March is National Red Cross Month

March 24th, 2009
March is National Red Cross Month

March is National Red Cross Month

In 1943, President Roosevelt, acting as the honorary Chairman of the American Red Cross, recognized that organization’s outstanding humanitarian services when he declared March “National Red Cross Month”. This declaration became the basis of support for annual fund raising and volunteer recruitment drives to support the critical activities of local Red Cross chapters. Supporting your local Red Cross chapter is particularly important this year as donor support has declined with the economic recession. I learned some interesting facts about my local Red Cross organization, which is the Greater New York Chapter of the Red Cross. First, the largest corporate sponsors of our local Red Cross chapter included Lehman Brothers, Bear Stearns, AIG and Merrill Lynch! Second, the New York chapter of the Red Cross responds to eight to ten disasters a day, ranging from people rendered homeless from the collapse of construction cranes to local fires. This is significant because many of us in New York are focused on 9-11-scale events when, in fact, it is the everyday disaster that we are, by definition, most likely to experience. With many small businesses struggling in the current economy, contributing funds may be difficult at this time. However, there are other ways you can support the Red Cross, from volunteer work to training. I urge you to contact your local Red Cross chapter to find out what you can do.

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If You Are Gasping for Air, This May Not Help

March 23rd, 2009
Gasping for Air

Gasping for Air

The Small Business Administration continues to work on guidelines for its forthcoming emergency credit facility, tentatively named “America’s Recovery Capital (ARC) Loan Program”.  The legislation enabling this program requires the SBA to create a new “business stabilization” program to back loans of up to $35,000 to small businesses “experiencing immediate financial hardship”. The proceeds of these loans are to make up to six months of interest and principal payments on a “qualifying small business loans”. This program was conceived as a stopgap measure to assist small businesses struggling to service existing debt. Congress allocated $255 million in the stimulus to fund the ARC program, paying for the program’s loan guarantees and interest subsidies, thereby levering up the amount available to lend. As the SBA is still developing the ARC loan guidelines, it does not yet know when the funds will be available.  While this may appear to be welcome news to small businesses that have thus far not benefited from the government bailouts, hold your applause. There are several issues to consider:

  • Defining “viable businesses” to mitigate moral hazard risk. For the first time in its history, the SBA will offer issuing banks a 100% guarantee on ARC loans that they extend to small business owners. If the business owner defaults, the SBA will repay the bank for the full value of the loan. The SBA will also fully subsidize the interest on the loans, making them effectively free of cost to the small business borrower. No payments on the loans will be due for a year and businesses will have up to five years to repay the loans. However, the full guarantee of the taxpayer to the SBA program raises the moral hazard risk: the risk that banks will lend to borrowers that are not creditworthy because the government will pay the loan losses. This is particularly troubling, as the SBA has already reported soaring default rates on its traditional loan programs. To mitigate this risk, the SBA stipulates that ARC loans are to be extended only to “viable” small businesses, which it defines as those that have “demonstrated an earnings history and a proven record for success that may just need a little extra help to get through a short-term downturn”. (Shouldn’t all loans be limited to “viable” businesses? And how did the SBA determine that the current economic downturn will exist only for the “short-term”?)

We dealt with this issue in the aftermath of 9-11 as disaster aid programs were defined as corporate welfare for the Fortune 500 and loans (with personal guarantees) for the small businesses. However, in order to qualify for the subsidized loans, you had to prove that yours was a “viable” small business. My business, which was newly incorporated and had a short history prior to 9-11-01, did not qualify, nor did other start-ups. (Although eight years later, we are still in business, which is not true for certain of the financial services corporations in the Fortune 500 that received 9/11 handouts.) In other words, in order to qualify for the loan, you had to prove that you didn’t need it.

  • Limited qualifications for the use of the loan proceeds. You won’t be able to use the new ARC loans to cover payments on existing SBA-guaranteed debt. The stimulus bill, the American Recovery and Reinvestment Act, contains a provision written into the bill by Congress that explicitly prevents the use of ARC loans to pay down existing SBA debt incurred before the bill’s passage. CNN quoted a staffer with the House Small Business Committee who explained that the provision was mandated by the Congressional Budget Office to comply with pay-as-you-go restrictions against increasing the federal deficit through new direct-spending legislation. He added “it is one of the most complicated things I’ve heard in a long time”. Businesses with existing SBA-loans can still apply for the new ARC loans, but they cannot use the latter to pay down the former.
  • Rewarding debtors. The House Committee staffer added, “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 prudently and avoided taking on debt of any kind, this program is of no help to you.  If you did take on debt, you should probably be negotiating new terms and forbearance with your creditors, even if you think you won’t need it. Take the breathing room while you can.

And of course, like all government programs, this one is complicated. I would prefer to invest my time in growing my revenues than attempting to decipher the requirements of another government program.

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Environmental Hazard in Pennsylvania

March 22nd, 2009
Not Always This Pristine

Not Always This Pristine

In Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses (John Wiley & Sons Inc., second edition, 2008), I set forth a framework for six disaster categories, including environmental hazards. It is important to understand that environmental hazards need not be Love Canal or Environmental Protection Agency Superfund level events. Even the most banal environmental hazards can disrupt the operations of your small business.  Consider that on Saturday, evacuations were forced in Pennsylvania when a tractor-trailer transporting 33,000 pounds of corrosive hydrofluoric acid overturned. The acid is used for industrial purposes, such as etching glass and making high-octane gasoline, refrigerants, aluminum and light bulbs. Most of the acid in the vehicle was in the form of pressurized gas; inhaling the gas causes respiratory irritation, eye damage and pulmonary swelling. As a precaution, authorities ordered an evacuation of about 5,000 people within a mile radius of the accident in Plainfield Township. A pet-friendly shelter was set up at a local high school and the Red Cross was asked for assistance.  The residents may not be allowed to return to their homes or offices for 24 hours.

I learned of a less dangerous incident that caused even more dislocation in rural Louisiana. I was delivering a “train the trainer” program to the technical counselors of Louisiana’s Small Business Development Centers when one of the staff shared an example of a recent disaster. A truck carrying products from a poultry processing plant overturned, spilling chicken fat across the bridge. The bridge was the sole transportation artery for that community and was closed for several days as civil authorities removed the contaminants. Local small businesses that were not set up for telecommuting on a temporary basis were disrupted for three to four days.

Prepare as best you can for these disruptions. Make sure your employees know that evacuation is not always the response to an environmental hazard. When contaminants are airborne, shelter in place may be the safer option. If you have employees who can telecommute, it is worth investing in a program for working from remote locations. What was unusual about the recent incident in Pennsylvania was that it made the national news. These events are so commonplace that they are not always reported.

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Plus Ça Change

March 21st, 2009
The Best Plans

The Best Plans

I had a rather unusual experience with the medical examination required for me to travel for the United Nations Capital Development Fund. On behalf of my first business, Childs Capital LLC, I had accepted an assignment to serve as the Senior Policy Advisor to the United Nations Advisors Group on Inclusive Financial Sectors. This was a follow-on initiative to the UN’s International Year of Microcredit with the goal of expanding access to finance for the poorest people in the developing world. I traveled a great deal for the UN on this assignment, working on projects in Kenya, India and elsewhere. The UN requires medical clearance prior to beginning the contract, including an echocardiogram, which I had performed at the New York Downtown Hospital. The doctor expressed concern about the abnormal results and wondered if I was stressed about anything. Indeed, I was! Next door to the hospital was a construction site with dynamite chargers going off every 3.5 seconds. (I know; I was counting while lying on the examining table with the electrodes attached to my chest.)

After 9-11, billions of dollars in stimulus aid went to subsidize construction projects in Lower Manhattan, apparently in the belief that “if you build it, they will come”. The site adjacent to New York’s Downtown Hospital was to become the Beekman Tower, a Frank Gehry-designed luxury rental building in Lower Manhattan with about 900 apartments.  This was part of a grand plan to make the financial district a “24-hour community”. I could never understand why anyone would want to live in this area. Even now, after all of the billions of dollars that went into these schemes, it is very difficult to buy a newspaper on a Sunday morning in that neighborhood or to find a restaurant that keeps its kitchen open past nine in the evening. It seemed to me the height of arrogance that one would think that central planning would work here where it has failed everywhere else. I was never convinced that policymakers in New York or Washington were any smarter than their counterparts in Moscow, whose economic plans have long since been discredited.

Construction on the foundation of the Beekman Tower began in 2006. Now, in 2009, construction is not finished and the real estate developer has cut this tower from 76 stories to 38, one-half of the height originally planned for this luxury rental building. “Given the current economy, we are conducting a study to assess costs, risks and overall timing,” announced the real estate developer in a written statement. “Work is continuing on the building including on the school and we should have some conclusive answers shortly.” The developer added that work will continue on the lower stories, but added that no additional floors will be added pending an evaluation of costs. Just last year, Forest City Ratner, the real estate developer, obtained $680 million in financing for this project, which was the largest construction loan in its history. It was seen as one of the few projects in New York City that was bucking the overall real estate meltdown as construction continued.

Now, of course, the world has changed. The financial system of the U.S. is effectively insolvent. Certain of the largest employers in the financial district, such as Merrill Lynch, no longer exist. Others, such as AIG, are struggling. Lower Manhattan faces an economic crisis more severe than that caused by the events of 9-11. The irony is that resilient small businesses in the financial district, including my own, were displaced for these “grand scheme” projects that were never really viable in the first place. So now we will create jobs, expand the tax base and support local charities in communities other than Lower Manhattan, leaving behind these half-completed construction projects. The Beekman Tower is not the only Lower Manhattan construction project that has run into trouble. AIG is attempting to arrange a sale-leaseback of two of its Lower Manhattan office buildings, an arrangement that is becoming increasingly popular in a soft real estate market. Both the New York Times Corp. and Citigroup have arranged sale-leaseback transactions for certain of their properties. And the developer of the properties at the World Trade Center site, Larry Silverstein, is reported to be seeking a bailout from the New York Port Authority, which has cash flow problems of its own.

Small businesses were displaced to make way for the New York Times Corp. to build its spectacular new headquarters, in an abuse of eminent domain seizures following the Supreme Court’s landmark Kelo decision. I wonder how different things would be in Lower Manhattan if market mechanisms had been allowed to work through the post-9/11 recovery, if public subsidies to large corporations had not been granted and if the small businesses, which continue to create jobs, would have been left to do our work in peace. These lessons appear to be lost on our policymakers in Washington as they seek to defend the latest outrage in corporate welfare and federal bailouts.

P.S. Nobel Prize-winning economist Gary Becker gave an insightful interview in which he argued that many of the government’s stimulus programs, to mitigate the impact of disaster, are counterproductive.

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Role Reversal

March 20th, 2009
Women Step Up

Women Step Up

In Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses (Wiley, second edition, 2008), I wrote that “I am going to make a politically incorrect statement. Be attentive to the emotional needs of the men in your life. I was impressed by the men in my life and how many of them suffered silently and perhaps put themselves at greater risk of illness and injury…..sometimes we forget the difficult burden of masculine conduct, so listen carefully and be particularly attentive to the men in your life who may have needs that they are too embarrassed to admit.”

The examples I supplied related to my personal experience of 9-11 as the owner of a small business in Lower Manhattan. Now we are facing an economic disaster, a day of reckoning for a quarter century or more of fiscal mismanagement and the financial consequences are even more ruinous. The cost of this has fallen dispropotionately on men. According to the Bureau of Labor Statistics, 82% of the 2.5 million jobs lost in the U.S. since November were held by men. In an article published in USA Today, titled “Women Step Up as Men Lose Jobs”, a number of interesting family stories are presented with a common theme: the role reversal imposes some stress, but more so for men as for women as they navigate the unfamiliar.

We all become comfortable with our daily routines as we go on “auto-pilot”. It is more efficient. But any disaster disrupts our familiar routine and that alone imposes additional stress. One of the key lessons that I learned from my own disaster recovery experience is that if you can identify the stressors, you can better manage them. So here is another one of which to be aware.

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Partnering with Employees

March 19th, 2009

TeamworkIn an unusually positive business report, a welcome respite from the current gloomy news, the story of how the CEO of one Boston hospital resisted the idea of laying off workers as the first line of business cost-cutting is instructive. Faced with declining revenues and increasing costs, the CEO of Beth Israel Hospital turned to staff to ask their ideas on how the budget gap might be closed. He expressed particular sensititivity about the need to preserve employment for low-wage, unskilled workers. The employees rose to the challenge and suggested how they could each make sacrifices to preserve employment. For a large organization, this may be an unusual approach. As small business owners, the initiative and creativity of each employee is a valuable resource that we cannot fail to utilize.

One of the key lessons I learned in business school was that the work product of our team was always better than what any one of us could have produced on an individual basis. Take the opportunity to solicit the feedback from your employees as to how you might improve your planning process.

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Not a Good Example

March 17th, 2009
Protect it properly

Protect it properly

Celebrities from Paris Hilton to Tom Cruise have experienced invasions of their privacy when their Blackberries were lost or stolen. Police recovered Hilton’s cell phone when the boyfriend of the person who found it attempted to sell it on Craigslist. It is unlikely that the police would go to such trouble to recover Blackberries stolen from small businesses. But then we should never find ourselves in such an embarrassing position anyway. Blackberry has a remote data wipe function that allows your network administrator to wipe out all contact information, e-mail messages and other sensitive data from the device as soon as it is reported lost or stolen. Of course, if the device is subsequently recovered, it is useless, even for reinstallation. It appears that the celebrities who expressed their dismay at their lost or stolen Blackberries were not familar with how to properly set up their cell phones. Learn from their example; the police won’t likely be tracking down your lost PDA. Set the appropriate security for all devices you and your employees.

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Clouds on the Horizon

March 11th, 2009
Clouds on the Horizon

Clouds on the Horizon

Crain’s New York Business reports that Lower Manhattan is “on the edge”, citing the following grim statistics:

  • 48,000 fewer workers downtown than before Sept. 11
  • 2.7 million fewer tourists downtown than before Sept. 11
  • 13% of downtown real estate is occupied by AIG, Merrill Lynch and Goldman Sachs
  • 12 million square feet expected to come on the market, excluding financial services consolidation
  • 57,000 residents in lower Manhattan
  • 1/3 of all downtown jobs are tied to financial services, insurance and real estate

The Lower Manhattan community has not fully recovered from the losses caused by the events of September 11 and now faces a much greater threat from the collapse of the financial sector, the leading employer in New York City. Local restaurants report that business is down as much as 40% as compared with this time last year and other small businesses that serve the financial sector, such as car services, law firms, accounting firms, print shops, etc., report comparable declines. Given the lack of diversification of the economy, the mood in the community is grim. The consequences to our local economy here in New York are not likely appreciated elsewhere across the United States, given the entirely appropriate focus on the consequences of the credit crisis for all of us. But for many of us here, the financial crisis is a small business disaster. What has not yet been reported, and I hope will attract the attention of journalists, is that many of the same institutions currently receiving bailouts in the form of TARP funds also received federal government aid in the aftermath of 9-11 – aid which was championed for the benefit of firefighters and emergency rescue workers with urgent medical needs, small businesses and other less powerful constituencies.

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Don’t Scare the Policyholders

March 10th, 2009

Rising Without Limit

The escalating cost of bailing out financial conglomerate American International Group (“AIG”) is staggering. Last week, Federal Reserve Chairman Ben Bernanke testified at a Senate Budget Committee hearing that AIG, which has recently benefited from multiple government rescues, made him “angry” because it had made “huge numbers of irresponsible bets” and “was a hedge fund, basically”. He reported that AIG’s investment vehicles lacked oversight. Last week, AIG confirmed it would give the US government a large stake in its two largest divisions as part of a more than $30 billion rescue package for the company, which lost nearly $100 billion in 2008. The Federal Reserve Chief defended the bailouts on the ground that as the world’s largest insurance company, AIG was too big to fail. In fact, the insurance operations of AIG that serve policyholders for property casualty, health and life insurance are regulated and presumably adequately reinsured and reserved for expected claims. It was the non-insurance financial businesses of AIG, in particular AIG Financial Products which took extraordinary risks on credit default swaps, that caused the fiancial losses of the company. Our policymakers should be clear in their use of language to avoid misleading the public as to what is really at risk here. And as economist Nouriel Roubini reported, this current round of bailouts for AIG was for the benefit of the large banks that were counter-parties to the aggressive financial trades made by AIG Financial Products. One would have thought that sophisticated Wall Street institutions would have diversified their risks to limit their exposure to any single counterparty and would have set aside allowances for expected credit losses. It is disingenuous to pretend that the bailout actions are being taken to protect the integrity of our financial system.

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Another Breach of Secure Credit Card Data

March 9th, 2009
Be certain your data are protected

Be certain your data are protected

Reports are surfacing that there has been a breach of secure credit card data from banks issuing Visa card accounts. Small businesses must be vigilant in two ways: first, carefully examine your card statements to ensure that your cards have not been misused. I log onto my online account information daily to proactively address any problems. Second, if your business accepts credit card payments, you need to monitor pending state legislation dictating what businesses must do to protect credit card transactions and other personal data. Currently, more than 30 states require companies to notify individuals whose data has been lost or stolen. Massachusetts and Nevada are currently considering more stringent laws.

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