A Lifeline to a Struggling U.S. Economy

 

On October 3, 2008, President Bush signed into law a $700 billion financial rescue package to shore up the nation's financial system and thaw frozen credit markets that had begun to affect the everyday operations of businesses large and small. Here's a detailed look at what some business owners are saying about the impact of the financial crisis, what's in the rescue package, and next steps for strengthening the U.S. capital markets.

 

 

"Over the past eight years, my partners and I have built a very successful business helping car dealers implement programs to provide replacement tires for their consumers. …The current turmoil in the credit markets has caused both commercial banks and private equity groups to significantly tighten availability and increase the cost of capital."
-Peter Water, Dealer Tire LLC, Cleveland, OH

 

"Our success and ability to provide employment, income generation, and tax revenues are connected to credit markets and the economic and social health of our city, our region, the nation, and the global economy. A failure to address the crisis in the credit markets by the U.S. Congress will represent a failure of responsible governance and threatens the economic and social well-being of Main Street."
-Stephen Horblitt,
Creative Associates International, Inc., Washington, DC

 

"Already, expenditures have been frozen on purchases of capital equipment and employee bonuses. A hiring freeze is also now in place … management's top priority is to come up with contingency planning to cut expenses because of economic uncertainty."
-A. Gregory Bachmann, Dymax Corporation, Torrington, CT
 
"We make hardwood floors and employ about 1,200 people. Our customers are wholesale distributors who depend on bank credit to finance their operations. We had a very good customer in California close their doors last Christmas after 62 years of business because they had all their bank lines called on three days' notice. They represented 5% of our total business, and we've never recovered that lost business. We have other customers in the same boat. Our business is down 24%, and we will have to trim staff."
-Don Finkell, Anderson Floors, Clinton, SC

 

"Do I agree as a taxpayer of the bailout? No. However, as an executive, I know without the bailout this country is headed in one direction-down. [Congress needs to] resolve the issues at hand, put strict requirements in place, and get the country moving forward."
-Garnett Hall, VEMAC, El Paso, TX

 

"We currently have several opportunities to expand a division of our company, including opening new offices and strategic acquisitions of competitors. In both cases, we would be aggressively looking to hire additional employees. Unfortunately, we have to slow down our growth plans because of the 'drying up' of bank capital markets."
-Rob Alley, E. Roberts Alley & Associates, Inc., Nashville, TN

 

"Our company has started a new and very exciting business unit that is showing excellent prospects. We need to hire additional employees and will potentially need to carry additional accounts receivables. We went to our bank to arrange a revolving line of credit secured by our receivables. We have excellent credit, are profitable and cash positive (even in this economic environment), and carry cash balances with this bank of more than $1 million at any one time. We were looking for an open line of less than $500,000 and were turned down."
-Dan Rice, PrintingForLess.com, Livingston, MT

 

 "Our business is very seasonal. As a result, we rely on a revolving line of credit for inventory purchases and operational expenses during nonpeak sales periods. Without the line, we would be unable to meet payroll and expense obligations in certain months of the year. If access to the line of credit is limited or not available at all, we would likely cease to exist. The current situation is a concern like no other I have experienced in my 20-year career. Congress must ensure enough is done now to stabilize the credit markets."
-Scott Kinsey, Kindermusik International, Inc., Greensboro, NC

 

 

 

 

Q: Is this a bailout?
A: No. This is a long-term rescue plan to stabilize the financial system and get money flowing to borrowers and to businesses so that they can expand, increase inventory, and hire new workers. This package is as important to Main Street as it is to Wall Street.

 

Q: How will small businesses benefit?
A: Besides helping to unfreeze the credit market, the legislation includes $85 billion in tax benefits for businesses. Among the provisions is a one-year patch to the (AMT) alternative minimum tax; extension of the R&D tax credit and deductions for state and local sales taxes; and incentives for the development of solar, wind, and other forms of renewable energy. In addition, the Federal Deposit Insurance Corporation will provide unlimited deposit insurance for non-interest-bearing accounts, which are widely used by small businesses for payroll and other purposes.

 

Small banks that have been hurt by the mortgage crisis will be able to deduct losses from investments in Fannie Mae and Freddie Mac purchased before April 1, 2008. These banks also can elect to sell up to $125 billion in preferred shares of stock to the federal government as a way to access capital.

 

Q: Do Wall Street executives and their companies get off clean?
A: No. Executives at banks that sell stocks or tainted assets to Treasury would face restrictions on compensation, including golden parachutes, severance packages, bonuses, and incentives that encourage unnecessary and excessive risks. The restrictions vary according to the degree of financial distress and whether the financial institution sells toxic assets or accepts investment from the government. The legislation marks the first time that the federal government has imposed restrictions on executive compensation.

 

In addition, all companies that participate in Treasury's program will be allowed to deduct only up to $500,000 of compensation paid to their top five senior executives.

 

Q: Are taxpayers on the hook for $700 million?
A: Maybe not. The legislation authorizes Treasury to access a total of $700 billion to buy either an equity stake in banks or their troubled assets originated or issued prior to March 14, 2008, including mortgage-backed securities. Subsequently, Treasury announced that it would use the first $125 billion to purchase an equity stake in nine of the nation's largest banks and another $125 billion in equity to be spread out over 8,500 smaller banks. While $700 billion is authorized for investment, the Congressional Budget Office (CBO) estimates that the actual costs will be substantially less.

 

Q: Is it true that taxpayers could actually come out ahead?
A: Yes. The government will hold troubled assets until the market improves and then slowly sell them back into the market. If, after five years, the government doesn't recoup its investments, then a fee will be assessed on financial institutions to make up for the losses. However, the government expects the value of the assets to increase, which would lead to a windfall for taxpayers. In the case of capital investments in banks, Treasury will receive preferred shares of bank stocks that pay 5% per year in dividends for up to five years and 9% after that. Says Treasury Secretary Henry Paulson of the stock purchase plan, "This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything."

 

Q: How will this help the housing market?
A: As the owner of mortgages and mortgage-backed securities, the government has the authority to facilitate loan modifications, such as a reduced principal or reduced interest rate and more time to pay back the mortgage. People who have lost their homes to foreclosure or who have restructured their mortgage loans also get some tax relief. The bill extends through 2012 a provision that allows taxpayers to exclude up to $2 million in forgiven or canceled mortgage debt from being taxed as gross income.

 

 

 

 

The economic rescue package was just a first step toward making the U.S. capital markets more stable, accessible, and competitive. Now begins the process of getting to the bottom of what went wrong, learning from mistakes, holding people accountable, and modernizing, and, where necessary, strengthening the regulatory underpinnings of our capital markets.

 

The U.S. Chamber, through its Center for Capital Markets Competitiveness (CCMC), will work to achieve the following in the months and years ahead:

 

Monitor implementation of the financial rescue plan. Confidence in the markets continued to tumble even after passage of the financial rescue plan, in part, because investors were unsure about how the government would implement the $700 billion plan. The Chamber will closely monitor the implementation of the plan and consult with government leaders throughout the process to ensure that taxpayers get the best return on their investments.

 

Advocate for smarter regulation. In the past couple of years, no fewer than four independent, blue ribbon commissions tasked with studying the regulation of the U.S. capital markets-including the U.S. Chamber bipartisan Commission on the Regulation of the U.S. Capital Markets in the 21st Century-concluded that our regulatory structure is outdated, disjointed, and ineffective.

 

Our system, largely unchanged since it was created 75 years ago during the Great Depression, has failed to keep up with changing markets with costly overlapping and duplicative regulation in some areas and large regulatory gaps in others. We need coherent, modern regulation. We need to update our accounting and auditing rules. And we need tough, but fair, enforcement of the rules.

 

Challenge special interests. The Chamber will work to stop trial lawyers, labor pension funds, and corporate governance rating agencies that, through lawsuits and politically motivated proxies, attack companies and drive down shareholder value.

 

To learn more, go to www.uschamber.com/ccmc.