- change ups
Death by banker
It’s a page-turning “who done it” murder mystery: We hear about the death of a small business, then a large local company and finally multinational corporations, one after the other after the other.
But where there is a death is there necessarily a murder? Of course, this isn’t true. There are many natural causes for the death of a business, from tough competition to partner embezzlement, from inept successors to no successors. But if there were a CSI financial forensics investigation, it would be clearly determined that more and more businesses are dying at the hands of a serial killer.
Over the quarter century I have practiced mergers and acquisitions, I have witnessed the bizarre love/hate relationship between businesses and bankers. Especially dysfunctional is the banker relationship with manufacturing, most specifically with auto industry parts suppliers. Throughout my career, these companies, mostly Tier One and Tier Two suppliers, have been courted by bankers, loved by bankers and eventually jilted by bankers. Until recently, this happened in reasonably predictable cycles. One bank would suddenly lose its fondness for auto suppliers (“a recent internal audit indicates our loan portfolio is too deep in that space”) while another bank would be professing its newfound attraction (“we are aggressively pursuing companies in that space”). Thankfully, the “space” between one bank and the other was generally bridged without severe damage to the business.
Welcome to the world of bank failures. Welcome to business financing 2009. The players are the same but the rules have changed, and the result is murder. No longer is a jilted business able to move from one bank to the other with reasonable fluidity. What was a painfully frustrating exercise has become, with greater regularity, a painful death. Banks are now wholesale offloading targeted customers, leaving them with little prospect of securing a new lender. While in the natural ebbs and tides of business and financing this has always occurred at manageable levels, now lender psychosis has turned once mercenary bankers into business killers.
Who done it? Few reporters put the murder weapon — a called loan or a frozen credit line — in the hands of bankers. All too many of these companies are not naturally dying and may not even have a cold, but they are put on life support because of a fractional, out-of-formula lending ratio, one late payment in a decade of borrower fidelity, or “just because” at the banker’s whim.
According to Neil Irwin, in a Washington Post article: “At the core of the financial crisis is a simple problem: Banks don't fully trust each other. So they hoard cash and only lend to each other if the borrowing bank pays enough to justify the risk.” Frankly, the problem goes much deeper, with banks and governments playing God with the markets. According to Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, "The interbank markets are a fundamental part of the plumbing of the financial world.” Well, the plumbing is stopped up and our precious manufacturing base is suffering the most. While we wait for the so called “Stimulus Bill” to act as financial Drano, paranoid self-serving bankers are quietly killing off their true source of wealth: businesses.
"This contraction in availability and rise of the cost of credit have worsened … for corporate and business borrowers,” claims Lockhart. "We've heard anecdotes confirming this from contacts throughout the Southeast. In short, Main Street is being affected." It is economics 101, Mr. Lockhart. One can only hope that predatory bankers soon rediscover the symbiotic relationship, however dysfunctional, between them and business. But in the mean time, it’s “Business Owners Beware the Hand that Feeds You.”
Jim Hines is the president of Company Connections, a middle market merger and acquisition firm based in Ada.