, the plan will require no additional appropriations from Congress. In fact, the plan I propose is carefully constructed to deliver investment returns to taxpayers at very low risk.

Unlike the public-private programs for toxic assets, already hampered by unyielding banks with little motivation to sell, there is no shortage of SMEs in desperate need of loans. With access to low-cost government financing, private investment managers, carefully screened through a transparent and thorough process, will be anxious to participate.

America’s small and midsize companies, those still suffering under the burden of Wall Street mistakes, are the very same businesses that have long played by the rules and operated as the engine of job-creation and economic growth in America. A government program to support lending would both foster the rebuilding of this country’s manufacturing base and facilitate the historical role of SMEs to create and sustain jobs and to afford the opportunity to a workforce to earn its living with dignity.

More information is available at www.SMERescueLoans.com.

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Posted in Economy, Financial Crisis, SME Rescue Loans, Treasury | 3 Comments »

WHITE PAPER: PPIP Rescue Loans Program

Tuesday, July 28th, 2009

PPIP Rescue Loans Program
A Public-Private Program to Sustain and Create Employment through Incentives for Private Rescue Lending

Summary
As financially impaired banks have retrenched from traditional secured lending to middle-market companies to preserve capital and repair balance sheets, a gaping hole in our financing economy has been shaped. More than eighty percent of this country’s work force is housed in companies with fewer than 500 employees.  Middle-market and smaller companies, the backbone of the American economy, have lost access to the traditional working capital loans upon which they have long depended for managing businesses in the ordinary course.  As a consequence to this sudden dearth of capital available in this market, companies that might otherwise rationalize and survive the current economic downturn are laying off workers — layoffs that will result in permanent job losses as, without access to capital, these companies have no choice but to liquidate.  This phenomenon is driving not only permanent job losses, but also the eclipse of technology and the destruction of transferable industrial knowledge, causing irreparable damage to the American economy.  The Rescue Loans Program (PPIP-RLP) would exploit unused TARP funding intended for the Public Private Investment Partnership (PPIP) to incentivize qualified private investors to provide rescue financing to companies unable to access the bank loan or credit markets, temporarily filling the lending/financing void left by banks, hedge funds and collateral debt obligations (CDOs).  Access to rescue financing will save many companies that might otherwise liquidate — with a direct and immediately quantifiable sustainment of employment — and will simultaneously assuage the immediate and overwhelming threat to our economy, rising unemployment.

  • The PPIP-RLP would function under the existing PPIP.
  • The program’s configuration would be built upon structures already announced in the existing PPIP Legacy Securities Program and the PPIP Legacy Loans Program.
  • The program would require no additional funding from Congress.
  • The RLP would save jobs, in a manner that can be immediately effective and quantified, through a combined private and public sector solution.
  • The private sector equity will absorb the entire first loss, ahead of both the government loans and the government equity contribution, significantly reducing taxpayer risk.
  • The government program will be temporary and will be replaced with private sector and bank financing as the credit markets recover.

Read the full white paper:  PPIP Rescue Loans Program (pdf)

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Posted in Economy, Financial Crisis, Treasury, ppip | 1 Comment »

We Must Be A Country That Makes Things Once Again

Tuesday, June 9th, 2009

In his inaugural address, President Obama poetically and prophetically addressed the import of manufacturing to this great nation.  In his words:

It has not been the path for the faint-hearted, for those who prefer leisure over work, or seek only the pleasures of riches and fame. Rather, it has been the risk-takers, the doers, the makers of things — some celebrated, but more often men and women obscure in their labor — who have carried us up the long, rugged path towards prosperity and freedom.

– President Obama’s Inaugural Address

But sometime shortly after inauguration, Obama apparently disregarded the promise of his words, the need to develop incentives and programs and the responsibility to promote the renaissance of US Manufacturing.

A fundamental economic recovery is rooted in job creation which depends fully upon the revival of US manufacturing.  The economic recovery, recently touted, is built upon the same false foundation that caused the devastating crisis of last fall.

Every great empire has been built upon a manufacturing economy; the fall of every great empire has been the failure to remember this fundamental fact.

The revitalization of US manufacturing extends well beyond the saving of GM and Chrysler. We must relinquish the too big to fail—too small to play mentality that has, to date, dictated government behavior.

More than 80% of the US workforce is housed by companies with fewer than 500 workers.  Most of this nation’s workforce lies in small and mid-sized companies, those with no access to loans, programs, or bailouts.  These companies are starving for cash.

The State of the Economy—–Even Weeds Start Out Green

  • With more than 70 portfolio companies across a dozen industries, I have yet to see the green shoots of recovery.  Revenue lines, despite significant declines year over year of 20-50%, reflect no major revival in top line growth.
  • The unemployed ranks increased by 787k in May to 14.5million and the unemployment rate rose to 9.4%. Since the start of the recession in December 2007, the ranks of unemployed persons have risen by 7 million.
  • While many sectors showed improvement in the latest job report, the news for manufacturers continued to be abysmal.  156,000 manufacturing jobs were lost in May, roughly the same for April.  Since the beginning of the recession, more than 2 million manufacturing jobs have been lost.
  • Since January of 2008, manufacturing has lost an average of 0.81% each month versus 0.26% for overall employment.
  • Non-seasonally adjusted manufacturing jobs May 2007/May 2008 have fallen by almost 12% or 1.6 million jobs.
  • Over the last decade, on a seasonally unadjusted basis, from a high of 17.4 million –manufacturing jobs have fallen to under 11.9 million, a loss of 7.5 million jobs.
  • Since peak employment in 2000 at a rate of 17mm cars—automotive and supplier employment has fallen by 50%.
  • Job recovery in the manufacturing sector is expected to be very slow—as many of the jobs lost will never again be available due to liquidations.  With liquidation comes loss of jobs, technology and know-how.

Printing Money and Federal Reserve Balances—Money Flows but Not to Industry

  • The Fed creates money in part by printing it, but mostly by crediting banks with deposits at the Fed. Those deposits are called reserve balances and are a key component – along with currency – of base money or central bank money which ultimately brings about changes in broader money supply measures.
  • Deposits at the Federal Reserve have increased its reserve by $855 million to $867 million, or by 99%, since the same time last year, in order to provide support the insolvent banks.  This is the creation of money out of thin air.
  • If Federal programs, as promised, are fulfilled to include the proposed purchase of 1.75 trillion of securities, balances at the Federal Reserve could increase to $3.4 trillion by the end of the year.
  • National Debt as a % of GDP already stands in excess of 50%– the Congressional Budget Office projects the national debt will increase to 82% over the next decade.  However, absent changes to current policy, the ratio could exceed 100% in less than 5 years.
  • With current policies, the US is on a collision course to lose its AAA rating. S&P has already stated that National Debt to GDP at 100% is incompatible with AAA rating.
  • The government has already committed nearly $4.2 trillion in spending to combat the financial crisis, with the total al potential cost of the bailout reaching $12.8 trillion in direct investments, loans, guarantees, and other programs.
  • It is increasingly disturbing that none of the potential $13 trillion of spend has been dedicated to strengthen this nation’s small and midsized companies –the heart of the American economy.

Weakening Dollar—Consequences to our Infinite Spend

  • The Fed policies have led to the forever weakening dollar, even against the currencies of countries with astounding declines in GDP.
  • Commodities—oil, steel, copper, gold………are all priced in US dollars. The weakening dollar has led to increased commodity pricing which in turn will increase expenses, eroding earnings at manufacturing companies with already deflated revenues.
  • Inflation lies in the shadows—ready to pounce with any true pick-up in demand.  At that time, we will be a nation of workers unprepared to withstand amplified cost structures, still deleveraging life styles.
  • And hedge fund money off the sidelines is adding insult to injury by riding the rising wave of commodity pricing.

The US Has Long Obfuscated the Need for Manufacturing—Nothing Has Changed

  • The idea that a manufacturing nation could be replaced with a financial market economy was ill conceived and veiled the import of job preservation. We need to immediately establish a provisional Federal Bank , a PPIP or TALF- like program targeted at loans to industry that will stimulate our economic resurgence.
  • I fear we are destined to repeat the same mistakes that led our economy, our banks and our financial system to the precipice of collapse.
  • Liquidity must be made available not solely to big banks where Treasury-injected capital has been amassed, but rather expressly to deserving American companies and their people who will re-ignite our sputtering economy. A provisional Federal Bank must be initiated to foster enterprise and to provide job opportunities for every American.
  • In times of great monetary loss, financial institutions severely tighten credit and we have already felt the consequences of that behavior. A provisional Federal Bank would assure access to capital for businesses with appropriate collateral and the commitment to embrace change.
  • Although many Fed actions have aimed to enhance liquidity and extend credit, none such action has resulted in direct lending to smaller and middle market companies upon which a resurgent economy will depend.
  • The TARP has little to facilitate lending – and it is getting no better.  Among those banks taking money from the Fed, commercial lending fell by an additional 1.2% in March.

Obama Administration Had the Opportunity to Realign Priorities and Values

  • The new administration had the opportunity to set priorities, to humble the nation and to inspire a patriotic rebuild of America.
  • In the panic of crisis, the government chose the path of least resistance. It reached again for the magic switch of fiscal and monetary policies. It chose to save the banks through cash, guarantees and programs.
  • It flooded the markets with the hope that it could slow the 2nd derivative of GDP prior to a systemic collapse.
  • But once crisis was averted, there was never a change in policy to focus on job creation through a focus on manufacturing.–to rebuild the economy bottom up with a foundation to withstand the next decline.
  • Instead the need for funds flow to small and mid-sized manufacturers has been wholly ignored with more manufacturers liquidating daily.

This Nation Suffers Under the Weight of a Crisis in Morality and Humanity

  • This economic crisis first found root in the loss of values—the acceptance  of behavior void of morality under the veil of responsibility to oneself, one’s family and one’s investors.
  • We, the American people are suffering under the weight of a crisis in morality, this great burden that threatens to destroy us and our nation, and yet we seem not to notice or recognize its symptoms and effects.
  • We naturally rationalize our own behaviors because it is the way in which we protect ourselves from feeling blame or guilt, when our actions hurt others or we hurt ourselves.  This is an instinctive response and yet it keeps us stagnant; it does not allow us to learn or grow from mistakes or build the internal infrastructure to defend against repeating the mistakes of the past
  • I do not believe we can begin to heal as a nation until we are willing to analyze fully the mistakes that led us to this place of darkness, despair and economic depression.  Once we each recognize that we are frail and flawed, we can address our own respective mistakes, change behaviors and begin to repair our lives.  Simply put, we need to each become better people.
  • To rebuild a company or a nation we must cultivate a culture of change, of appreciation for second chances.
  • We must accept that fighting for scraps will leave many hungry and that only by building value, together, will there be sufficient wealth to be shared.
  • Greatness is never one hero, but a group of people standing shoulder to shoulder moving in one direction. That is a force of nature.

The Renaissance of US Manufacturing Must Become a Government Priority through Capital Investment Partnerships and Incentives

  • If taxpayer money is to be used to ignite the economy and to provide credit during this tenor of fear and tenure of crisis, then the first priority must be to provide credit for struggling middle market and small companies.
  • We need government funding and incentives to inspire private investment in the US manufacturing base.
  • The Treasury and Federal Reserve should expand TALF or create a PPIP to support emergency loans to small- and mid-sized companies.
  • Only a resurgent manufacturing sector will lead to job creation

The Future of this Great Nation Depends Upon……….

  • We must reinvent our economy with a new manufacturing base rooted in technology\
  • The US  Economy can never fundamentally recover until we are once again the maker of things
  • The administration has supported green and alternative energy initiatives but we need more support for all sectors of manufacturing.

But we are Americans –we are a resilient people—but we must work as one force and remember that………………….

This country has long been a meritocracy founded upon education and work ethic, a nation in which each one of us could overcome the circumstance of birth to live the American dream. This is not a time in our nation’s history for panic, self-pity, entitlement or complacency; it is a time for discipline, hard work and cooperation. Call me naïve, but I believe that faced with the ugly truth, we will roll up our sleeves, raise ploughshares and stand together to rebuild America.

The power and pride of a nation radiates not only from its military and strength of leadership, but also from its prosperity and generosity toward others that such wealth affords.  Capitalism encourages the people of all nations to reach beyond their status. In the words of Winston Churchill, In war as in life, it is often necessary when some cherished scheme has failed, to take up the best alternative open, and if so, it is folly not to work for it with all your might. We must never forget the inextricable link between great power and great responsibility; when much is given, much is expected.  Power lies in prosperity and our salvation in truth.

Posted in Economy, Financial Crisis, Green Shoots, Obama, Treasury | 3 Comments »

Stress it or Dress it — That is the Question?

Tuesday, April 28th, 2009

I have read the white paper that serves as foundation for The Supervisory Capital Assessment Program (“SCAP”), the “bank stress tests,” and reviewed the preliminary results, but still I fail to understand where the concept of “stress” is intertwined within the Treasury and Fed efforts.  How can “stress” be defined by the average consensus on projected macroeconomic data?  Is “stress” not a multiple of loss expectations to protect against the outlier scenario?  Stress under SCAP is defined as “severe but plausible”——–but if we are to guard only to the point of plausible—why bother with such tests at all?  Insiders at Sheila Bair’s Federal Deposit Insurance Corp. have said of the stress tests performed on the nation’s 19 largest banks, “it’s a pointless exercise that’s more sizzle than steak. “   Others inside the FDIC have called it a “sham” and an “open book-take home exam” that allows for manipulation of loss and recovery information.  If we revert to the second quarter of 2008—what was the average consensus on GDP, unemployment and house pricing for the remainder of the year?  Did reality align with the “severe but plausible” consensus of credible economists?  I think not.

Such examination leads to the question why SCAP has been conveniently implemented at a time when the Government straddles two missions.  On one hand, the Administration strives to quash the fears of bank insolvency while, conversely, it attempts to comfort the American taxpayer that their bank investment dollars are watched, monitored and the results transparent.  In its quest to quell constituent complaints, we must wonder whether  the dynamic duo—Treasury and the Fed–are truly stressing bank balance sheets, under adverse economic conditions, to ensure their ability to withstand continued losses in a protracted economic recession or are they merely “dressing”  financial reality in poetic rhetoric to promote populace comfort and market optimism.  Somewhere between the two ends of this spectrum and economic specters, lies some version of the truth.

I believe that Treasury made an enormous mistake when it pumped almost $700 billion of taxpayer dollars into America’s financial institutions absent any apparent analysis, void of mandates and without limitations on usage.  Since the execution of error, the Treasury and Federal Reserve, each and together, have taken one action after the other to defend and correct their collective lapse in judgment.  The simple truth is that the same results could have been realized absent any cash infusion but simply with the combined guarantee of fiduciary deposits and interbank lending in confluence with relief on capital ratios.  Such actions when united with a 0% interest rate environment would have enabled almost all bank holding companies (“BHCs”) to earn their way out of the dark abyss of self-inflicted financial losses.  If financial institutions should be unable to pay their debts as due, and need government capital to do so, such BHCs should either be merged with others of greater strength or seized by the FDIC.   With the use of taxpayer monies come broad responsibilities to investors which government agencies have not been well prepared to provide.  I believe the stress tests are no more than broad political posturing aimed at assuaging the angst of the American taxpayer while clearly averting any damper of market sentiment.  And in the attempt to straddle the spectrum, SCAP has proven to be much ado about nothing.

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Posted in Financial Crisis, Stress Test, Treasury | 4 Comments »

Tim, Why won’t you take a chance on lending?

Sunday, March 29th, 2009

To reduce the distance between problem and solution in order to enhance the probability of success is a lesson of great import etched upon me with the pointed pain of experience. With each additional layer between current state and future goal, we undeniably increase the time to and reduce the prospect of successful accomplishment.

“We need the banks to take a chance on lending,” was the mantra of Treasury Secretary Geithner on the Sunday morning press circuit. But what will be the cost and how much time will it take to motivate them to do so? How many more millions of jobs will be lost as small and mid-market companies liquidate on a daily basis before the banks are ready to embark upon the lending crusade? What assurances are offered that cash infused or toxic assets removed will lead to immediate lending to companies damaged by the interim starvation? Why can we not take the journey of shortest distance between the need to unlock credit and emergency loans available? We must use Government funds to assure that the goal is reached and the mission accomplished.

It is time to face certain harsh facts.   The U.S. TARP has failed to revive lending and has zero chance of plugging the vast and expanding cavity in the global economy burrowed by the evolving financial meltdown.  While we have pumped billions of dollars into banks to sit idle, the dearth of credit is suffocating the American economy. The program to remove toxic assets from bank balance sheets is under analyzed and the structure and participation unproven.  If we are to avoid a punishing depression and rebuild America’s industrial base, the only solvent and enduring lender – the U.S. Government – must step up to lend directly to corporate America through either a provisional federal bank or by means of a carefully constructed structure designed in the fashion of a private-public leveraged partnership whose mandate is emergency loans to America’s industrial base.

The only solution is to create a provisional federal bank or a series of private/public investment funds that will lend directly to American industrial companies. A federal bank overseen by a private-sector investment board or partnerships managed by the private investment funds could temporarily fill the credit gap left by private-sector banks still reeling from the consequences of their mistakes.

Geithner clearly confirmed that his intent was not to help the banks but rather to help the people dependent upon banks. He said, “I would not spend a penny on helping a bank for the purpose of helping a bank. Everything we’re doing is for the people that depend on this financial system. Every time we provide assistance to the financial institutions, it’s only because we need them to do a better job of getting credit to help reduce the risk of a deeper recession.” Tim, there is a less expensive, more direct path to reaching your goal with a much higher probability of success. Why is it that you will not see and grasp the opportunity?

In this time of desperation, we must move past our ideological preconceptions about the role of government in the economy. Once we decided to stoke our rapidly declining economy with taxpayer money, adding layers that separate American industry from the capital we mean to deploy makes little sense. Many companies that could again be strong and profitable need immediate capital and time to rebalance. Absent credit, the liquidation of American industry and the loss of American jobs will continue its march towards further defeat with each passing day.  Tim, say it ain’t so.

Lynn Tilton
CEO, Patriarch Partners LLC

Posted in Financial Crisis, Treasury | No Comments »

Where Has Fundamental Analysis Gone?

Saturday, March 28th, 2009

There has been much debate this week on the Private Public Investment Program (“PPIP”) since Geithner’s unveiling last Monday.  I, too, have taken my place and offered credent voice to the discussion. Speculation, analysis and disagreement are expected when a plan of such financial magnitude and expectation is launched, but so is, with all due respect, the fundamental analysis upon which such qualitative offering is built.

I remain uncertain that Treasury Secretary Geithner has yet realized that the introduction of programs or new regulation that carry broad powers and monumental force should be built upon fundamental quantitative analyses that test the hypotheses.  The outline we sketch or the plan of action we intend is never the outcome at the conclusion of a transaction. In similar fashion, the plan of attack at the onset of war will rarely be as the history of the battle is written.  As such, it is of great import that Mr. Geithner and his PPIP team have already created a straw man with selling bank, private fund and the use of government leverage.  In other words, have they experienced the negotiation, the pricing, and the quantitative modeling to prove that the structure is fundamentally sound and have they tested and removed obvious obstacles such that the program has a high probability of success?

From what I recognize as apparently absent and based upon the underwhelming success of TALF, to date, I doubt this is so.  Treasury Secretary Geithner, it is only through the weaving of qualitative structure with the quantitative reflection of thought, that problems arise and solutions are integrated.  It would be too much to expect or hope that a first broad stroke at a program, meant to meet the desires of myriad participants with distinct needs, absent a straw man realistically tested, could work as introduced.

If and when tried and tested, the following will prove true:

  • Leverage is a multiplier of equity value, provided that the purchase price is well below ultimate recovery values.  This leaves more to be shared.
  • Banks must be encouraged to sell low through incentives to include sharing in the equity upside and equity value counted towards its capital base.
  • This theory is distinct from “leverage used to increase purchase price” which may please banks, but insures substantial risk to the American taxpayer and radically reduces future recovery values.
  • Absent the use of the seller’s credit files, the buyer cannot accurately price assets and bids will be lower due to risk. Such divide might leave the bid and ask too far to bridge.  All parties are better served by transparency and analysis.
  • A blind auction is exactly that—blind and therefore a precursor to dumb bidding, enforcer of the zero sum game theory that will keep players on sidelines.
  • Success will also require active monetization — passive distressed investing is an oxymoron.

Why do I feel competent to advise? Because I have actually successfully completed and monetized transactions that are substantially similar.   And I assure you that the final transaction was a time-tested sequence of obstacles posed and solutions provided to find equity, balance and the proof that a transaction need not be a zero sum game.

Lynn Tilton
CEO, Patriarch Partners LLC

Posted in Financial Crisis, Treasury | 4 Comments »

Getting the Banks to Play the Toxic Asset Game

Friday, March 27th, 2009

As the markets roared in celebration of Geithner’s Private Public Investment Program (PPIP), I stood adamant but somewhat lonely in my stance that the structure, as presented, was tainted with a fatal flaw.  In all successful transactional structures, the interests of and the benefits to the parties must be mutually aligned.  Geithner’s program, as presented, pits the selling financial institutions against the private investment funds and the American taxpayer, a misstep that if not modified, will likely lead to failed auctions, angry participants and further evidence that the strategies of Government agencies have been introduced based on broad macro assumptions and little, if none, relevant micro experience.

As the holder of a US Patent used to create two bad banks, US 6,654,727 B2, I am well versed in the requirements to a successful transaction.  First, asset prices must be significantly below the ultimate recovery values.  Banks will not be induced to sell at prices that allow for program success absent a share of equity appreciation.  Neither the Treasury equity contribution nor the leverage provided by the Federal Reserve should permit overpayment on toxic assets.  The assumption that the Government offering fosters higher prices is erroneous, as excessive pricing with leverage only serves to increase losses to the American taxpayer. Absent buyer overpayment, banks have little need to engage in fire sales when access to the government well is evergreen for those deemed “too big to fail.”

I was thrilled to read this morning that Sheila Bair, Federal Deposit Insurance Corp Chairman, has recognized that equity upside for banks will be requisite to motivate the trade of illiquid assets for cash today. The premise, albeit idealistic, is liquidity will promote lending and starved corporate entities will cease to hemorrhage American jobs   However, based upon my experience, one additional obstacle must be addressed — adjustments to the capital requirements of selling banks.  Because selling prices will lkely prove below the marks on respective balance sheets, a sale that promises liquidity and equity upside might still render deep losses and reductions to tenuous capital bases.  At the risk of sounding pedantic, I believe Ms. Baird must also consider allowance of future upside to count towards bank capital.

The crucial feature must be the balance of risk and reward among parties and the inducement to participate.  The structure and program must encourage prices that reflect illiquid markets and time to asset recovery.  The clearing price must find equilibrium within the alignment of benefits.  If both upside potential and its value to capital requirements are addressed, the PPIP is far more valid. With parallel interests, selling banks will embrace immediate liquidity, without the fear for appearance of foolishness, loss of value to constituents or profit of others at their expense. Financial transactions, like life, need not be a zero sum game.

Lynn Tilton
CEO, Patriarch Partners LLC

Posted in Financial Crisis, Treasury | 1 Comment »

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