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Financial Bail-Out News Quiz

It's been a momentous two weeks of business news, leading to the Federal Bail-Out bill being signed into law yesterday, October 3, 2008. How many of the following news quiz questions can you answer correctly?

1. How much is provided for in the Federal Bailout bill?
a. $7 billion
b. $70 billion
c. $700 billion
d. $7 trillion

2. What department of government will have primary responsibility for administering the bailout?
a. Treasury
b. Interior
c. Federal Reserve
d. Homeland Security

3. What did the stock market (i.e., Dow Jones index) do the day that the bailout bill was signed into law?
a. Up 778 points
b. Down 778 points
c. Up 157 points
d. Down 157 points

4. What unfavorable economic news was reported the same day as the bail-out bill was signed into law?
a. Record U.S. trade deficit
b. Oil prices back up to $120/bbl
c. Very unfavorable jobs report
d. U.S. economy officially in recession

5. Which financial institution was not offered a Federal bail-out in time to avert its bankruptcy?
a. Freddie Mac
b. Fannie Mae
c. Lehman Brothers
d. AIG

6. Which politician made a speech in March of this year "tracing the sub-prime crisis to lax oversight, and calling for a major overhaul of regulatory policy?"
a. George W. Bush
b. Barack Obama
c. John McCain
d. Michael Bloomberg

7. What led General Electric to sell $3 billion of convertible, 10% preferred stock to Warren Buffet?
__________________________________________________________________________________________
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8. What accounting provision, in conjunction with the sub-prime crisis, has led to weaker bank balance sheets?
a. Accounts receivable aging
b. Accelerated depreciation
c. Pooling of interest
d. Lower of Cost or Market

9. Which perk was not rolled into the bail-out bill that Congress eventually approved?
a. Extended mortgage forgiveness for homeowners
b. New/extended tax credits to promote reduced energy
c. Increased tax credits for real estate developers
d. Middle-class protection from alternative minimum tax

10. For each of the acquired, or to-be-acquired banks (a, b, c, d), match it to an acquiror, choosing from 1, 2, 3, or 4. (This one is tricky!)

a. Merrill Lynch
b. Washington Mutual
c. Countrywide Financial
d. Wachovia

1. Citigroup
2. Wells Fargo
3. Bank of America
4. J. P. Morgan Chase

Answers to the questions will be posted here on 10/15. Congratulations to Drew Keeling, of Kusnacht, Switzerland, for being the first to get back to me with correct answers to all 10 questions.

What if CEO's Made Decision as if they Were Using Family Money

I've been hearing for years that small businesses create a disproportionately high percentage of the new jobs in the United States, and this year has really driven home some of the reasons why.

This summer, I traveled with my family for a vacation at the Tyler Place Family Resort in far-north Vermont, on the shores of Lake Champlain.

My wife Camilla found it through an Internet search last February, and although it is rated one of the top 10 family vacation resorts in the U.S., I assumed booking a week for this summer would be easy, given the bad U.S. economy.

Was I ever wrong: they were 100% filled, although we did get a chance to grab another family's canceled reservation, for a week that was not entirely of our choosing.

How does Tyler Place, which has been run successfully by successive generations of the Tyler family for 75 years, sustain this level of consumer demand and success?

Simple, they have a strong business strategy which they adhere to, and execute with excellence. "We could stay open another week or two for the leaf season, but that's not our market," owner Ted Tyler told me. Tyler Place is totally focused on creating a one-week relaxing vacation experience for families with children. Given that there are no phones, televisions, nor easy Internet access you are bound to relax, and five different age-appropriate programs will engage and delight your children.

Tyler Place is fairly priced for what you get, and it is evident that they have reinvested a fair amount of money into the facilities. The questionnaire that you are asked to complete upon checking out is a highly evolved tool, and serves to keep Tyler Place running at 100% capacity for years to come. For example, they ask, "do you know of anyone with school aged children whose schools end early and may be interested in coming to Tyler Place the first week of the summer."

We've all seen many large company failures that have played out over the first nine months of 2008, including financial firms such as Lehman Brothers, which inexplicably raised its dividend 13% in early 2008, and retailers taken over by private equity shops, such as Linens 'N Things. It seems that having control of large pools of other people's capital does sometimes breed a certain detachment or arrogance in CEO's decision making while the responsibility of nurturing a family business often does wonders to keep small businesses "on-strategy", and focused on excellent execution. If corporate CEO's always ran their companies as if they were financed by family money, the U.S. economy would probably be in much better shape today.

Small Business Recession Growth Strategies

On June 19th I was interviewed by Diana Ransom, a reporter for "Smart Money" , on strategies that small business owners can use to grow their business during a recession. Here are my four suggestions:

1. Look to the internet for sales growth. According to the National Retail Foundation, internet sales grew at a 21.8% rate in 2007, while total retail sales grew by only 3.9%. With gas prices above $4.00/gallon nationwide, strong internet sales trends growth is expected to continue.

2. Consider selling your goods or services outside the United States. The dollar is very weak versus foreign currencies, which means that United States products and services have a pricing advantage versus those of many other countries. For business owners with no previous export experience who are unsure of their first steps, a good place to turn is the U.S. Commerce Department's Gold Key Matching Service which will help by making introduction to experts and potential trading partners, quickly and affordably.

3. Grow by acquisition. For small business owners with expansion plans, acquisition can sometimes be more affordable than the cost of building new offices or facilities in new geographic locations or markets. This may be especially true during a recession, when business values are generally depressed. It is important, however, that the acquisition make strategic sense.

4. Gain market share with stellar customer service. If your business is not poised to expand through new channels, geographies, or by acquisition, you'll have to earn your sales growth by winning away share of market from your competitors in your current market. One proven way to do this is by offering superior customer service than your competition.

Consumer Expectations at All-Time Low

The Conference Board's Consumer Confidence Index dropped from 58.1 in May to 50.4 in June (1985 = 100). The Expectations sub-index also dropped, from 47.3 to 41.0, an all-time low since 1967, the inception of the Consumer Confidence Index. The percentage of consumers expecting business conditions to worsen over the next six months outnumbered those expecting them to improve by nearly 4-to-1; 33.9% and 8.8% respectively. Consumer spending accounts for 70% of the U.S. economy, so low consumer confidence heightens the risk that the U.S. economy will enter a recession in late 2008 or early 2009.

SBA 7(a) Loans Down 18% vs. Year Ago

The Small Business Administration backed about 40,000 of its 7(a) loans in the first quarter of 2008, down 18% from the same period one year earlier. The drop off in the SBA's express loan program was even greater, at 30%. Eric Zarnikow, associate administrator for capital access at the SBA attributes the decline to a "weaker economy." Congresswomen Nydia Velazquez (D-NY), chairwoman of the House Small Business Committee, disagrees, saying the SBA's declining loan volume can't be attributed entirely to the bad economy. Says Velazquez, "it is important to remember the SBA's loan program was created to kick in during tough times."

Restaurant and Bar sales down 19% in Bisbee

Bisbee, Arizona, located 90 miles from any major highway, started feeling the pinch from higher gas prices at the end of 2007. "Business Week" reported that while the 130-year-old mining town had 58,000 visitors in 2007, up 16% from 2006, restaurant and bar sales were down 19% in December. According to Wikipedia, Bisbee was featured in the 1957 film "3:10 to Yuma," as well as its 2007 remake.

Consumer Sentiment Drops to 28 Year Low

Consumers' sentiment dropped to a 28-year low in early May of 2008, as reflected by the 59.5 University of Michigan index. Survey Director Richard Curtin told "Forbes" that "all of the the early May decline was among households with incomes below $75,000." According to Curtin, "record number of consumers... (9 out of 10)... said the economy is in a recession."

26 Billion Dollars of Angel Investments in 2007

Despite the weakening U.S. economy, angels invested $26 billion into 57,120 ventures last year, according to the University of New Hampshire's Center for Venture Research. The dollar amount invested represented a 1.8 percent increase over 2006, while the number of entrepreneurial ventures receiving angel funding represented a 12 percent increase. Studies show that entrepreneurs with good ideas who start their businesses in down economies will do better, as they will benefit from the lower cost of land, labor, and purchased goods and services.

Rare Glimpse at Linens 'n Things Financials

Linens 'n Things provided an unexpected public posting of its financial results under private equity firm Apollo Management when it recently posted its 10-k report for 2007 in conjunction with the desire of some of its private shareholders to sell shares on the NYSE. Linens 'n Things posted a $242 million net loss in 2007 on revenue of $2.8 billion. The company had a $36 million net profit in 2005 on revenue of $2.7 billion in 2005, the last full year of public ownership (Apollo Management took the company private in February, 2006.) Linens 'n Things gross profit margin slipped from 40.8% to 37.5% over the two year period; Selling, General & Administrative Expense increased from 38.5% to 43.7% of revenue; and interest expense increased from 0.2% to 3.9% of revenue. By comparison, publicly-owned segment leader Bed, Bath & Beyond has 2007 gross profit margin of 41.6%; Selling, General & Administrative Expense at 30.4% of revenue; and no interest expense. The Linens 'n Things 3/20/2008 10-k report lists numerous risks, including the following: "despite current indebtedness levels the Company and its subsidiaries may still be able to incur substantially more indebtedness. This could further exacerbate the risks associated with its substantial leverage." On April 15th, Linens 'n Things announced that it had decided to defer $16 million quarterly interest payments due to the holders of its senior secured floating rate notes.

10 Things Your Credit Card Processor Doesn't Want You To Know

Kevin Scott Rizer, founder of Trade Days Processing, provides insights into the world of credit card processing fees in this informative podcast. According to Rizer, there are ten things that credit card processors don't want merchants to know. Here are eight of them:

1. Credit card processors don't care about the "ins and outs" of your business, and are not in a good position to recommend products that will best fit your needs.

2. Credit card processors are not telling merchants all of the fees that they will be charged. For example, some merchants are quoted the rate for "qualified" transactions, and fail to mention the higher rate for "non-qualified" transactions (those where the cards are not present)

3. Credit card processors can hold or take back a merchant's money if there is a "charge-back."

4. Merchants can often save a lot of money by purchasing the (inexpensive) credit card equipment they wind up leasing.

5. Credit card processors neglect to inform merchants about programs such as "pen-based debit" and "electronic check acceptance" that can save merchants money, and simplify their business processes.

6. Credit card processors have power to unilaterally raise or lower rates.

7. Merchants need to understand if the person who is signing them up for a credit card processing agreement will be reachable a few months later, to provide support.

8. If you cancel the contract with a credit card processors, there will be a cancellation fee; these can range from $150 to several thousand dollars.

Entrepreneurs' Earnings Gap

Even successful business founders typically earn 35% less than they would have working for others, according to Case Western University Professor Scott Shane, author of "The Illusions of Entrepreneurship," reports BusinessWeek.com. "People who run their own businesses have greater job satisfaction," states Shane, but then we create a "myth (of entrepreneurship) that says because we like it and it makes us happy, it must also make financial sense."

Prediction Markets Gaining Popularity

Best Buy, General Electric, Hewlett-Packard and others are having their own employees participate in "prediction markets" to gain insight into product demand, store opening dates, and other future events, the "NY Times" reported. The notion that the opinion of a large group of well-informed individuals will be more accurate than one or a few "experts" was popularized by James Surowiecki's book "The Wisdom of Crowds," and is now being tested by dozens of major corporations, including Google, Cisco Systems and General Mills. Small service providers like Consensus Point, NewsFutures and Xpree are assisting companies that don't have the in-house expertise to establish prediction markets on their own.

New Insights Into Wall Street Mortgage Meltdown

In this enlightening podcast, University of Maryland Professor Michael Greenberger explains to Fresh Air's Terry Gross some of the origins of the current mortgage-related losses and write-downs impacting Wall Street. Credit default swaps, or bets on whether mortgage holders would default, are today unregulated at both the Federal and State level due to the Commodity Futures Modernization Act, a 262 page bill passed by Congress in 2000, right before its 2000 Christmas recess. According to Greenberger, banks have also been careful to word their credit default swap contracts to avoid falling under insurance industry regulations. "It's as if a bunch of Las Vegas bookies started taking bets, and never bothered to write them down or record them......here, these banks didn't bother to hedge themselves.....we would have been better off if Las Vegas had handled this operation, than having Bear Stearns handle it," asserted Greenberger.

Who Profits From IPO Underpricing?

Research has shown that Initial Public Offerings (IPO's) are underpriced by an average of 15%. This "Knowledge at Wharton" article by Professor Robert E. Hoskisson suggests that "it is in the interest of investment banks to underprice an IPO because it nurtures ties to institutional investors, who are often repeat customers of the banks and who benefit directly from the underpricing." So-called "inside directors" (i.e., company managers who also sit on the board) need to take a stand on behalf of shareholders to minimize IPO underpricing, according to Hoskisson, and his study co-authors, Jonathan D. Arthurs of Washington State University, Lowell W. Busenitz of the University of Oklahoma, and Richard A. Johnson of the University of Missouri.

DiNapoli Discusses NY State Budget Deficit

Speaking to members of the Westchester County Association in Tarrytown this morning, New York State Comptroller Thomas DiNapoli said, "For too many years, New York State has treated debt as a surrogate for wealth, using it to buy things we want, rather than things we need." New York is spending more money than it is taking in, DiNapoli told his listeners, adding that "faced with a budget deadline, and demands from constituencies, we make compromises, we get the budget done, but don't deal with structural imbalances." The New York budget crisis is not as severe as New Jersey's Di Napoli told a questioner, but its budget practices are not as good as New York City's, where Mayor Michael Bloomberg used recent good years as an opportunity to pay down old debt and build reserves.

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