Transcript Emergency Check-up for Business

Emergency Check-up
for Business
Washington creating new rules …
is your business ready to play by them?
Presentation Overview
Where are We?
What Is the Framework for New Economy?
Stimulus Package Impact
Budget Proposal Impact
Forced Industry Mergers and Bankruptcies?
Overview
• Where are We?
– Banking Status
– Economy and Direction
– Government Intentions and Intervention
– Accounting Profession as Intentional and
Inadvertent Catalyst
Where are We?
•
Banking
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1970’s – Community Reinvestment Act
– requiring banks to lend in Blighted and
redline areas
1999, Freddie Mac/Fannie Mae
pressured by Washington to vastly
increase lending to subprime borrowers.
Where are We?
• Banking (cont.)
– Wall Street reacted to green light on credit
by increasing supply of debt.
– Banks joined the party by
lowering/eliminating underwriting
– Consumers took advantage of opportunity
and bought & borrowed excessively
– Developers began Massive Commercial
Building Activity, spurred by Available Credit
Where are We?
•
Economy
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We have a nationwide dependence on real
estate and collateral industries
Business dependence on financial and banking
credit and finance
Ripple effect to all business when liquidity (debt,
credit, and capital) disappears, demand is reduced
across the board (i.e. lower sales)
Lay-offs spread through all industries, multiplying
the effect of inability to repay debt  downward
spiral of ability to service debt of all types
Where are we?
•
Government
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Helping or hurting?
Capitalism & Free markets vs. Socialism &
Government control
Opening flood gates of money supply – amount
of $ issued going up x4.5 total supply in less than 6
months
•
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TARP $700 Billion – properly supervised
Stimulus Package $787 Billion – unsupervised
Budget deficit of $1.6 Trillion in 2009
Toxic Asset Buyback $1.2 Trillion in 2009
Inflation must occur to balance money supply with prices
Where are We?
• Government (cont.)
– Proposed new programs for Healthcare, Education,
Universal Schooling (pre-K  college), Energy redo
with cap and trade.
– Suppliers of money – already beginning to balk
• China asking for security and collateral for existing treasury
debt.
• We are planning $10 Trillion+ more in future budget deficits,
where will it come from?
– Program to Buy Troubled Assets
• Public-Private Investment Program to buy toxic assets
• Matching 7% Private Equity with 7% Public Equity and FDIC
Financing to buy mortgage backed securities
Where Are We?
• Accounting Profession’s Impact
– Recent Accounting Requirements Have Lowered
Attractiveness of US Capital Markets
• SOX- Added Costs, Complexity, and Criminal Penalties to
management for errors, misstatements, or lack of
documentation
• FIN 48 – Now requires Public Companies (Private in the
future) to fully disclose all tax strategies, federal, state,
and international that reduce or shift tax.
• FASB 157 – Requires current appraisals or estimates of Fair
Value for balance sheet accounts (Mark To Market)
• FASB 141 and 142 require booking then challenging
goodwill or intangible value every year in anticipation of
future events
Where are We?
• Accounting Profession’s Impact
– 1938 Mark to Market suspended for banks
– 2007 Mark to Market reinstated for banks
– Impact is to price assets and collateral daily instead of valuing to
maturity
– Example: High rated MBS bonds
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Original issue par – collateral value 108%
Current default rate 6.5%
Practical value 85% to par
Market value 22%, caused by no buyers and illiquidity
– Consequence: $3 Trillion reduction in Tier 1 bank capital
– Consequence: Reduction of $36 Trillion in available lending
by banks
Where Are We?
• Accounting Profession’s Impact
– Mark to Market Status with SEC (FASB 157)
• Slightly modified to recognize performing illiquid assets
• Clarified to give auditors some guidance
• Not Repealed, and Still the Standard
– Status with Auditors
• Dangerous area of judgment
• Will take conservative/harsh position mostly
– Consequence to Markets
• Debate and Lack of Trust of Financial Reporting
• Wiggle Room for Mischief; therefore Caution on Investing
Overview Of Activities in DC
• Tax and Business Regulation
– Stimulus Passed
– Budget Proposed
– Trial Balloons and Pending Actions
– Planning Tips
Tax & Business Regulation
Aspects of Stimulus Package
•
Tax cuts for people under $250,000 AGI
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Reduces or eliminates income tax to larger groups of people
(redistribute tax burden)
Refunds payroll taxes to larger groups of people through
“refundable credits” to non-payers (welfare)
Targeted green energy credits were expanded
Strengthen workers rights to unemployment,
forced unionization, subsidized COBRA
payments for insurance, require union shops
for federal contracts (imposed unionization)
Tax & Business Regulation
Aspects of Stimulus Package
• Some business incentives do attempt to keep
the jobs alive
– Extension of bonus depreciation through 2009
• 50% first year expense of items bought in 2009
– Increased 179 deduction of $250,000, phase out begins at
purchases of $800,000 or more
– Extended Net Operating Loss (NOL) carry back from 2 years
to 3, 4 or 5 years for 2008 losses
– Targeted jobs credit of money for certain unemployed veterans
& disconnected youth 2009-2010
– Lower tax impact on Cancellation of Indebtedness (very
specific & limited)
Obama 2010 Budget
•
Revenue Provided for tax cuts by:
–
Increasing income tax on $250,000 earners
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Increased capital gains and dividend rates (20%)
Increased top rates to 36% and 39.6% on OI
Reducing value of itemized deductions to 28%
Without legislation, estate tax reverts to old rates
(55%) in 2011
Healthcare Provisions (Down Payment)
–
–
$634 Billion (half from reductions in payments to
providers)
“Must put the US on a clear path to cover all
Americans”
Obama’s 2010 Budget
•
Energy & Environment Provisions
–
Tax increases on oil & gas (therefore higher
prices)
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Elimination of $2.0 Trillion in existing tax deductions &
preferences to energy producers
Restrict Domestic Drilling
Reduce emissions by Cap and Trade
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Auction rights to pollute
Money to Treasury
Costs pass through to consumers
Obama’s 2010 Budget
•
Transportation
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$120 Billion next year for transportation needs
$800 Million on air traffic control upgrade
$1 Billion on high speed rail
Stimulus money provided for highways and
bridges to be improved (shovel ready projects)
Obama’s 2010 Budget
• Labor and Poverty
– Extended unemployment benefits, required retirement
plans, increase food stamp benefits, child nutrition
programs, energy bill subsidies, low income housing
increases
• Permanent Estate Tax structure (45%
rate, $3.5 Million lifetime exemption)
Trial Balloons
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Increasing Payroll taxes ($250,000
and above unlimited) Social Security,
Medicare
Expanded Power to seize private firms
Retroactive Control of compensation to
executives
Charging upper income beneficiaries a
higher premium for Medicare’s
prescription drug coverage.
Planning Tips
•
Restructure your affairs to protect your
income, assets & estate
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Review business structure to create maximum tax
efficiency
S Corps use of $ salary/$ distribution management
If C Corps rates decline & Personal rates go up – we
may revisit C Corp Planning & Use
Consider adding family members to the owner group to
take advantage of lower rates (watch out for Kiddie Tax)
Retirement plans beefed up to build assets, net of tax
Planning Tips
•
Restructure your affairs to protect
your income, assets & estate (cont.)
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Plan for categories of income
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Passive / active
Capital gains / capital losses
Dividend income
Ordinary rates
Planning Tips
•
Asset transfers for 2009-2010 may
reduce taxable estate
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In current economic environment, asset
values are likely at lifetime lows
Family limited partnerships continue to be
viable and may allow some control and
flexibility over transferred assets
Planning Tips
•
Creditor Protection before you have
Creditor problems
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Asset protection trusts
Entity & ownership structures (business & personal)
Off shore trusts (fully disclosed and legal)
Consult specialized counsel
Overview of the Future
• New World Order
– Financing Redefined
– This is a Reset, not a Recession cycle
– Be Proactive
– Corporate Positioning
Strategies in the New World Order - Financing
•
Some Banks have been weakened &
are raising costs dramatically
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Large banks must reduce size dramatically,
if weak
•
Cancel outstanding unfunded lines of credit
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Loan being renewed
Credit card lines
Increase collateral requirements
–
Personal guarantees, personal assets, business assets
Strategies in the New World Order - Financing
• Weakened Banks (Continued)
– Surviving Large Banks will take Market
Share
– Alternative lenders may be available
• Asset-based lenders
• Specialty lenders (Mezzanine, Equity leasing,
Factors)
– Community banks could be alternative
• Some weakened by real estate
• Others avoid risk
Be Proactive – Steps You Can Take
•
•
Connect with your banker – this is
more important than ever!
Must have good, timely financial
statements and may require upgrade
•
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Compilations  review
Review  Audit
Be Proactive – Steps You Can Take
• Don’t be caught short, plan ahead
– Loan matures in August  get ready NOW
– Get your financial house in order, be ready
– Have forecasts that are realistic  you will be held to
them & Covenants will mirror forecasts
• Have a plan B – if your bank can’t or
won’t perform – have a choice – BE READY!
• Anticipate – lower sales, lower margins,
volatile costs
This is a Reset, not a Recession Cycle
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Resize your business for survival
Cut out the Fat
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Inventory not moving, sell or dispose
Plants/equipment lines not producing, close down
Extra or under utilized personnel, let go or redeploy
Sales effort not producing or growing too slowly,
discontinue product line
Re-price vendor & supplier agreements, all types
Negotiate payment terms (Cash now = Discount %
off / Cash later = pay what you owe)
This is a Reset, not a Recession Cycle
•
Build Muscle
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Upgrade people
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Let go of weakness
Add Stars – available in the market place
Revisit how you do things- Upgrade
Process
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Use planning tools (legal, operating, financial
performance, monitoring) & technology to get more for less
Tap into your younger employees and talent from other
industries, and consult with outside advisors to challenge
your business plan & rethink or reinvent yourself
This is a Reset, not a Recession Cycle
•
Know that in a time of Great Crisis there
is:
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1 Part DANGER – to be confronted
1 Part OPPORTUNITY – to exploit
Great Opportunity for
seizing market share!
Corporate Positioning
• Public vs. Private- Must consider cost/benefit to
remaining public
– Pros (?)- Access to public capital (Not today?)
• Liquidity for shareholders (at vastly reduced prices)
• Market Valuation of Company’s Value Daily (Down?) Public
SEC Oversight, and SOX Criminal Penalties
– Cons- Public Reporting and Compliance Costs
• Governmental Mandates on Compensation (TBD)
• Transparency and Legal Vulnerability
– Consider Go-Private Strategies
– If Private- Exit may be Sale to Outsiders or
Management
Overview
• Investment Strategies
– History
– Rule #1
– Asset Allocation
– The Market
– Rules for investing in today’s Market
Investing in a Volatile Market
• If you were Brilliant, you bailed out in
October 2007
• Did you Reach your pain threshold and
bail at some point in the last 16 months
History
• Since October 2007, almost all asset categories
declined
• The S&P 500 Index declined by 37% during 2008 &
declined by 55% from October 2007 through March 9,
2009
• Bonds, normally considered a safe haven also declined
• 85% of stocks and 97% of stock mutual funds declined in
2008
• What was the number 1 question in October 2008?
– IS MY BANK GOING BROKE?
Investment Rule #1
• Know Thyself
– What is your True Risk Profile?
– If you were an aggressive investor one year ago, are
you now conservative?
– If you were aggressive and you stayed invested, you
potentially lost 55% through March 9th. On $100,000,
that amounts to $55,000
– If you were a moderate investor (60%/40%) you lost
$34,600
– The moderate investor did 20.4% better
Asset Allocation is still Important
• If you need the money within the next 3
years, be conservative
• Invest according to your correct risk profile
• Sometimes a 0% Return is good
The Market
• The Market has undergone downturns in
the past
– It has always recovered
– Usually recovers very quickly once the bottom
is established
• If you are not in the market now, consider
getting back in
• The Market usually recovers 6-9 Months in
advance of the general economic recovery
Rules for investing in Today’s Market
• Don’t place all your bets in one day
• Buy Companies that do well regardless of
the economy
• Buy Companies with strong Balance
Sheets
• Buy Companies that pay a dividend
• Buy Companies that have the cash flow to
pay their dividends
Rules for investing in Today’s Market
• Dollar Cost average into the market
• Be confident in the companies you buy so if the
stock goes down, you are willing to buy more.
• Consider placing sell stops
• It is critical to properly allocate your investments to
match your risk profile
• Properly diversify your investments
CONSIDER PROFESSIONAL MANAGEMENT
SUMMARY
• Future is cloudy
• Many moving pieces in banking, economy
& government
• Strategy for the future will focus on:
– Intrinsic Value of assets and businesses
– Company and Individual Survival in the midst
of change and disruption
– Our own Staying Power as investors and
business owners
Washington Representatives
Member Name
DC Phone
DC FAX
E Correspondence
Senator Saxby Chambliss
R-GA
202-224-3521
202-224-0103
http://chambliss.senate.gov/public/index.
cfm?
Senator Johnny Isakson
R-GA
202-224-3643
202-228-0724
http://isakson.senate.gov/contact.cfm
Representative Jack Kingston
R-01
202-225-5831
202-226-2269
http://kingston.house.gov/ContactForm/z
ipauth.htm
Representative Sanford D. Bishop, Jr.
D-02
202-225-3631
202-225-2203
http://bishop.house.gov/display.cfm?con
tent_id=229
Representative Lynn Westmoreland
R-03
202-225-5901
202-225-2515
http://www.house.gov/writerep/
Representative Hank Johnson
D-04
202-225-1605
202-226-0691
http://hankjohnson.house.gov/contact_h
ank_write.shtml
Representative John Lewis
D-05
202-225-3801
202-225-0351
http://www.house.gov/formjohnlewis/con
tact.html
Representative Tom Price
R-06
202-225-4501
202-225-4656
http://tomprice.house.gov/html/contact_f
orm_email.cfm
Representative John Linder
R-07
202-225-4272
202-225-4696
http://linder.house.gov/index.cfm?FuseA
ction=ContactJohn.ContactForm
Representative Jim Marshall
D-08
202-225-6531
202-225-3013
http://www.house.gov/writerep/
Representative Nathan Deal
R-09
202-225-5211
202-225-8272
http://www.house.gov/deal/contact.shtml
Representative Paul C. Broun
R-10
202-225-4101
202-226-0776
http://broun.house.gov/email.shtml
Representative Phil Gingrey
R-11
202-225-2931
202-225-2944
http://www.house.gov/formgingrey/IMA/i
ssue.htm
Representative John Barrow
D-12
202-225-2823
202-225-3377
https://forms.house.gov/barrow/webform
s/issue_subscribe.htm
Representative David Scott
D-13
202- 225-2939
202- 225-4628
http://davidscott.house.gov/Contact/
Article & Links
Inside Obama’s First Budget
www.npr.org/new/specials/2009/budget
US Seeks expanded Power to Seize Firms
http://www.msnbc.msn.com/id/29847658/
Treasury Releases Details on Program to Buy Troubled
Assets
http://www.financialstability.gov
Is Rand Still Relevant?
http://messageboards.aol.com/aol/en_us/articles.php?boar
dId=70219&articleId=61478&func=6&channel=Money+%26
+Finance&filterRead=false&filterHidden=true&filterUnhidde
n=false
Charts
www.shadowstats.com
Reaganomics vs. Obamanomics
http://online.wsj.com/article/SB123431484726570949.html
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