Remember the good old days? Several years ago, I attended a closing dinner where the CEO of my company gave a toast. He stated, “Mark my words, these are the good times, and it doesn’t get better than this. Some day we will look back on these times and say, ‘Those were the good old days’” At the time, I thought he had enjoyed too much wine. Now I wonder — could he have been right?
Our industry has experienced daunting change over the past two years. Some say that the reset button has been pushed. Will we ever get back to normal, or is this the new reality?
During his speech at last year’s ELFA Annual Convention Mark Zandi, chief economist at Moody’s Economy.com, claimed that he had coined the phrase: “The Great Recession” to draw comparison to the Great Depression and to properly reflect the depth and severity of the economic downturn we find ourselves climbing out of today. Perhaps you have noticed that the recovery is taking far longer than the rapid decent we experienced during the crash.
Since the turn of the century, we have seen some pretty significant ups and downs. Some were mild corrections while others were precipitated by events — like the bursting of the tech bubble, reaction to Y2K and, perhaps the worst, the shock of the 9/11 attacks. However, the credit meltdown, which began in 2007 and caused the disappearance of several venerable financial institutions in 2008, wiped out trillions of dollars of wealth and produced some of the lowest lows after riding some of the highest highs, seems to beat them all. When it crashed, it happened fast and we hit hard.
Imagine being a part of one of the legendary Sunday night meetings with then-Treasury Secretary Henry Paulson and several Wall Street players. Some of their actions helped to avoid a total meltdown of the U.S. financial markets: Making the decision to save AIG while letting Lehman Brothers fall, and arranging for the sales of Bear Stearns, Merrill Lynch and Wachovia. It must have felt like the weight of the world was on Secretary Paulson’s shoulders. By making those bold moves, he and his cohorts created the New Reality. Through their actions they removed the “excesses” in the financial system and forever abolished “irrational exuberance.” The Sherman McCoy-styled Masters of the Universe got a wake up call. Investment banking and private equity firms may not be what they use to be — and life in the commercial finance and leasing industry — as we knew it — is gone forever.
What Does the Future Hold?
Let’s start with credit. The new norm will be sanity … rational behavior … few or no “story credits” … only deals that make sense. Finished are the days of credit scoring to $750,000. Even small ticket is seeing a return to standard underwriting and true financial structuring. Gone are the approvals for FICO scores of 575. Want to get your deal done? You should plan to ask for two years of financial statements — no, make that three years — and while you’re at it, get a current interim and a comparable from last year. You may think this is absurd. It’s not. This is the new reality.
Gone too are the days of relaxed documentation requirements. Be prepared for stronger language, tighter terms and conditions, fewer waivers and exceptions, required certificates of incumbency or authority and personal or corporate guaranties. This too is the new reality.
Funding has also been impacted. Discount rates shot up for every broker, small independent lessor and for many banks. Traditional funding sources either exited the business altogether, or refined their partner qualification criteria to a level that very few companies are now able to qualify. Even the Goliath Enterprise had to apologetically inform its clients that it was unable to honor its commitments to fund business for its vendor partners when the company saw its source of funds wither away. So much for partnerships.
Portfolio management has already been impacted by the new reality. Fewer rewrites and extensions are being permitted. We’re seeing shorter runways for customers who “promise to pay.” There will be faster reclassification and downgrades on loan quality ratings with more diligent adherence to policies and procedures. Unfortunately, the increased awareness on portfolio quality and greater willingness to pull the trigger on non-accruals and defaults, will have a ripple effect on the front end of the business. Credit departments will set higher standards for stressed industries, geographies and customer profiles. Get used to it… This is the new reality.
And what about employment? The term “jobless recovery” has been used repeatedly since the stimulus package took hold in August 2009. We have seen economic growth — but the job numbers have deteriorated, particularly in the financial services sector. While overall employment decline showed improvement in January 2010 according to the February ADP Employment Report, our sector registered another drop of 16,000 jobs.
What will the new reality look like as it relates to jobs? It is simple. Folks will need to create their next job. Each week I take calls from job seekers who hope to network with me and through a friend of a friend find their next gig. Employers and headhunters disagree. Traditional methods won’t work in the new reality. No finance company, bank or independent lessor want to add the fixed expense of taking on more headcount. Instead, they prefer variable expenses that are incurred only when a new revenue opportunity is created. This is the reason why there is an abundance of sales jobs posted on every industry website. Most of those jobs are straight commission. More than likely, they are positions with no salary and limited or no benefits.
My advice is the same whenever I counsel one of these networkers. Identify your value proposition and promote it to a company that can benefit from your strength. For example, one former colleague who spent 25 years in the leasing business was able to demonstrate to a venture capital firm the value he could add to their organization by overseeing equipment financing for the firm’s investment portfolio of companies.
Another guy who possessed 20 years of experience in vendor finance was displaced by a big bank when the crash occurred. He was able to persuade a global technology vendor to bring their financing in-house. He was able to convince the vendor that the chaos that impacted major players like CitiCapital, GE and CIT could be avoided if the company would take control of the origination side of customer financing. He parlayed the uncertainty and doubt felt by the company into a position running their customer financing program.
Message to the many who are struggling with a job loss: Don’t take your next job — make your next job. This too is the new reality.
Finally, let’s look at the financial impact and changes that have been driven by the credit crunch, starting with spreads. Everyone acknowledges that when we hit the second half of the last decade — 2006, 2007 and even into 2008 — pricing was ridiculously low. Lenders and lessors were scrounging for asset growth and ignoring simple arithmetic. Today they are paying for their sins with abnormally low portfolio yields for aging receivables.
During the latter portion of 2008 and throughout 2009 we saw the pricing pendulum swing in the opposite direction. As the Fed tried to stabilize the economy by holding rates at record lows, spreads began to increase. Yet the impact of the higher spreads coupled with lower volume wasn’t enough to fill the gap on the already thinly priced portfolios. Even with expense cuts and reduced headcount, almost every company in our industry saw a serious decline or complete disappearance of profits, while we as individuals felt the hurt in our own wallets through lower commissions, bonuses and salaries. Holy cow! Is this the new reality?
The new reality is not all bad — in fact it can be quite good. For most of us it is a return to fundamentals; simple blocking and tackling. We let things get out of control and now we are reining in the rogue behavior and getting back to basics. Will it be harder to get deals done? You better believe it. In some cases, creditworthy customers will be declined because the pendulum swings both ways and we are still reeling from the effect of having loosened those reins. Eventually, a need for growth will let it swing back to center and we will start to see a normalization of markets. Though, as warned earlier, normal is sane, rational behavior. An exercise in common sense.
This year looks to be a year of transition. The optimist in me says that we may see some light growth, but my pessimistic side looks to 2011 for the real normalization. As for employment — my best guess is that it will never return to where we were. Look for flatter organizations with fewer high-paying jobs and more at-risk components of pay packages.
I can live with this new reality. It’s bearable and maybe even reasonable. Can you?
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