When Banks Stop Lending Money

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Today we have seen another “historic” event, a global rate cut. Countries around the world got together and with the guidance of the US Federal Reserve cut rates.

Joining the rate cut were central banks in Canada, England, Sweden, Switzerland and the European Central Bank. Central banks in China, Hong Kong, Kuwait and the United Arab Emirates acted separately to cut rates, a move the Australian central bank had taken the day before. More Arab central banks are expected to do the same in coming days. Washington Post

Along with the interest rate cut there was also news of a major government bailout of U.K. banks. And yesterday it was reported that Iceland would get a hefty loan from Russia.

All of this is being done to make money cheaper and get it flowing again, the problem is that though this move makes money less expensive to borrow it does not remove the toxic assets. Banks, financial institutions, and even countries do not trust each other. No one knows who has what on their balance sheets that may take them down in the near future, and what that will mean to those attached to the sinking ship.

I lend to you, you go under, and then everyone questions my judgement and I go under. This is a no win situation. So What do the rest of us do while we wait for the world to sort this out??

When large institutions let you down where do you go to get the help you need? Yesterday I read an article at Tech Crunch about Seattle’s Top Entrepreneurs Banding Together To Invest In Startups and after today’s news it got me thinking where can you go to get money?

In April I wrote a post titled, Show Me The Money where I talked about circumventing the big lenders and going into angel, venture capital, individual, or group lending arenas. I highlighted four websites, one no longer exists, but the other three are still going.

RaiseCapital.com

LendingClub.com

Prosper.com

These three websites have one thing in common, they have regular people investing in regular people. I look at someone like Warren Buffett, a man who came from humble beginnings and through hard work, education, and determination has built up an empire that any small country would envy.

Part of the problem right now is that investors really don’t know what they invested in, what their 401K, mutual funds, and retirement accounts are attached to. Main Street, Wall Street, it is all one street. So instead of just lying in the middle of the street hoping some big truck puts you out of your misery, why not do something to take control? Take your money and invest in individuals, ideas, and companies that are driven by real people as opposed to conglomerates.

The positive side to this huge mess may be that it pushes people to take control, educate themselves, and possibly even band together to help each other out. There was a time when a town worked collectively to build itself up, there was no one else to go to but your neighbor. I like what is happening in Seattle because those entrepreneurs and investors know their market, they know what works and doesn’t work in their backyard.

The advantages of people working together — better investment decisions, enhanced deal flow, the ability to combine their funds into larger equity investments, and group social attributes. The advantages of a small or medium sized business owner  or startup going to an investment group is that you become less of a statistic and more of a real entity. You can pitch your idea, get feedback, work together, and in some cases get some mentoring from some very impressive entrepreneurs.

I hope we see more investment groups come together to start investing in middle America. I think people investing in people will bring the soul back into our businesses and economy.

Quick side note…..

Before starting an investment group or going to one for your investment needs you should be sure to consult qualified counsel regarding federal, state, and local rules and regulations that may govern your organization. Attorneys and accountants can be invaluable to any organization, and you should avail yourself of their knowledge and background to ensure the legality and economic value of your angel group.

What do you think, do we bring our investments back to a local rather than global level, and if so would that get us out of this mess faster?

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About Author

Bridget is President of The Get Smart Web Consulting Group, a web presence and digital strategy firm with offices in San Diego County California and Collier County Florida. But more importantly she is a web, tech, and Twitter addict!

  • John W. Condon

    I think a smarter public will result and that is good. People will now know what Fannie Mae is, what the Senate Banking Committee does and how it failed us, know that professional political partisanship is to be avoided like the plague, know that lending money to those that can not repay will not end well, know that if you do not understand it do not buy it be it smooth politicians or investments. My parents (the Greatest Generation) sure got a lot smarter as a result of the Depression and WWII which was the only thing that ended it. The babyboomers have been so lost, spoiled and really unrealistic and the next generation I am afraid is lost too but the following generation will grow up deprived and hungry from the start and perhaps will understand life a bit more. Tat generation will cut off entitlements that we can not afford and are self-destructive. Painful for the previous generation but they asked for it. You pay as you go and if you think you are going to foist the cost of your extravagances on the next generation, watch out. They might just say NO WAY DAD.

    Local communities are often not much different than Washington. Big spenders too. Grandiose. Our community thinks it can afford no growth, no industry and living like the Indians with huge plots of open space. You can but keeping industry out is very expensive if you want tax revenue to fall on someone other than the homeowner. They need to acknowledge that their schools are failing and that is affecting them in the pocketbook. One looks a lot more closely at your pocketbook when you are poor but when you have a lot of cash the world is your oyster and you need do nothing to earn anything. Gonna change and about time.

    Maybe next time prosperity reaches this land we will be grateful and not despise that fact. Maybe next time we will not burn it all down just because there are winners and losers in the race for wealth. If you do not have enough money get another job or another skill – just do not piss and moan.

  • http://livelife365.blogspot.com Mike Foster

    Maybe great, great, great grandpa Mike was right all along…he kept his cash under his mattress and never used credit. Hmmmm, wish I did sometimes.
    Excellent post during these dark days.

    peace,
    mike
    livelife365

  • http://www.healthnutwannabeemom.blogspot.com heidi

    At this point I am not sure what to do. It seems like the problems just keep getting deeper and deeper.

  • http://www.thegetsmartblog.com/?fbconnect_action=myhome&userid=3 Bridget Ayers

    John – I am not anti establishment, I am pro diversification and community. We need to work together to learn from our mistakes and build for the future.

    Mike – We are definitely in a better position than some countries, look at Iceland and the UK. Iceland is saying that people who had money in their bank will not get it back. I can’t imagine losing all the money I had in my checking or savings account.

    Heidi – It is a domino affect right now, with one problem creating another problem, and so and do forth. We will get out of this though, if this is Country is one thing, it is resilient.

  • http://ssgreylord.blogspot.com ssgreylord

    seems to me like everybody’s afraid to invest in anything these days…:(

  • http://www.sportsandimports.us Adam Berlin

    My name is Adam Berlin; I own and operate Sports and Imports. We are an independent auto dealership located in Asbury Park, New Jersey (Neptune TWSP).

    In light of the recent “bail out’ appropriation to Capital One, I felt obligated to share the details of my situation to help prevent Capital One Bank from similarly mistreating other qualified borrowers and to ensure Capital One Bank is held accountable for their actions.

    Capital One Bank has wrongfully refused to honor a floor plan financing agreement that was renewed and signed on July 1, 2008 for a term of 1 year. Specifically, the Credit and Security Agreement (CSA) entered into in this matter provides for a (1) one year term, which was not scheduled to expire until July 1, 2009, “unless sooner terminated pursuant to a default”. Their termination was expressly based on a “business decision” without relevance to any of the terms and conditions of the CSA. This is the type of corrupt, deceitful and greedy corporate behavior that I thought the government was trying to prevent.

    On August 14, 2008 Capital One announced they would end financing of auto dealers’ inventories (floor planning) in New Jersey and New York. They gave dealers a very unrealistic time frame, 45 days to find another bank. Oddly they said they would continue to finance dealers in Texas and Louisiana.

    If they are breaking month old contracts to existing creditworthy customers with a proven track record of servicing debt for 6.5 years, you can bet they certainly aren’t making new loans to qualified borrowers. The government’s plan to inject money to encourage lending is not achieving the desired results, quite the opposite.

    My company has been in business for 6.5 years. In the last 3 years alone my company has collected $1,500,000 from consumers in sales tax for our government and community. We have sold over 5,000 vehicles totaling $60,000,000 in that time frame (some deals we sold out of state and we paid other states sales tax).

    Five month ago we employed 32 people, now we are down to just 10. Eighteen months ago we consolidated 2 locations in Tinton Falls relocated to a larger better equipped facility on Asbury Avenue. After massive renovations and $400,000 later we resurrected the former Cadillac building into a new landmark in Monmouth County (once owned by the Rockefellers’ from the 1950’s).

    We have enjoyed a 6.5 year relationship with Capital One Bank (through 3 bank mergers without interruption). Throughout our entire 6.5 years we had a very successful relationship together with a flawless track record of responsibility and on time payments. We have (and still maintain) perfect credit, both personally and professionally.
    As an owner and creator, with tremendous pride and ethics, I have also been faced with many difficult “business decisions” over our 6.5 year history. That being said, I can respect and appreciate any “business decision” that a company makes if they feel it’s in their best interest.

    The irresponsibility of Capital One, however, is not just unfair and unethical…..but their actions are severely damaging consumers and small business’ ability to borrow with complete disregard for the governments ‘bail out” plan.

    If they wanted to end our relationship and get out of the “floor plan business” that’s their decision…I could accept it and move on. Conversely, I’d expect Capital One Bank, as a “hugely successful business” to honor their decision to renew my 1 year CSA (Credit and Security Agreement) that was signed on July 1, 2008.

    When I was told by Capital One’s representative Rich Antanacii only a month after resigning a 1 year agreement I was “shocked” to say the least. At the time I didn’t fully appreciate the magnitude of his wrong doing. The CSA was not terminable at will. It can only be terminated upon the expiration of its term (i.e. on July 1, 2009) or upon the event of a default. Incredibly, Rich Antanacii unilaterally terminated the CSA by his letter dated August 14, 2008. This letter was not based upon a default; none existed for this to happen.

    Stated bluntly, IT’S ABSURD AND ACTIONABLE!!

    In addition to Capital One’s wrongfully inducing me into signing the CSA on July 1, 2008, Capital One also forced me to close a floor plan line maintained separately with Manheim Financial Services. In doing so, only 13 months earlier reflects Capital One’s complete disregard for my company’s business interest. Manheim has since informed me that re-opening my account with them is no longer an option.

    Needless to say finding another lender in the current environment is also impossible. The inability to secure another floor plan lender has had a devastating mental and financial impact on our company and if someone doesn’t step in immediately it will most likely result in Sports and Imports closing its doors with even more job loss.
    To add injury to insult, I learned that on December 4, 2008 Capital One definitively announced that will acquire Chevy Chase Bank in MD. Under the agreement, Capital One will purchase Chevy Chase for $445 million in cash and 2.56 million Capital One shares.

    So, Capital One gets $3.56 billion in bailout money and buys a bank for $520 million. Without looking at a financial statement or being an analyst I think it’s pretty clear one of two things are going on: either Capital One used our hard earned tax dollars to fund this acquisition or they used their own money in which case why would the government give them our money?
    I don’t see any benefit to our economy; consolidation usually doesn’t create jobs it ends them.

    After reading about the acquisition and being faced with an imminent collapse of my own company it became clear…it seems to be a pattern for Capital One. They intentionally are mis-leading the government (or at least the public) by borrowing money to fund an acquisition much like they mislead me in signing a 1 year agreement on July 1, 2008. By the admissions of Capital Ones own employees..past and present….I recently learned…contrary to what they had been telling, they had no intentions of staying in the floor plan business and haven’t for a very long time. Yet they signed a 1 year contract in July and canceled it a month later for no other reason other than a “business decision”.

    One can’t help but wonder if it’s just coincidence that Capital One is Virginia based company and also able to get away with “company” murder?

    I don’t understand how lending a hugely profitable and cash rich company $3.56 billion help our financial crisis when they turn around less than a month later and spend a huge chunk of it to buy another company that will most likely result in more job loss and certainly no job creation. The $3.56 billion cash infusion did not encourage them to start lending again what so ever. In fact, it accomplished just the opposite by giving them even more power to abuse.

    Additionally, on December 17, 2008 NJ, Governor Jon S. Corzine signed legislation creating the New Jersey Main Street Business Assistance Program, the latest in a series of initiatives established under his Economic Assistance and Recovery Plan to help the citizens and businesses of the Garden State weather the national economic downturn. The program was designed to enable qualified small and mid-size firms and nonprofit organizations in New Jersey to access capital by providing State support for bank lending through loan participations and credit enhancements.

    Developed in partnership with the departments of Banking and Insurance and Treasury and the state’s banking community, the Main Street Business Assistance Program will be funded by a $50-million State appropriation and administered by the New Jersey Economic Development Authority (EDA).

    As soon as I read the news I called my representative at NJEDA to reiterate my need for help. As I learned from my conversations with them 3 months ago, loans still need to originate and be approved at one of the EDA’s 13 preferred lending institutions. Wouldn’t you know Capital One is a preferred lender? When I attempted to reach out to some of the preferred lenders, including Capital One, I was told the same thing I heard three months ago, “right now they aren’t doing anything”.

    Capital One’s wrongful termination of our CSA should be enforced and they should be held liable for the damages they have caused. At the very least, someone should stop them from wrongfully and arbitrarily ending other creditworthy borrower relationships, while allowing Capital One’s CEO, Richard Fairbanks and his crew to walk away with hundreds of millions.
    According to Fortune 500’s annual ranking for 2008, Capital One Financial is the seventh largest commercial bank in the U.S. and the 130th largest overall U.S. Corporation. (that was before their latest acquisition) A bank of that size, with the help of a $3.56 billion dollar infusion from the government, could do a lot of good. Unfortunately, no good has come of it.

    One can’t help but wonder, what’s in Richard Fairbanks Wallet? Your family’s money? It seems Richard Fairbanks and his “army” thinks they can take what they want, when they want, from whomever they want without consequence. Maybe that’s why Fairbanks has been in the top 5 the highest compensated CEO’s for the last 5 years earning over half of a BILLION DOLLARS!!!
    I believe in “free markets” too which is why I went in business for myself. However, unlike Capital One, I honor my commitments and obligations. Does earning a multi-million dollar a year paycheck require taking advantage of the very people that helped get you there just because you can?

    Having said that, I am smart enough to know I don’t stand a chance against them in court, and I sincerely hope someone else’s intervention might. In the mean time, I stand defenseless against Capital One’s soldiers as their lies and games force me to default and ruin my reputation and credit (780 fico).

    I have spent the last 6.5 years building….working day and night and day….sacrificing valuable time that could have been spent with my wife and son. I will not rollover and let them hurt others without, at least, attempting to seek justice.

    Feel free to take a look at my site for a better appreciation of just how passionate we are about our business http://www.sportsandimports.us .

    Regards,

  • http://www.eastangliansaabdealers.co.uk/ Rod@Saab Dealers

    I agree with Bridget, i been living in uk and know very well the problem. And it’s so sad that Iceland is saying that people who had money in their bank will not get it back. So we’re not so bad after all…

  • http://coverageprogram.com to our health

    This economy is hurting everyone, especially business. As for the banks, eventually they will ease, and begin to lend money again, because that’s what banks do, right? I think from know on banks will scrutinize and be more cautious about their potential customers. Im optimistic, and believe things will get better, and hopefully we will all learn from our past mistakes.

  • http://www.tvloanmodificationleads.com Live Lead Transfer

    nice post

  • kevinrussellersel

    CIO's 401(k) to thousands of dollars' worth of time on the corporate jet to millions in long-term incentive payouts. No. 1-ranked Barbara Desoer received $10.5 million in total compensation as global technology and fidelity 401k operations executive at Bank of America, with $9.7 million of it coming from such sources.

  • kevinrussellersel

    CIO's 401(k) to thousands of dollars' worth of time on the corporate jet to millions in long-term incentive payouts. No. 1-ranked Barbara Desoer received $10.5 million in total compensation as global technology and fidelity 401k operations executive at Bank of America, with $9.7 million of it coming from such sources.