Buffett’s Tax Rate – Irrelevant

September 28, 2011

I am getting very tired of hearing the completely irrelevant statement that Warren Buffett’s secretary pays a higher percentage of her taxable income in taxes than her boss. While the example below is not based on Mr. Buffett’s income, it is representative of what a nicely compensated executive and his assistant might earn, and pay in taxes.

Assistant Executive

Earned Income $50,000 $200,000
Capital Gains 0 300,000
TOTAL INCOME 50,000 500,000

Federal Tax – Single
25% (Asst.); 33% (Exec.) 8,681 51,116

Social Security and Medicare 3,825 9,521*

Capital Gains Tax – 15% 0 45,000

MD State Tax – Single
4.75% (Asst.); 5.5% (Exec.) 2,322 25,072

TOTAL TAX $14,828 $130,709

TOTAL TAX/TOTAL INCOME 29.65% 26.14%

*Social Security is paid up to a wage ceiling of $106,800.

The Executive pays a higher percentage tax rate in both Federal and Maryland State income taxes. Additionally, since this example assumes the Executive has a portion of his income derived from Capital Gains, those gains are taxed at 15%. Do not forget that these distributions have also been taxed at the corporate level.

The above example has the Executive paying $115,881 more than his Assistant. In this example, the Executive is “only” paying 26.14% of his taxable income in various taxes as compared to the Assistant paying 29.65%. How or why do these percentages mean anything substantive when one person pays $100,000+ more than the other person and one person has income that is subject to capital gains, and therefore double taxation (corporate and individual level). Using the percentages to try and prove a point is simply meaningless.

Stop referencing this meaningless percentage. Manipulating information to falsely get your point across is disingenuous and doesn’t help remedy the myriad economic problems we face; it merely makes for greater divisiveness.

Business Credit Availability

March 25, 2011

Is Business Credit Availability oxymoronic?

I recently assisted three businesses in obtaining financing, and I am assisting a fourth company with its financing needs at the present time. Let’s highlight each example and then you tell me if you think there is credit available to small and medium sized businesses.

The first company obtained a 90% Small Business Administration (“SBA”) 7(a) loan. Securing the loan is a first lien on all business assets, life insurance on the owner, a subordinate lien on the owner’s personal residence, the owner’s personal guarantee, and a 90% guarantee from the United States government. The 90% SBA guarantee was a limited time only program. If the company did not make the deadline for this program, the lender would not loan money to this company – even with a standard 75% SBA guarantee.

The second business is a government contractor that has been in business for many years. They needed a working capital line of credit. Advances would be secured by eligible United States government accounts receivable. They were able to obtain the line of credit they required, secured by all business assets, the personal guarantee of the owner, and a second lien on the owner’s residence with twice as much equity as the amount of the line of credit.

The third client also obtained a line of credit. In addition to the standard collateral package referenced in the above examples, the lender also secured its loan with an abundance of commercial real estate equity.

We now get to the final case. I cannot provide too much detail due to confidentiality issues, but you’ll get my drift. A company in a depressed city in the Midwest renovated a structure. For this example, let’s assume that the appraisal performed last year stated the “as completed” value of this structure at $100. The recent appraisal obtained indicated the value at $50. The company is the sole tenant and operating business in this building. The business generates more than adequate cash flow to service the debt, has never been in default, and is in compliance with all loan covenants.

Due to the declination in appraised value from last year to this year the lender wants the borrower to set aside 75% of its free cash flow in a separate account as additional collateral. I guess the borrower should be thrilled that the lender didn’t merely ask to receive half of their loan proceeds returned because of the 50% declination in appraised value. However, how can a medium sized business survive, much less thrive, when 75% of its free cash flow is being taken away from the entrepreneur. The bank is telling the client that the regulators require this action.

The Administration continues to tell banks to loan money to businesses. Banks claim regulators criticize loans, even ones where cash flow is sufficient to service the loan, if collateral values have declined due to the recessive economic environment we have encountered.

Is Business Credit Availability oxymoronic?

Capital One and Really Bad Service

December 21, 2010

I love good customer service. Whenever I’m treated to really good service – i.e., someone does something that surprises me by going above and beyond the call of duty – I tell everyone. I do this because I’m a stickler for providing great service, I study the topic of customer service, and I want others to know what it means to provide great customer service. The other day, a friend of mine told me about exceptionally poor service he received from Capital One. Let me know what you think.

My friend’s daughter will be attending college abroad next semester. He wanted to pay the $14,900 tuition on his Capital One credit card, which he has had for the last 10 years. He would obtain the perceived benefit of double points for this charge. However, his credit limit on this card was only $15,000. Therefore, he prepaid the charge, waited for the funds to clear his bank, and then called Capital One to explain that he would be charging the tuition and they should apply the prepaid amount to the tuition charge.

The Customer Service Representative (and I use the term very loosely) at Capital One told him the charge would be denied since it would exceed his credit limit due to other charges already placed on his account. My friend spoke with this person and then this person’s supervisor, all to no avail. My friend, a ten year customer that has never missed a payment of any kind and, had Capital One obtained a recent credit report they would have seen that his credit is impeccable, was denied the ability to place a charge that would have exceeded his credit limit, even though the amount had been pre paid. Oy gevalt! Are the Capital One Customer Service people, and supervisors, so poorly trained that they cannot make simple, common sense decisions? Does Capital One not care at all about its long time customers? Did Capital One purposely deny the ability to make this charge since they knew they would not be collecting exorbitant interest for the next millennium? Let me know your thoughts.

To add insult to injury, my friend requested a refund of the prepaid amount so he would be able to use these funds to pay the tuition. Capital Bank told him it could take up to 10 business days for the funds to be refunded.

This is my last Blog post for 2010. Posts this year were:

 The Tipping Point
 I Can Write a New Banking Story Every Day
 Rep. Hank Johnson
 Should Congress Establish a Cap on ATM Fees?
 Housing and the Credit Crunch
 Financial Reform Reshmorm – What a Mess
 Student Loans
 Commercial Property Owners Defaulting by Choice
 Riddle Me This: When is a Foreclosure Not a Foreclosure

I’m an optimist; I always see the glass half full. However, I still believe we are going to experience greater economic malice in 2011. We cannot succeed as a country with massive amounts of debt and out of control government spending, long term unemployment at ridiculous levels, lack of credit availability, continued increases in oil and commodities prices, and so much uncertainty that businesses choose to horde cash rather than making needed capital investment in fixed assets and personnel. That said, I’m grateful for my family and our good health and I wish all of my friends and associates and very happy holiday season and a healthy and happy New Year.

Riddle Me This: When is a Foreclosure Not a Foreclosure

October 7, 2010

Holy Unbelievable! Banks foreclosing on homeowners without proper documentation. How can this happen? Doesn’t a financial institution need the proper documents, and have to adhere to proper legal means in order to foreclose on real property? Aren’t banks supposed to have the utmost of integrity and credibility? After all, they are the protectors of our money.

Evidently, they do. Although many “too big to fail” banks have been signing and notarizing foreclosure documents without reading them, falsifying documents, signing via electronic means, without promissory notes, and all other maladies that negatively affect the foreclosure process, they won’t be able to continue with these abhorrent practices much longer – or maybe they will.

Many States and Congress are taking action to stall or prevent banks from foreclosing on residential real estate until inquiries are made as to why the banks have been attempting to foreclose without proper documentation. Lenders themselves are (temporarily) ceasing foreclosure action until they fix the mess they got themselves into.

However, a bill passed without public debate, sponsored by Representative Robert Aderholt (R – Alabama), and awaiting President Obama’s signature, will require courts to accept as a valid document notarizations made out of state, which will make it more difficult to challenge the authenticity of foreclosure and other legal documents. The “Interstate Recognition of Notarizations Act” requires all federal and state courts to recognize notarizations made in other states. This includes electronic notarizations stamped, en masse, by computers. Politics at its best.

When I bought my first house 25 years ago I was presented with a lengthy Deed of Trust to sign. I started to read the document and the settlement attorney pointed out that he could summarize the document, which provided the lender with its lien against my property, in ten words – “if you pay you stay, if you don’t you won’t”. The attorney was wrong. Clearly paying your mortgage no longer has anything to do with staying in your home.

Commercial Property Owners Defaulting by Choice

August 27, 2010

The August 25, 2010 edition of The Wall Street Journal wrote about commercial property owners such as Macerich, Vornado, and Simon Property Group choosing to stop making mortgage payments on certain underperforming properties, even though there is sufficient overall corporate cash flow to make the required payments. Individuals have been defaulting on residential mortgages for some real reasons – i.e., no cash, and some not so real reasons – i.e., strategic. Private commercial owners have strategically defaulted to entice lenders to negotiate restructure agreements. But the phenomena of publically held companies, with ample cash flow from other sources of operation, choosing to strategically default on its loans is a relatively new undertaking.

Although the companies quoted in the article indicated that making the strategic decision to default is not taken lightly, what will be the long term ramification to these companies for making the decision to default on its loans, while having cash.

Lenders loan money to these entities because they have sufficient secondary and tertiary sources of repayment. Although the primary source of repayment may not produce ample cash flow to service the loans in question, didn’t the lenders make their credit decisions based on alternative sources of repayment, as well as the long term credibility these companies possess?

Once these companies exhibit the willingness to default, regardless of the fact that it was a difficult decision, will lenders continue to loan them money for other projects? Will their cost of debt increase? Will additional guaranties be required in the future to prevent strategic defaults from occurring next time?

I think actions like this further hurt the already damaged credit markets. Time will tell how lenders will perceive credit worthy companies that strategically default on certain properties.

Student Loans

August 24, 2010

As you might have guessed, I do not believe in the necessity of student loans. To me, it’s blatantly obvious that government funding and/or subsidies of college costs ONLY serve to increase the cost of college.

It just came to my attention (and infuriation) that Congress and federal agencies provide a perk to staffers – repaying their employees college loans. In 2009, as much as $60 million was anticipated to have been paid on behalf of government employees.

This program has been in place for many years. It was implemented under the guise of needing to provide a benefit for those choosing public service since they would be compensated less than their peers in the private sector. However, with the national unemployment rate now standing at 9.5%, according to the United States Department of Labor, and at the highest level ever recorded in 30 years for college students, do we (you and me, the citizens and taxpayers of the United States) really need to offer this $60 million perk to federal employees?

Financial Reform Reshmorm – What a Mess

July 16, 2010

The Senate passed financial reform legislation. This bill, to become law, will have tremendous reach on all of us, regulating everything from ATM machines to Wall Street traders. At this time, it’s impossible to truly discuss the entire bill intelligently since it’s more than 2,300 pages long and I haven’t read it yet. Just like most people did not read the health care legislation, including our legislators, yet had strong feeling about that law; people will have strong feelings about financial reform too, yet no real information to base those feeling on. Note, I did read the health care bill and plan on reading the financial reform legislation.

What I can tell you about financial reform is that it will expand government. It will create new, larger bureaucracies. Forget about too big to fail. The Bureau of Consumer Financial Protection will be too big to accomplish anything. With their wide sweeping powers, they will have the ability to take over companies – maybe even small businesses – for reasons that they will not need to substantiate. Industry will continue to be mired in regulation.

Goldman Sachs settled with the SEC for being accused of misleading investors in a mortgage backed securities investment. They paid $550,000,000 – the largest settlement ever. Spin: the government is proud of this settlement and claims they showed Goldman Sachs that it cannot act in a misleading manner. Goldman Sachs is laughing out loud. Now even larger bonuses can be paid to its bankers; and, Goldman Sachs’ stock was up 4.4% in trading yesterday.

Companies and private investors are hoarding cash. More people live paycheck to paycheck than ever before. Banks own more equity in our homes than we do. Bankruptcy filings are at their highest level (other than 2005 when bankruptcy laws changed) than ever before. It is taking the unemployed longer to find a job than ever before. The last thing our country needs is more legislation.

Housing and the Credit Crunch

May 26, 2010

I had the pleasure of attending an Academic Symposium presented by The George Washington University School of Business’ Center for Real Estate and Urban Analysis, among others. Some of the papers written that were discussed included: Stability in Consumer Credit Scores: Level and Direction of FICO Score Drift as a Precursor to Default and Prepayment, Causes of Default: Economic Conditions, Underwriting and Moral Hazard, and the presentation I enjoyed the most The Credit Rating Agencies, by Lawrence J. White of the Stern School of Business, New York University.

Just imagine sitting in a room filled with academics, businessmen, public sector officials, and students and listening to some very smart academic types explain the empirical work they’ve done regarding the housing crisis. Best part of all, the speakers were interesting and engaging, not boring as one might expect when listening to professors discuss empirical information.

Bottom line, a lot of information is being, and will continue to be analyzed, regarding the present housing debacle that this country is facing. At least part of the housing mess may have been predictable if certain data was properly analyzed. Fraud, as you might guess, played a part in the housing and credit crisis too. Not too hard to believe when you consider the prevalence of no documentation loans that existed a few years ago.

The amount of energy that was on GW’s campus, even with school not being in session, was tremendous. Today made me proud of my GW degrees.

Should Congress Establish a Cap on ATM Fees?

May 14, 2010

Iowa Senator Tom Harkin (D) proposed capping automated teller machine (“ATM”) fees at 50 cents. Why not cap soda dispensing machines at 75 cents? Better yet, shouldn’t Congress mandate the maximum fee charged by the candy machine in the break room at work?

What is wrong with our legislators? How much time, energy, and money do they waste on trying to legislate things that they should simply stay out of?

It’s really very simple. If you need cash and don’t want to pay the stated fee at the ATM then don’t get the cash from that machine. You have many ways of accessing your cash without paying ATM fees. Is the concept of taking responsibility for one’s actions so difficult to understand?

Regulating ATM fees is in fact telling a private business how much money they can charge for a product or service. Did Senator Harkin give any thought to the cost of the ATM machine? Did he think about the annual maintenance required to operate the machine? No, merely cap the fee and limit the potential profitability of the bank that provides this service.

Survey question of the day – when will capitalism return?

Rep. Hank Johnson

April 8, 2010

How many of you have read about Rep. Hank Johnson, the Congressman representing the Fourth District in Georgia (DeKalb, Rockdale, and Gwinnett Counties) asking Admiral Robert Willard in an Armed Services Committee meeting if the Admiral was concerned if the additional troops inhabiting Guam would tip over and capsize the island. If you don’t believe that a United States Congressman really asked this question with 100% sincerity, go to http://www.youtube.com/watch?v=l9R-cQ_A_6w or http://tinyurl.com/y8o922p and watch the video for yourself.

I have always been an advocate that no question is too stupid to ask. Rep. Johnson made me change my mind! A Congressman representing approximately 1.5 million people asked if Guam would capsize by sending additional troops to the island. Nothing further needs to be said about this; except, of course, that you probably haven’t heard of this because the main stream media has given this item little to no play. Just imagine if Governor Palin asked if Guam would capsize if more people inhabited the island.

Increases in jobless claims, tight credit markets, residential and commercial property foreclosures, or lack thereof due to extend and pretend, enormous salaries for executives at publically traded companies, government controlled health care, and a slew of additional maladies are changing the landscape of our country. Good thing we have Rep. Johnson’s help in governing our nation. Fire him now!