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– 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– 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– 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• 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

• 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?

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

• 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 RegulationAspects of Stimulus Package

• Tax cuts for people under $250,000 AGI– 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)

• 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)

Tax & Business RegulationAspects of Stimulus Package

Obama 2010 Budget

• Revenue Provided for tax cuts by:– Increasing income tax on $250,000 earners

• 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)• Elimination of $2.0 Trillion in existing tax deductions

& preferences to energy producers• Restrict Domestic Drilling

– Reduce emissions by Cap and Trade• Auction rights to pollute • Money to Treasury• Costs pass through to consumers

Obama’s 2010 Budget

• Transportation– $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• 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

– 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

• Restructure your affairs to protect your income, assets & estate (cont.)

– Plan for categories of income– Passive / active– Capital gains / capital losses– Dividend income– Ordinary rates

Planning Tips

Planning Tips

• Asset transfers for 2009-2010 may reduce taxable estate

– 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

• Creditor Protection before you have Creditor problems

– Asset protection trusts– Entity & ownership structures (business & personal)– Off shore trusts (fully disclosed and legal)– Consult specialized counsel

Planning Tips

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

– Large banks must reduce size dramatically, if weak

• Cancel outstanding unfunded lines of credit– Loan being renewed– Credit card lines

• Increase collateral requirements– Personal guarantees, personal assets, business assets

• 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

Strategies in the New World Order - Financing

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

• Compilations review• Review Audit

• 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

Be Proactive – Steps You Can Take

This is a Reset, not a Recession Cycle

• Resize your business for survival

• Cut out the Fat– 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– Upgrade people

• Let go of weakness• Add Stars – available in the market place

– Revisit how you do things- Upgrade Process

• 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:

– 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 RepresentativesMember 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/zipauth.htm

Representative Sanford D. Bishop, Jr. D-02 202-225-3631 202-225-2203 http://bishop.house.gov/display.cfm?content_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_hank_write.shtml

Representative John Lewis D-05 202-225-3801 202-225-0351 http://www.house.gov/formjohnlewis/contact.html

Representative Tom Price R-06 202-225-4501 202-225-4656 http://tomprice.house.gov/html/contact_form_email.cfm

Representative John Linder R-07 202-225-4272 202-225-4696 http://linder.house.gov/index.cfm?FuseAction=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/issue.htm

Representative John Barrow D-12 202-225-2823 202-225-3377 https://forms.house.gov/barrow/webforms/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?boardId=70219&articleId=61478&func=6&channel=Money+%26+Finance&filterRead=false&filterHidden=true&filterUnhidden=false

Charts www.shadowstats.com

Reaganomics vs. Obamanomics http://online.wsj.com/article/SB123431484726570949.html

     

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