By Tom Wilbur
If the United States of America applied at a bank for a loan this week, could the bank lend Uncle Sam some money? Maybe. Maybe not.
A banker’s responsibility is to make loans to qualified applicants— something they do every single day. Bankers are trained in the process of evaluating the variable risks of lending. It involves much more than just handing out funds and hoping the funds will be paid back someday, and has at its core “risk management”— as its biggest driver.
A number of factors are prerequisites in the evaluation of any loan request— factors that include staying consistent with prudent financial models and sticking with the fundamentals of sound lending practices. In the case of any individual borrowing money, we look at things like job time and stability. History of re-payments for credit extended in the past. Available cash resources and other assets. And recurring expenses related to the income sources of an applicant, as well as the value of any collateral being pledged.
In addition, there are some new stipulations added by Congress (from directives like Dodd-Frank) to reign bankers in— which are creating some roadblocks to the industry’s abilities to make certain kinds of loans, individually or by type of loan. Agree or disagree, more onerous regulations do slow lending activities. You’d have to speculate for yourself if that’s good or bad for our nation, and for our present economy.
Commercial bankers take into account specifics like ongoing cash flow, a loan’s collateral position (like commercial real estate and accounts receivable), a borrower’s performance trend lines, the history of their operations, and the strength of the guarantors on the loan. This analysis must lead to a reasonable conclusion that an extension of credit will result in the loan being paid back, on time and as agreed, with primary and secondary sources of re-payment. Bankers are also asked to evaluate the management of a borrowing entity, and further compare the current financial operations to a current budget. Likewise, they must compare projected financials to budgets in place for the future.
Since the United States government hasn’t had an operating budget for years, bankers would immediately be faced with an early warning sign—an issue they’d have to see if they could work through. This is not a political discussion, and as such, there would be no value to anyone in politically blaming one side of the aisle or the other—and really no excuses to be sought. But the question to our government’s leadership of “Where’s the budget?” —would remain.
There is a “suggested budget” for 2013 by the present administration, available for all to see on the Internet. While not approved by Congress, we could use these projections as a place holder for an economic blueprint for the country going forward. Here would be the key areas of concern for a banker:
1. Negative cash flow. Based upon these projections, the United States of America will once again take in less revenue in 2013, than it spends. Certainly, this is nothing new for our country. But the non-partisan Congressional Budget Office announced this past week that the federal deficit (based upon all things being equal) will be in excess of one trillion dollars next year. Bankers typically can’t make a loan to any person or business that spends more than it takes in—particularly if there are no indications that the borrower intends to take any corrective action.
2. Debt. In total, our nation is $16 trillion in debt and does not have a plan in place to repay the obligations it has outstanding—for generations to come. Right now, that’s a debt of about $50,000 for every citizen of the United States. If that seems like a lot to you, it is—the highest deficit in our nation’s history, and growing. Because there is no plan to reduce the debt, a banker upon origination of the loan would have a “problem asset”, and in the present environment, bank managers would be further questioned by their regulators as to why they made the loan in the first place.
3. Trend lines. In tracking the past three to five years of our nation’s economic activities, with an expansive and ever increasing desire by the federal government to spend more money, and a continued gridlock about how to increase revenues with our current economic situation, along with the management weaknesses previously cited above—significant questions about where the nation is headed fiscally— need to be resolved. The trends are weak, and point to few definable possibilities for improving our deteriorating positions.
4. Revenue sources and expenses. In most organizations, inadequate gross revenue requires a change in the strategic plans for the future. Businesses, for example, must evaluate how to generate more inflow of funds or lower their overhead. They could, for example, reduce the number of people they employ, decrease the number of buildings they occupy, evaluate the effectiveness of the utilization of their current systems and equipment, or adjust their overall capital outlay. Without more revenue, they’d have to make cuts in expenses, or else they’d be unprofitable. For our nation, more revenue either means raising everyone’s tax rate, or getting more people back to work in the labor force to contribute funds to the coffer.
5. Liquidity. Is the United States’ ability to generate liquidity in peril, due to its economic place in the world? Are there repercussions from the latest downgrades in U.S. securities by the ratings agencies? Politically, if America gets sideways with countries that routinely invest billions in our nation’s Treasury, does our country have the ability to sustain itself without them? Bankers do “lend” money to America when they buy Treasury bills and bonds (like any other investor in the market place) but if the ratings agencies for securities lowered their assessments too far, investing in securities backed by the United States might even be prohibited as an available option, under current banking law.
It’s clear that our nation needs to make changes in the way it counters the huge economic issues it faces today, regardless of who is in charge. We owe it to ourselves, and to generations of Americans who will follow us, to make our nation fiscally sound again. Our very independence and freedoms depend upon our ability to rise above the clustered fray, and take responsibility for our debts. To continue to cash checks on a significantly overdrawn account will lead the United States of America towards a day of reckoning. It’s hard to imagine that we would allow our nation to be in the position to reach a tipping point of that magnitude, but the numbers speak for themselves.
Assuming we’re awake, we now need to face the moment. I’m optimistic that as a nation, we can adjust and make the required changes necessary to bring our country back to a position of prosperity, and economic balance. But it will take time, patience and sacrifice. We need leaders who are willing to establish a solid financial plan, bilaterally, and stay the course in doing what’s right for our nation. Everyone will need to pitch in. I’m looking forward to seeing us get that started, together, as soon as possible.