Why Does Money Cost So Much These Days?

February 7, 2011 By George Lovato Jr 2 Comments

What Does a Rising Rate Really Mean?

Money TwisterI listened to a friend recently predicting gloom and doom about rising bond rates. The fact is a little increase in the U.S. bond rate is good. Too much and could adversely affect the economy which we all know is fragile in its current condition. What does a rising rate really mean? First better yield on parked funds. Second, lending institutions will have a better basis to forecast a base rate to lend by in simple terms. And increased yields on invested money can mean more money to lend. In short it is not the end of the world.

I can recall a time when Wall Street Prime was a reasonable reference point for the cost of money. That has gone out the window. Rates are pretty much all over the board now. There does not seem to be a clearly defined interest rate pinpoint. LIBOR was also a reference. But that too is unreliable these days. What is a good bellwether? U.S. treasuries used to be and should become again the standard. But they first must stabilize and next they must be priced attractively. So at a time when we are all searching for anchors on a sandy beach, maybe a little increase in the U.S. bond market is not a bad thing. What Bernanke is doing now and how he is managing the course is in my opinion sound. Create demand.

Time and the Cost of Money Marches On

I recently had a discussion with a client on the cost of money. His reference point was his previous loan rate which was established seven years ago. It just happened to be five and one quarter percent. He wanted to renew his loan at the same rate. When I informed him that it was going to be in the mid to upper sevens he was shocked. He could not fathom the increased cost. His position was he had been performing on the loan and all should have been left unchanged. He did not see the reason why he should pay more. After some time I explained all that has happened in the last four years outside his bubble and he was astounded. What happened he wondered? How could what happened out there affect me? Well the reality set in and he then was more accepting that what he had seen in the news did in fact have an impact on him. What a surprise.  Well time and the cost of money marches on.

I hear that same argument from a lot of my clients. Why does money cost so much these days? There are a host of reasons, much too long for this blog but suffice it to say a lot has changed. Losses from lending institutions must be absorbed. Risk must be accounted for in the cost of money. The cost of management of lending must be adjusted just to mention a few reasons. Do not be so shocked when you see the proposed interest rate. It is going to cost more. Pure and simple.

The Cost of Capital

There is a story in my upcoming second book (Due out in May) about this very subject. You can find my first book here. It speaks of the cost of capital in its varying forms. Commercial bank debt costs less than semi-regulated debt. Equity is far more expensive than both of those forms and the list and prices goes on. Cost of capital is volatile in today’s market.  We must plan for it along with all the associated costs that accompany debt or equity. It has now become a cost to contend with. Long ago it was by most standards inconsequential. Today it is measurable and significant. In the story I mentioned in my upcoming book it relays an incident where the interest on a loan went from six percent to fourteen percent in a matter of a few months. This increased cost was never projected nor anticipated (variable loan rate combined with default covenants added to the loan) and as a result the client went out of business in the process. Lesson…allow for the varying and increased volatility of the cost of capital.

Everything Has Changed

Some of us feel we are unaffected by what goes on in the world around us. Others feel that as long as we are unchanged so is the manner in which we do business. The fact of the matter is that many things have changed in the world of finance in the past few years. So much so that even some of the rules that guided some of our decisions are non-existent or so radical is the paradigm shift it is hard to even comprehend. Suffice to say if we are in business, we must be more observant and mindful of the changes in our world, economy and in finance. Don’t listen to opinion but search for the facts and patterns. Open your mind as well as your ears. Most of all, we know now that everything has changed and that includes the cost of money.

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I’m Saddened By What The Government Did

December 8, 2010 By George Lovato Jr Leave a Comment

I Guess The Government Dodged That Bullet

Golden PenWell the cat’s  out of the bag…the Federal Reserve loaned money to foreign banks. This is not new news. The long and the short of it is that these are different times than in ’08. This was a full blown crisis of epic proportions. As you all know I am a real fan of Chairman Ben Bernanke. I think he is always the smartest guy in the room. If you all recall the United States was being blamed for creating risky junk investments to which we conned the European banks to invest in. I know that is an exaggeration but that was the tone and tenor at the time. Politically I am sure the Chairman was under a mountain of pressure. Well most of the money has been repaid. Whew! I guess  the government dodged that bullet.

Carte Blanche Lending to the Loudest Banks?

However I think it would be wise and prudent to analyze history and the events of years past. My first question is how much true analysis went into who, how much, for what reason and the potential of payback of the potential borrowers. Was this carte blanche lending to the loudest banks? I hope not. But the question needs to be asked. What was the criteria? Who made the calls on who got what? We need to know. Now insofar as frequency goes that is another story. Morgan Stanley borrowed over 200 times. You mean to tell me a bank could not project its actual liquidity needs? Jamie…shame on you.

The Golden Pen

Then there is the issue of hedge funds getting assistance. What? Since when did they qualify? I would like to have been the fly on the wall when that decision was made. I feel that was a huge mistake. They are in the risk business. They should have never received the golden pen from the Federal Reserve. I am disappointed in that decision. As you all know I think the automotive industry should have never received the golden pen either. I am on record that it should have been survival of the fittest. We broke a rule of commerce on that one. I am appalled about lending to a British bank that buys the very same assets from a failed American institution we allowed to fail to begin with. We should have saved Lehman! There is the proof in the pudding.

We Must Stay Within Our Own Boundaries

I hope we learn from history. We are bankers and we have to follow our own rules. We must be prudent but forward thinking. We must be aggressive but controlled in order to stimulate and complement the needs of small business. We must be disciplined for all concerned and conduct the business we are educated and trained to conduct. In other words stay within our own boundaries. We must look to the past and learn. We must use those lessons for the benefit of commerce.

I Am Saddened By What The Government Did

The cat is out of the bag and the cat is laughing. I am saddened about what I know now about what our government did. I wish they had not done some of the things they did. I am disappointed in some of the behavior of some of my fellow bankers. In the end we need to follow our own rules of commerce and capitalism and never allow our government to use the golden pen like that again. Are we better off for what was done? We will never know. We can only speculate.

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Government Has Not Learned Anything From History

September 13, 2010 By George Lovato Jr Leave a Comment

Banks Get New Restraints

gavel on moneyFront page news reads “Banks Get New Restraints”. Globally governments are agreeing to add more regulation to avoid future financial melt downs. That assumes that all the governments involved have a crystal ball and the view from here is in fact what we will need seven years from now.

And it Was Not Good

As for now we need a little less regulation to allow the financial industry the latitude to maneuver in choppy uncertain economic waters. So now government, the icon of not knowing what is right for business is using its fuzzy image crystal ball to predict and control the future. I cannot disagree more. I have seen firsthand what over stepping regulation can do to an industry. I have seen what the perspective and inexperience of regulators can do to a perfectly healthy business. And it was not good.

Arm Chair Quarterbacking

Imagine for a moment a person that has no real world business experience making sea changing decisions for a financial institution. This government regulator is now arm chair quarter backing the strategy and business practice of a bank. Dangerous. Now put the factors together. More regulations phased-in in the future, of which we know nothing about, along with government regulators whom know little if nothing about how to interpret and integrate these new regulations into safe and sound business practice for banking institutions.

The Complex, the Mundane and the Futile

This is clearly a case where government has not learned anything from history. The government is going to over reach, over regulate, force over capitalization and overkill, at a time when we need to free up time of bankers to get back in the business of lending. Instead we are now going to increase cost and take away valuable time to understand the complex, mundane and futile. Wow!

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Mr President – Your Government Should Leave Well Enough Alone!

August 30, 2010 By George Lovato Jr 1 Comment

Stock ticker moving upThe Guiding Minds of Corporate America Have Done a Solid Job

Recently we have seen much comment on the fact cash harbored in corporate America is at an all time high. We have also heard how the government is pushing big banking to lend to small business again. In both cases there is a lesson in the news. First cash being at an all time high is in fact a good sign. This in simple terms means that at the appropriate time corporate America will reinvest in itself. The mood, tempo and general indicators of the economy will be right and the capital to exploit the economic condition of the nation will be present. This is a sign of recovery. Corporate America has done a pretty good job of judging the right time in a number of areas. Have there been mistakes and false starts in the past? Certainly. But by and large the guiding minds of corporate America have done a solid job.

The Government Has Made More Mistakes Than American Enterprise

Let’s speak for a minute on the governments comments. First they have played banker in the recent past. They have made what I consider some very controversial decisions in that regard. They helped the weak to survive and intervened in a manner not fitting American enterprises number one rule – survival of the fittest. Now after we have stopped the bleeding of the biggest economic banking hemorrhage in human history, the government wants to tell banks what to do. The government has made more mistakes than American enterprise. They have attempted to change the basic rules of business governance. Now before the timing and condition of the economy is ripe for regenerating the lending cycle again, the government wants to push where pushing is contradictive to its warnings to Wall Street and the financial community at large.

Dear Mr. President,  leave well enough alone. Business and the financial community will be its own best judge as to when, where and how it will begin to fuel the rest of the economic recovery.

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