economics

April 30, 2010

OPEC’s Speculative Position

Filed under: Uncategorized — ktetaichinh @ 4:48 am
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By LIAM DENNING

Like comedy, correlation analysis rests on timing.

In its latest monthly report, the Organization of the Petroleum Exporting Countries put a chart front and center showing the price of oil tracking closely the level of open interest in Nymex oil contracts. The message was that speculators are driving oil prices higher.

The timing is interesting in several respects. The Commodity Futures Trading Commission wants to limit the size of positions taken by speculators in the oil futures market. The deadline for public comment on the draft regulations passed Monday.

[C1.SKYBOX2] TKkOil facility in Jubail, Saudia Arabia

Position limits are aimed at curbing speculative excesses, which some blame for the spike in oil prices in 2008 and the 65% increase in prices over the past 12 months. A particular target is the passive investors putting money into buy-and-hold oil futures funds.

These funds do create demand for futures. But the effect on oil spot prices is more subtle. Passive investors raise the price of futures relative to the spot price of oil. That’s a big reason why the oil futures curve has sloped upward for most of the past five years, corresponding with when investment in commodity funds really took off.

As energy economist Phil Verleger observes, that premium for oil delivered further out in the future can create an incentive for sellers of futures to buy physical oil, store it and sell it forward. The result is bigger inventories of oil, acting as a buffer against shortages arising from unexpected swings in oil supply or demand. Mr Verleger points to this winter’s cold snap, which should have caused heating-oil prices to spike but did not due to the security provided by high inventories.

[OPECHERD]

It’s worth remembering that after oil prices crashed in 1998, OPEC specifically targeted cutting global oil inventories to raise prices. As the past decade has demonstrated, it certainly helped in that regard.

This is why OPEC would love to see passive money forced out of the futures market. This would reduce the premium to spot prices and, hence, the incentive to store oil. Initially, the unwinding of these trades might cause oil prices to drop significantly as barrels flooded onto the market. Longer term, however, lower inventories would hand market power back to those producers controlling the world’s swing spare production capacity: Step forward OPEC.

In another interesting twist of timing, OPEC’s chart only begins in September 2009. As Deutsche Bank points out, extending the analysis back just to early 2008 would show a period during which net long positions on Nymex were falling yet crude was racing toward its all-time peak. It puts correlation between changes in net positions on Nymex and oil price moves at 17%—positive but hardly in lock step.

Even if OPEC’s timing is off, the sight of a cartel bemoaning market distortions really should raise a smile.

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Goldman Shows It Can Still Lobby Hard

By ELIZABETH WILLIAMSON And BRODY MULLINS

WASHINGTON—Goldman Sachs Group Inc. is lobbying hard to kill a provision in financial industry overhaul legislation requiring big banks to sell off their derivatives-trading businesses, and rival banks are welcoming the help, shrugging off attacks on the firm by lawmakers and securities regulators.

Goldman’s lobbying could put Democrats and the White House, which is lukewarm on the provision, in a difficult position. With congressional elections looming in November, lawmakers don’t want to appear supportive of Goldman or Wall Street.

But Goldman’s leadership is less concerned about politics than the provision itself, known as “section 106.” The nation’s five largest banks together earned $23 billion from derivatives trading in 2009, and are working separately and together to defeat the provision.

“I don’t think political Kabuki theatre is having any impact on the ability to get meetings and be heard” in Congress, says a person familiar with Goldman’s strategy. “The point of the matter from their standpoint is they can be heard…Nobody’s being treated like lepers.”

A non-Goldman banking executive agreed that working together to kill the provision was a “no-brainer.”

“I’m running across hordes of Goldman lobbyists working on this,” said a lobbyist working the bill on Capitol Hill.

[TODO]Kirsten Gillibrand

Late Wednesday some lawmakers predicted section 106 wouldn’t be included in the final legislation, although the final outcome isn’t certain. The Senate is expected to begin debate on the bill to overhaul regulation of financial derivatives Thursday.

The White House has been lukewarm on the section-106 provision. A source familiar with the White House’s deliberations on the matter said that the president pulled back other administration officials who wanted to work to drop it.

Goldman is focusing its efforts on congressional delegations from New York and New Jersey, whose region could lose significant tax revenue should the derivatives provision pass.

Key to bankers’ effort to defeat the provision, three people involved say, is lobbying by the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association, the Business Roundtable, and Financial Services Forum.

Goldman and other big banks have gotten the ear of New York Democratic Sen. Kirsten Gillibrand, who says she has “concerns” about a central provision in the legislation.

Wednesday, after a weekly luncheon for Senate Democrats, Ms. Gillibrand spoke with Agriculture Committee chair Sen. Blanche Lincoln (D, Ark.) to argue against the provision, which Ms. Lincoln authored.

“The senator reiterated her support for the bill, which she voted for, but also shared these concerns,” said Matt Canter, Mrs. Gillibrand’s spokesman.

“Our office has been hearing from many New York companies and consumer organizations about this legislation,” a spokesman for Ms. Gillibrand said Wednesday. “Senator Gillibrand does share the president’s concerns about whether this one provision could impact lending to small businesses.”

Ms. Gillibrand, also fighting for her seat in November, is attending a fund-raising event on Monday with many longtime Democratic backers who also work on Wall Street. An invitation to the event offers “a political discussion” with Sen. Chris Dodd (D., Conn.) and Ms. Gillibrand at a private Park Avenue residence Monday. Donors are encouraged to contribute and solicit up to $19,800 to achieve “host” status. The person familiar with Goldman’s strategy said the firm wouldn’t rule out sending a representative to the event.

Goldman Sachs has ramped up its presence its Washington lobbying operation in recent years and now ranks among the top corporate spenders on lobbyists. Last year, the company spent at least $2.8 million to influence Congress and the Obama administration.

That’s more than double the $1.2 million that Goldman spent on lobbying just four years ago, according to lobbying-expenditure records compiled by the nonpartisan Center for Responsive Politics.

Goldman’s Washington operations are run by Michael Paese, a former aide to House Financial Services Committee Chairman Barney Frank (D., Mass.). Mr. Paese oversees a team that includes 14 outside lobbying firms encompassing dozens of lobbyists. In the last few years, Goldman has beefed up its ranks of Democratic lobbyists, including former Rep. Richard Gephardt, a Missouri Democrat who once was one of the top Democrats in the U.S. House.

The firm also employs a number of senior Republican lobbyists, including Ken Duberstein, a former White House chief of staff under former President Ronald Reagan.

Goldman is also a big source of campaign donations for both Democrats and Republicans. Since 1989, Goldman’s political action committee and employees have been the No. 1 corporate source of campaign donations to the Democratic Party with a total of $20.3 million, according to the Center for Responsive Politics. President Obama alone received about $1 million from Goldman employees for his 2008 presidential campaign.

The company and employees are also the fourth-largest source of political donations to Republicans with $11 million.

The SEC’s lawsuit has damaged some of the relationships Goldman has nurtured, including with Ms. Lincoln, chief mover behind derivatives provision.

Ms. Lincoln, who is facing a stiff re-election campaign from a Democratic primary challenger, proposed the derivatives legislation on April 9, the same day that the SEC announced its lawsuits against Goldman.

Just a few weeks ago, Mrs. Lincoln was in discussions with Goldman officials about hosting a fund raising in New York with company employees. She has since said she would no longer ask for campaign donations from Goldman or its employees.

Last week, Mrs. Lincoln overcame industry opposition and won enough votes in the Agriculture Committee to approve the new derivatives rules. This week, she became the first Democratic senator to give back the donations she has received from Goldman’s PAC and employees. Mrs. Lincoln said she would donate the $7,500 she accepted from Goldman and give it to the Arkansas Hunger Relief Alliance. In a press release, Mrs. Lincoln called on other senators to follow her lead.

Write to Elizabeth Williamson at elizabeth.williamson@wsj.com and Brody Mullins at brody.mullins@wsj.com

For Employees, Concern and Shots

Filed under: Uncategorized — ktetaichinh @ 4:45 am
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By KATE KELLY

Goldman Sachs Group Inc.’s thrashing in Washington left many employees angry, some discouraged and others worried their email and other internal documents could be snatched by regulators and investigators.

“Let me remind you that we should anticipate continued external focus on Goldman Sachs for the foreseeable future,” Goldman Chairman and Chief Executive Lloyd Blankfein said in a voice-mail message to employees after what he described as a “rigorous” hearing by the Senate Permanent Subcommittee on Investigations on Tuesday.

“Please do not let this distract you from your daily responsibilities,” he said.

Bloomberg NewsGoldman Sachs’s employees paid close attention to the testimony of firm officials, some from local watering holes. Here, company headquarters.

EMPLOYEES

EMPLOYEES

Some employees of the New York company told each other how unfair it seems to them that Goldman is being singled out for betting against the housing market in 2007 as it was pitching mortgage-backed bonds to certain clients. Many other Wall Street firms did the same thing but escaped the relentless, nearly 11-hour pummeling Goldman got.

According to employees, Goldman managers have urged them to keep a low profile, think carefully about the restaurants and parties they attend and watch how they behave in public. Some employees are even reluctant even to go out to lunch with co-workers for fear of being overheard talking about Goldman, said one person familiar with the matter.

On Wednesday, Goldman employees still were sizing up the performance of Mr. Blankfein, accused trader Fabrice Tourre and other current and former executives who testified before the Senate panel.

Some people at the firm said Mr. Blankfein seemed insufficiently apologetic, focusing too much on Goldman’s role as a trading operation and not enough as a trusted underwriter securities sold to clients.

A Goldman spokesman declined to comment.

One particularly shocking disclosure to Goldman’s current mortgage traders, according to one of them, came in the employee performance reviews that were unearthed by the Senate committee. Some traders wondered aloud if their own internal communications would remain private.

Traders, including those in the fifth-floor mortgage division of Goldman’s headquarters at 200 West Street in lower Manhattan, have been reminded by their bosses to stay focused and keep doing business as usual despite all the distractions, according to people who heard the remarks.

Before Tuesday’s hearing, Jeffrey Verschleiser, one of Goldman’s mortgage-division heads, spent days poring through email and other documents to help executives prepare for their testimony, said people familiar with the matter. Other employees in the group assisted.

As the hearing dragged on, employees and alumni fired text messages, emails and instant messages back and forth about the group’s performance. One Goldman employee said he was invited to tag along with a group of traders who said they were heading to a bar to watch Mr. Blankfein’s testimony.

He said they joked that they planned to down a shot of liquor every time the CEO used the word “synthetic,” a reference to the type of collateralized-debt obligation for which Goldman has been accused of fraud by the Securities and Exchange Commission.

Goldman denies any wrongdoing.

—Carolyn Cui and Joe Bel Bruno contributed to this article.

The Tourre Exception? Release of His Emails Led to Pointed Questions, But Not Many Answers

Filed under: Uncategorized — ktetaichinh @ 4:43 am
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By MICHAEL CORKERY

There was a lot to digest from the 10-hour-plus grilling endured by Goldman Sachs Group executives Tuesday, and the media’s coverage was fairly encyclopedic.

But one line of questioning that doesn’t seem to capture much attention is Sen. Tom Coburn’s probing into why Goldman publicly released the emails of Goldman trader Fabrice “Fab” Tourre.

The Oklahoma Republican raised the issue early in the hearing, asking the Goldman executive how it made him feel that his employer had released his emails. Mr. Tourre refrained from any criticism of Goldman action, but he seemed rattled by the question.

The senator went on to point out that Goldman not only provided reporters with Mr. Tourre’s emails, but also with English-language translations of the documents. (Mr. Tourre’s first language is French.)

Mr. Coburn never accused Goldman of seeking to set up Mr. Tourre as a scapegoat, but the line of questioning seemed to suggest Mr. Coburn thought Goldman may have been looking to part ways legally with its employee. (Goldman Sachs has said Mr. Touree did nothing improper.)

Deal Journal spoke with a couple of legal experts on Monday, before the hearing, who said it was in Goldman’s interest to stick with Mr. Tourre. First, the investment bank has stated publicly that it stands behind Mr. Tourre and it would be awkward to reverse course. Second, Goldman may need Mr. Tourre as much as he needs Goldman. Left to defend himself, Mr. Tourre could turn on his former firm and, potentially, disclose embarrassing information about it, the lawyers said.

And of course, Mr. Coburn could simply have been trying to portray Goldman as heartless and unseemly in an effort to discredit the investment bank’s claims of having high ethical standards. Indeed, later in the hearing Mr. Coburn asked Goldman finance chief David Viniar whether he thought it was “unethical” to release Mr. Tourre’s emails. Mr. Viniar said he thought there was nothing unethical about it, but that he wasn’t involved in the decision to release them.

Mr. Coburn later asked CEO Lloyd Blankfein about the email release. Mr. Blankfein also said he wasn’t directly involved in releasing the emails.

Mr. Coburn pressed both executives, asking why Goldman didn’t release emails from other employees. Neither seemed to have a ready answer.

In a voicemail to Goldman employees shortly after the SEC charges were released, Mr. Blankfein distilled the case to its essentials: “The core of the SEC’s case is the allegation that one employee misled two professional investors by failing to disclose the role of another market participant in a transaction.”

Regardless, Mr. Coburn’s questioning seemed only to make Mr. Tourre more sympathetic in the court of public opinion.

As one commentator on the Deal Journal Web site wrote about the Tuesday hearings: “Free Fab.”

Swiss Seek Tougher Taxes for Bankers Move Comes as Government Pursues Support for a Bill That Would Allow Bern to Settle UBS Case

ZURICH—The Swiss government proposed tougher taxes on bank bonuses in order to shore up parliamentary support for a bill that would allow Bern to meet its obligations in last year’s settlement of a tax case with the U.S. government.

One proposal would compel companies to classify bonuses as a distribution of profits, rather than as personnel expenses. That way, the company would pay taxes on bonuses even if it posted a loss.

Employees receiving the bonuses wouldn’t, however, see any change to the taxes they pay on them, in contrast to the one-time tax on bonuses levied recently in the U.K.

In February, the Swiss government presented an ad hoc law that would lay the legal groundwork for it to hand over to the IRS the names of thousands of U.S. taxpayers who had secret accounts with UBS. Parliament is expected to vote on the bill in June, so that Bern can hand over the names by an August deadline.

That law has been deadlocked in parliament after some Swiss parties demanded the government restrain banker bonuses and strengthen capital rules for UBS and Credit Suisse Group as a solution to the “too big to fail” dilemma.

The debate over bonuses in Switzerland heated up again after UBS paid its top investment bankers huge bonuses for 2009 even as the bank posted a large loss. Soon after, Credit Suisse Chief Executive Brady Dougan cashed in options valued at more than 70 million Swiss francs ($64.4 million).

Switzerland moved more quickly than many countries in requiring companies to subject bonuses to claw-back provisions and to pay out some variable compensation over a number of years, but there is popular pressure to do more. The bonus measures presented Wednesday also include a provision to tax employee stock options at the time they are exercised, instead of when granted. The government didn’t indicate how much money its proposals could raise.

The Problem With Being a Trendsetter Copycat Fashions Move Faster Than Ever, Making It Harder to Protect Original Ideas; Smaller Designers Bear the Brunt

Filed under: Uncategorized — ktetaichinh @ 4:38 am
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When it comes to fashion, no success is sacred. Last year, the Shashi bracelet, a bauble of macramé and rhinestones, was on Lindsay Lohan’s wrist and sold for about $60 at Henri Bendel and Intermix. Now, American Eagle Outfitters Inc. is selling similar-looking bracelets priced at $12.50.

“It’s not fair,” says jewelry designer Yuvi Alpert, who, along with his business partner, Danna Kobo, makes and sells the Shashi bracelet. While the design continues to sell well, the Shashi bracelets’ retailers have complained about less expensive look-alikes on the Web and in stores, Mr. Alpert says. “I can’t know of how many people didn’t buy Shashi bracelets because of it,” he says. American Eagle Outfitters declined to comment.

Can You Spot the Knockoff?

When it comes to fashion, no success is sacred. Emerging designers are especially prone to cheaper knockoffs. Here is a side-by-side comparison of the originals and their knockoffs.

Emerging designers like Mr. Alpert and Ms. Kobo are tiny fish in a global fashion food chain that seeks an endless supply of new trends. The fashion world is ravenous for new jewelry, accessories and clothes to fill the shelves of retailers and Web sites, many of which seek to offer fresh inventory as often as every two weeks. Often, existing designs become the inspiration for new, mass-produced pieces.

Small designers face a particularly large burden; often, they lack deep pockets to chase down versions they find similar, and their brands are so little-known that customers often aren’t aware they’re not buying an original design.

Scarf designer Elle Sakellis says she wondered why the trendy retailer Kitson didn’t reorder her $190 Otrera “evil eye” scarves. Ms. Sakellis created the scarves after seeing a wall of luck totems meant to protect against the “evil eye” in a store in Mykonos, Greece. Kitson and Intermix bought them, and they sold well, she and the stores agree. But soon, a scarf with a similar motif, made by a company called Raj Imports Inc., showed up at Kitson for about $30. Then polyester versions appeared on Web sites for as little as $10.

“Everyone always says that imitation is the best form of flattery. But it happened too soon,” she says. “I’m not Louis Vuitton. It’s not like when someone buys a Raj scarf that they know it’s an Otrera knockoff.”

Raj Kapoor, owner of Raj Imports, says he can’t remember what inspired his evil-eye-themed scarf. “We do get inspiration from some products. But it’s altered enough to have its own identity,” he says. He said the evil-eye scarf was “insignificant. …We’ve probably designed a few hundred items since then.”

Fraser Ross, owner of Kitson, says he dropped the Otrera scarf for the cheaper version. “It’s like, we carried the higher price,” he says, “and now we’re carrying the diffusion line.”

Designers must be fleet, he says, at creating new, cheaper versions of their own creations. “I’m always telling these designers, ‘Knock yourself off. They’re knocking you off, so do it yourself.’ ”

Store chains and manufacturers are constantly searching for new ideas that can be mass-produced. The Web sites, “look-book” catalogs, and trade shows where emerging designers show their wares to the press and retail buyers can become sources of ideas.

“There are buyers who buy [designs to copy] for a living,” says Michael Heimbold, a partner with the law firm of Steptoe & Johnson whose clients are often the defendants in copycat lawsuits. “They go to a show and say, ‘this is cool, let’s make one.’ ” Mr. Heimbold isn’t familiar with the Shashi bracelets or the scarves.

Tracing the originator of a design can be challenging, because designers are always looking to other sources for inspiration, from ancient symbols to the recent “military” trend. But fashion creators make motifs their own through design choices. What makes the “evil eye” scarf special, for instance, is not the fact it has the symbol but the placement and size of the symbol, the border, and the choices of fabric, color, and details such as beads hanging off the corners.

The mass versions can arrive on the market with astonishing speed. When shoe designer Tiffany Tuttle discovered one of her designs selling under a rival label, she says, “Their shoe actually hit the stores before mine did.”

Trendsetting stores that carry independent designers’ work—stores like Kitson and Fred Segal in Los Angeles, New York City-based Intermix, and Colette in Paris—also help spread ideas. Their celebrity clients feed new trends to a hungry global audience.

The Shashi bracelet became part of the trend machine when Ms. Kobo created the Shashi bracelet. Her partner, Mr. Alpert, initially dissed the pieces as too “girly.” But after the bracelet was introduced at Henri Bendel and Intermix last May, influential stars including Ms. Lohan and Katy Perry were soon wearing them.

By December, Mr. Alpert and Ms. Kobo had sold 10,000 of the bracelets. The Shashi helped fund the young designers’ development of their more expensive Ruby Kobo jewelry line, for which they won a 2010 Council of Fashion Designers of America “Incubator” award.

By February, the bracelets’ retailers began complaining about less expensive versions, Mr. Alpert says. The American Eagle Outfitters bracelet come in a variety of colors like the Shashi’s, and it’s hard to tell the difference between them, except that the American Eagle bracelet’s string seems weaker and coarser.

Mr. Alpert and Ms. Kobo have applied for a patent on the Shashi and say they had an attorney send cease-and-desist letters to American Eagle Outfitters and about a half-dozen Web sites. But it is costly—and seems impossible—to slow the flood of imitators, they say. This week, Mr. Alpert says, the Trendy Room boutique in Port Orange, Fla., cancelled an order of Shashi bracelets, saying cheaper versions are available. The Trendy Room co-owner responsible for the decision couldn’t be reached for comment.

There’s a bill bouncing around Congress that would allow clothing designers to copyright their creations. But critics argue it would benefit only big brands that have the resources to apply for and protect their copyrights, trademarks and patents.

The most effective response to the current environment, according to some small designers, is a steady stream of new material. Mr. Alpert says he and his partner have stockpiled more than a year’s worth of new Shashi designs.

Ms. Sakellis’s latest look is a hamsa hand scarf, featuring the Middle Eastern luck charm. “The hamsa scarf will get knocked off, too,” she says, “I just know it.

The Math Behind New Baggage Fee

Filed under: Uncategorized — ktetaichinh @ 4:37 am
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One reason some airlines are eager to charge fees for carry-on bags: There’s no room at the (overhead) bin.

To avoid checked-baggage fees, more travelers are carrying more bags onboard with them. At the same time, airlines have packed flights with more passengers, on average. That’s led to a real-estate crisis in the cabins—not enough space in overhead bins to accommodate all customers. So more flights are delayed when customers struggle to cram bags into full bins and airline workers have to send bags that don’t fit down to cargo compartments.

Mr. Baldanza says Spirit will be able to trim five minutes off each flight—20 hours of airplane time per day. That’s like having two extra $40 million planes in your fleet, and would let the airline add more flights without having to buy more planes. Today, without carry-on fees, Spirit is often gate-checking as many as 20 to 30 bags per flight that don’t fit in overhead bins.

Part of the bin shortage is of Spirit’s creation: The airline squeezes more seats onto its planes than competitors. Spirit has 145 seats on its Airbus A319s; US Airways Group Inc., by comparison, has 124. And when “properly packed,” Mr. Baldanza says, the A319 has room for 130 bags. If each passenger puts only one bag in the bin, and every passenger packs the bin in the most efficient manner, then the last 15 people to board a full flight still are going to find bins completely full.

Airlines and travelers alike say people are bringing more stuff onboard planes. AMR Corp.’s American Airlines was averaging 1.1 to 1.2 checked bags per passenger before it instituted baggage fees in 2008. It now averages about 1.0 bags or less, according to spokesman Tim Smith.

The Power of Lucky Charms New Research Suggests How They Really Make Us Perform Better

Filed under: Uncategorized — ktetaichinh @ 4:36 am
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Believing in their own good fortune can help people only in situations where they can affect the outcome. It can’t, say, help people watching a horse race they have bet on.

..

“The idea that wearing a red shirt, saying some sort of incantation or prayer or carrying a lucky charm will bring good luck is very appealing because it gives people the illusion that they have some degree of control over future events in their lives,” says Peter Thall, a biostatistician at the University of Texas. “The painful truth is that we have little or no control over the most important events in our lives.”

[LUCK-jumble] Jason SchneiderBetter Memory: with their ‘lucky charms’ on hand performed significantly better than those separated from their charms. Moreover, participants with their lucky charms reported that they felt 30% more capable than participants without the charms.

Mathematicians have demonstrated the role that randomness plays in life—”there are no long-term successful craps players,” says Harvey Mudd College mathematician Arthur Benjamin.

But don’t tell that to the people who believe they can shape their own luck. They’re well represented in games of chance, such as lotteries and casinos, and will be out in force at Saturday’s Kentucky Derby, in which a favorite is named, what else, Lookin At Lucky.

Investors also are prone to superstitions. For example, during an eclipse, which many cultures view as a bad omen, major U.S. stock-market indexes typically fall, according to research conducted by Gabriele Lepori, assistant professor of finance at Copenhagen Business School in Denmark. This effect persists even after controlling for economic news and long-term trends. And the indexes usually bounce back soon afterward.

Financing Programs Aim to Help Franchisees With Bank Loans Scarce, Companies Create Lending Arms to Assist Business Owners—but Terms Are Sometimes Strict

Filed under: Uncategorized — ktetaichinh @ 4:32 am
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Arthur Romanov and Irina Salgan opened their sixth Edible Arrangements fruit-basket shop recently to take advantage of low real-estate prices and easy-to-negotiate contractor bids.

QuiznosQuiznos store operators Steve and Valerie Mallard, left, in their Denver store with John Fitchett, head of a new Quiznos financing program.

SBFRAN

SBFRAN

Despite good credit and a strong track record, the longtime franchise owners weren’t able to secure traditional bank financing, as they had for past expansions. Instead, Mr. Romanov and Ms. Salgan used a lease-to-buy program offered by Edible Arrangements International Inc.’s year-and-half-old financing arm, Farid Capital.

As bank lending continues to be sparse, a number of corporate franchisers are providing financing arrangements and other aid to potential franchisees. Though business owners say they’re grateful for the assistance, many of the programs do come with strict terms.

Farid Capital’s lease-to-buy program requires most franchisees to contribute about 30% of the costs. But Mr. Romanov says he wouldn’t have been able to afford the $130,000 in start-up expenses without the $60,000 he requested from Farid. “We need all the help we can get,” he says.

The moves by franchisers to provide more aid come as many former top lenders, including CIT, Comerica and Banco Popular have severely curtailed their lending, says Ronald A. Feldman, chief executive at Siegel Financial Group, a business consulting firm in Conshohocken, Pa., that specializes in business acquisitions and franchise financing. What we’re seeing is that some franchises will now “provide credit enhancement to banks, such as partial guarantees on the loan,” Mr. Feldman says.

Others are helping candidates become more viable before heading into the bank. Dunkin’ Donuts has reduced some of the royalty fees the franchisee would pay, so long as the shop opens in targeted markets. Because franchisees pay those fees on the sales they make, they can show the lender “greater profitability and ability to repay with reduced expenses,” explains Grant Benson, vice president of franchising for Dunkin’ Brands Inc.

At the International Franchise Association, a trade group in Washington, spokeswoman Alisa Harrison says more franchises are brainstorming strategies, such as developing internal financing divisions. “Members have told us some of their highest-quality prospects are still having a tough time getting financing,” she says.

Banks are expected to lend $6.7 billion to franchises in 2010, an amount that is projected to fall some $3.4 billion short of demand, according to a study released in December by the IFA and FRANdata, a franchise research firm.

Not all franchises are in need of a creative work-around system, as the severity of the credit crunch has varied from franchise to franchise. Prior to the recession, franchisees often found start-up capital at lenders that were partners with the franchiser. But lenders are now more wary of those franchises that carry high loss and delinquency rates.

Before the recession, too-lenient franchisers sometimes funneled weak candidates through the start-up process, says Bob Coleman, who collects data on loans backed by the Small Business Administration. According to a preliminary report compiled on loans from the government’s last fiscal year, some franchises had loss rates as high as 27%. As a result, “banks today look at the performance of the franchiser,” he says.

Corporate franchisers lending to potential franchisees isn’t new. Sylvan Learning Inc., a tutoring company, and Firehouse Restaurant Group Inc., a Midwest and Southwest chain that owns Firehouse Subs, established lending arms years ago.

But some of the newer lending models don’t follow the traditional mold. Quiznos, privately owned by QIP Holder LLC, created a lending division earlier this year that allows parties to buy a store with only a $5,000 down payment. Participants don’t pay the franchise back in predetermined amounts. Rather, owners must funnel store profits—80% each month—back to the company until the loan is repaid, which is expected to take two to five years. Initial losses are tacked on to the loan.

John Fitchett, the program’s president, says the company uses different criteria than banks, rating applicants based on experience and personality first, while other factors such as financial history and credit scores are secondary.

“We’re seeking out [candidates] who have a restaurant background, and the savvy to run it,” says Mr. Fitchett.

Until the loan is paid off, the store owners are actually Quiznos employees and the store is legally owned by Quiznos. If the store doesn’t turn a profit in 12 months, Quiznos reserves the right to change ownership, Mr. Fitchett says.

Eight stores have opened and Mr. Fitchett says he expects about 200 to follow by the end of this year. The program is open to new owners or existing ones who want to expand.

Steve and Valerie Mallard, one of the first accepted applicants, opened their Quiznos store in Denver last month and have hired 15 employees. Mr. Mallard, who has a history of working with Subway and Ruby Tuesday restaurants, says he wouldn’t have been able to finance such a store on his own.

Despite being the “guinea pigs,” he explains, “it’s nice to have a low-risk program in this economy.”

How to Tackle Government Labor Costs Pay freezes, two-tier wages, pension reform—nothing should be off the table.

Filed under: Uncategorized — ktetaichinh @ 4:31 am
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Years ago, there was an informal “social contract”—public employees generally received lower wages than private-sector workers, and in return they got earlier retirement and generous pensions, allowing them to catch up. That arrangement has long since gone by the boards. The result is a remarkable trend. State and local government employees for years have received pay increases in excess of inflation, and BLS figures show they now have wages that are 34% higher on average than in the private sector.

Partly responsible for these trends is unionization, which the Department of Labor reports has jumped to 37.4% of the public sector in 2009 from 24.1% in 1973 (unionization in the private sector declined to 7.2% from 25.4% in the same time period). The result is often pay levels higher than needed to attract qualified employees. The average quit rate among state and local employees is a third of that in the private sector.

Public employees also have a 70% advantage in benefits. Health insurance, retirement benefits, life insurance and paid sick leave are not only much more available to them, but much richer. In 2009, BLS figures indicate that the costs of health insurance were 2.18 times as much for state and local employees as for private-sector workers.

In the private sector, defined-benefit pensions have declined over the years in favor of defined-contribution plans such as the 401(k). In 2009, defined-benefit plans were available to only 21% of private-sector workers—but to 84% of municipal employees, according to the Cato Institute. And public-sector defined-benefit plans paid retirees about twice as much as those in the private sector.

Public-sector retirement costs also are high because many can retire at age 55 after 30 years of employment with pensions equal to 60% or more of final salary, which is often jacked up by lots of overtime in final working years. In some states, employees can “double dip” by retiring early and then resuming their previous jobs or taking other government positions. So they get salaries and pensions at the same time.

With slow economic growth, limited income expansion and high unemployment likely in future years, a taxpayer revolt may be brewing. Americans still want basic municipal services like police and fire protection, good schools for their kids, clean streets and garbage collection, but at lower costs and budgets that don’t kick the deficit can down the road.

State and local government labor costs can be reduced in an orderly way. Following in the footsteps of bankrupt GM, two-tier wage structures would allow existing employees to continue at current salaries, but pay new hires much lower wages that are nevertheless adequate to attract and retain qualified people. And the new people can be enrolled in defined-contribution pension plans that require employee contributions instead of defined-benefit plans. Retirement ages can be increased.

While waiting for existing employees to retire, their pay can be frozen. Pension formulas can be reformed to avoid the system being gamed by heavy overtime in final years on the job, and double-dipping can be eliminated. Retirees in the public sector can be required, as they are in the private sector, to pay meaningful shares of their health-care costs.

These changes would be profound and shake up the high-paid, secure image of state and local government jobs. But essential services would still be delivered, only much more cost effectively. Push has come to shove.

Mr. Shilling, an economic consultant and investment adviser, is president of A. Gary Shilling & Co.

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