Archive for May, 2009

Protecting New York City From the Sea

Sunday, May 31st, 2009
New York City Sea Barriers

New York City Sea Barriers

I had the opportunity to tour the emergency response center of New York City’ s Office of Emergency Management.  Officials there told me that one of their greatest concerns was the threat of a major hurricane striking the city. Indeed, National Hurricane Center Director Max Mayfield testified before Congress “it is not a question of if a major hurricane will strike the New York area, but when.” A hurricane would flood Wall Street, the financial district, densely packed neighborhoods and the City’s infrastructure, which is largely underground, such as the subway. So I was very interested to learn of a conference held in advance of the new hurricane season (which starts on Monday) in which innovative solutions for New York were presented.

Some engineers are proposing the construction of a barrier to block the sea surges and protect areas vulnerable to flooding.  One idea involves the construction of a barrier between New Jersey and Queens, some five miles long, which would rise out of the water to meet storm surges.  It may sound extreme, but if New York were to experience a repeat of the hurricane that struck Long Island in 1938, the storm surge would be as high as 25 feet in parts of New York City. The result would be flooding of as many as 600,000 homes and an evacuation of three million New York residents. The economic losses would exceed $100 billion.  This makes the cost of the barriers, estimated to be $6 – $9 billion, appear to be a sensible investment.  Of course, at this time New York doesn’t have the finances for such an investment and seeking help from the federal government would not appear to be a prudent strategy. Surely every community would rightly demand the same protection.  For the time being, it make sense to prepare for flooding by moving critical infrastructure such as pumps to higher elevation areas. It also makes sense to launch a public awareness campaign. When I toured OEM’s command center, I learned that their leadership feared New York residents would enter subway stations on a storm alert – the last place you want to be when a hurricane or flood is forecast.

School Holidays

Saturday, May 30th, 2009
Danger - Children at Home

Danger - Children at Home

Summer holidays typically begin for school children the week after Labor Day. This means that you and your employees may have children home for the summer months during business hours when you may be working from a home office on a temporary basis or perhaps as part of a longer-term telecommuting arrangement. If you have teenagers who want to use your computers, you will need to ensure that safeguards are in place. Social networking hubs and music download sites that are especially popular with teenagers are often vectors for viruses or mal-ware. You wouldn’t want those to infect your home computers and certainly not the computers you use for your small business. So make certain that your business computer is used for business purposes only. This will also make your tax reporting easier, since there will be no question about the purpose of the computer. Insist that your employees do the same. And you may want to take appropriate cautions to teach your children about computer safety as these are good habits to learn as they become more proficient with technology.

Lack of Enthusiasm Among Lenders

Friday, May 29th, 2009
Lots of Paperwork, Few Results

Lots of Paperwork, Few Results

According to a recent survey conducted by Coleman Publishing, 80% of small business lenders are not committing to participate in the emergency loan program of the U.S. Small Business Administration. Known as the “America’s Recovery Capital Program” the emergency loan program for small businesses was authorized in the stimulus bill passed in February. 35% of lenders surveyed decided categorically not to participate in the program; 45% had not taken a decision, as there was a lack of clarity about the program specifics, although loan applications are to be made available to participating banks on June 15. Only 20% of small business lenders surveyed stated that they would participate in the program. The issue is that the SBA itself does not make loans; it guarantees them to participating bank lenders. I had written in a blog entry on March 23 that I thought it unlikely that banks would want to participate in this program. With the principal guarantees on the loans being raised, taxpayers would assume a greater share of the losses. Presumably bank executives are sufficiently savvy to know how the public would assign blame for that outcome. I doubted that they would want to be once again on the receiving end of the pitchfork. Add to that other reasons for the lack of enthusiasm in the banking sector for this program: its complexity, the lack of fees or interest to compensate banks for their investment of resources in processing these loan applications, the definition of viable business and so on.  It is a substantial amount of work for relatively small loans with a limit of $35,000 and funding sufficient for only 10,000 small businesses to participate. That works out to 200 businesses per state. We could have that many small businesses apply for New York alone. This program appears to be an ill-conceived effort to throw a bone to the small business constituency that is understandably outraged about the bail outs of Wall Street and Detroit.

No Longer Held Hostage

Thursday, May 28th, 2009
Home Offices Have Choices, Too

Home Offices Have Choices, Too

In Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses (John Wiley & Sons Inc., second edition, 2008), I recommended that small business mitigate the risk of the failure of third party service failure by having redundant services. In some multi-tenant buildings that is not feasible, as real estate management companies enter into exclusive agreements with service providers, denying their tenants freedom of choice. These arrangements result in fees paid to the real estate management companies for delivering the tenants as hostage customers. The existence of such agreements and the fees associated with them are not typically disclosed to the tenants who are told that there is only one service provider choice.

The Court of Appeals in Washington has just upheld the Federal Communications Commission (“FCC”) ruling that prohibited such exclusive agreements on the ground that they are anticompetitive. The FCC’s ruling states that cable operators can not enter into such exclusive contracts and existing contracts of this nature can not be enforced. Now both commercial and residential tenants (remember more than ten million businesses are home-based) have choices and can choose redundant service providers for contingency. This is particularly important as cable providers deliver not only television, but also voice over internet telephony and other services essential for small businesses.

Without Precedent!

Wednesday, May 27th, 2009
Unusual Case

Unusual Case

In Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses (John Wiley & Sons Inc., second edition, 2008), I wrote that the cash flows of an insurance operating company could not be diverted for other corporate purposes, thus providing some security for the policyholders. Last week, lawyers representing a group of policyholders of American International Group Inc. (AIG) filed a lawsuit in California Superior Court against the company, its executives and its auditor, PricewaterhouseCoopers. The policyholders allege that AIG had improperly diverted capital from its insurance operating companies, thereby undermining the critical asset for claims payment. State insurance commissioners are supposed to prevent this from happening; specifically, holding companies cannot extract capital from their insurance subsidiaries, no matter how much pressure they are under. However, the policyholders who are plaintiffs in this lawsuit alleged that AIG had pledged the cashflows of its insurance subsidiaries to repay the Federal Reserve Bank for the government bailout funds. This is absolutely without precedent and raises some troubling questions with respect to the regulatory responsibilities of the state and federal governments.  I will be following this case with great interest.

Storefront Access

Tuesday, May 26th, 2009
No Physical Damage, But No Customers Either

No Physical Damage, But No Customers Either

A small bomb exploded outside an apartment building on Manhattan’s Upper East Side over the weekend. Newspapers reported that residents were unnerved by the blast and the nearby Starbucks coffee shop sustained moderate physical damage. Unfortunately, this is not the first small explosive device to detonate in a residential neighborhood in Manhattan. The police are looking for clues before the bomber strikes again. But the lesson that the small businesses in the affected area are likely learning now the hard way concerns the increasing disconnect between physical damage and economic losses and the nature of everyday disasters. The old insurance paradigm correlated economic losses with physical damages and provided commensurate benefits. If your office building became a giant smoking hole in the ground, you would likely have commercial insurance to indemnify the loss. But in a service economy, economic losses are becoming less and less correlated with physical damages. Apart from the Starbucks coffee shop, no other retail business in the neighborhood where the bomb exploded sustained physical damages and thankfully, there were no injuries or loss of life. But all of those businesses will lose revenues as pedestrian access to their storefronts and restaurants will be resticted for some period of time as the cleanup work is done and the police gather evidence.  This is why business interruption insurance is so important; it replaces revenues lost during a period of disruption. But most storekeepers lack this important coverage. Don’t learn this lesson the hard way. Have a conversation with your insurance broker about whether business interruption insurance is appropriate for your business.

Memorial Day

Monday, May 25th, 2009
Recognizing Those Who Serve

Recognizing Those Who Serve

I had occasion to read a letter to the editor captioned “Best Free Subscription Plea of the Month” in the now defunct Business 2.0 magazine. The author of the letter, Specialist Mickey Doto, described how he and his colleagues in the 252nd Infantry on duty in Iraq have to burn all trash before moving on to their next site. He happened upon a copy of the magazine and pulled it out of the fire so that he and his colleagues would have something to read. I immediately packaged and shipped a box of magazines to him in Iraq. Postal rates to U.S. military installations overseas are subsidized, such that I was able to ship 14 pounds of magazines for $2.90. I wrote to Specialist Doto that my choice of magazines reflected my own interests. As a small business owner, I subscribe to magazines such as Entrepreneur, Inc., Fortune Small Business and other publications relevant to my work. I offered to purchase at the newsstand any titles that he and his colleagues would prefer. Specialist Doto wrote back to me to say that I could not have made a better selection. As it turns out, the 252nd are reservists from the New York/New Jersey area called to active duty. Most of them are small business owners. Specialist Doto owns Dragons Way Karate Academy in New Jersey where he teaches martial arts to children. His bunk mate owns a car service in New Jersey that provides transportation to area airports. They were delighted to have something to read and connect them with home. Every week I ship a box of 14 pounds of magazines and am embarrassed that it is so little, but it appears to mean a lot to the men and women over there. We in the small business community have many unique ways to contribute and today we should reflect on how we may do so.

You Can’t Afford This

Sunday, May 24th, 2009
Very Vulnerable!

Very Vulnerable!

With its usual punchy headline, the New York Post announced “Subway Thief Smokes Bacon“. Apparently a thief in the Seventh Avenue subway station stole a Blackberry from actor Kevin Bacon. Bacon tried to chase down the thief in an apparent effort to protect the privacy of those celebrities whose contact information he had stored on the device. In an earlier blog about this issue, I wrote that small business owners cannot be as careless as Hollywood celebrities. Blackberry has a remote data wipe feature – make use of it! Once your Blackberry is lost or stolen, your systems administrator (or you, if you perform that function) can effectively “nuke” the device by remote control – wiping out all sensitive data and completely disabling it. Of course, once that action is taken, it cannot be undone if the Blackberry is subsequently recovered. So I would like to add a few additional tips to my original recommendation.

Although Kevin Bacon immediately began to chase the thief, this will not always be the case. There will always be incidents in which some time elapses between when the device is lost or stolen and when its absence is noted and reported. This leaves you vulnerable for data breaches before you put into effect the remote data wipe. So do not store sensitive banking or credit card information or other passwords on your Blackberry. And encrypt or password-protect your contact database and e-mail messages. A skilled hacker can probably break through this protection, but it is the first line of defense to slow him down before you direct the remote data wipe.

U.S. Government: Punish the Prudent Small Businesses

Thursday, May 21st, 2009

In his testimony yesterday to the U.S. Senate Banking Committee, Treasury Secretary Timothy Geithner acknowledged that “small businesses account for most of the jobs in this country. That is why are trying to expand these programs for them.” Reflecting the popular anger at the bailouts of the rich and the reckless, Geithner appears to be repeating message points about how the “prudent” who did not become over-extended and behaved responsibly are suffering as a result of the behavior of the less prudent. At the hearing yesterday, he specifically referenced “viable businesses” that were “prudent” and “did not take on too much debt” now need to be helped because their access to capital has been hindered by the choking up of the credit markets.

Except that is not what the federal government has done.

The stimulus bill passed by Congress in February requires the Small Business Administration to create a new “business stabilization” program to back loans of up to $35,000 to small businesses “experiencing immediate financial hardship”.  Known as America’s Recovery Capital (ARC) Loan Program, this emergency SBA program restricts the use of the proceeds of the loan. It rewards debtors in an unusual way. Small business owners cannot use new ARC loans to cover payments on existing SBA-guaranteed debt. However, as I posted on this blog on March 23, private loans made for any legitimate business purpose — including credit card debts, bank loans and real estate loans — would be eligible for the program.  So if you managed your small business carefully and avoided taking on debt, or you took on less expensive (relative to credit card debt) SBA loans, this program is of no help to you.

This is exactly at odds with what Secretary Geithner said about the administration’s plan to help “viable businesses” that were “prudent”.

Perhaps reflecting their own lack of familiarity with the legislation they had passed, not one senator on the banking committee called him on it.

Small Business at the Top of the U.S. Senate Banking Hearing

Wednesday, May 20th, 2009
Blowing In The Wind

Blowing In The Wind

Today, U.S. Treasury Secretary Timothy Geithner testified before the U.S. Senate Banking Committee. I watched the hearing in its entirety and was amazed that 80% of the questions the senators put to Mr. Geithner concerned small business lending. The senators made it clear that this was a major issue of concern to their constituents. Committee Chairman Senator Chris Dodd of Connecticut opened the session by asking what could be done to “catalyze more small business lending”. On the one hand, I was heartened to see that the senators clearly got the message that their constituents were outraged about the Troubled Asset Relief Program (“TARP”), the bailouts of large, irresponsible financial institutions, and the choking off of credit to the small business sector, which creates more than half of all employment in the U.S.

But at the same time, the federal government appears to be at odds with itself and is pursuing measures that can undermine its stated policy goal of unblocking credit to the small business sector.

Consider the opening statement of Secretary Geithner (the text of his remarks is available on the website of the U.S. Treasury) in which he announced that Treasury policies, including raising the amount of guaranteed loan principal to 90% and reducing or eliminating fees, raised weekly loan volumes of the U.S. Small Business Administration (“SBA”) by over 25 percent since March 16. In fact, loan volumes on March 16, or at any other date in 2009, were anemic. This is not the right baseline for comparison and suggests that the Treasury Secretary is attempting to manage public perceptions rather than confront the problem.

Another concern is that the Treasury and the SBA appear to be on a different timeline than the small business owners reporting their “frustration” (Chairman Dodd’s term) to their elected representatives. Secretary Geithner reported a start in the small business emergency loans that Congress had authorized in February’s stimulus bill. The SBA has been working since then to draft guidance for this program to distribute to the banks by June 8. They intend to accept loan applications starting June 15. Cashflow is critical to a business and an economic disaster is not terribly different from a natural or other man-made disaster. Consider that after the 1993 bombing in the World Trade Center, of those small businesses that could not resume operations and cash flow within five days, 90% of them were out of business one year later. The fact that the SBA took four months to develop guidance to disburse loans enabled by legislation passed in February suggests that it doesn’t have a sense of urgency.

Another issue that Secretary Geithner raised in his testimony was that guarantees on SBA loans had been raised from 80% to 90%. The most recently reported default rate on the SBA loan portfolio was 12%. Now the taxpayer will be on the hook for a higher amount of bad loans. Presumably, bank executives are sufficiently savvy to know how the public will assign blame for that. If you don’t want to be on the other end of the pitchfork, intertia is a sensible response to the government’s various initiatives.