Sunday, November 23, 2008

I met someone yesterday. President, A Major Canadian Bank’s Business and Personal Banking, Eastern Canada and just under that Bank’s President in terms of rank. She gave her opinion of current markets, and it resumes to this:

- This current economy represents an opportunity to RBC, because:
o The Bank has always had tighter controls and monitoring than other banks
o The Bank’s president himself years ago started to deny practices such as “name-lending”
§ “Name lending” is granting quick credit with no analysis to borrowers you “know well”.
· Other lenders continued to lend sight-unseen, and therefore now face a crisis:
o Some of their borrowers are now in trouble.
§ Since corporate credit is unavailable, there is a cash-flow problem within some formerly formidable companies.
o As is known if sound farm management, crop yields are uncertain.
§ You therefore, (if you were a farmer), buy a silo to protect against shallow crop yields.
· This is how credit is used, to get through the “dry-spells”.
o Corporate credit was used the same way.
§ When the balance-sheet and cash-flow is weak, you borrow.
· Not any more for some.
- So what the Bank had implemented years ago is now paying dividends. Sound lending practices and constant monitoring leaves our company in a position to lend quickly because:
o We have been monitoring and advising our clients for some time already
o We can therefore act quickly to assess the client’s request, and ensure it is within a sound overall business-plan.
o We can spot irregularities in borrowing habits, because we know borrowing habits.
o We implemented strong guarantees to ensure that even in trying times, we’d still be able to lend.
- A lot of our customers flew quickly from the Bank, because of the tight conditions we imposed. Many of them are now coming back to us, because their lenders have lost appetite.
o This offers us the opportunity to prune and select who we will do business with now.
§ Those who still have a working business strategy we will lend to.
§ Those who have a structured debt-system we will lend to.
§ Those who still have tangible guarantees to offer, we will lend to.
- Some of our current clients will come to us to ask for available credit, and some will be denied.
o Sometimes, (as admitted by her), this will be our fault.
§ We didn’t monitor our customer’s business closely enough.
§ We didn’t understand nor pay attention to their business plan.
§ We didn’t counsel our clients on changing market conditions and how to react.
§ We didn’t request the additional guarantees early enough, before they were taken as pledge by other lenders.

As was stated by her, our success lies in the following, which was really the vision of the President of the Bank long ago:
- Clear lending policies, which are strict and sound and allow the bank to lend with confidence.
- Constant and frequent monitoring of a companies’ books, which allows us to foresee the market and its inherent changes.
- A strict guarantee policy, which affords us sufficient leverage against your company that we can move in and act within our interests in challenging times.

Certain “pep-talk” aspects of what she divulged were so elementary it was almost obscene. It resumed to this: If your dentist weren’t allowed to examine your teeth for three years, could you blame him for needing a tooth extraction?

You need to allow him to examine you every three months in order that he can give you a fluoride-treatment or something of that nature. If you are a regular brusher and flosser, you still need to let the good doctor probe into your mouth anytime he wants, just to ensure all is O.K. It is in your best interest.

Is it really?

Or is it in the best interests of those behemoth companies that are now able to pounce on opportunity and ensure that despite crisis, they continue to examine and ensure their dominance?

When asked if the Bank still had as much appetite as it did before the crisis, she was again quite frank: No.

- Certain segments are no longer appealing to the Bank.
o Capital Markets, as is plainly obvious, no one knows who’ll win that tug-of-war and
o Automotive financing.

I was aghast at her explanation of the latter.
- If you are a car dealership, you have a constant need of credit. You need to finance all of the cars on your lot in a financial vehicle known as “floor-plan”.
o Therefore, you have cash-flow sufficient to meet your very near-term needs such as payroll and lighting despite the huge and cash-flow inconvenience of buying a fleet of new-model cars.
o The guarantees offered to whoever financed your fleet were traditionally met by a mixture of your sales-turnover and profit thereon. Plus what the financier saw was the inherent value of the asset.
o There is a constant and complex monitoring of your inventory, done by the financer of the cars. They constantly rework the registration of a moving-charge against inventory.
§ There is therefore a “margin-of-error” calculation on just how many cars will sell.
o If you are left with a fleet of unsold cars at the end of a quarter, let’s say, then you need to shelve that debt. Low-cost, fleet management financing is no longer available. You need to turn to your financier, the bank, to allow opportunities to exist to continue to hold those cars and not sell them at distressed market conditions.
- The Bank is now saying “No!”

In her own words, she has stated that any dealership holding only domestic vehicles will be told “No!”. If they hold a mixture of domestic and foreign bands, they’ll get a maybe. The question of only foreign-brand-holding dealerships was never raised, but was implicit in the answer.

Why the not-so-sudden shun of domestic product? Perhaps the not-so-sudden shift is the result of years of policy-shift against worker’s rights. Perhaps the accomplishments of years of struggle by the auto-makers, to have established living-conditions and living-wages have suddenly been turned against those very workers. Externalities, such as the right to earn as much as is needed to support a family in modest, perhaps mediocre but still not dangerous conditions, have succumbed to the right of Corporations to continue to supply their principle supporters, the ultra-rich, with exuberant wealth.

Let’s face it: Despite the media’s claim of superiority of construction of foreign brands (which by the way is expressed as liberally overseas about Fords and Chevrolets), the true equation of competition lies in the comparative work-environment of competing production-markets. It costs, (by recent media outlet’s definition), an extra $1000 dollars to assemble a domestic-product car as compared to a foreign equivalent.

That is because of labor initiatives, the result of years of struggle by unions to make ends meet for workers. The foreign markets never allowed this to happen, so now you hear about “Legacy costs” (the right to paid retirement and health benefits by 30 year-veteran incomes paid to the company) being the ‘cause’ of the economic crisis that faces domestic production.

Phooey! The mismanagement of funds in the equities and hedge-fund markets are the cause of the current economic crisis, and anyone honest will admit this. The rampant availability of a huge “silo” of debt allowed the American economy to feel impervious to the effects of global consumption and production.

The ability of a Chinese, Communist government to produce goods despite any concern for human rights but at a ridiculously low cost-per unit is a factor, but hang on a second: Why did we provide a market for those goods?

The reluctance to sway away from fossil-fuels despite countless generations of conservationists who had predicted the broad swings that are currently affecting, by domino effect, the word commodities markets is a root cause.

The fact or Russia’s repositioning of its importance on the world-stage of the flow of oil is a root cause.

And yet what goes, sight-unseen, is how the major market-makers will use this to their advantage. This is not “conspiracy-theory”. This is how these actors think. This is what keeps them alive. This is unavoidable unless there is a major shift in terms of who controls the economy.

As it stands, the US remains the most remarkable market-force in play today.
- Resources are abundant, including oil reserves.
- They still have a monopoly on currency-reserves, allowing them to basically set exchange-rates.
- An unchallenged superiority in terms of functioning, literate and skilled workforce.
- Availability of new technologies and techniques unrivaled worldwide.

One must ask the question then: Why is Detroit in ruins? Why is there a growing perception of the inability of a market-force like the US able to continue to exist in relative comfort?

My answer lies in its inherent inability to handle social crisis.

The current economy will sell its first-born child to support the makers of policy, and they will do so by eliminating the very principles that made the economy as strong as it is.

Democracy made this continent the powerhouse that this is; capitalism (greed) never even played a part.

The pirates and buccaneers that first established this nation created the association between the two terms, democracy and capitalism. This was never an easy marriage.

I attach this segment with Chomsky for another analysis of this effect.