I have just put the phone down to a friend of mine, who has a business back in the UK.  Like most in his sector, he is suffering due to the economy and also, like most he is heavily dependent on bank finance.

We were talking and he was telling me how revenues have nearly halved over the last 12 months or so and that trading is extremely difficult and he can't see himself lasting another 6 months!

I asked him if he had tried negotiating with the bank and he said that he had, some months ago, but not now as he feared he may push them too hard and they will foreclose.

I told him first, that a hell of a lot has happened over the last few months and second, that he is probably in better financial shape than the bank!  I also told him that he absolutely MUST start negotiating, asking for his payments to be suspended for a period, to get the business back to a positive cash flow and ultimately to profit.

In my business career, I have faced recessions and serious cash flow problems, even in 'boom' periods.  What I have learned most as a entrepreneur, is how to survive.  My idea of survival is to make sure that every creditor is aware of the problem up front and then to devise a plan to pay them back, but the plan must be realistic and achievable for all.

I have been 'bust' in my career before and at that time, my creditors would not negotiate with me and I told them that I was sorry, but I could not meet my payment obligations, their attitude was simple - pay or we bust you, which they did.  This was during the recession of the late 80's/early90's and I think one of the reasons why it occurred, was because I told them of my problems too late and they had effectively lost trust in me.  the next time I had a problem, I addressed it immediately and I worked out a deal with my creditors to pay them back.  At that time, I could have easily 'busted' the business myself and started a new one the next day, but I wanted to honor my obligations to the creditors and not lose the business.

There is always a deal to be worked out to solve any problem in business, but you have to be open and honest with everybody and the plan must work for all the parties involved.  Trust is the most important part of the relationship with financial institutions and trust can and is built and maintained in both good and bad times!

~Neil

I have talked about the fact that the modern banking system has collapsed and has triggered a financial tsunami, but now I will talk about the 'weapons of mass destruction', not those  - purported to be found in the Middle East, but the financial weapons of mass destruction - derivatives.

I will quote Warren Buffet, the world's greatest stock market investor, in his Chairman's Letter in the Berkshire Hathaway 2002 Annual Report:

"We view them (derivatives) as time bombs both for the parties that deal in them and the economic system.  In our view derivatives are financial weapons of mass destruction, carrying dangers that, while now latent are potentially lethal."

Further:

In 1990, Sir Julian Hodge in a memo dated November of that year to senior executives of the Julian Hodge Bank said:

"In no circumstances enter the derivatives trading market without first agreeing to it in writing with me…At some time in the future, it could bring the world's financial system to its knee."

So what exactly are derivatives?

First, let's establish that there is an organization that started all of this - the International Swap and Derivatives Association (I.S.D.A).  This is the organization that spawned the US$500 trillion global derivatives market - the organization that manufactured most of the derivative products, the financial WMD's. 

Derivative trading could, at the extreme, be described as 'loan sharking' and 'gambling'.  In reality, it is the ability to trade with money you don't have to 'put up' or even money that you don't own, the ability to trade on 'margin'.  Say you want to trade an amount of US$ 1000, you need only to actually part with 10% of that amount and despite the fact that you are 'truly' working with 1000, your actual physical cash exposure is only 100.  Now multiply this into the millions.  There is a downside however…losses can be unlimited!

The problem is that the officers of the ISDA are from the worlds leading banking institutions! 

I talked earlier about the fact that banks are now lending to almost anyone and this has spawned from the lack of money making opportunities from 'traditional' banking.  

The banks have been forced into forming their own 'elite' money making club in an effort to protect their industry, the industry that is worth literally billions.

Many mathematical geniuses are employed to create elaborate mathematical models to eventually come up with the 'sucker deals' - the endless list of investment products that are inveitably sold to the public.

If you are from the UK, you will probably be aware of how, in the early to mid 1980's, the building, banking and insurance industries collaborated to sell more homes and the creation of a set of 'products', that lined the pockets of the same industries, but only served to potentially bankrupt the individuals in the process.  I am talking about the 'endowment' mortgages that promised to pay off a 25 year mortgage in 15 years, through the 'prolific' investment capabilities of the fund managers…and we were sold!

I am not against the sales people who sold them for they were totally indoctrinated by the belief, nor the people that bought them, for they knew no better, but I am against the acceptance of blame when it all went wrong and disaster struck in 1989/90.

…continued

~Neil

We must not disillusion ourselves that the current financial crisis is just another 'crash' and all will be well after the 'correction'.

It is true that the capitalist society works on a boom and bust principle but when I talk about 'correction' in the current crisis, I am not talking about simply letting the system 'work itself out', I am talking about the end of the present global financial system as we know it  We have an opportunity to re-build a better and fairer system of wealth distribution - the world has paid a heavy price, especially the millions of wage earners who have lost their homes and savings. 

Before I delve into the 'real story', I want to take you back to the times when owning a home was reserved for the privileged few, when even getting a Bank account was a privilege and more importantly, when lending was subject to strict criteria.  Banking in those days was the 'professionals profession'.

Banking and Stockbroking were the professions of the privileged few and it was a 'club'.

Now let's take a look at the last thirty years - we have seen a drastic change in the sheer amount of lending, to the point where the lending criteria is simply, 'do you have a pulse?'You see, it is not easy for Banks to make money any more - not in the traditional fashion anyway!  Also, think of the amount of 'day trading' that occurs today in the markets.  Now before you all go crazy and tell me that this is the removal of the 'club' system and that it is opening up opportunities for all - think of the motives behind the system that actually created these so called 'wonder' opportunities! 

In the good old days, customers were recommended, mortgages were recommended as of course were all loans and importantly, the people were far more more creditworthy.  My Grandfather said to me one day ( I was nine and raised by my Grandparents and  my Mother), "son,if all of us stopped paying our mortgages, what would the Banks do)?  He was not far from the truth, but of course, because lending was far more restricted, there would have been a far greater chance that they would have got their money back and of course, the stigma of bankruptcy was huge in those days.  But a very good question all of you should ask your Bank today is that if each depositor walked into the Bank at the same time and asked for their money, would the Bank be able to cover it? Think about that question when you next negotiate an interest rate for a loan!

Simply put, we are in an era of hyper competition and the Banking system is far from immune - just look at the deals that have been thrown your way, just to get you to borrow money.  think of the automotive industry, it is no longer about buying cars, but getting the right type of credit.  think of huge global corporations - General Electric for example - where does most of it's revenue come from?  Not from manufacturing, but from the GE Capital arm of it's business - finance.  the same can be said of General Motors and it's GMAC finance arm.

..continued

~Neil

I was reading Mark Cuban's blog where he is talking about the advisers that President Obama has assembled around him and the fact that he has not one single entrepreneur on his team.  Mark further talks about the need for the Government to get in touch with the people who form companies and literally live from job to job, hoping to get paid on time. He says that entrepreneurs who start and run small companies will be the propellant of the economy. I could not agree more.

These are the people who take the real risks, putting their money on the line each and every time and who have to constantly fight Governmental 'red tape'.  Yet many of these companies develop into hugely wealthy enterprises, creating jobs and paying serious amounts of taxes.  We need to locate and nurture this talent.

It seems the fat cat Bankers are at it again, this time back in the UK, the Royal Bank of Scotland saw fit to hold a SECRET 300:000 pounds party for its executives - fair enough you might say, when times are good, but not after receiving 20 billion pounds of bailout money from UK taxpayers!

Still on the Banking scene, it seems that the UK Banks have told the Chancellor that they will not pass on any interest rate cuts to customers as their profit margins are already too tight and they are not 'charities'.  They are absolutely correct - the charity is the UK taxpayer who has had no option but to bail them out with billions of pounds of their own money - the same money the Banks expect the taxpayers to then put back in their pockets so they can make even more!

~Neil 

I have just read an article in a British newspaper about the Chief Executive of failed banking organization Halifax Bank of Scotland (HBOS) being paid a ‘consulting’ fee to help Lloyds TSB, the bank that is taking them over to identify the weaknesses of the company. The fee for this consulting arrangement is a staggering 60:000 pounds per month!

Under his leadership, bad debts have doubled to 5.2 billion over the last five months and although he has forgone a golden goodbye of nearly one million pounds, he has the small consolation of a 2.4 million pension pot and of course the ‘consulting’ relationship, not to mention the potential loss of 20:000 jobs as a result of the Government backed nationalization of high street banks.

There is an argument that it doesn’t really matter if the executive leadership of large, public companies fail, they will probably leave with far more money than most people will see in a lifetime, when of course, the shareholders that back the companies end up losing.

But what about the humble entrepreneurs out there who have huge amounts of desire, ambition and of course, the winning ideas that will ultimately create wealth and jobs? If an entrepreneur fails, he or she will just become another one of many in the statistics of business failures and as most successful entrepreneurs will testify, they are certain to face failure at least once during their journey.

Three good examples of hugely successful entrepreneurs in Britain are Sir Philip Green, Sir Alan Sugar and of course, Sir Richard Branson - did they experience failure? Definitely. What I am saying is that out there is a huge pool of potential and existing entrepreneurial talent and that is the talent that needs nurturing and most of all, Government help.

It is of course election day here in the US and my money is on…

~Neil