[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
CREATING OPPORTUNITIES FOR SMALL BUSINESSES IN AN ECONOMIC RECOVERY
=======================================================================
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
October 28, 2008
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 110-116
Available via the GPO Web site: http://www.access.gpo.gov/congress/
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HOUSE COMMITTEE ON SMALL BUSINESS
NYDIA M. VELAZQUEZ, New York, Chairwoman
HEATH SHULER, North Carolina STEVE CHABOT, Ohio, Ranking Member
CHARLES GONZALEZ, Texas ROSCOE BARTLETT, Maryland
RICK LARSEN, Washington SAM GRAVES, Missouri
RAUL GRIJALVA, Arizona TODD AKIN, Missouri
MICHAEL MICHAUD, Maine BILL SHUSTER, Pennsylvania
MELISSA BEAN, Illinois MARILYN MUSGRAVE, Colorado
HENRY CUELLAR, Texas STEVE KING, Iowa
DAN LIPINSKI, Illinois JEFF FORTENBERRY, Nebraska
GWEN MOORE, Wisconsin LYNN WESTMORELAND, Georgia
JASON ALTMIRE, Pennsylvania LOUIE GOHMERT, Texas
BRUCE BRALEY, Iowa DAVID DAVIS, Tennessee
YVETTE CLARKE, New York MARY FALLIN, Oklahoma
BRAD ELLSWORTH, Indiana VERN BUCHANAN, Florida
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
BRIAN HIGGINS, New York
MAZIE HIRONO, Hawaii
Michael Day, Majority Staff Director
Adam Minehardt, Deputy Staff Director
Tim Slattery, Chief Counsel
Kevin Fitzpatrick, Minority Staff Director
______
STANDING SUBCOMMITTEES
Subcommittee on Finance and Tax
MELISSA BEAN, Illinois, Chairwoman
RAUL GRIJALVA, Arizona VERN BUCHANAN, Florida, Ranking
MICHAEL MICHAUD, Maine BILL SHUSTER, Pennsylvania
BRAD ELLSWORTH, Indiana STEVE KING, Iowa
HANK JOHNSON, Georgia
JOE SESTAK, Pennsylvania
______
Subcommittee on Contracting and Technology
BRUCE BRALEY, IOWA, Chairman
HENRY CUELLAR, Texas DAVID DAVIS, Tennessee, Ranking
GWEN MOORE, Wisconsin ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York SAM GRAVES, Missouri
JOE SESTAK, Pennsylvania TODD AKIN, Missouri
MARY FALLIN, Oklahoma
.........................................................
(ii)
Subcommittee on Regulations, Health Care and Trade
CHARLES GONZALEZ, Texas, Chairman
RICK LARSEN, Washington LYNN WESTMORELAND, Georgia,
DAN LIPINSKI, Illinois Ranking
MELISSA BEAN, Illinois BILL SHUSTER, Pennsylvania
GWEN MOORE, Wisconsin STEVE KING, Iowa
JASON ALTMIRE, Pennsylvania MARILYN MUSGRAVE, Colorado
JOE SESTAK, Pennsylvania MARY FALLIN, Oklahoma
VERN BUCHANAN, Florida
______
Subcommittee on Rural and Urban Entrepreneurship
HEATH SHULER, North Carolina, Chairman
RICK LARSEN, Washington JEFF FORTENBERRY, Nebraska,
MICHAEL MICHAUD, Maine Ranking
GWEN MOORE, Wisconsin ROSCOE BARTLETT, Maryland
YVETTE CLARKE, New York MARILYN MUSGRAVE, Colorado
BRAD ELLSWORTH, Indiana DAVID DAVIS, Tennessee
HANK JOHNSON, Georgia
______
Subcommittee on Investigations and Oversight
JASON ALTMIRE, PENNSYLVANIA, Chairman
CHARLES GONZALEZ, Texas MARY FALLIN, Oklahoma, Ranking
RAUL GRIJALVA, Arizona LYNN WESTMORELAND, Georgia
(iii)
C O N T E N T S
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OPENING STATEMENTS
Page
Velazquez, Hon. Nydia M.......................................... 1
Chabot, Hon. Steve............................................... 2
WITNESSES
Wilson, Stephen P., Chairman and CEO, LCNB Corporation, Lebanon,
Ohio, on behalf of the American Bankers Association............ 4
Dorfman, Margot S., Women's Chamber of Commerce.................. 5
Brown, Richard A., President and COO, Krause Corporation,
Hutchinson, Kansas, on behalf of the Association of Equipment
Manufacturers.................................................. 8
Bradbury, Jim, President, Grand Rapids Controls CO., LLC,
Rockford, Michigan............................................. 9
FRANKE, Thomas, Executive Vice President and Chairman of the
Board, Riemeier Lumber, Cincinnati, Ohio....................... 12
APPENDIX
PREPARED STATEMENTS:
Velazquez, Hon. Nydia M.......................................... 29
Chabot, Hon. Steve............................................... 31
Altmire, Hon. Jason.............................................. 32
Wilson, Stephen P., Chairman and CEO, LCNB Corporation, Lebanon,
Ohio, on behalf of the American Bankers Association............ 33
Dorfman, Margot S., Women's Chamber of Commerce.................. 48
Brown, Richard A., President and COO, Krause Corporation,
Hutchinson, Kansas, on behalf of the Association of Equipment
Manufacturers.................................................. 59
Bradbury, Jim, President, Grand Rapids Controls CO., LLC,
Rockford, Michigan............................................. 65
Franke, Thomas, Executive Vice President and Chairman of the
Board, Riemeier Lumber, Cincinnati, Ohio....................... 69
STATEMENTS FOR THE RECORD:
Mica, Hon. Daniel, President and CEO, Credit Union National
Association.................................................... 71
(v)
CREATING OPPORTUNITIES FOR SMALL BUSINESSES IN AN ECONOMIC RECOVERY
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Tuesday, September 28, 2008
U.S. House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 10:05 a.m., in Room
2360, Rayburn House Office Building, Hon. Nydia M. Velazquez
[Chair of the Committee] Presiding.
Present: Representatives Velazquez, Ellsworth, and Chabot.
Chairwoman Velazquez. This hearing of the Small Business
Committee is now called to order.
This September, in the face of a collapsing housing market
and a staggering crash on Wall Street, Congress took action.
Since then, talk of the growing financial crisis has dominated
American conversation. From Capitol Hill hearing rooms and
newspaper editorial boards, to kitchen tables across the
country, it seems everyone has a theory about how we got into
this mess. Now, of course, everyone has an opinion on how we
should get out of it.
Congress is now contemplating the next steps in stemming
the financial fallout. As the process moves forward, Congress,
economic models and philosophies are up for consideration. But
while it is all well and good to discuss the theory of
financial crisis, it is far more important to hear from the
people who are living it. It is far more important to
understand and act on what Main Street is actually facing.
In today's hearing, we will do just that. This morning, we
will hear from small-business owners who are experiencing the
full effects of the current downturn. Like the rest of the
Nation, they have watched their home values plummet and their
401(k)s evaporate. Now, they are seeing their piece of the
American dream suffer too.
This Committee recently compiled a report on the effects of
the financial crisis on small businesses. The results of the
study, which we are releasing today, were nothing short of
outstanding. As today's witnesses can attest, small businesses
in every corner of the country, spanning every segment of the
economy, are suffering. The reality is that many small firms
are struggling to meet the most basic obligations, such as
making payroll and stocking their shelves.
Not surprisingly, the credit crunch is largely to blame for
this, and the extent to which that is true is quite startling.
Small businesses are facing credit lines that have been
drastically reduced and, in some cases, revoked all together.
The recent Federal Reserve's Senior Loan Officer Survey found
that 65 percent of lenders are enforcing stricter loan
standards. That figure is up a full 58 percent from 1 year
earlier.
Even small firms that have been managed to make ends meet
are now abandoning plans for growth, efforts that would
otherwise create jobs. According to the National Federation of
Independent Businesses' monthly index, few small firms have
immediate plans to expand or hire additional workers.
During past recessions, the Small Business Administration
has served as a lifeline for struggling startups.
Unfortunately, even these programs are on the decline. With SBA
funding down 25 percent from 2007, many fledgling companies,
the sort that drive innovation and expand industry, may never
get off the ground.
There are a lot of different takes on the current financial
crisis and even more opinions on how we should dig our way out
of it. But regardless of your thoughts on the matter, one thing
is very clear: Small businesses will be the key to economic
turnaround. Whether it is by expanding the SBA role or
providing targeted tax relief, entrepreneurs must have access
to all the tools they need. They have powered this country out
of other recessions, and they can do it again today. While
current circumstances may be different from those in the past,
the blueprint for recovery remains the same: more jobs and
greater economic growth. That is the formula we need, and that
is the formula small businesses can provide.
I would like to thank all of the witnesses in advance for
their testimony and for taking time out of your busy schedule
and jobs to be here with us. And I am pleased that they could
join us, and look forward to their insight on this critical
matter.
With that, I yield to the ranking member, Mr. Steve Chabot,
for his opening statement.
Mr. Chabot. Thank you, Madam Chairwoman, and thank you for
holding this important hearing this morning.
I want to thank the panel for the testimony that they will
be giving us here shortly.
All of us are aware of the recent turmoil and continuing
volatility of the financial markets. These problems also touch
America's small businesses. Availability of credit is reduced,
thereby dampening the capacity of small businesses to create
needed jobs.
Yet it is not just the availability of credit that bothers
America's small-business owners. They are also ordinary men and
women with the same concerns about the value of their homes,
the safety of their investments, and outlook for the future of
their children that every American has in these uncertain
times.
Given the current situation in the American economy,
policies must be developed that help unleash the power,
flexibility and vitality of America's small-business owners.
Those policies require reductions in the Federal deficit,
lowering taxes, and making health care more affordable for our
small-business owners.
Recent actions by the Federal Government have increased its
borrowing and debt ceiling. The Federal Government then is
competing for debt capital with all businesses, including small
businesses. I suspect that the witnesses before us today
probably cannot compete in the credit markets with the single
most credit worthy borrower the world economy has ever known,
the United States Government. Thus, to borrow money, small
businesses represented here--and the 25 million small
businesses across the country--will have to pay higher interest
rates to attract the credit they need to operate and expand
their businesses.
We can reduce this hidden and insidious tax on America's
business owners by reducing the Federal deficit and eliminating
unnecessary and wasteful spending. In addition to the hidden
tax associated with higher interest costs, some of America's
small businesses also face the prospect of paying higher taxes
under some of the proposals discussed in this year's
presidential campaign.
Increasing the cost of credit and increasing taxes that
small-business owners must pay is a double whammy that these
individuals and the American economy can ill afford. If we
raise the cost of operating their businesses, America's small-
business owners will limit hiring and investment. In turn, this
would reduce economic growth and inhibit recovery from the
current turmoil in the economy.
Any stimulus package that Congress considers must not raise
taxes on the most productive part of the American economy, our
small-business owners. In fact, the stimulus package should
reduce taxes on small businesses so they have more money to
spend in the manner they best see fit, rather that relying on
how government bureaucrats think money should flow into the
economy.
There is no doubt that all American businesses have made
cutbacks in spending, including providing health care to their
workers. This has been a longstanding problem for America's
small businesses that has been exacerbated by the recent
volatility in the financial markets. Congress must find ways to
make the provision of health care more affordable to America's
small businesses. One such possibility would be to include the
enactment of association health plans in any stimulus package.
Such plans have met with bipartisan support, including my own
and also that of the chairwoman.
No one can deny that recent weeks and months are placing a
strain on the finances of all Americans, including America's
small businesses. Increasing the size of government, expanding
the deficit and raising taxes simply is the wrong prescription
for what ails America. Congress must exercise its power wisely
by reducing the deficit, lowering taxes and improving the
ability of small businesses to provide health care to their
workers.
Before closing, I would like to thank the witnesses,
particularly Tom Franke from my district in Cincinnati, for
taking the time out of their busy schedules and their hectic
times in these up certain times in running their businesses to
coming here to Washington and provide their views to this
Committee. I know we all look forward to hearing it.
And, with that, I yield back the balance of my time, Madam
Chairman.
Chairwoman Velazquez. Thank you, Mr. Chabot.
It is my pleasure to welcome Mr. Stephen P. Wilson. Mr.
Wilson is CEO of LCNB Corporation, the holding company for LCNB
Bank and the banking insurance agency in Lebanon, Ohio. Mr.
Wilson also serves as chairman and director to both companies.
He is here to testify on behalf of the American Bankers
Association. Founded in 1875, the American Bankers Association
represents banks of all sizes on issues of national importance
for financial institutions and their customers.
Welcome, Mr. Wilson.
STATEMENT OF STEPHEN P. WILSON, CHAIRMAN AND CEO, LCNB
CORPORATION, LEBANON, OHIO, ON BEHALF OF THE AMERICAN BANKERS
ASSOCIATION
Mr. Wilson. Thank you. Madam Chairwoman and members of the
Committee, again, my name is Steve Wilson. I am from Lebanon,
Ohio. I am chairman and CEO of LCNB National Bank. I am also
pleased to be hear today to represent the American Bankers
Association.
Our Nation is certainly facing difficult economic
conditions. It will clearly take time to work through these
problems. We need to collectively look for solutions that will
ensure a fast recovery. I have always believed that we must be
realistic about the present and hopeful for the future.
Hearings like this allow us to discuss these issues and work
together to restore confidence in our financial system.
In spite of the difficulties faced by all businesses,
including banks, I want to assure you that the vast majority of
banks continue to be well-capitalized and are opening their
doors every day to meet the credit and savings needs of their
customers.
We applaud the efforts of Congress to find solutions.
Although these actions are not ones that were requested by the
regulated banking industry, we believe that they help unfreeze
financial markets and help make credit available to consumers
and businesses on Main Street.
The focus on credit to small businesses is particularly
important, as they are the drivers of new ideas, new employment
and new economic growth. For banks like mine, small businesses
are our bread and butter, and banks throughout our country
continue to make small business loans.
However, the demand for small business lending has fallen
in recent weeks and is most pronounced in areas of the country
hardest hit by the housing downturn. For example, in my area of
Ohio, there are three plant closures that are expected to
happen soon. That will eliminate 13,000 jobs. This will have a
major, major impact on our region. So, ensuring that adequate
liquidity and capital are available during this time is
critical to maintaining the flow of credit to small businesses.
The Emergency Economic Stabilization Act contains some
provisions that should free up capital. Community bankers
remain concerned about whether the Troubled Asset Relief
Program can help them and, indeed, perceive that it may even do
them harm. Banks will consider carefully its structure and its
pricing. In addition, they believe that using TARP funds to
guarantee loans would be more effective. This would leave the
relationship between the bank and their customers intact and
put a floor on losses, thus freeing up capital to meet new loan
demand.
Moreover, while the root of the current problems has been
residential mortgages, the economic disruptions are spreading
into the commercial real estate and into the small business
lending area. Thus, TARP funds should be available to purchase
or guarantee a broader class of loans.
As TARP is implemented, it is important that regulators
recognize that many well-capitalized banks have sufficient
liquidity and are meeting the credit needs of their
communities. These banks may not want to participate, and no
negative regulatory consequences should arise from that
decision. Indeed, all regulatory policy should be carefully
monitored during this time. We are very concerned that a
regulatory overreaction could worsen the credit crunch. As it
did following the 1991 recession, we are hopeful that
regulatory reason will win the day this time.
There are several measures that would help banks support
loans to small businesses. I want to briefly mention just one
of those from my written statement regarding the SBA lending
program.
Loan volume declined by 30 percent last year in SBA's
flagship 7(a) loan program. To help reverse this trend,
Congress should reduce program fees, make the application
process easier and less expensive for both small businesses and
the banks, and, on a temporary basis, increase the Federal
guarantee provided on SBA loans. This would extend the program
to many more communities across our country and provide more
loans to businesses.
As Congress considers these and other changes, we urge
caution not to enact policies or regulations that will
inadvertently restrict the availability of credit that is so
vital to our economic recovery. We stand ready to work with the
Committee, Madam Chairwoman, to find effective ways to ensure
lending flows to small businesses.
Thank you very much.
[The statement of Mr. Wilson is included in the appendix at
page 33.)
Chairwoman Velazquez. Thank you, Mr. Wilson.
Our next witness is Ms. Margot Dorfman. Ms. Dorfman is the
founder and CEO of the U.S. Women's Chamber of Commerce. Ms.
Dorfman has an extensive background in business, business
ownership, publishing and nonprofit leadership. The U.S.
Women's Chamber of Commerce is dedicated to championing
opportunities to create women's business growth, career and
leadership advancement.
Welcome, Ms. Dorfman.
STATEMENT OF MARGOT DORFMAN, CEO, U.S. WOMEN'S CHAMBER OF
COMMERCE
Ms. Dorfman. Thank you.
Chairwoman Velazquez, Ranking Member Chabot and members of
the House Small Business Committee, I thank you once again for
this opportunity to speak on behalf of the millions of small-
business owners, their employees and families nationwide who
are scared, hurting and watching during this economic crisis
while Washington focuses on corporate executives and big Wall
Street bailouts instead of getting down to Main Street America,
where jobs are created, families are fed and mortgages are
paid, to get credit flowing and raise consumer confidence.
I have five words for you: big, bold, simple, focused, and
now.
I am hearing every day from small-business owners who are
very frustrated as they watch while Secretary Paulson and
President Bush repeat the failures of the past by always
looking out for corporate executives. Pouring billions of
taxpayer dollars in at the top of the system in no way assures
that a small-business owner in a local community is going to be
able to get their line of credit increased during this abrupt
economic slowdown.
Our members are angry that the Federal Government is giving
taxpayer money to big companies that have been horribly
irresponsible, while responsible small businesses are not
getting the money they need to keep their doors open. As one of
my members said about her business, "I don't want to lose my
company. We have 40 families that we provide for, and it is a
big responsibility that I take very seriously."
On behalf of the millions of American small-business
owners, I implore you to act now with a big billion-dollar
punch that will reach directly to the credit needs of small-
business owners. We have been surveying our members to get a
clear look at this issue, and they tell us there are three key
problems.
First, consumer and business confidence is falling rapidly
and creating a sudden contraction in business revenues.
Second, lenders aren't lending. Our members report that, in
the last 90 days, 53 percent are tapping into their own
savings, 63 percent have turned to credit cards, and 24 percent
have turned to family and friends for a loan. And business
owners are telling us that they are downsizing their employees
or independent contractor force in alarming numbers. Seventy-
one percent of businesses say they have downsized. Sixty-nine
percent have seen their revenues drop. Thirteen percent say if
economic conditions do not change, they may be forced to close
their doors. Only 20 percent have seen revenues increase, and
these businesses also cannot secure the capital that they need
to grow their business.
Third, the cost of credit, when available, is going up.
Thirty-eight percent of businesses tell us that their credit
card and loan rates have gone up in the last 90 days. Twenty-
two percent tell us their credit limits have been reduced, and
17 percent have had their lines of credit halted.
Among the comments I have received from our small-business
owners, one in California mentioned that she has two lines of
credit. One was cut in half. Another, with Bank of America, was
$50,000, went to take $10,000 to meet payroll and was turned
down. She is a customer of 20 years and runs millions of
dollars through their bank, has three bank accounts, two
personal accounts, and a credit score of 750.
Congress must take legislative action to help restore the
flow of credit and capital to small-business owners as soon as
possible. And the Small Business Administration must take
immediate administrative action to loosen lending operating
procedures.
You must focus on getting the cooperation of the lending
community by keeping the solutions simple to implement by using
existing systems, lowering the lender and oversight fees, and
assuring the lending community that any new programs, rules or
procedures will be in effect for at least 2 years. And use this
opportunity to re-engage regional banks, so that we are not so
reliant on a few big banking institutions.
As you make legislative and administrative changes, don't
forget the SBA is not the organization it used to be. Eight
years of budget cuts and poor executive leadership have gutted
the organization. The option of direct lending may totally
overwhelm the capacity of the SBA infrastructure. Even now, we
continue to hear that the SBA is not adequately supporting the
businesses who are struggling, Katrina disaster victims and,
again, who have been impacted by Gustav and Ike.
It may be much better to incentivize banks to get back into
lending with a specific pool of money made available for only
small business lending. We have to hold banks accountable for
providing loans or stop giving banks taxpayer-provided
bailouts. And we must dramatically increase transparency.
Additional actions are needed to help business owners get
through these hard times. Congress should expediently pass
another stimulus package, this time to support small
businesses. We need lower small business taxes and penalties,
delayed tax payments, delayed retirement accounts, and extend
the amount of the period for loans against retirement accounts.
Most importantly, you must take action to reduce health care
costs.
And finally, specifically speaking of women-owned small
businesses, you must remember that our businesses are already
at a disadvantage, as the SBA regularly lends smaller amounts
to our firms. I encourage you to make sure that the lending
programs reach to our marketplace so that we may leverage the
resources necessary to keep our doors open and drive future
growth. For instance, establishing a special 2-year look-alike
of the Patriot Express lending program, with loosened
administrative rules, hiring guarantees and greater lending
authority, would quickly and greatly assist many of our members
to keep their doors open.
And you must take action to implement the 8-year-old
Women's Federal Procurement Program as Congress had originally
intended. We find with the recent 2007 goaling report that the
Federal Government is still shutting out women-owned firms at
an alarming rate. Numerous members have told us that receiving
fair access to these Federal contracts could certainly provide
business growth at this important time.
In closing, I have five words for you: big, bold, simple,
focused, and now. We need you to champion our needs now before
it is too late.
Thank you.
[The statement of Ms. Dorfman is included in the appendix
at page 48.]
Chairwoman Velazquez. Thank you, Ms. Dorfman.
Our next witness is Mr. Richard A. Brown. Mr. Brown is
president and COO of Krause Corporation in Hutchison, Kansas.
Krause was founded in 1916 and currently employs around 225
people.
He is here to testify on behalf of the Association of
Equipment Manufacturers. The AEM is a trade association that
globally represents more than 800 companies that manufacture
equipment worldwide in the industries of agriculture,
construction, forestry, mining and utility.
Welcome.
STATEMENT OF RICHARD A. BROWN, PRESIDENT AND COO, KRAUSE
CORPORATION, HUTCHINSON, KANSAS, ON BEHALF OF THE ASSOCIATION
OF EQUIPMENT MANUFACTURERS
Mr. Brown. Thank you very much, Chairwoman Velazquez and
Ranking Member Chabot, for the opportunity to testify.
I am Richard Brown, the president and chief operating
officer of Krause Corporation in Hutchison, Kansas. We were
founded in 1916, and we are a privately held manufacturer and
marketer of agricultural tillage products. Krause Corporation
has survived the Great Depression, the Dust Bowl, two world
wars, multiple other wars that drove material shortages, and
numerous financial interruptions, and we intend to be here in
the future.
I also have the privilege of serving on the board of
directors of the Association of Equipment Manufacturers. AEM is
one of the oldest trade associations in North America,
representing over 800 companies that manufacture agricultural,
construction, forestry, mining and utility equipment.
In addition to serving on the board, I am chairman of AEM's
Small Enterprise Committee. If I can borrow the acronym SEC,
the SEC represents the interests of and provides specific
services for AEM member companies reporting less than $250
million in annual revenue and that comprises 95 percent of
AEM's membership.
While Wall Street is on a financial roller coaster, I am
here to tell you that many small businesses in America are in
economic free-fall. This financial crisis is also taking a toll
on rural America and agriculture. In my State of Kansas and all
across the country, agriculture is the economic foundation for
countless small businesses and thousands of Main Streets.
Modern agriculture requires farmers to have access to
credit so that they can make the large capital investments
needed to plant and harvest crops. The tightening of the credit
markets is coinciding with the rapid rise in the cost of
agricultural inputs. It is also important to note that the
record commodity prices, which earlier this year garnered
intense media attention, have fallen sharply in the past few
months. As an example, corn alone has fallen 50 percent below
break-even.
We are now seeing farmers delay their purchase of inputs
from their normal preseason purchasing patterns, as they are
having credit trouble. The ripple effects of tightened credit
markets, at a time of increasing capital requirements for
agriculture, will lead to economic hardships for rural America.
I also perceive a growing sense of anger among rural
Americans about this situation. Generally speaking, they did
not buy homes they could not afford or run up huge credit card
debt, but now are forced to deal with the consequences of other
people's excesses and, as a result, are losing faith in the
system.
No question, these are hard times, but government can and
should take steps to ensure the continued success of America's
entrepreneurs. We have four recommendations.
Number one, extend the bonus depreciation and enhanced
expensing provision, which are a part of the stimulus act of
2008. This extension will continue to help multiple sectors of
the economy by enabling companies to purchase the modern tools
they need to operate. Also, Congress should consider
reinstating the 10 percent investment tax credit for new
equipment purchases as a long-term way to encourage the use of
modern, more efficient, production technology.
Number two, invest in infrastructure. America is the
world's largest importer and exporter, and we depend upon the
efficient transportation of goods and services. Studies show
that we need to invest from all sources $140 billion to $255
billion annually to stay competitive. In addition, EPA
estimates there is an annual shortfall of $23 billion of our
investment in water infrastructure. Investing in infrastructure
is one of the most productive short- and long-term investments
the Government can make.
Number three, help small businesses export. My company is a
perfect example of what exporting can mean. We have increased
our exports 20 to 25 percent and nearly 10 percent to Russia,
who are aggressively funding food self-sufficiency. This is a
catalog of Krause Corporation in Russia. That is why it is
important for Congress to pass the pending free trade
agreements with Colombia, Panama and South Korea. We at Krause
Corporation have the products and technology, but we do need
governmental assistance to break down trade barriers and
improve transparency.
Number four, please help control rising health care costs.
Krause Corporation's annual health care costs represent $857
per machine unit we sell, while none of our global competitors
have a direct comparable expense. Our health care costs at
current rates are doubling every 4 to 5 years, and represents a
greater risk than even $100-a-barrel oil.
Whatever actions are undertaken, I can't stress enough that
we must restore the confidence in the marketplace. Times are
tough, but I am confident we will survive to see better days.
With proper Government action, these days can be closer than
they appear.
Thanks very much again for the invitation to testify, and I
will be happy to answer questions.
[The statement of Mr. Brown is included in the appendix at
page 59.]
Chairwoman Velazquez. Thank you.
Our next witness is Mr. Jim Bradbury. Mr. Bradbury is
president of Grand Rapids Controls Company in Rockford,
Michigan. Grand Rapids Controls has developed from a small
domestic cable supplier into a global supplier of motion
control systems. Mr. Bradbury's company is a family-owned
company and a major employer for Rockford, with around 200
employees.
Welcome.
STATEMENT OF JIM BRADBURY, PRESIDENT, GRAND RAPIDS CONTROLS
CO., LLC, ROCKFORD, MICHIGAN
Mr. Bradbury. Hi. Thank you, Ms. Velazquez and the Small
Business Committee, for inviting me here today to discuss how
the economy has impacted my business. My name is Jim Bradbury,
and I am president and CEO of Grand Rapids Controls Company,
LLC.
Today, I am going to share with you some background history
on how the automotive and office furniture industry has changed
how we do business, and how the current economy is different
than it was just a few years ago.
Founded in 1968, GRC designs and manufacturers motion
controls for automotive and office furniture OEMs. When you
adjust your seat, open a car door or window, you are likely to
use our products. Headquartered in Rockford, Michigan, GRC also
has manufacturing plants in Greenville, Michigan, and Qingdao,
China. Known as a problem solver by our customers, GRC provides
full-service support and R&D, testing and manufacturing of
finished products. Two hundred people work for us in Michigan
today.
For the first 20 years, GRC mostly supplied a commodity
product. In the early 1990s, the consumers' tastes changed, and
more features were required on chairs and in vehicles. We
responded by developing the ability to design new products for
these applications.
In response to the increase in offshore competition, GRC
developed lean manufacturing techniques and automated machines
to increase productivity. In 2001, the economy started to
decline, as competition continued to increase. Chinese and
Mexican competitors were achieving acceptable quality, while
offering significant price savings to our customers. In just a
couple of years we started to see large chunks of business move
out of our plant to these far-off places. In the span of 3
years, we saw sales slide 50 percent.
In the summer of 2004, the owners of GRC sold the company
to another family-owned business, The Charlton Group. The
Charlton Group brought knowledge of international business and
financial resources to grow the business. However, the new
company needed to stop bleeding cash, and a new competitive
business model was required.
Immediately, we cut expenses, stepped up sales efforts,
evaluated our products and met with customers to find out where
they were headed. In talking with our customers, we were
informed that we needed a plant in a low-cost country for them
to continue doing business with us. We determined that our
commodity product was too difficult to automate, so we
collaborated with a partner to open a plant in China.
This served two purposes. First, it positioned us well for
China's future domestic growth. And secondly, it gave us a
competitive model for a commodity product in the short term.
The strategy worked, and we were awarded 17 new programs. By
the end of 2007, we achieved over 85 percent growth, all of our
plants were full, 100 new jobs were created in the U.S., and
profitability was up.
During the growth period, we had borrowed a great deal of
money to reinvent the company. By the end of 2007, we had paid
most of the new debt off, and 2008 looked to be another good
year.
But 2008 has proven a challenge to manage. In the first
quarter of the year, a large supplier went on strike for 3
months, reducing our sales by 20 percent. Material and gas
prices rose dramatically at the end of the strike. Vehicle
inventories were up. Customers started to slash orders, and the
industry panicked with no end in sight to high gas prices.
The office furniture industry was no exception, as the OEMs
made a commitment to buy global companies and began to move and
source existing products overseas. The end result was a 40
percent decline in sales and loss of profitability. In response
to the decline of revenue, we had to cancel wage increases and
bonuses. Resources are restricted to operationally critical
items, sales growth and cost reduction activities.
Despite the pessimistic outlook for 2008, GRC has achieved
some great results.
The bigger hurdle may not be the loss of sales, but the
effect that the tightening credit markets will have on
unprepared small business. Financially, GRC uses a line of
credit for daily operational activity. The limit on the line of
credit is based on a formula that calculates a percentage of
our qualified accounts receivable, plus a percentage of our
qualified inventory. As sales fall, AR and inventory shrink,
effectively reducing our line of credit. Banks aren't sure of
the value of our assets and are taking a much more conservative
approach to lending. Despite our best efforts, we are getting
squeezed by unsecured creditors and loss of sales revenue.
I have traveled all over the world, and I believe America's
creative culture and can-do attitude are great strengths. I
have also seen how Government can accelerate creativity in the
support of research and development. However, I believe other
countries have a competitive advantage over America's small
businesses, because in an American company most of their R&D is
passed on to customers in higher prices. In other countries,
the Government partnerships are more aggressively supporting
the supplier R&D expenses to offer the world a better price, or
the Government allows the copying of the technology.
Each year it becomes harder to compete in our home market.
I encourage you to help American small business by providing
the necessary resources to create a fair playing field and
develop new technologies so that we can develop new
technologies and we can grow.
Thank you for taking the time to listen to my testimony,
and I hope it provides insight into the plight of the small
businesses in today's economy. We are doing everything we can
to support our employees and our stakeholders in our effort to
create a great company.
The economy is fragile today, and it appears recovery is
many months away. If credit is not available to small business
and the field of play remains uneven, small business will
continue to have an uphill battle and America will suffer.
Thank you.
[The statement of Mr. Bradbury is included in the appendix
at page 65.]
Chairwoman Velazquez. Thank you, Mr. Bradbury.
The Chair recognizes Mr. Chabot for the purpose of
introducing our next witness.
Mr. Chabot. Thank you, Madam Chairwoman.
And it is my pleasure to introduce Thomas Franke, executive
vice president and chairman of the board of Riemeier Lumber in
Cincinnati, Ohio.
Riemeier Lumber is a fourth-generation building materials
company founded in 1925 by Harry D. Riemeier and his son,
Harold, to service the furniture and wagon industries. At the
end of Prohibition, Riemeier grew by selling soft wood to
distilleries and whiskey warehouses. During World War II, the
company supplied lumber and plywood to the war effort and
struggled with the challenges of price controls and scarce
resources.
Post-World War II expansion and the homebuilding boom led
Riemeier to supply lumber to the homebuilding industry. Other
family members joined the company as it expanded. Riemeier
weathered volatility in the housing market over the years, and
the business continued to grow.
However, the housing downturn of the past 2 years, coupled
with difficult economic conditions, caused the company to begin
layoffs, including people who had worked for Riemeier for 20 or
30 years. Although Riemeier sales were still strong, its bank
would not allow the company to borrow against millions of
dollars in receivables. Efforts to find investors or sell the
property were unsuccessful. Last week, the company held an
auction and closed.
I want to thank Mr. Riemeier for coming to Washington to
tell the story of his family's small business and to help us
understand what we can do for similar companies that are
struggling and need access to credit in these difficult times.
Mr. Franke, welcome.
STATEMENT OF THOMAS FRANKE, EXECUTIVE VICE PRESIDENT AND
CHAIRMAN OF THE BOARD, RIEMEIER LUMBER, CINCINNATI, OHIO
Mr. Franke. First of all, thank you to the Committee for
inviting us, and especially Congressman Chabot.
I will be a little redundant here, but this is Riemeier's
story. The Riemeier Lumber Company was founded in 1925. The
company started out selling the industrial market hardwood
lumber for furniture and wagon building. The end of Prohibition
moved the company into the commercial market, selling lumber
for distilleries and warehouses for storage of whiskey. The end
of World War II vaulted Riemeier into the residential market,
with the large need for housing. These three markets were the
core of the business.
The growth of Riemeier caused us to purchase and move into
a new facility in May of 2000. The new facility more than
doubled the acreage, warehouse and office space to allow for
future growth.
In November of 2005, a wall panel operation was started
called Riemeier Structural Solutions. This was the process of
constructing exterior and interior walls at the facility and
delivering them to the job site, resulting in reduced costs and
higher quality for the builder customers. The company was
prospering, and by the end of 2005 Riemeier Lumber and Riemeier
Structural Solutions had record sales of approximately $58
million and roughly 150 employees.
Customer demand for one-stop shopping placed the company in
the market for a roof truss operation. The purchase of Panel
Barn Lumber/Truss Design was agreed upon in 2006 and bank
financed in February of 2007, adding roughly 30 jobs. We now
had the business model that would carry us long into the
future, being able to provide lumber, wall panels and roof
trusses.
As the housing market began to struggle in 2006, our sales
declined by 5 percent from our prior year record sales, and
Riemeier Lumber experienced its first layoff in history in
November of 2006. Sales for the first quarter of 2007 were
poor, and in April we made our second round of cuts.
We managed to make minimal profit from April through August
and added a second shift at truss in anticipation of a good
September and October, as those were typically strong months as
builders rushed to finish projects prior to winter. Sales
during this period were well below expectations, and we had our
third round of cuts in October.
We finished 2007 down 24 percent in sales, causing a
significant loss. Our banking relationship that was so strong
in 2005, 2006 and 2007 as we grew and expanded the business
deteriorated during the latter half of 2007 as the housing
market continued to decline and the credit crisis accelerated.
Our builder customers were affected by the downturn and the
credit crisis. They were unable to pay us, which caused our
credit to suffer, as their unpaid receivables were not
considered good collateral by the bank. At the same time, our
bank itself was suffering greatly in the credit crisis from its
involvement with the subprime lending.
As the credit crisis deepened at the end of 2007 and
beginning of 2008, and its effect on our bank became more
evident and public, only 10 months after receiving additional
financing from our bank for the truss acquisition our bank
declared Riemeier to be in default of its loan covenants.
Whereas the bank had always previously insisted that it be
the sole lender and banking institution for Riemeier, it now
insisted that Riemeier find other sources of financing so that
our bank's exposure would be reduced. Despite Riemeier's many
attempts to comply with this request, it was not able to secure
additional financing due to the condition of the industry and
the continuing credit crisis. The company went through a bank-
supervised period of forbearance, during which interest rates
and bank fees were increased, creating greater losses for our
company.
As our bank's action became public, we began to see a more
rapid decline in our sales. On August 11th, the bank began the
wind-down process, including letters to send to our customers
and vendors explaining that we were going out of business.
There was also a list of employees and their termination date
and a list of our current jobs in process and whether they
would be completed or not. This was accomplished by the bank-
mandated consultant that is under contract with Riemeier as
required by the forbearance.
The current state of the company is as follows. The real
estate is currently for sale. Assets, including trucks, office
furniture, mill equipment and tools, have been sold at auction.
All material that could not be sold beforehand was also
auctioned. There are five employees left, including Ken, myself
and three accounting people to do collections until the last
day that we will be at the facility, which is slated for
November 6th. We will then close our door forever.
Thank you.
[The statement of Mr. Franke is included in the appendix at
page 69.]
Chairwoman Velazquez. Thank you, Mr. Franke.
Mr. Bradbury, if I may, I would like to address my first
question to you.
The primary story line on the credit crunch has focused on
major financial institutions on Wall Street. However, many have
argued that these credit issues are creating even more daunting
problems for businesses on Main Street.
As a small-business owner, what have you seen in terms of
accessible and affordable credit over the last 12 months?
Mr. Bradbury. Currently, banks seem to be less interested
in our business. We have had numerous people--we, like you, we
were looking at moving into one bigger facility a year ago,
because our facilities were full. Multiple banks looked at
financing it for us. Today, most of them want to walk, and a
lot of them just want to walk away from automotive. So we are
getting new lenders in the market that don't understand our
needs.
They are also questioning the asset values. They are re-
looking at our asset values to see if we can borrow money or
not against them in the future. And they also seem to have to
go up higher in their chain of command to get decisions made,
which slows down the process.
Chairwoman Velazquez. Mr. Franke, you testified that
Riemeier's long-time lender essentially told you to go
elsewhere for finance when times were tough.
Can you talk to us about the struggles that you faced in
identifying alternative sources of credit for your company?
Mr. Franke. We tried numerous sources, I guess, first-,
second- and third-tier lending. We decided against third-tier
lending, and we really couldn't find first- or second-tier
lending. There were no banks that were interested.
Chairwoman Velazquez. Can you talk to us as to the primary
reasons why those financial institutions did not offer
financing to you?
Mr. Franke. We were on a pretty good cash burn. We lost
significant money in 2007 and continued that into 2008. And
that was the primary reason.
Chairwoman Velazquez. Mr. Brown, you discussed that
agriculture is the economic foundation for thousands of Main
Streets across the country.
Do you feel that the struggles facing rural America have
been largely ignored in this recovery process?
Mr. Brown. Yes, we do, Madam Chairwoman.
The items I identified earlier, which are foundational
health care costs that have continued to escalate at an
unacceptable rate--usually, if you think of a farmer, it is a
farmer and his family, and he has to buy his or her own health
care.
Secondly, agriculture, historically, is fully dependent on
availability of credit to the farm. Farming is a very high-risk
operation--the vagaries of weather, pestilence, disease, et
cetera; and it requires significant money for feed, fertilizer,
fuel at this time of the year for the spring plant. Likewise,
it is not unusual for a 3,000-acre corn farmer to have to buy
10,000 gallons of diesel fuel to run his or her combine in the
fall.
None of these, to the best of my knowledge, have been
addressed in the economic programs discussed.
I think rural lenders are attempting to do a very good job.
I do not find fault with them, other than when you get on the
down side of the slope and your financial ratios start to
slide, when you need the help the most is rarely when you get
it.
Chairwoman Velazquez. Thank you, Mr. Brown.
Ms. Dorfman, every day we hear stories, anecdotal stories
in the papers, on TV, about small businesses complaining about
the fact of the credit crunch, that they are not able to access
affordable capital and lines of credit. The SBA and their
business loan programs are there, and yet you think that this
is a time for those programs to be basically used, and what we
hear is that the lending volume for SBA loan programs have been
declining.
Based on what you hear from your members, do you believe
that this is an accurate claim, that businesses simply are not
seeking loans and capital during this economic downturn?
Ms. Dorfman. I do not. We have surveyed several hundred
members who have been looking for ways to access credit. And
some of them have very good credit and have been paying on
time, have had lines of credit, and they have been cut.
When you take a look at the SBA loans, some of the issues
that we hear are that the fees on both sides, the bank sides
and the small business sides, are so enormous that it really is
challenging to get an SBA loan just from that alone. We also
see that the banks are not really, as you mentioned, being
friendly to folks who have been with them for years and years
and years.
When we hear this bailout package, money goes to the banks,
but where does it go then? It certainly has not gone down to
the small-business owner to access capital. The capital, in how
they are working, they have actually tightened the ability to
get the loans and the capital that they need for small
businesses.
Chairwoman Velazquez. Mr. Wilson, during this recent
downturn, we have seen steep declines in SBA lending year after
year. And our hope was that these programs will do just the
opposite and kick in when conventional lending pulled back.
So why have we not seen this? What do you think is the
primary reason or reasons for this steep decline in SBA lending
programs?
Mr. Wilson. I think it has a lot to do with the application
process. I believe, also, that the costs have risen to the
point where small businesses are concerned about making an
application, maybe being denied, but having a lot of expense
involved. Banks are concerned because of the process.
So, as I stated in my testimony, I think there are some
things that could be done with the SBA program, including
raising the limit on guarantees so that more communities and
more businesses would be touched by the SBA.
And you are absolutely right. This is exactly the time when
we need SBA to step forward and to take a larger role in
funding small businesses.
Chairwoman Velazquez. So you feel that the cost of the
loans, that if the Government provides a higher loan guarantee,
that it will incentivize financial institutions to make those
loans?
Mr. Wilson. That is correct.
Chairwoman Velazquez. Thank you.
I recognize Mr. Chabot.
Mr. Chabot. Thank you very much, Madam Chair.
Mr. Wilson, I will begin with you, if I can. Relative to
the $700 billion, which then went up to $850 billion, bailout
or rescue plan or whatever terminology one wants to use, there
have apparently been a number of businesses and banks, in
particular, that are thinking about or trying to use a fairly
significant portion of that money to purchase other
institutions.
What are your thoughts about that? And how helpful is that?
And how does that affect banks like your own?
Mr. Wilson. Let's go back to the original bill that was
passed. Certainly, a bank like ours was very conflicted as to
whether to support or not support that kind of action.
You know, there is a big difference between the regulated
sector of the financial services industry and the nonregulated
sectors. As a matter of fact, I have always learned that, to
solve a problem, you have to understand, to be able to define
the problem. And certainly one of the problems is the
definition of the word "bank." Regulated, nonregulated, all
called banks. Wall Street, Main Street, investment banks and
commercial banks, all called banks. So it is difficult to
understand the important differences between these firms.
So in a bank like ours that stuck to sound lending
principles, that has the capital and the liquidity and the
earnings and the growth and the asset quality to continue to
lend, to continue to meet the credit needs of our customers, it
would have been very easy to say that that bill was a really
bad idea.
However, I don't think there is any doubt that it was
needed. And it was needed because the credit markets were
locked up and they had to be released.
We have a small business in our area that is a retirement
home. That retirement home has bonds outstanding for building
their facility. When a series of those bonds came up, there was
no market for those bonds. The same experience was repeated
with a hospital in our area; that was repeated in lots of
different ways. That was repeated by some of the banks that I
am sure other witnesses are talking about, where they just
simply did not have the liquidity to meet loan demand.
So the bill had to happen. Now that it is there, how do we
use it? And, as I said in my testimony, you could use it to
inject capital, but you also could use it to guarantee loans.
And in guaranteeing loans, you leave that relationship intact
between the borrower and the bank. You leave intact the
creation of capital if you guarantee those loans.
So I think a better use would probably be to buy back
loans. Obviously they are going to be buying back securities.
And I presume that some capital injection makes sense, but I
would prefer they did a lot more of the former.
Mr. Chabot. Okay. Thank you very much.
Ms. Dorfman, I will turn to you next, if I can. I think it
is fair to say from your statement that the bailout, or, again,
rescue plan, you had some real concerns about it in how it was
structured and everything else. And, of course, it happened
now, it is already done, so I won't ask you how you would have
structured it.
But now that it is the law, are there changes,
modifications? Because Congress can always change things. How
would you suggest that we modify this over the next upcoming
months or year to make it more useful for small-business folks?
Ms. Dorfman. Well, again, I think we need to ensure that
there is a benefit to the small-business owner.
And I would just like to reflect back on the lending. I had
a member who went for a small business loan with Bank of
America about 6 weeks ago, before the financial issues, and she
was told that, "We don't do small business loans." And the
question was, well, not even the SBA loans? No. But what they
would give is a line of credit, or revolving credit, at 21
percent interest.
So, I really have a concern that the money that is out
there is not being used appropriately in terms of assisting the
small-business owner's access to capital. And I feel that is
where the focus we should be, that we need to get the lines of
credit back to where they were. Our members have been very good
about paying them back. And the ones who are growing, they
can't even get the capital they need so that they can hire more
people and try and help turn the economy around. So I think
that is where the focus needs to be.
Mr. Chabot. Thank you very much.
Mr. Brown, relative to the 2001 and 2003 tax cuts on
capital gains and across the board and all the other ones that
were passed, the Federal inheritance tax, the death tax, do you
have an opinion as to whether--even though we haven't made them
permanent yet, they haven't gone back up, but Congress, in its
budget this past year, put us on the glide path for those tax
cuts ending, and there has been a lot of talk about capital
gains, taxes going back up.
Do you have an opinion as to how that would affect small
businesses and markets and job creation?
Mr. Brown. Thank you, sir. We would support the
continuation of those, not for profit taking, but for
reinvestment. Most of our constituency are sole entrepreneurs,
closely and privately held. The contribution of profitability
from reduced taxes, the vast majority is reinvested in the
business, either to buy equipment or to hire additional people.
If I am allowed to comment on some of the earlier thrusts
in regard to bankers and what can be done, I empathize greatly
with Mr. Franke. Our company several years ago was on the verge
of bankruptcy. I faced a choice, a very difficult one: Pay the
banker, pay payroll, or pay a bankruptcy attorney. I sought to
pay the bankruptcy attorney so I could hold the others at bay.
There is a reason things are happening today the way they
are, and it is called the pace of change. For a small company
like most of ours, we don't have the critical mass to absorb a
jolting change in the marketplace. I am going to use one
example.
Steel, which comprises the vast majority of our purchases,
went up 85 percent in the months of April and May. Health care
walked in and gave us a 28 percent price increase or cost
increase. We don't have the resiliency to absorb that, and that
often pushes smaller companies to the brink of things they
prefer not to do.
This may not sound very sophisticated in a legal term, but
I would like to see incorporated in this environment a timeout
so that the details of situations can be evaluated, so that
declining or deteriorating financials on the part of a small
business don't impair the bank's credit rating. Likewise, let
us get the detail out and sort out. There may be some
businesses legitimately that should go out, but with the pace
of change that we are all experiencing, far too many are going
out when they don't need to.
Mr. Chabot. Thank you.
Mr. Bradbury, you stated in your testimony, "In talking to
the bank, the feeling I get is that at the lower levels, they
do not have a clear direction on what they can or cannot do in
regards to loan approvals."
Could you go into that in a little detail, what you meant
by that?
Mr. Braden. Well, the bank we are using, because credit
lines and things are coming down, and it is just through the
natural progression, that when you need to go and get a
decision made at a bank about funding future growth, they want
to go to their corporate headquarters to get an answer versus
being able to have a direction at the bank level. So the loan
officer doesn't seem to have a clear picture of what he has
approved and what decisions he can make, and they are still
trying to figure that out.
Mr. Chabot. Thank you.
Mr. Franke, just a couple of questions. One, where do you
all go from here? Do you have any kind of plans at this point?
And how many employees were there that they lost their jobs
over this period of time?
Mr. Franke. At the high point we were roughly 170. And my
brother and I have one thing maybe in the works. We are
talking, we have a nondisclosure. But we also have a guarantee
to the bank, so we have to resolve that before we can move
forward.
Mr. Chabot. And how many other small businesses did you use
as suppliers? I assume that this will have an impact on them as
well?
Mr. Franke. Numerous, yes. There were independent wholesale
people left in town, and some of the larger ones. But, yes, we
used almost everybody that was involved in the building
material supply.
Mr. Chabot. Thank you very much.
Mr. Wilson. Congressman Chabot, may I follow up on that
question?
Mr. Chabot. Sure.
Mr. Wilson. One of the things I expressed in my testimony
was a concern, and it is a natural concern, that in these times
regulators become overly concerned about things, and they can
contribute to a credit crunch. They are very concerned right
now about commercial real estate, so all banks are under great
scrutiny in that area. As a matter of fact, they have even set
guidelines as to capital, as to how much a bank can have in
commercial real estate.
SBA guarantees protect banks from the regulators in that
regard, so I would just add while we are on the subject of SBA
and the ability of SBA to help in this particular case, again
expanding the SBA guarantees allows banks to put more money
into small businesses without receiving criticism from
regulators.
Mr. Chabot. Thank you very much.
I yield back, Madam Chairman.
Chairwoman Velazquez. Mr. Ellsworth.
Mr. Ellsworth. Thank you, Madam Chairman, for hosting this
meeting, and thank you all for your testimony. We learned quite
a bit.
Mr. Wilson, I was interested when you said you were
conflicted on whether to support or at least take the rescue
bailout and support that. We were conflicted, too. I think
there were 435 Members that were conflicted.
How did you come down to your conclusion to think it was
maybe not a good idea, but the idea at the time, to support
that or at least encourage that path? It may not have been the
bill that you would have written, but it was what we faced.
What did you use as criteria to say it was probably a good idea
at the time?
Mr. Wilson. I went back to how we got in the situation that
we are in. And if you take a look the housing boom, the housing
burst, the housing bubble, and you go back to 2006, which was
kind of the banner year, 76 percent of the mortgage loans made
that year, and we know that because of HMDA data, were made by
the unregulated sector of the banking industry. That means that
24 percent were made by the regulated portion.
So, what happened was these loans were made no matter
whether they were suitable or not. They were made by people who
were receiving commission, not underwriting loans and putting
them on their own books. So those loans were then sold,
securitized, and amazing to me, but a lot of bankers bought
those securities. So the net result was on the books of banks
that may have said no to the loan, but said yes to the
securities, those they are now calling toxic assets had tied up
a tremendous amount of capital and liquidity. That had to
change. There were banks in our area that simply could not meet
the credit needs of their customers because they didn't have
the liquidity or the capital to do that.
The investment banks in particular, that you are very aware
of, were locked up with these assets and couldn't provide
liquidity. When companies from General Motors down to small
businesses went out to borrow, they found that either there was
nobody willing to buy bonds or make the loans, or in the case
of bonds, if they could sell them, a corporate bond, they were
at extraordinary rates, 30 percent, 40 percent, et cetera.
In order to get our economy moving again, and if the
economy doesn't work, no matter how good we are in Lebanon,
Ohio, there is going to be a problem, the bill had to be
passed, liquidity had to be injected into the system, and so I
applaud Congress for taking that action.
Mr. Ellsworth. Thank you.
You said earlier in your written testimony that hearings
like this allow us to discuss these issues and work together to
restore confidence in our financial system.
What do you see now moving forward to restore the
confidence in the small business owner with the financial
institutions to get that moving? What would you see? We want to
restore confidence in these guys at this end of the table.
Mr. Wilson. I think what they have to understand is the
fact that we are small businesses also, for the most part. For
example, the Small Business Administration defines a small
business as less than 500 employees. By that definition, 8,100
community banks are small businesses. As a matter of fact, that
is 97 percent of the industry. And even more telling, over
3,500, or 41 percent, have fewer than 30 employees. So there
are a lot of options out there that maybe small businesses
didn't pursue. Small business had access to a lot of different
financing options, and many of them moved away from their
community banks.
I would suggest that there are a lot of community banks out
there with the capital and the liquidity and the desire to make
loans, and you just need to keep looking.
Mr. Ellsworth. Thank you.
Ms. Dorfman, this Committee probably has the best chance of
changing things within the Small Business Administration, and
thank you for being here again and your honest testimony.
What changes do you seek, on this side of the table, could
be made in the short term with SBA that we can really have an
effect and we can go after between now and the end of the year
or early next year that would provide the most short-term help?
Ms. Dorfman. First of all, again, if you increase the loan
guarantees and the limits, we do need to make sure that it is
going to be 2 years or more. I personally faced a while ago
when I got an SBA loan where it was 80 percent guaranteed, the
banks--when it first came out that it was 80 percent, the banks
had been lending at a 50 percent guarantee, and I was turned
down, turned down, turned down, simply because they were not
willing to restructure how they were going to be manufacturing
the loan, in quotes. So if there is a long-term--you know, it
is going to be that way for 2 years, then they are more likely
to restructure how they do loans. So I think that is important.
We need to have increased lending authority, lower fees
absolutely. Loosen up the rules on the credit-worthiness and
also loosen up equity injection rules. Relax the rules for
refinancing, especially credit card debt, since many of our
small businesses are now having to turn to their credit cards
to make ends meet in this time frame. Relax life insurance and
job creation requirements. And then also allow those with
current SBA loans that may need to restructure them for a lower
payment to be able to do so.
So those are some of the thoughts we have had.
Mr. Ellsworth. Could I ask another question, just another
for clarification?
Chairwoman Velazquez. Yes.
Mr. Ellsworth. On that point, because loosening the rules
of credit-worthiness, some would argue that is what got us into
the loans that went to people that weren't worthy of loans, and
that is why we are in this, and I am not talking about small
business, maybe home loans.
How would you argue that? When I go home and say that is
one of the things we want to change, they are going, that is
what got us into this problem to begin with.
Ms. Dorfman. If you take a look at home loans especially,
what has happened is if, quote/unquote, you own your own
business, and they view you as self-employed, even though you
are bringing in money all the time, it is very difficult to get
the loans that you might need. So there are times when some of
the regulations need to be loosened, and certainly you need to
take a look at that.
Mr. Ellsworth. Thank you, Madam Chairman.
Chairwoman Velazquez. Thank you.
Mr. Franke, the reason we called this hearing today is to
hear from you and see how can Congress take actions to be able
to provide tools and help to assist small businesses, which are
the job creators in our country. I can tell you that help
didn't come soon enough for your business, but I hope that in
the process of discussing a second stimulus package, that we
are able to use the insights that we are getting from you today
to be able to have some input into the end product of that
second stimulus package.
So I would like to ask you, we know that the company you
run has been in operation since 1925, and I am sure that you
have faced many obstacles throughout that time. However, you
discuss how the problems in the housing market compounded the
challenges facing your lender.
Do you believe that if credit was made more available, that
companies like yours might be able to rebound rather than shut
their doors?
Mr. Franke. I think probably if they would have remained
tightened earlier, we wouldn't have hit this wall. So now, yes,
probably. But, yes, I would say probably so.
Chairwoman Velazquez. Mr. Wilson, from your testimony, it
is clear that banks want to lend, but again we have heard so
many businesses express difficulty in getting loans. How can we
resolve this disconnect and help businesses find lenders who
are ready, willing and able to help?
Mr. Wilson. Well, the first step was to unfreeze the credit
markets. I know so often we look at the financial markets as
the major stock market went up, stock market went down, but it
is really the credit markets where the problem lies. And no
matter what our desire as a small bank is to make loans, if the
larger banks and if the bond market is tied up and
nonfunctioning, it will be very difficult to meet all of the
needs in our country for credit. So, again, I think that it was
very, very important that you moved forward as you did.
To Congressman Ellsworth's point, I know he was conflicted
a bit, using that word again, on somebody wants a loan, we
lower the standards, is that a good idea. And I would submit to
you that it is not a good idea. I think that is what did get us
into trouble. I believe that as a banker, we are doing our
customer a favor when we tell them "no" if we truly believe
they are not going to succeed. To make a loan to somebody that
is going to result in their failure does not make sense, but to
work with them to understand how they can move forward--and I
know you indicated that if they would have kept their standards
steady throughout, that you would still be in business today,
and I believe that.
I received an e-mail the other day. That e-mail was from a
customer that said they had come in to see me, and I know the
year, because they said they asked questions about Y2K, so it
was the 1999 time frame. That customer indicated that they had
liked my answers, and they had opened accounts with our bank,
and subsequently we turned down a loan to them. They were
frustrated, they were angry, and they left our bank. His e-mail
was to say he shouldn't have been granted that loan; that he is
back, because if we would have told him no, he would have been
in better financial stature at this point in time; and that he
moved back to our bank because he appreciates the fact that we
underwrite loans, that we are concerned about the success of
our customers and the suitability of loans.
So, you are absolutely right. The answer is not to lower
credit standards. It is to inject the capital and the
liquidity.
Chairwoman Velazquez. Yes, Mr. Bradbury.
Mr. Bradbury. I would like to respond a little bit. I think
we all can select anecdotal stories, in all fairness, Mr.
Wilson.
There is real math at work here, whether we talk about a
farmer whose input costs have gone up 100 percent, over 100
percent, his financials haven't changed, but to deny credit
under those circumstances that is beyond his control, he or she
hasn't changed a thing. In the case of our company, steel going
up 85 percent. We spend $6 million to $8 million a month, and
we don't get it back at the earliest until 90 days, usually 120
days, and to deny credit in those circumstances based upon
those facts to me is not appropriate.
So, there are proper times when businesses are failing
across the board, but we are in, in my view, very unusual times
with $140, at one point, oil, steel up 85 percent, and some of
the other figures. These for small businesses are just
Draconian percentages that we have to deal with, and, frankly,
we need the help of the banking community.
Thank you.
Chairwoman Velazquez. Mr. Bradbury, over the past few
months, there has been a wide discussion of the challenges
facing the automakers in the United States. How important is
the domestic auto industry for small businesses like yours and
others across the country?
Mr. Bradbury. Well, in automotive, there are many tiers of
suppliers. There are five tiers up to the OEM level. We fit in
the tier 2 to 3, meaning we have a loot of tiers below us that
support us.
As credit tightens, there was a lot of weak companies
already going into this. Fortunately for us, and I am going to
kind of elaborate a little here, we have a fiscal
responsibility to control our debt as a small company, and our
stakeholders insist we pay our debts off.
Had that not been the case, I might be sitting in his shoes
today, because we were about ready to grow and expand, not even
a year ago, and because we ran into some issues with some bond
financing on the property, we decided not to, and luckily that
saved us a lot of extra costs.
But the communities, we supply $20 million in income into
our community. That is a significant amount, in taxes, wages,
not to mention all the other suppliers' products we buy. So
there is a tremendous ripple effect that is present there if
they start to collapse.
Chairwoman Velazquez. Thank you.
Mr. Brown, you discussed that many small manufacturers are
currently struggling with decreased demand for their products.
Has your company's sales been affected, and are you considering
layoffs or delaying expansion plans?
Mr. Brown. We actually are in a growth mode. We are in a
growth mode because we were concerned about the volatility in
America. We approached the Kansas World Trade Center and also
the U.S. Department of Commerce.
We didn't start exporting until just 3 years ago. With
their help, we are now, as I mentioned in my testimony,
exporting to Russia, Kazakhstan, Ukraine, Australia, a little
bit to the U.K., and we are developing the skills. Frankly,
there is a huge body of knowledge on how to finance it, Ex-Im
Bank and the paperwork that is required. This is an area both
for Krause and the small enterprise Committee that we are going
to aggressively go after.
Our strategy, because of the volatility within America, has
been to stabilize by going global. When America goes through
the spasms, and that, in my view, is what this is, this has
provided a buffer. So, we actually are growing. I think
agricultural equipment producers generally have been growing
this past year because of the global shortage of food.
Construction equipment, conversely, very much mirrors the
general economy, the reduction in infrastructure, bridges,
building, residential. They are hurting to a greater extent
than my company is.
Chairwoman Velazquez. Thank you.
Mr. Chabot?
Mr. Chabot. Thank you, Madam Chair. I just have a couple of
questions.
Mr. Wilson, could you comment on to what extent the high
energy costs that we had over the last year or so, whether it
is gas or diesel, what impact you think that had on small
businesses and the economy, if it did, if you think it did; and
then what, if any, impact do you think the rapidly falling
price at the pump--I saw it as low as $1.99 in Cincinnati
yesterday, at least four stations had it at that, so it has
come down pretty quickly. Some of the reasons, unfortunately,
aren't the best, obviously, because the economy is tough right
now.
Could you comment on that?
Mr. Brown. I am sorry, I thought you said Mr. Wilson.
Mr. Chabot. If I did, I apologize. I meant you. I have my
next question for Mr. Wilson.
We can't see your names down there. We spend all this money
on the new room, and we can't see your names.
Mr. Brown. Energy costs are critical in agriculture.
Fertilizers, what has happened in fertilizer is extraordinary.
By order of magnitude, 5 years ago, anhydrous ammonia, which is
the primary nitrogen fertilizer, was between $120 and $180 a
ton. This past year, it was $1,200 a ton. It is made from
natural gas primarily. It has now, quote/unquote, dropped to
$800 a ton.
So the impact of high energy costs have driven inflationary
ramifications throughout every industry, agriculture
notwithstanding. Certainly on the construction side, the
reduction of allegedly of 1 billion miles a month of driving
and the order of magnitude like that has had a very dramatic
impact as well.
So, the drop for us personally, our company, the drop to
$70 oil, while it will be helpful, pales in comparison to our
cost of steel and health care.
Mr. Chabot. Thank you.
This time I did mean the question to you, Mr. Wilson, if I
could. Did you have a comment?
Mr. Bradbury. Yes. In automotive, plastics are all made
with oil resins. So as oil went up, plastics went up, and you
saw a lot of bankruptcies in the plastic industry because we
can't pass our increases on to our end customers. We also get
charged, we have daily shipments coming into our plants. There
are surcharges on all of those for gas. So as that comes down,
that does help us in that it will reduce costs over time.
It also goes to the model mix in the automotive. Many
people were buying large SUVs and trucks and vans. That changed
overnight. I mean, there was a huge percentage drop in those
vehicles. They are starting to creep back up, which will
stabilize the market a little and buy time to meet the CAFE
long-term.
Mr. Chabot. Finally, Mr. Wilson, could you comment, you are
familiar with the mark to market accounting changes that were
made some time ago. Could you comment on the impact that that
had on this whole financial mess that we have seen recently?
There have been some changes suggested and I think that are in
the process of being implemented. But could you comment on that
whole process and how that has affected the banks and how your
books look and why you can or can't lend because of that?
Mr. Wilson. It has been a major impact, and the impact has
been that it takes liquidity off our books. If we have to write
down a security that we have no intention of selling, we are
going to hold to maturity, it is going to be worth its face
value, yet according to those accounting rules, it is worth
today half, say, of what it was. Well, that is that much
liquidity, capital, that comes off our books.
Mark to market is an interesting thing. If we mark to
market both sides of the balance sheet, if we mark everything
to market, our buildings, et cetera, et cetera, both sides of
the balance sheet, there might be some sense to it. But to just
simply pick off things out of the balance sheet and have us
mark them to market is a bad idea. It is an idea that when the
FASB or the Accounting Standards Board comes up with something
we have to comply with. That is why in my testimony I indicated
that I would hope there could be an oversight board for
accounting that would think of the consequences of these things
to our economy. It is all done in the sense of transparency and
making things more visible to shareholders, et cetera.
Well, I would argue if you don't mark to market the entire
balance sheet, you are causing wide swings that don't need to
happen and are not representative of what is really going on
with our bank's balance sheet.
So, thank you for asking that, because that is something
that is of great concern to us.
Mr. Chabot. Thank you. That was one of the things which
contributed to this credit crunch, where banks weren't able to
loan, which put us in this terrible position; is that correct?
Mr. Wilson. That is correct.
Mr. Chabot. Thank you very much. I yield back, Madam Chair.
Chairwoman Velazquez. Mr. Ellsworth.
Mr. Ellsworth. Thank you, Madam Chair. I don't mean to
ignore the three gentleman at this end of the table. My
question seems to aim more at Ms. Dorfman and Mr. Wilson.
If the both of you, on the chance that there are
entrepreneurs out there watching this program today, what
advice would you give to someone baking cookies or whatever on
where they should go? They are having trouble getting credit,
they are balancing the books, they are not balancing the books.
What would you tell the entrepreneur today where to start
looking for those lines of credit?
Mr. Wilson, would you tell them come into the bank, check
and see? Ms. Dorfman, what would you tell them, SBA? If you
could touch on that.
Ms. Dorfman. Well, first of all, most of our members are
more what we call the midlevel businesses. They are
manufacturers, technology, professional services, a lot of
construction folks. So their challenges are quite a bit
different than what you are referring to as a start-up.
The start-up, there are resources out there, the Small
Business Development Centers, they could stop in and start the
process of understanding how to start a business and what is
needed to move forward.
I think with the businesses that we deal with, it has been
very difficult, because they have relationships with their
banks, and their banks have just cut them off, and that is the
issue.
Another example you had mentioned, you know, loosen up the
rules of credit-worthiness. Well, in the cyclical world which
many of our members operate in, they know that they are going
to get the check in 30 or 60 or 90 days, but that is not going
to fulfill what the bank has to do from a regulatory
standpoint. So they are not able to access that credit for that
short term to really be able to pay their employees and keep
the business going. And that is the challenge.
Mr. Ellsworth. Thank you.
Mr. Wilson, any comment on what you would tell the person
out there, the business owner?
Mr. Wilson. A couple of things. Number one, I would not
give up. I think that a lot of businesses that are in
difficulty have not tried to access the SBA programs. That is
one important way to go.
Another thing is when you are talking to your community
bank that you have worked with for a long time, if that is your
relationship, and they tell you that they think building that
new building or doing whatever is a bad idea because of
numbers, cash flow, et cetera, I would suggest that they
listen.
It is a very difficult time right now, and while we want
the economy to grow and prosper, individual businesses must be
very cautious at this point in time, because if they are not,
survival becomes an issue.
Mr. Ellsworth. Thank you all very much, Madam Chairman. I
yield back.
Chairwoman Velazquez. Mr. Wilson, in your testimony you
note that the economic disruption is now affecting commercial
real estate and small business lending. Do you believe that
small businesses will have greater access to financing if the
TARP were used to purchase or guarantee a broader class of
loans, including commercial real estate and small business
loans?
Mr. Wilson. I do indeed. If we expand that program to
guarantee not just mortgage loans, but to guarantee commercial
real estate and small businesses loans, there is no doubt that
that would provide more access to credit. There are a number of
things that I had in my testimony, the SBA, what Congressman
Chabot referred to as accounting standards. Anything that
provides more liquidity to the banking system is going to make
them more able and more willing to lend.
Chairwoman Velazquez. Mr. Wilson, I believe that Congress
has given the authority to the Secretary of the Treasury to use
TARP and to extend it to include commercial real estate and
small business loans.
Mr. Wilson. That program is not in place, to my knowledge,
at the present time.
Chairwoman Velazquez. They are working on regulations. What
I am saying is we do not have to revisit the law that we
passed, because the authority is already there, and we will
work with Treasury for them to understand that it will be an
important tool for small businesses.
Mr. Wilson. Thank you.
Chairwoman Velazquez. Mr. Brown, you mentioned that many
rural Americans and small businesses as a result of the current
crisis are losing faith in our economic system. Why do you
believe that there is a crisis of confidence?
Mr. Brown. Thank you. The rural Americans, frankly, are
looking for solutions to the problem rather than handouts. The
example I would use, and I will use both construction and
agriculture, and I think I can speak for the gentlemen to my
right, we would much rather have markets restored, a vibrancy
of the competitive environment, that we can continue to do what
we do best, rather than many of the programs that are being
discussed.
Rural America doesn't see or feel often these programs
impacting them. I am not an accurate historian, but I am going
to use an example. Twenty years ago when Japan went through a
similar housing situation, they, meaning the central
government, did not allow unemployment to exceed 6 percent.
They invested hugely in roads and bridges and dams and other
areas that continued business in all locales of the economy.
So, the bottom line for rural Americans, it is kind of a
tangible. Let us do something that is proactive and positive,
rather than just dole out money.
Chairwoman Velazquez. Mr. Chabot, do you have any other
questions?
Mr. Chabot. No.
Chairwoman Velazquez. I would just like to ask my last
question to any of the members of the panel. As you know, there
are discussions here about a second stimulus package. And I
hear you, Mr. Brown, but maybe other members of the panel have
other opinions regarding any type of proactive action taken
through a second stimulus package.
If we do have the opportunity to work on a second stimulus
package, what would you tell Congress should be the first or
top priority regarding any second stimulus package?
Mr. Wilson?
Mr. Wilson. You have a very difficult task there. You are
riding a very thin line between knowing when to stimulate the
economy and not creating future problems. If you overstimulate
the economy, if you do more than you have to do now, and I am
not saying you are, it is just a challenge that you face, we
are going to face increasing inflationary pressures in the
future, we are going to increase the national debt in the
future, so we are passing on to future generations what we do
today.
It is important to get the economy moving again. It is
important that you look at things like additional packages,
stimulation packages. But be cautious, be careful, because you
don't want to overdo it.
Chairwoman Velazquez. Any other comment from any of the
other Members?
Ms. Dorfman. I would agree that getting money back into the
small business pockets, many of our members say, you know, give
us the sales. That is what will keep us going. So if there are
programs such as Mr. Brown had discussed where the small
business owner actually gets access to those contracts, then
that would be great. That would work very well for them.
Chairwoman Velazquez. Mr. Brown?
Mr. Brown. Yes, thank you again.
I would strongly urge the first consideration be aimed at
what we call the capital goods industry, manufacturing and
producing something that has lasting and sustainable value.
I personally face a decision whether to continue to build
some of our product in the United States or build it in Russia,
and I haven't got a clue what it is like to build in Russia. I
am not sure I even want to do it.
But if we don't start investing in basic manufacturing and
the basic capital goods industry in this country, and we
continue the outsourcing that has occurred, no amount of
consumer stimulus will solve the problem.
Chairwoman Velazquez. Mr. Bradbury?
Mr. Bradbury. I agree with Mr. Wilson in the sense of what
is the right amount of growth and what is the right amount of
risk? How much debt is too much, and how much growth is too
much?
You know, we are in the automotive industry, and our
industry has gone global in the last 3 years. We opened a plant
in Asia, and we had to increase our overhead in order to manage
it. In my testimony, I mention the fact that there is
opportunity to challenge Americans to achieve new heights. We
are a society that can rise to the challenge. We have seen it
time and time again.
The CAFE is a challenge. It is something that we have to
achieve. It can drive a new business opportunity for Americans
to aspire to become the leaders in the world in those types of
things. But we need enough funding to be able to generate the
type of investments we need to make to survive here in this
country first.
Thank you.
Chairwoman Velazquez. Mr. Franke?
Mr. Franke. I guess the only thing I could say is I would
love to go back to 2005 and make some different decisions based
on this isn't going to last forever. That is all.
Chairwoman Velazquez. Mr. Chabot?
Mr. Chabot. Just one final comment. I would like to again
thank you holding the hearing and want to thank all the
witnesses for their testimony. I think it has been very helpful
and informative for the Committee.
I want to especially again thank Mr. Franke. We have had a
lot of witnesses from Cincinnati, and generally they have happy
endings. Unfortunately, this is one that is very sad,
especially for those employees whose jobs had to be eliminated,
and I am sure for your family, to have been in existence for
125 years. Obviously it was a very significant change in the
environment that you operated in that has resulted in this.
So our condolences, and we certainly hope that your family
does as well as possible and the employees to the extent that
you can help them as well. We thought this was a story that
needed to be told in these very tough economic times. Thank you
for sharing it with us.
I yield back.
Chairwoman Velazquez. I echo the comments made by the
Ranking Member. I will say that the record of this hearing
today will be made available during any discussion with the
leadership in terms of a second stimulus package.
The intent of this hearing was precisely that. Any time
that we sit at the table to have meaningful discussions
regarding how can we best stimulate our economy, and what type
of tools can we provide for small businesses to enable them to
continue to grow our economy, that was the main reason for us
to call this hearing. So I want to take this opportunity to
thank all of you for your insightful information.
Mr. Franke, to you, thank you for your willingness to come
and tell the story. So many times we discuss the economy and
the numbers and the unemployment rate and the deficit, but
there is a human face to all those numbers, and you signified
that at such a great level.
I ask unanimous consent that Members have 5 days to submit
a statement and supporting materials for the record.
Without objection, so ordered.
Chairwoman Velazquez. This hearing is now adjourned.
[Whereupon, at 11:40 a.m., the Committee was adjourned.]
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