Business Insider Magazine - Volume 4 - Issue 1 - 3rd Issue 2008

INSIDE:4th Annual Business Meeting, Event & Banquet Guide The Los Angeles South Bay B2B Magazine • Third Issue 2008 • Volume 4, Issue 1 • www.BusinessInsider.us • Complimentary Copy

BUSINESS insider Banking on the South Bay 7 South Bay Financial Institutions Provide a Ray of Hope in Dark Market Read in-depth perspectives from C. G. Kum, President & CEO of PRESORTED STD U.S. POSTAGE PAID PERMIT 447 LOS ANGELES, CA

First California Bank and 6 other South Bay Financial leaders on the impact of the banking crisis in your South Bay business community.

SUBPRIME FALLOUT - CREDIT CRUNCH - MORTGAGE MELTDOWN!

The Rules Have Changed!

Publisher & Editor David Whitehead

Debt Structuring, Credit Management And Tax Planning Crucial in Real Estate Financing

Contributing Writers Dennis Branconier, Ed Burzminski, Ken Roberts, Brian Simon, David Whitehead

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housands of homeowners are learning the hard way how short-sighted mortgage opportunities can devastate their financial situation. In the current volatile mortgage market, a mortgage is no longer just a mortgage. It is a financial instrument that needs to be woven into the fabric of your short and long term financial plans. As a Certified Mortgage Planning Specialist and Certified Liabilities Advisor, I take a financial planning approach to mortgage lending and debt management to effectively maximize tax advantage while structuring your financing with safety and liquidity in mind.

BUSINESS insider MAGAZINE The South Bay Los Angeles Business-to-Business Magazine

Graphic Design & Production David Whitehead Copy Editing & Proofing Brian Simon

Ken Roberts CMPS, CLA President Certified Mortgage Planning Specialist Certified Liabilities Advisor 30 Years in Real Estate

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Advertising Sales Manager David Whitehead Assistant to the Publisher Alexandra C. Hart BUSINESS insider MAGAZINE Welcomes Input From The Community: All Letters to the Editor should be concise and include the writer’s name, address and phone number. BIM will publish select letters addressing relevant issues and topics discussed in the magazine. We will not publish street address, email address or phone number. If the editor comments about a letter, the reader may respond with at least as many words as were used by the editor. We would like to stimulate a sincere dialogue. All letters become property of BUSINESS insiderMagazine and are subject to editing for length, content, grammar, punctuation, etc. Letters may be submitted by email to: [email protected] Or mailed to: BIM Letters to the Editor P.O. Box 1032 Palos Verdes Estates, CA 90274 (310) 872-9732 www.BusinessInsider.us www.TheBizBoard.net BUSINESS insider MAGAZINE makes every attempt to provide business decision-makers with current and accurate information. However, BUSINESS insider MAGAZINE disclaims any implied warranty about the correctness or accuracy of information published in BIM and www.BusinessInsider. us or its appropriateness for a particular purpose. You assume full responsibility for using the information and understand and agree that BUSINESS insider MAGAZINE is neither responsible nor liable for any claim, loss, or damage resulting from its use. Opinions and/or claims of BIM contributing writers and advertisers do not necessarily reflect the opinions of BIM’s publisher. © 2008 BIM Publications & BUSINESS insiderMAGAZINE All Rights Reserved

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In This Issu e...

Cover Story: Banking on the South Bay 2008 7 South Bay Financial Institutions Provide a Ray of Hope in Dark Market ... 25 Financial Insider Your Large Life Insurance Premium Need Not Come Out of Your Own Pocket ... 9 A Real Estate Pro’s Perspective Where There is Smoke ... A Financial Blaze is Soon to Follow ... 12 Publisher’s Perspective The Good News: The “Bailout” Passed” The Bad News: The “Borrowout” Passed” ... 15

Marketing and Advertising Insider: Advertising in a Down Economy ... 10

Technology Insider: Mobility Problems in the High-Tech Workplace ... 6

SPECIAL FEATURE: 4th Annual Business Meeting Event & Banquet Guide ... 17-24 South Bay Calendar of Business Events: Save the Date! ... 27

Banking on the South Bay Get’s Interesting This Year! I feel bad for good banks that have had their industry’s reputation tarnished by loose lending practices during the real estate boom. Unfortunately, we find the topics of banking and real estate forged together in infamy under the heading of “subprime loans.” But the good news is, business banks generally don’t get involved in dodgy sub-prime loans and the financial institutions profiled in this year’s “Banking on the South Bay “ issue are generally a pretty conservative lot. They simply don’t dabble in risky lending and never have. However, given the unprecedented events of the past year, Business Insider Magazine feels an obligation to be circumspect in our analysis of the banking crisis. For at least the next generation, September 2008 will be viewed as one of the bleakest months in the history of American banking. The first event to grab headlines was the government’s decision to take control of the nation’s largest holders of mortgages, Freddie Mac and Fannie Mae, as more than 117 banks remained on the FDIC’s watch list of troubled institutions. Then the great Lehman Brothers stunned the financial community by declaring bankruptcy, and no bailout seems possible. Bank of America stepped in to purchase Merrill Lynch as AIG, Wall Street’s premier insurer, is seeking a multi-billion dollar bailout. In addition to our profiles of local bankers discussing how the credit crunch has impacted local banking and in some cases even created new opportunities, we also examine monetary issues key to the folly that will affect our nation’s economy for years to come. Your publisher makes no claims to psychic powers. However, we did plan to release the annual banking issue in this time frame a year ago, so our timing turned out to be impeccable.

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TECHNOLOGY INSIDER

Mobility Problems in the High-Tech Workplace By David Whitehead

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as mobile technology made the traditional office obsolete? Technology has mobilized business people in ways barely imagined when most of us started our careers. Wireless technology is cheap and available everywhere we look. An inexpensive laptop computer can now hold enough data on its own to outshine small office networks of the eighties. Virtual servers are cheap to rent, relatively secure and accessible from any Internet connection. In fact, all of these innovations have brought into question the need to have a traditional office at all. In truth, there is very little I do in running my business that I can’t do with a cell phone and my laptop computer using virtual resources. And my life has been that way to some degree for several years. When I started Business Insider Magazine, I was anxious to get out of the prison cell I once called my office. I had traditional managers who didn’t understand the way I liked to work. Their vision of the workplace included an indoor skyline of tall filing cabinets overlooking a landscape of crinkled papers hanging over the edge of long neglected in-boxes. When I left, I felt liberated from the ball and chain we called headquarters and of all of the paper-producing administrative procedures I considered archaic. In this day and age, a magazine publisher doesn’t need to generate tons of paper in the office to generate tons of paper at the printer. But the transition to a mobile work life wasn’t as easy as I anticipated. Since much of an upstart publisher’s life involves sales, I immediately became a laptop road warrior. I regularly invaded every caffeine-fortified Wi-Fi “hotspot” I could find to go about my business in decidedly modern fashion. Do I really need a regular office to run my business? The fact is I don’t. But everyone needs a proper place to work to be productive. That’s where there is a big disconnect with mobile technology and workplace productivity. I learned there are major complications in getting things done when the workplace has no place to call its own. Pitfalls to Working on the Road Whenever you go into a coffeehouse these days, you regularly see people working on their laptop computers. At

6 S O U T H B AY B U S I N E S S I N S I D E R M AG A Z I N E

the beginning or end of the workday, it’s a fine place to go to recharge your motor, check and respond to email and get caught up on your administrative work. And it’s not a bad place at all to write, research online, or do creative work. This is where working from wireless “hotspots” is at its best. But most public forums are lousy places to do phone work. And that’s a big problem for business owners and salespeople trying to work on the road. Public places either have too many distractions or the ubiquitous cell phone shout ends up disturbing others. Plus, you have to walk outside to have a private conversation. California’s new law requiring motorists to use handsfree sets when using a cell phone while driving just adds another complication to the mobile work life. It seems mobile technology has developed a workplace image that is not realistic. I roll my eyes when I see ads depicting young, hard-charging executives running though an impressive office plaza while taking an important call on their cell phone. It creates a sense of energy suggesting the kind of productivity that leads to success. But think about this for a moment: How many people are really so good at multi-tasking that they can have a coherent business conversation while running down the street without knocking people over or getting hit by a bus? Do people really work like that? Well, I occasionally get long, rambling voicemails, usually left after hours, from someone with a jittery voice huffing through their words because they are trotting along very quickly as they are speaking on their cell phone. When that happens, I really think they are tying to give me an exaggerated sense of their own importance by letting me know I am not worth a proper conversation during the business day. Mobile technology has given arrogant people entirely new ways to act unprofessionally. And I love those ads depicting trendy young people with laptop computers pointing and clicking away while reclined in contorted positions no person over 40 could hold for more than five minutes. I occasionally do see young people working that way with their laptops, but real Continued on page 8 3RD ISSUE 2008

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TECHNOLOGY INSIDER immature employees giggling the day away, and strange alternative music reverberating through the room. If you try to make a business call from a place like that, people overhearing the background noise think you are in a Bohemian night club or maybe an opium den. I used to look for Starbucks locations where fewer people hung out and the sound system tended to be tamer. I suspect those are the ones they plan to close. I couldn’t

Continued from page 6 businesspeople are more likely to be hunched over them, sometimes grimacing as they work. That’s how I know they are serious road warriors. Personally, I have found there are too many glaring productivity problems that spring up when working regularly from public places. First, most coffeehouses have a loud, bistro-like atmosphere, including gurgling espresso machines, boisterous

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work at the Starbucks nearest my home because it was right next to a school. The mommies took the place over after dropping off their kids and they sat around chatting loudly until noon about their domestic adventures spiced up with bawdy neighborhood gossip. And then teenagers would start showing up about 3 p.m. to create havoc the rest of the day. Their gossip tended to be bawdier. It was really a lost cause trying to work in this environment. There was one place I hung out frequented by grouchy retired people who would regularly admonish me, “This is not an office!” even when I wasn’t using the phone. It simply bothered them to see people stressed out working when they were trying to relax. The one place where I generally could work was at airport terminals, but you can only do that when you are traveling. Airport terminal activity creates more commotion than an individual cell phone user could ever hope for, and in this environment of frantic people and endlessly droning noise, you can usually find a place to camp out and do the work you need to do. An airport creates an energy that puts you immediately into a great rhythm for getting productive. Plus, you have absolutely nothing else to do while waiting for your plane. And you always sound important when you tell people you are calling from the airport. But other public places are anything but conducive to this kind of work. I eventually gave up trying to work routinely from the road and went back to a semi-traditional office, meaning I still work mostly virtual through the Internet, but I have decided to be far less mobile by choice so I can get some work done. Plus, I was drinking too much coffee every day. So given this marvelous technology that allows a person to work anywhere, why is the traditional workplace likely to be around for the foreseeable future? Because practically speaking, even though mobile techContinued on page 39 3RD ISSUE 2008

FINANCIAL INSIDER

Your Large Life Insurance Premium Need Not Come Out of Your Own Pocket It is Possible to Get Tax Free Money to Pay Your Estate Taxes Without Impacting Your Working Cash Flow! By Dennis J. Branconier, CLU

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r. and Mrs. Successful Business Owners (we’ll call them Mr. and Mrs. Subo), now in their mid-60s, have recognized that it’s time to make some critical decisions that affect both business and family. They have built a solid and growing manufacturing company over the past 28 years and wish to keep the family business thriving into the next generation. Of their three children, their daughter and one son in their early 30s are active in the business and have shown both competence and interest in continuing to grow the company. The other son has developed his career in education and is unlikely to participate in the family business. Mom and Dad want to treat all three equally as they address their estate planning goals for the present and future. About five years ago, in a joint meeting with their estate planning attorney and CPA, it was clear that the Subos’ success was resulting in the rapid growth of their assets, with far more expected. At that time, their net worth was about $5 million, comprised almost entirely of their business. Their advisors recommended transferring a minority interest, as large as they were comfortable with, to an irrevocable trust for the three children. In that way, all future growth of those assets would occur outside of the Subos’ estate and therefore avoid estate taxes upon death. Though this made sense economically, Mom and Dad felt uncertain and awkward about giving up some control of the company. In addition, though the children were showing good promise in their young adulthood, the parents were concerned that giving too much to them might be a curse rather than a blessing. They decided to follow their advisor’s recommendation and gift a portion of their company stock to a children’s trust, but kept it conservative by transferring 20% of their interest. The appraised value of the company at the time was $4,000,000, but the 20% interest was worth less than $800,000 due to lack of marketability and lack of control. So the value reported on the Subos’ gift tax return was actually less than $600,000 as calculated by a professional appraiser (today that stock is worth $2,200,000, which translates into an estate tax savings of about $1,000,000). Now that this strategy is “old history” for them and the children are five years older and more mature, the Subos wish they had done more at the time, but they are now

3RD ISSUE 2008

focused on how to make the most of the next steps of their succession plan. The company is now worth $11,000,000 and counting (their 80% worth almost $9,000,000), with their net worth approaching $12,000,000. Though they are still in good health, they do not fight the realization that the day will come when they will no longer be here. If they were gone today, their estate tax liability would be nearly $4,000,000. With even modest growth over their life expectancy of about 20 years, it’s not hard to imagine the tax liability getting out of hand (5% growth would add another $5,000,000 to the tax bill in 15 years under the 2008 tax schedule). Space restrictions prevent the author from discussing strategies to reduce and/or freeze the size of the taxable estate. Those techniques can and should be applied as fully and reasonably as possible with the help of qualified tax and legal advisors. Whatever is left is subject to estate taxes under two conditions: 1. The government accepts only cash. 2. The government expects to receive cash within nine months of death (for a married couple, typically this means the second death). This presents a particularly glaring problem if the estate’s assets are largely illiquid, as is the case for many business owners and real estate investors. Create Needed Liquidity Double Tax-Free Life insurance is the only method authorized by the Internal Revenue Code to create income tax free dollars upon death. When structured properly, it can also avoid estate taxes. That’s why it is such a popular tool for addressing the estate tax liability. However, when the premiums are substantial, several considerations come into play: • The estate owner might not have the cash flow or liquid reserves to cover the entire premium. • The estate owner might rather have use of the money for business or other investment opportunities. • Gifting of the premium dollars to an insurance trust (or the children outright) might exceed the annual gift Continued on page 38 S O U T H B AY B U S I N E S S I N S I D E R M AG A Z I N E 9

MARKETING & ADVERTISING INSIDER

Advertising in a Down Economy By Ed Burzminski

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hen the economy starts slowing down and sales drop off, the natural next step for a business is to cut unnecessary expenses, which usually includes advertising. While this may seem like the natural thing to do, a contrarian approach is to spend more on marketing and advertising. There is still a need for your product or service, and the company that comes to mind is where the money will flow. How often have you scrolled through to the second page of a Google search? The theory goes that companies investing in Search Engine Optimization, or SEO, to get their names on the first page of a web search will generally see more business than those that aren’t making the investment. The same theory holds true for advertising in a soft economy. The company that continues to invest in advertising will not only survive, but will more than likely thrive when the economy picks up again. Identify Where Your Target Market Gets Its Information. If you’ve never considered advertising your business or you currently are advertising and want to improve results, consider where your target market gets its information. • What publications do they read? • What trade shows do they attend? • Are there networking groups for that specific market? • What trade/professional organization do they belong to? • What networking groups do they attend? • What websites are specific to the market? • Who are their trusted advisors? • Where do their trusted advisors network? • What do their trusted advisors read? This type of market research helps fine-tune the type and frequency of advertising investment and ensures that your ad gets the maximum opportunity to be noticed by your target audience. Let’s talk about the trusted advisors. If your business is a professional service, oftentimes work is generated through referrals from a CPA, an insurance broker, a networking group or some other trusted professional advisor. A referral from one of these people can open doors that are otherwise difficult to open. Many chambers of commerce are good places to network. The trick with chambers is that you get out of it what you 10 S O U T H B A Y B U S I N E S S I N S I D E R M A G A Z I N E

put in. In other words, to maximize the networking value of a chamber, be prepared to get involved in committees and helping out with events. Size and Frequency To be effective, advertising has to be repetitive and consistent. Building an identifiable brand is an important component to advertising. While it’s common to think bigger is better, often in advertising a smaller ad that runs regularly is more effective than a full page that only runs once. When I lived in Marina del Rey, each week I looked through the Argonaut community newspaper to find the Handy-J Car Wash ad for the discount coupon. It was always there, just in a different place each issue. So I had to hunt around for it. I made it a point to go to Handy-J whenever my car needed a wash—after picking up an Argonaut, of course, and clipping the coupon. As it turns out, while at Handy-J’s one Sunday getting my car washed, I met the woman who later became my wife. Take Goodyear tires as another example. Why would a tire company spend huge amounts of money to operate a fleet of blimps across the nation? Does it make you want to run right out and buy tires from Goodyear? Not necessarily. Goodyear is building brand recognition by being visible to its market-- just about anyone who owns a car, truck, bus, RV, etc. The Goodyear Blimp is a reminder that the next time one of us car owners is looking for tires, we’ll be drawn to the Goodyear ads in the newspaper or look for Goodyear’s online. I’ve been a devoted Goodyear tire customer for over 20 years. Why? I can’t really explain it; it’s just that I feel a sense of comfort with that brand… I grew up seeing it all the time in television commercials, at ball games and just flying overhead, so I just tend to choose Goodyear over others.

Where to Advertise If your business is a consumer product or service, the most likely places to advertise are in ready-to-buy venues reaching the masses. These can be via newspapers, cable television, the Internet, billboards, bus benches, etc. Here again, it’s important to understand where your market gets its information—or in the case of consumers, what is the demographic, where do they shop, what do they read, are they mostly taking the bus, what and where is their commute, etc. 3RD ISSUE 2008

To be effective, advertising has to be repetitive and consistent. Building an identifiable brand is an important component to advertising. While it’s common to think bigger is better, often in advertising a smaller ad that runs regularly is more effective than a full page that only runs once. Newspapers are “ready-to-buy” media, meaning they are a great place to promote special coupons, products or discounts. The big dailies like the Los Angeles Times reach a wide audience, while community newspapers generally are weekly or monthly and more targeted to particular cities. Local magazines can also be good places to advertise to reach the general population of a city. To find a magazine that is specific to a particular trade or business, start with a Google search for the industry followed by the word “magazine.” You’ll probably be amazed with the number of results. Believe it or not, chamber of commerce business directories and maps are actually an excellent place to connect to a certain kind of audience. Generally, the members of a chamber of commerce are business owners or, if the company is larger, a mid- or higher-level manager. The board of directors is generally composed of the movers and shakers of the business community and the chamber is generally perceived as an organization that gives its “stamp of approval” to its business members. Reaching out to the chamber market is a good way to reach other business owners and managers. A good business directory will have at least a one-year shelf life, include valuable information about the community, the business infrastructure, the quality of life in the community and a comprehensive listing of products and services available in the community. That list is usually limited to members of the chamber and, in the general scheme of things, a chamber membership is not very expensive. In fact, the publisher of the chamber directory or map will usually design the ad for you at no extra charge, as long as you provide them with the text, a photo and/or a logo. That leads to the next issue—actually creating the ad. With all the available software these days, it’s pretty easy for anyone to fancy themselves a graphic artist and create a display ad. Well, you wouldn’t hire a dentist to repair a muffler. Then why hire yourself to do something an expert can do much faster, with much more experience and understanding of design? Hiring an expert will give your ad a clean, professional appearance. Designing the Ad How do you find a graphic artist? Contact the local chamber of commerce for a referral. When you find an ad that looks good, contact the company and ask to be referred to 3RD ISSUE 2008

the graphic artist that created the ad for them. Full-service marketing or public relations companies will generally include graphic design services. Although working with agencies can be very rewarding, it can also become costly. Research and referrals pay off well here. When all else fails, do a Google search for graphic artists or graphic designers in your city. Take a good look at their portfolios and make sure they have experience designing both print and online ads. Web Advertising and Special Offers Online advertising can be a valuable tool. Having a website is becoming a must these days so people can get a better understanding of what you do can create value for the buyer. Optimizing the website so it gets more easily found during a search, or SEO (Search Engine Optimization), is a good place to invest some money with an expert. SEO optimizes keywords to help your website not only show up when someone searches for your product or service, but also ideally help it show up on the first page of the search. This can be quite involved and it is a good investment. Special promotions are great ways to get people to try the product or service. A free consultation, 20% off your first order, or a free extra of some sort lowers the barrier. The local Thai restaurants and pizza parlors often use this technique with their mini-menus that show up hanging on the doorknob. Pictures in an ad, on the website and in any promo help draw in customers. A nice photograph of a schwarma plate on a flyer is a lot more enticing and informative than just writing “schwarma plate” on a menu. Those who don’t know what it is will just pass it up. Those who do may go get it. But a photo can make it look really tasty even if you don’t know what it is. An economy in decline can be an opportunity to grow. A smartly planned advertising strategy is an integral part of survival and can help position a company for gaining market share when the economy again starts to pick up speed. Ed Burzminski is a Business and Management Consultant helping business owners realize maximum performance and value from their business. He was President and co-founder of Performance Publishing Group, Inc. in El Segundo, CA. You can email Ed at: [email protected]. S O U T H B AY B U S I N E S S I N S I D E R M AG A Z I N E 1 1

A R E A L E S TAT E P R O ’S P E R S P E C T I V E

Where There’s Smoke... A Financial Blaze is Soon to Follow By Ken Roberts

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he financial events of the last few weeks are almost unprecedented. To draw an analogy we Californians can relate to, the financial landscape is on fire and blazing out of control. Even with the firefighting Fed’s tireless efforts to contain the blaze, it is picking up speed and cutting a path of destruction through the biggest names on Wall Street. And I applaud the leadership, creativity and courage of fire captains Ben Bernanke (Fed Chairman) and Henry Paulson (Secretary of Treasury), whose decisions and economic policies impact not only our nation, but the entire civilized world. They are proposing a bold measure to try to quell the financial inferno threatening us. But before we get into the details of the firefight, let’s examine the events leading up to perhaps the most complex financial firestorm in history. Much has been said by many about the creation of investment vehicles by Wall Street to meet an underserved market of Baby Boomer funds in search of safe, high-yielding investments providing greater returns for retirement. With no open market for the Collateralized Debt Obligations (CDOs) and Structured Investment Vehicles (SIVs), rating agencies set the value of these investments. It wasn’t until hedge funds began to fail because of mounting losses from non-performing sub-prime mortgages contained within these portfolios that the ratings of these debts got dramatically downgraded. Along with the ability to leverage in some cases hundreds of times over the actual dollars invested was the unbridled proliferation of these investments based on plain old-fashioned corporate greed and a flawed computer model that didn’t see the most glaring hole in its risk assessment: a substantial downturn in the real estate market. That was the lightning strike in the dry brush amidst gusting Santa Ana winds and low humidity that ignited the pending catastrophe we face today. Rumors of accounting irregularities and subsequent financial instability have plagued the two Government Sponsored Enterprises (GSEs) Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) over the past year. On September 7, 2008, James B. Lockhart III, the director of the Federal Housing Finance Agency (FHFA), announced his decision to take over Fannie Mae and Freddie Mac with the full support of Paulson and Bernanke. Combined GSE losses 12 S O U T H B A Y B U S I N E S S I N S I D E R M A G A Z I N E

of $14.9 billion and market concerns about debt and their ability to raise capital threatened to disrupt the U.S. housing financial market. The Treasury was authorized to put as much as $100 billion into each institution to make sure they remained solvent. Guaranteeing mortgages purchased by Freddie and Fannie was the Fed’s attempt to stabilize the mortgage markets and ensure the housing markets have financing readily available. This may make Mortgage-Backed Securities (MBS) more attractive to investors. If MBS carry a higher yield than Treasuries with the same U.S. government-backed guarantee, they could attract additional investment funds and thereby lowering mortgage rates, further fuel home buying, and hopefully begin to shore up the sinking housing market. We now know that deregulation of Fannie and Freddie allowed them to leverage their invested funds up to 50 times! There were several attempts over the last few years to pass legislation requiring more oversight and accountability for both institutions. In 2003 and again in 2005, bills were introduced, but didn’t have enough support to get passed. The warning signs were there. Surprisingly, some of the loudest voices now being heard in Congress decrying the lax policies that led Fannie and Freddie into their current financial mess are the same voices that wouldn’t vote for the proposed oversight because they didn’t see the need at the time! Next, one of the oldest investment banks, 158 year-old Lehman Brothers filed for bankruptcy while 94 year-old Merrill Lynch was acquired by Bank of America in a fire sale of half its market valuation just a year earlier. And the Federal Deposit Insurance Corp. (FDIC) seized control of Washington Mutual, Inc., and JP Morgan Chase & Co. will buy its assets for $1.9 billion. Wamu’s takeover makes it the largest bank failure in U.S. history. Then as the fire rages, the two remaining major independent investment banks, Goldman Sachs and Morgan Stanley, threw in their towels by becoming bank holding companies. This will give

Now let’s turn to the bailout plan devised by the Treasury and the Fed. As it was pointed out to me, we need to stop calling it a bailout, but rather a plan to stabilize the economy.

3RD ISSUE 2008

them the ability to borrow directly from the Fed’s emergency lending facilities as needed to maintain liquidity. And with it comes a substantial increase in federal oversight required in the banking world and new capital requirements. With the acquisition of Bear Stearns by JP Morgan in March of this year, the recent bankruptcy of Lehman Brothers, the purchase of Merrill Lynch by Bank of America and the transition of Goldman and Morgan to banks comes the end of an era on Wall Street as we know it. A few substantial fire blocks have been put in place to contain the blaze. The Federal Reserve announced it will expand its emergency lending program to include the approximately $3.5 trillion in assets invested in money market funds, and President Bush authorized the Treasury to be able to access up to $50 billion from a Depression Era fund to be able to insure money market funds. This was done to bolster investor confidence and avert a run on those assets by consumers. Finally the SEC announced a temporary ban on short-selling of stocks for 799 financial companies in an attempt to reduce harmful speculation that puts further stress on the financial sector. One potential bright spot, although certainly criticized, was the $85 billion loan to insurance giant AIG. Although AIG has 74 million clients in 130 countries and an estimated $1.1 trillion in assets, it currently has short-term liquidity needs. Most people aren’t aware that this is a loan transaction; not a bailout. It is a very straightforward business deal. For the $85 billion, the U.S. government gets a 79.9% equity interest in AIG and all its primary subsidiaries as collateral, with an effective interest rate equaling 11.98% today (the three-month LIBOR rate currently at 3.48% today + 850 basis points), all due and payable in two years. AIG will be able to sell some of its businesses in an orderly manner to repay the loan. This loan could actually work out well for taxpayers.

3RD ISSUE 2008

Now let’s turn to the bailout plan devised by the Treasury and the Fed. As it was pointed out to me, we need to stop calling it a bailout, but rather a plan to stabilize the economy. Paulson and Bernanke proposed $700 billion of federal funds to buy troubled mortgage-related securities and other bad debts, get those off the books of the financial services industry and unload

them to a government-sponsored third party that can hold them long enough to realize some future upside value. This would be similar to the Resolution Trust Corporation (RTC) that came to the aid of troubled savings and loans in the late ‘80s by acquiring defaulted mortgages, foreclosed real estate and other assets of nearly Continued on page 14

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Continued from page 13 750 failed S&Ls. This new entity would service and modify loan terms in an attempt to get them to perform again and hold the problem mortgage-backed securities until a more favorable economic climate in which to sell them presents itself. It’s much like a real estate investor who buys fixeruppers, makes cosmetic repairs and rents them out until the real estate market rebounds before selling. There are some respected analysts who believe the government could actually turn a profit from this transaction! While that may prove to be optimistic, the point is that this is far from lining the pockets of Wall Street with $700 billion never to be seen again. The first draft of the bill was a blank check with no oversight, no accountability, no liability and no chance of being approved. But over the weekend, both political parties rolled up their sleeves and hammered out a plan that had safeguards, oversight, accountability and some potential recourse down the road, while doing away with golden parachutes for senior management of any company helped by the program. It would be broken up into installments. There would be $250 billion available immediately for the Treasury’s use, followed by an additional $100 billion later. The remaining $350 billion could be cancelled by a future no vote of Congress. At first, the proposal was defeated in the House of Representatives. The stock market sold off on the news and the Dow Jones Industrial Average closed down 778 points in the worst single-day decline ever on Monday, Sept 29. There was much debate and finger-pointing by both parties for not getting the plan passed. The average American is mad as hell and dead set against what they perceive as a Wall Street bailout with tax dollars. Many legislators who were either skeptical or opposed to the plan changed their minds when the likes of Warren Buffet said it must be passed to avoid financial Armageddon. Because legislators are coming up for reelection, however, they wanted others in the House to vote for the measure to pass it—not them—for fear of not getting reelected by their uninformed constituents! The public needs to understand where we are and what’s at stake. Congress needed to stand-up and do what’s right for the public good. On Friday, October 3, it finally did by passing the Senate version of the bill, allowing President Bush to sign the document into law the same day. Let’s look at the dilemma we would have faced if Congress hadn’t. Banks can lend about 12 times their capital base. If they have mounting non-performing assets on their books, they either have to sell more equity or reduce their loan portfolio to maintain reserve requirements. Because of banking regulations, they must “mark to market” the value of their assets. If they have “performing” loans and no one wants to

14 S O U T H B A Y B U S I N E S S I N S I D E R M A G A Z I N E

buy them, it makes the value in today’s market inordinately low even though in a normal market they would be worth a substantial amount. Banks are finding that it is extremely difficult to raise the needed capital and there is no market for selling their non-performing or bad loans. So they have to sell the good loans that are performing, but because of weak demand, at a deep discount. Because banks and investors originally used leverage to buy more assets, they must now deleverage. With the non-performing assets on their books, banks have to have extra cash reserves on hand, which reduces the amount of money they have to lend. It is a downward spiral. By removing the “bad assets” to the only organization that has the wherewithal to take them over (the federal government), we free up our banking system to function again and bring back confidence to the markets, both here and abroad. Many medium and large companies finance their daily operations with Tier 1 commercial paper. It is the lifeblood of the business world. It is drying up. At the rate it is declining, in a matter of days, businesses could find they can’t do business, period. The costs of raising money through the issuance of high-yield bonds that many businesses use to finance their growth are so high that it’s impossible for them to raise needed capital. Accordingly, the financial markets are seizing up. This is how dire the situation is. Technically, we may not have the data to officially declare a recession. But sinking stock values, declining real estate prices, rising unemployment and a straightjacket from the credit crunch making all forms of financing difficult if not impossible to get, sure makes average Americans feel like they are right in the path of a raging financial wildfire. I venture to say if the actions being discussed today had been implemented a few months ago, some of the current casualties on the financial landscape might have been averted. More importantly, Congress finally realized if something wasn’t done and done quickly, we wouldn’t have to worry about a recession. Think real estate values at .50 on the dollar, the Dow at 8,000 and 10% unemployment. It wouldn’t just be former Wall Street folks in soup lines. And it wouldn’t have been confined within our borders. Everyone needs to recognize the magnitude of the situation. I liken it to being at a dinner party when the person sitting next to you begins to choke. You could have a debate with other guests about how maybe the choking guest should not have taken such a big bite. You could weigh in on the choking guest’s character and physical condition. Did they bring this on themselves? Has their behavior warranted their being saved? What is their importance in the community? If they passed away, would it deeply impact everyone else’s appetite and enjoyment of the evening? If you save this guest, does it set a dangerous precedent that Continued on page 39 3RD ISSUE 2008

PUBLISHER’S PERSPECTIVE

Good News: The “Bailout” Passed Bad News: The “Borrowout” Passed By David Whitehead

T

he week before this issue went to press, I went back to the drawing board several times reworking this column. Our Real Estate columnist Ken Roberts was cheerleading for the $700 billion rescue plan. He laid out a foreboding scenario facing the economy if a plan wasn’t executed immediately. Being the monetary policy nerd I am, I was keenly aware he was right about the precipice we were teetering over. I was also keenly aware this could set us up for a much bigger fall later because the country is flat broke and deep in debt publicly to the tune of $10.2 trillion. That’s why despite the fact my own business would suffer greatly if the economy didn’t get some financial relief, I couldn’t bring myself to support it. I flipped when I first saw the “$700 billion” headline in the Los Angeles Times in September. Then I was pleased when the House of Representatives rejected the first version. And then I realized the Senate version of the plan was not only more politically palatable, it went right to the heart of consumer fears and added a layer

of oversight the original bill lacked. I thought it was sneaky to insert an extension of the Alternative Minimum Tax into this legislation that excludes about 20 million Americans from this unpopular tax affecting middle class families. Who in Congress wants to vote against that? But this and a lawmaker’s wish list stuffed into the 451-page novel that was ambiguous political legalese at its finest was the clincher that turned things around. On Friday, October 3, the House of Representatives approved the Senate sponsored version of the bill in a 263171 vote. The President signed it into law the same afternoon and it’s now a done deal. I fully recognize we face catastrophic consequences if they had chosen to let the economy correct on its own. And let’s face it: the term “correction” is a euphemism when referring to an event of this magnitude. For that reason, I empathize with the call to put this fire out immediately. The shortterm consequences Ken laid out (see column on page 12) if a rescue plan wasn’t enacted are absolutely correct. However, I fear the eventual conse-

The root causes of this crisis go far beyond any momentary issue facing the financial industry. It’s the aggregate debt load caused by more than a generation of debtdriven economics that is now destroying our economy in short order. 3RD ISSUE 2008

quences far more if we continue to operate under a dangerously distorted and manipulated economic model. The root causes of this crisis go far beyond any momentary issue facing the financial industry. It’s the aggregate debt load caused by more than a generation of debt-driven economics that is now destroying our economy in short order. It has reached an apex that can only be fixed by allowing a genuinely free market with appropriate rules of the road as opposed to politically charged bureaucratic regulations to correct it. No matter how financial leaders paint a rescue plan that could recoup this expenditure to the government and ultimately to the taxpayers, there is no functional way to do this without shifting the debt elsewhere that will ultimately return this astronomical financial burden to the American people. No one in the mainstream is talking about the debt-charged foreign investment money that’s going to fund this scheme. In fact, the plan is really designed to keep that going as opposed to rescuing anything. No rescue or bailout is possible because our nation is simply too broke to do it. We will need to continue massive borrowing from abroad to function and the next crisis will only be that much worse. For most people it hasn’t sunk in yet, but this may be remembered as one of the most far-reaching decisions our government has ever made. And expect the controversy to grow. As Wall Street royalty the likes of former General Electric CEO Jack Welch are screaming for the taxpayers to rescue their cozy country club world, Continued on page 16

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PUBLISHER’S PERSPECTIVE Continued from page 15 the public didn’t buy it at the onset. I was and still am totally against throwing another $700 billion on the debt heap. Unfortunately, we are left with no good options. The rescue plan provides $700 billion in liquidity that was expected to keep investor share prices propped up awhile longer and give consumers a short reprieve from their inevitable financial miseries. But that hasn’t happened as of this writing as the Dow Jones industrials sank 875 points over the two-days prior to October 8. But not implementing a massive liquidity infusion plan means the economy would have been free to correct itself in short order. If the new Senate proposal failed, we would have been poised to let the financial tsunami hit us full force. But continuing to expand the debt load will make the collapse that much worse when it finally happens. On the other hand,

letting the system collapse would have given international financiers a free hand to pick up the pieces and reshape the global economy in their ideal image. Most people don’t realize this, but we just missed an opportunity to find out the true state of the U.S. financial system. Many leaders in government and finance have known this reality for some time. We have a corporate controlled media addicted to Wall Street money that kept this process as fuzzy for years. Confronted by a financial reckoning this extraordinary, we need transparency and honesty—not the destructive financial policy disguised as a bailout we ended up with at the end. What we need is a full acknowledgement by central banks, the government and financial leaders of the out-of-control debt that caused this problem in the first place. That means a return to economic fundamentals that protects

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16 S O U T H B A Y B U S I N E S S I N S I D E R M A G A Z I N E

the domestic wealth and sovereignty of the United States of America. This is an idea we tossed out the window so long ago most people don’t understand the monster we created that is destroying our economy. Original Version of Bill Would Have Given Treasury Secretary Extraordinary Power The $700 billion bailout package as originally written would have given the Treasury Secretary a mandate that amounts to financial martial law. The original text of the bailout bill contained 32 words that probably made it unpassable in an election year. This inflammatory language alone makes me suspicious of their real intentions. I personally thought it was tantamount to a modern day “Enabling Act” for the financial system. They read as follows: “Decisions by the [Treasury] Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” Giving Paulson money is one thing. Giving him some emergency powers to be executed for a limited period with oversight is another. But to coronate him as a “money czar” blows my mind. Ronald Reagan is looking down from a cloud saying, “Oh my God! What have I created?” Mussolini and Stalin are looking up at this from the depths with glowing approval. Our nation has sunk lower than I ever imagined, and perhaps people are finally waking up enough to understand how dangerous this situation has become. By default, when we hand that level of wealth over the to a government agency to use at its discretion with virtually no oversight, we are giving it enough influence to rule our financial destiny by decree. And we should all be savvy by now to realize that those who control money and finance ultimately control everything else. PerContinued on page 28 3RD ISSUE 2008

M e e t i n g, Eve nt & B a n q u e t G u i d e The South Bay Los Angeles B2 2B Magazine • Specia al Annual Supplement • www.BusinessInside er.us • Complimentary Copy

BUSINESS insider

3RD ISSUE 2008

Your South Bay Los Angeles Resource Guide for 2008-2009 S O U T H B AY B U S I N E S S I N S I D E R M AG A Z I N E 1 7

2008-2009 BUSINESS MEETING EVENT & BANQUET GUIDE An Economic Downturn is the Time to Turn Up Your Event Planning!

A

downturn in the economy isn’t the time to put event planning on the backburner. This is the time to sharpen your company’s razor and get your best people in the state of mind to ride through the challenges ahead. That means it’s time for strategizing, team building and

making sure you are taking care of your best clients. What better way than to hold a well-planned event? Don’t make plans haphazardly. Set objectives. Seek event venues that impress and serve fare that makes the best impressions. If budgetary considerations require you to use your own facilities, put some extra budget into higher-end catering and décor. For business meetings, scrutinize meeting room venues for ambiance suitable for productivity. Don’t be afraid to travel from one end of the South Bay to the other for retreats. It’s best to keep people away from in-office distractions so they can focus on the event curriculum. See event planning as a recession-essential investment for the future and take the time to make sure everyone involved takes it seriously. Think of your holiday party as a time to build the camaraderie that builds long-term cohesion in your organization. Your annual banquet can be a multifaceted marketing opportunity if you organize and use it effectively.

18 S O U T H B A Y B U S I N E S S I N S I D E R M A G A Z I N E

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“2007 Business of the Year” El Segundo Chamber of Commerce.

And what about sales opportunities? Why not hold informational seminars to establish new relationships and build up your contact database? And why not make your serious business meetings an

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essential now than ever. Your employees and clients often judge your company by the way it conducts its events. Make sure the venue, curriculum, décor and cuisine make the impression you want and need. Rest assured, it will be remembered for a long time. Your South Bay region has a wide selection of quality event service providers. This 4th Annual South Bay Business Meeting, Event and Banquet Guide showcases some of the best and is meant to serve as a keepsake resource to be used throughout the

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S O U T H B AY B U S I N E S S I N S I D E R M AG A Z I N E 1 9

to boardroom through our corporate drop-off division. Choose from a menu of more than 60 reasonably priced, gourmet items, all delivered in creative packaging directly to your office. Our menus can be downloaded for ease of use and orders can be placed on the Web, by phone or fax. Now that you know, there’s no excuse for another pizza lunch meeting! NYFC’s Premiere Events division produces extraordinary events at any location. Our coordinators have worked their magic under the most challenging of circumstances and have the experience Banquet & Meeting Rooms

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S O U T H B AY B U S I N E S S I N S I D E R M AG A Z I N E 2 1

Banquet & Meeting Rooms

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22 S O U T H B A Y B U S I N E S S I N S I D E R M A G A Z I N E

Business Insider Magazine Main: Website: www.BusinessInsider.us Classified Advertising Website: www.TheBizBoard.net BIM Publications - Business Insider Magazine PO Box 1032, Palos Verdes Estates, CA 90274 (310) 872-9732 [email protected] ©2008, BIM Publications - All Rights Reserved

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Banking

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7 South Bay Financial Institutions Provide a Ray of Hope to a Dark Market

By Brian Simon

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midst the current frenzy of financial gloom and doom, it seems difficult to find a silver lining. Yet if there is a bright spot, the South Bay can stake a claim on a chunk of it. An area equally prized for its appealing location and economic diversity, the South Bay hasn’t experienced quite as harsh a jolt as other regions. And after talking to several executives from various small to medium sized financial institutions that service the area, we were surprised to learn that things are rather hunky dory, particularly in the realm of business banking which hasn’t been impacted anywhere near that of the residential market. In fact, many of the firms and agencies interviewed have even profited from the ongoing economic woes. This news comes as a welcome departure from the seemingly daily dosage of dire reports—a soap opera so volatile that various bits of information within this article will likely be outdated by the time you read this. This much is basic: Starting with the sub-prime collapse about 14 months ago and continuing with a severe real estate downturn and crippling credit crunch, the U.S. economy has spiraled into a freefall the likes of which we haven’t seen in perhaps decades. That isn’t the worst of it. When the very institutions that could always be counted upon are suddenly vulnerable, the confidence that has long been the backbone of national investing has been seriously shaken. The list of casualties reads like a financial who’s who: Bear Stearns, Indy Mac, Merrill Lynch, AIG, Washington Mutual, 3RD ISSUE 2008

Wachovia, Morgan Stanley, Lehman Brothers, Fannie Mae and Freddie Mac, to name the most prominent of the fallen stars. That’s not the end of it. Other notable banks and lenders could be next in line for a bailout or takeover. In fact, nine regional banks had already failed this year alone as of press time. Meanwhile, investors worry that their savings are no longer safe. Some even fret that the very bastion of government-backed reliability, the FDIC, could be in trouble if it isn’t recapitalized soon. As of press time, Wall Street had just taken its biggest hit since 9/11 and Congress had just passed a $700 billion bailout plan for the mortgage industry. Whether this plan can stabilize the market remains to be seen. In the meantime, several South Bay-based financial institution executives weighed in on the matter and let us in on how they’ve managed to circumvent the crisis. Malaga Bank CEO Randy Bowers sees the country’s financial meltdown as a multi-step process that started with the sub-prime collapse. Next, larger institutions with sizable investment portfolios found themselves exposed to mortgage-backed securities, which created enormous writedowns. Then, construction and land development loans began to default left and right, adversely affecting smaller banks that specialize in such lending. Increased credit card defaults followed that and, if nothing improves, business S O U T H B AY B U S I N E S S I N S I D E R M AG A Z I N E 2 5

Banking

on

the

South

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“It shouldn’t come as a surprise that this loans could be next on the list of problems. Though not immune to the current spate of trouble spots, Malaga has managed to avoid the worst of it. “On the asset side, we didn’t have massive investment portfolios and didn’t make loans in markets that were troubled,” said Bowers. “We did very selective construction Randy Bowers lending and no subprime whatsoever. We’ve always been somewhat cautious and prudent. At the same time, we haven’t significantly restricted our lending.” If there is one area where Malaga has run into some challenges, it’s on the deposit side of the coin. Though the market rate for a typical 12-month CD was running at 2.25 or 2.50 percent, several banks were offering close to 4.0 percent, or even higher—a move many called “pricing out of desperation,” but one nonetheless tempting for interesthungry investors. Bowers estimated that Malaga has lost some of its deposits as a result, but is well-positioned to weather the storm. “We’re going to continue what we’ve been doing and keep our eyes open,” he said of the 23year-old, four-branch operation. “We’re still growing, anticipate continuing to do so, and will be looking at expansion opportunities if they arise.” In the meantime, Bowers is hopeful that time will take care of the current shakeout. “The question is how much time and how much worse does it get,” he said, estimating that it may be another year before we see the bottom. “When it recovers is anyone’s guess. People just have to be prudent in how they spend their money.” When asked why banks engaged in sub-prime or aggres-

“I think there’s a couple out there on shaky ground, but our financial market with FDIC insurance has proven to be a stability in our economy. If it wasn’t for FDIC, I think there would be huge panic and put the industry in peril.” Henry Walker, CEO - Farmers & Merchants Bank 26 S O U T H B A Y B U S I N E S S I N S I D E R M A G A Z I N E

happened. Home appreciation is historically cyclical and can’t go up indefinitely. Combine that with poor underwriting standards and it’s a recipe for disaster.” Randy Bowers, CEO Malaga Bank sive construction lending in the first place, Bowers said competition compounded the problem, but that the ringleader may have been Wall Street itself. “It fed the monster by allowing a lot of poorly written loans to be originated and sold to investors despite a lack of equity in their property, or approved 100 percent loans or loans with no documentation of income or assets, poor credit histories, or a combination of any of these,” said Bowers. “It shouldn’t come as a surprise that this happened. Home appreciation is historically cyclical and can’t go up indefinitely. Combine that with poor underwriting standards and it’s a recipe for disaster.” Known for a conservative philosophy that has helped earn it top safety ratings, Farmers & Merchants Bank steered clear of sub-prime lending and didn’t invest a penny in Fanny Mae or Freddy Mac. “It’s not part of our business,” explained CEO Henry Walker. Henry Walker “We focus on conservative commercial lending. Our priority is to safeguard our depositors’ money.” With that in mind, Walker could only shake his head when asked about the failures of several major banks in recent weeks. “A lot of banks put money into bonds backed by sub-prime mortgages, which only earned a half-percent more than what they would have gotten with governmentbacked bonds,” he said. “Just look at the risk in that. They’re not concerned about future return on assets; they were more concerned about appeasing their shareholders for that year’s return. Most of the people running these banks weren’t owners. They were worried about this year’s salary and this year’s bonus. It appears that neither management Continued on page 30 3RD ISSUE 2008

CALENDAR OF BUSINESS EVENTS

Save The Date! Redondo Beach Chamber of Commerce and Visitor’s Bureau For more information about the events listed, call 310-3766911 or visit www.RedondoChamber.com Networking Events: Young Professionals Coffee Connection Tuesday, October 21, 2008, 9:00 a.m. SweetWave Coffee 800 Torrance Blvd., #110, Redondo Beach This casual networking opportunity allows Young Professionals to meet, mix and mingle over their morning cup o’ joe. If you like to start your day meeting new people and talking business, then Coffee Connection is for you. The South Bay Young Professionals is open to all people ages 21-39 who would like to meet new, like-minded people in a fun environment. www.MySpace.com/SouthBayYPN. Network Café Thursday, November 13, 2008, 11:30 a.m. – 1 p.m. Redondo Beach Cafe 1511 S. Pacific Coast Hwy., Redondo Beach Enjoy a great lunch and learn about Chamber members and their businesses while promoting your own. Each person will get to present a 30-second commercial in front of the whole group! Advance reservations are required. Members with reservations are $20 and guests and members without a reservation are $25. Please call 24 hours in advance to cancel. No-shows will be invoiced. Bring a door prize to further market your business. South Bay Association of Chambers of Commerce Tuesday, November 18, 2008, 5:30 to 7:30 p.m. Redondo Beach Performing Arts Center 1935 Manhattan Beach Blvd., Redondo Beach South Bay Association of Chambers of Commerce hosts Air Force Week. RSVP required with the Redondo Beach Chamber of Commerce. Admission Free.

Thursday, October 16 Medawar’s Fine Jewelers 810 Silver Spur Road, Rolling Hills Estates Thursday, November 20 Palos Verdes Art Center 5504 Crestridge Road (at Crenshaw Blvd.), Rancho Palos Verdes Breakfast Mixers: Breakfast mixers take place from 7:15-9 a.m. the first Wednesday of every month. Admission is $15 for members with R.S.V.P. and $18 for members without R.S.V.P or Guests. Wednesday, November 5 Trio Mediterranean Grill 46 Peninsula Center, Rolling Hills Estates Torrance Area Chamber of Commerce For more information about the events listed, call 310540-5858 or visit www.TorranceChamber.com. Business Expo 2008! Thursday, October 30, 2008, 4-7 p.m. Torrance Marriott 3635 Fashion Way, Torrance Join members of the Torrance Area Chamber of Commerce and local business leaders for this premier annual networking event. The Torrance Marriott’s main ballrooms will be lined with member displays offering products and services of all kinds. Admission is free to the public. Food and drinks served. El Segundo Chamber of Commerce For more information about the events listed, call 310322-1220 or visit www.ElSegundoChamber.org.

Palos Verdes Peninsula Chamber of Commerce For more information about the events listed, call 310-3778111 or visit www.PalosVerdesChamber.com.

Salute to El Segundo Mayors Mixer Thursday, November 13, 2008, 5:30-7:30 p.m. Mattel, Inc. 333 Continental Blvd., El Segundo

Evening Mixers: All mixers take place from 5:30-7:30 p.m. the third Thursday of each month. Admission $5 for members and $10 for guests. Cash bar, food and prizes.

Holiday Mixer Thursday, December 4, 2008. 5:30-7:30 p.m. Citizens Business Bank 275 Main St., El Segundo

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S O U T H B AY B U S I N E S S I N S I D E R M AG A Z I N E 2 7

PUBLISHER’S PERSPECTIVE Continued from page 16 haps the public at large is starting to see the scam and I have no doubt the lawmakers who turned against the original bill at the last minute preferred the wrath of their corporate financial supporters to an angry electorate that would have shown them the door this November. Many said they were offended by a partisan speech by House Speaker Nancy Pelosi, who was pushing this bill on behalf of the Bush Administration. However, I don’t believe for a minute they would base a decision this serious on something that petty. It was merely a convenient excuse to wash their hands of the entire mess. The new Senate version includes oversight and limits the duration of the authority of the legislation. As it turned out, the electorate was properly frightened and the new version of the bill sailed through easily. The desperation this process reveals is both extraordinary and unprecedented. Our nation’s longstanding cycle of debt-driven economics is revealing its dark side as the credit crunch spreads its toxins around the world. In the United States, the reported public debt has grown from 2.7 trillion in 1989 to $10.2 trillion and rising fast as of this writing. It began to grow exponentially following September 11, 2001. Most people don’t realize the multi-billion dollar bailout is really a “borrowout” that only compounds the problem when the next financial tsunami hits us. This isn’t a political affirmation. It’s mathematical reality. Money issued to the government by central banks accrues compounding interest that must be paid back. With the help of the Treasury Department and the Federal Reserve, the Bush administration shifts us into high gear as the gas gage nears empty. Try doing that with your own business and see how long you last. First $300 billion to back the Bear Stearns buyout and now the government has been forced to take responsibility for approximately $5.3 trillion of mortgage debt held by Fannie Mae and Freddie Mac. That’s nearly half of all U.S. mortgages! As of this writing, there are 117 banks on the FDIC watch list of troubled financial institutions. The recent IndyMac Bank rescue depleted approximately $20 billion of the organization’s $50+ billion budget, meaning the FDIC will need help from other agencies on a massive scale before this is over. Now the unthinkable is happening. Before the sub-prime blowout initiated this mess, there were five major investment banks on Wall Street. Now there are two still functioning. The great behemoth Lehman Brothers declared bankruptcy in September, and the same week Bank of America announced it was purchasing Merrill Lynch. Then at the beginning of October, Citigroup and Wells Fargo were vying to purchase Wachovia Bank. And the end of this is nowhere in sight as President George W. Bush embarks on what will likely be a multi-trillion dollar bailout the rest of us (or perhaps our grandchildren) 28 S O U T H B A Y B U S I N E S S I N S I D E R M A G A Z I N E

would eventually pay back in one form or another. Keep in mind the $700 billion figure they pitched for this “bailout” was no doubt a conservative estimate. Before this is over, it will head into the trillions. In fact, the day the bailout package failed in the House, I became aware of a September 23 Forbes.com article that took a while to make its way around the Internet. It revealed the $700 billion figure was chosen purely for political reasons. It had nothing to do with the actual amount needed for a bailout, which in reality no one really knows. The real value of domestic mortgage debt is still a mystery. “It’s not based on any particular data point,” Forbes.com quoted a Treasury spokeswoman as saying on September 23. “We just wanted to choose a really large number.” Isn’t that just marvelous? This bill was thrown together so quickly I doubt if anyone really knows if it has any merit. Some would argue the course was set in the early 20th Century when we shifted to issuing currency at interest through a for-profit central banking system. Believe it or not, you must look at the 100-year tend to understand the strains placed on the economy by the central banking system. When money itself accrues interest before a chartered bank can lend it to a borrower, it adds an additional strain to the economy. There is a large and growing movement in America that believes the strain from this added layer of compounding interest tied to units of currency issued is the reason our nation lost control of its debt in the first place. A Central Banker Makes a Candid Admission Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas, gave an uncharacteristically candid appraisal of the national debt May 8 in a speech he made before an audience in San Francisco at the Commonwealth Club of California. “I have been scanning the horizon for danger signals even as we continue working to recover from the recent turmoil,” the transcript read, “In the distance, I see a frightful storm brewing in the form of untethered [sic] government debt.” Following his litany of foreboding rhetoric, Fisher dropped a bombshell describing how un-funded obligations for Social Security and Medicare were, as he put it, estimated at “$99.2 trillion over the infinite horizon.” Some have taken this to suggest the national debt is really more than $100 trillion, but there is really more nuance to it than that. What he meant was, we haven’t funded future obligations we know about for Social Security and Medicare as the baby boomers are entering retirement at a rapid pace. The high birthrate and longer life expectancies we are experiencing today have forced estimated costs of these programs to grow enormously, and the “pay as you go” system can’t cover these un-funded costs. What he implied was we could be in the hole for nearly $100 trillion in a few years if we don’t do something to properly fund these programs that don’t just shift the debt 3RD ISSUE 2008

elsewhere. That is an astoundingly candid admission to come from a central banker. I was amazed bloggers were able to find this speech posted on his organization’s website because the Federal Reserve has a reputation for being extremely secretive on these matters. In fact, if Fed Chairman Ben Bernanke had made statements like this to the national media, rest assured the financial markets would have gone wild months before recent events started tearing them apart. Deep Debt Driving the Credit Crunch The mainstream media would have you thinking irresponsible lending practices and homebuyers overextending themselves are the sole cause of the credit crunch. Others would cite corporate greed. But should we blame the kids when they get sick from eating too many sweets or the

parents for leaving the candy dish within their reach? Let’s say there is plenty of blame to go around. However, we need to go as high as we can in the economic order to truly understand this. The root economic problems causing this incredible volatility have not been addressed, and the individual issues have been politicized to the point that it makes it nearly impossible for the average person to grasp what is actually happening. There are credible experts that assert our nation’s payments on compounding interest accrued by ongoing expansions of the money supply cannot be covered by realistic expansions of the GDP. But unlike average citizens who have to declare bankruptcy when credit limits are maxed out and compounding interest surges ahead of income, governments have no defined limits on borrowing. Therefore each

bailout extends debt of one form or another and exacerbates the compounding interest that much more. Also, the Federal Reserve opted for liquidity over controlling inflation by dropping the key lending rate to two percent from the low fives when the credit crisis hit. The economy is enjoying some short-term stability from the money flush, but inflation will persist as the root problem of compounding debt is exacerbated further. In late September, the Fed opted to leave the rate at two percent, indicating that the organization’s latitude for extending liquidity is reaching its limit. But then less than a week after the bailout plan was announced, the Fed rushed through a 1/2 percent rate cut in the wake of a plunging stock market. And yes, ultimately citizens will have to cover this tab and most of us would go bankrupt individually if we had to Continued on page 39

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3RD ISSUE 2008




S O U T H B AY B U S I N E S S I N S I D E R M AG A Z I N E 2 9

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“The business banking sector is not impacted materially in terms of credit quality ... the sector seems to be holding up well even though the economy is slowing down. Problem institutions with a business banking component are struggling mainly due to construction loans.” C. G. Kum, CEO First California Bank Continued from page 26 nor the board did their fiduciary obligation to safeguard the depositors’ money. The result: Big investment banks and investment houses that failed are simply getting what they deserved.” Walker sees the government bailout plan as a “positive” and “necessary for now,” though he admitted, “At some point, the government needs to quit intervening and get back to a free market principle. There never should have been a Fannie Mae and Freddie Mac in the first place. The free market would have taken care of it. It has helped America excel far better than any country in the world.” Walker is optimistic that the housing market will right itself and believes we are near the bottom in Southern California based on recent evidence that investors who had been waiting on the sidelines are beginning to dip back in once again. As for business banking, he noted that the industry as a whole does a very good job of lending money, is well-regulated, and has a strong balance sheet with F&M being one of the strongest. Still, he disclosed that business customers have reflected that earnings are down. “When consumers are uneasy and don’t feel good about the economy, they quit spending,” he said. “Right now, people are pulling back on their spending. We’re seeing it and hearing it from our retail and restaurant customers especially.” Walker expects recovery to start by the end of next year, but cautions that it may not feel like it to the everyday Joe. Still, he sees the current crisis as “a good thing” that will help strengthen the economy and the industry. “Recessions can be positive because they shake out those who engaged in risky behavior and cause painful losses to others.” he said Asked if he expects more “big names” to follow Indy Mac, Wamu, Wachovia and others into the financial abyss, Walker opined, “ I think there’s a couple out there on shaky ground, but our financial market with FDIC insurance has proven to be a stability in our economy. If it wasn’t for FDIC, I think there would be huge panic and put the industry in peril.”

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What about those who worry about the FDIC’s own solvency? “It’s an implied commitment by the government to recapitalize the FDIC, and by the end of the day, there are still a lot of safe banks out there. FDIC insurance is doing what it was designed to do—calm the markets and reduce the panic. It speaks of how welldesigned and resilient our country is...” First California Bank CEO C. G. Kum identified residential lending and construction as the main culprits for Southern California’s financial woes. “Until we are able to C. G. Kum work through the inventory of homes for sale, we are going to be where we are for the foreseeable future,” he said. At the same time, Kum doesn’t feel business banking has suffered nearly as much, though it isn’t growing at a rapid clip thanks to a generally slow economy. “The business banking sector is not impacted materially in terms of credit quality,” he said. “Overall, we have a low level of problem loans, and the sector seems to be holding up well even though the economy is slowing down. Problem institutions with a business banking component are struggling mainly due to construction loans.” Kum said FCB will not pull back any products, particularly in business banking, although it will look at credit with a “more conservative eye” because the economy dictates it. “Our clients tend to be more conservative business people, which makes our job easier,” he said. “We’re still lending in the residential sector, but very cautiously—it’s the only sector where we have pulled back a bit. FCB has one of the lowest level of problem loans in California.” Now, any type of construction lending is under heavy scrutiny and many commercial developments are on hold because credit is tight, Kum pointed out. “If it’s a large project, banks of our size are too small to provide financing,” he said. “Many large projects were financed by offshore money, large banks and large thrifts. Now these players are not making these loans at all, which is stalling the projects.” Meanwhile, FCB recently merged with South Bay Bank (a subsidiary of First California Financial Group, Inc.) to double in assets, grow to 12 branches and become a maContinued on page 32 3RD ISSUE 2008

                           


 
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S O U T H B AY B U S I N E S S I N S I D E R M AG A Z I N E 3 1

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Continued from page 30 jor player in the mid-tier ($1 billion to $10 billion in assets) niche market. Neither bank engaged in any sub-prime lending, although SBB had a strong presence in residential construction. But even that sector wasn’t as negatively impacted as it was elsewhere. “Our markets are mostly in coastal communities in Ventura and LA counties,” said Kum. “Those markets, including the South Bay, have held up better than other markets in Southern California--another reason why our loan portfolio is cleaner than other markets. Values haven’t dropped as significantly in the residential sector compared to the Inland Empire. In some cases, they’ve even gone up. People will always want to live on the west side of the 405, so as a result the residential sector has held up.”

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South

The South Bay’s residential market may be in better shape than other regions, but it is the business sector where various financial institutions are especially thriving. As American Business Bank regional vice president Patti Vollmer explained, “The credit crunch is not impacting us as a bank to any great extent because we focus on businesses. Our customers have typically been around for many years, so they have very strong management teams that have been through downturns and they are navigating through these difficult times quite well. For us it is really business as usual.” Now celebrating its 10th anniversary, ABB has five locations and focuses on middle market ($5 million to $100 million in revenues) companies. The bank has no 30-day past-due loans and no net charge-offs. The only real estate

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32 S O U T H B A Y B U S I N E S S I N S I D E R M A G A Z I N E

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lending it does is of the owneroccupied variety. “If someone wants to refinance or buy a building, we will Patti Vollmer oftentimes provide the credit for that purpose, but we don’t do investment real estate or construction financing for developers,” said Vollmer. Though ABB’s low loan-to-deposit ratio (around 50 percent) gives it flexibility to lend more if needed, half of its customers don’t borrow at all. “They’re great, successful, middle market businesses—they may have a line of credit, but often don’t use it at all.” Though many businesses don’t take out loans at ABB, the bank has actually noticed a recent growth spurt that Vollmer attributes to the current economic crisis. “We’re bringing in a lot more customers now than normal because many companies have become uncomfortable with their existing bank that may be having credit problems,” she explained. “So we’re profiting from the credit crunch in that respect.” The new clients are coming from two different categories— large national banks that overextended and reported significant losses; and smaller regional banks that focused heavily on real estate and suffered the consequences. A medium-sized bank with assets just under $700 million, ABB recently reported growth in assets, loans and core deposits compared to the same quarter a year ago. “It looks like the bank may be doing better during these troubled times than if things were normal,” Vollmer admitted. “I hate to see what’s going on in the banking industry right now. On the mortgage lending side, it seemed so predictable it

3RD ISSUE 2008

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had to come to a head sometime.” Asked how the bank does it, Vollmer noted, “We don’t change our underwriting during downturns. We stay very consistent. Our customers know the loan we made them a year ago is still available. We go into the relationship on a conservative level so we can just work with them. Back then (before the economic crisis), we weren’t being the most aggressive out there. We’re growing nicely, but have stuck to our core beliefs and underwriting parameters. It makes us do well in very competitive times but we do even better when there is a hiccup in the rest of the industry.” The “new kid on the block” having opened in 2007, Bank of Manhattan avoided some problems simply by virtue of not yet existing. As President Jeff Watson put it, “We weren’t in the marketplace three years ago. Would it have made a difference? To be honest, most likely we would be feeling the impact in some respect—we would have probably had some problem loans in our portfolio. But we don’t have them now because our underwriting is very strong and we are coming in during a tough market where credit availability is scarce and we’re getting opportunities to get the upper tier of borrowers.” Continued on page 34 3RD ISSUE 2008

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“ ... over two thirds of the highest performing banks were started in recessionary periods.

Continued from page 33

Jeff Watson

Catering to small to middle market businesses, B of M reports no problem loans and, like ABB, can partially thank the current financial crisis for its early successes. “There’s a stat out there where over two thirds of the highest performing banks were started in recessionary periods,” said Watson. “Timing is everything. They didn’t have to go through the problem credit cycle. They came in at the bottom

and rode it out.” In B of M’s case, the founders figured that a chunk of its original capital raise goal of $20 million would come from institutional funds. But that money dried up as prices of community bank stock began to plummet. “We were fortunate enough to have about 350 local investors raise $25 million, which has proven to be more beneficial subsequent to our opening since they’ve also become clients,” said Watson. Well-capitalized and not needing to focus any resources on “troubled asset management,” B of M hopes to take advantage of new opportunities as other banks struggle with credit. That includes expanding into a much larger organization if the arrangement makes sense. Again, timing is everything. Had the bank started up a bit earlier, it may have run into some roadblocks due to a desire to grow and compete, Watson admitted. “The competitive nature for assets made certain people stretch on credit and pricing

“Have we hit bottom yet? I don’t know what that really is. I think the election will be an interesting wildcard. There are inflationary pressures. The government has to balance inflation with keeping rates low. This is a difficult task.” Chris Myers Citizens Business Bank

34 S O U T H B A Y B U S I N E S S I N S I D E R M A G A Z I N E

Timing is everything. They didn’t have to go through the problem credit cycle. They came in at the bottom and rode it out.” Jeff Watson, CEO The Bank of Manhattan issues,” he said. “We probably would have had some problems crop up. It’s the nature of the business. What looked good three years ago obviously has been affected.” Though Watson is very optimistic about his own bank’s prospects and solvency, he is less rosy about the overall economic picture, predicting another two years of turmoil before any turnaround. “It’s going to be a tough 2009/2010,” he said. “This is a different cycle—it’s not like the ‘90s. It’s more dangerous because the liquidity and housing impact are deep.” Asked for a possible solution, Watson suggested (a week or so before the $700 billion bailout made national news) that the government may have to step in to provide more liquidity in the marketplace. “The housing market compounds the problem,” Watson explained. “People can sell properties, but can’t get financing for buyers.” With a name like Citizens Business Bank, you can probably guess where the focus lies. Sure enough, only 3.5 percent of CBB’s portfolio resides in residential construction and land loans. “We’ve got $3.5 billion in loans, but only $125 million of that is in residential construction,” said CEO Chris Myers. “Our loan problems are very contained and small compared to a lot of our competitors and we haven’t had to change our business model.” A medium sized bank with three of its locations in the South Bay, CBB zeroes in on the percentiles of top performing businesses throughout the various sectors, figuring those are the ones able to withstand different economic downturns. “And if they’re our customers, we’ll be around for a long time too,” Myers reasoned. “That Chris Meyers

3RD ISSUE 2008

NOW, MORE THAN EVER... has been our philosophy for the last 34 years.” As various major players have fallen out of the banking wars over the past 14 months, Myers has begun to see more loan opportunities come his way. “We felt the credit structuring from a couple of years ago was getting too aggressive,” he said. “We pride ourselves in providing a consistent source of credit through different economic cycles for our customers, so we’re reliable for them.” Like Bowers at Malaga, Myers sees major deposit competition among the banks, with many institutions paying up, especially on jumbo CDs—a recipe for disaster, in his opinion. “When you look at something like that, think of the economics,” he said. “The theoretical rate that a bank can borrow from the Federal Reserve is two percent. This is called the ‘Feds Fund Rate.’ The fact that a bank will pay five percent for a deposit means it needs liquidity, and most likely cannot borrow from the Federal Reserve. The prime borrowing rate is five percent, so to pay five percent for a deposit means you’re not making any money on loans that are at the prime lending rate.” Asked how such rates impact business lending, Myers responded, “Banks typically look for a positive sloped yield curve—where short-term rates are lower and long-term rates are generally higher. In 2006, the yield curve flattened dramatically and you couldn’t make enough spread on new loans. Over the past nine months, our net interest margin has widened, which is good for us and makes good business sense for us to lend. If I can pay two percent for a deposit and lend at six and a half percent, I’m doing okay.” Myers expects the current crisis to continue well into next year and hopes to see recovery starting by early 2010. Have we hit bottom yet? “I don’t know what that really is,” he said. “I think Continued on page 36 3RD ISSUE 2008

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“Our greatest increase in assets has always been when there is trouble in the economy. It’s a flight to quality.” Steve Stoppel, CEO Torrance Community Credit Union Continued from page 35 the election will be an interesting wild card. There are inflationary pressures. The government has to balance inflation with keeping rates low. This is a difficult task.” During the upheaval, CBB has not only picked up some new clientele but also a few key employees from other banks who are frustrated about lending limitations at those institutions. “We’re an attractive employer right now,” said Myers. “Our assets and loans have increased. Our profitability is up eight percent from 2007 and our loan growth is up over 10 percent. We are a good success story in this kind of economy. We’re one of the few banks in the black at a time when at least 75 percent are in the red.” While the argument can be made that the business sector is driving South Bay banking, there are other financial institutions doing just fine without it. In the case of Torrance Community Credit Union, business banking has been virtually non-existent. CEO Steve Stoppel reports that the credit union itself is still making money, in part thanks to the fact it didn’t engage in “exotic lending” in the mortgage realm. But he has noticed some impacts. “On consumer loans, some of our members are having issues making payments, which in some cases have gone up 50 to 75 percent,” he said. “They’re also struggling to make car and credit card payments.” As a result, Stoppel estimates that delinquencies are up 20 percent, though TCCU has the capital and flexibility to navigate through such obstacles. “We’re trying to help our members

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to reduce their financial burden, so we’ve been doing some work-outs, allowing them to skip some payments so they can get back on their feet.” TCCU’s standard policy is to give a loan to virtually anyone who can pay it back. As such, it has picked up business from customers needing home equity lines of credit—as many institutions have frozen or limited that type of lending. As an example, Stoppel offered the following: “A member starting to remodel his house found out his bank (one of the big ones) cut his credit limit down to his balance, so he had no access to funds. We were able to give him his loan here.” Stoppel believes it’s more of a knee-jerk reaction when some banks cut or freeze credit lines, especially when the customer in question boasts an excellent credit score, great income, and plenty of equity. Once limited to City of Torrance employees and their families, TCCU has recently expanded its scope and can service anyone in Torrance as well as Hawthorne, Lawndale, Redondo Beach and the Palos Verdes Peninsula. Full-scale business banking, now only available in small doses for sole proprietors, is also on the long-term radar. Why would someone switch to a credit union? “We don’t have a credit crunch,” Stoppel replied. “We have plenty of money to lend out. As long as you have the resources to pay us back. We’ve got $35 million in investments just sitting there.” Steve Stoppel

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With higher than average market rates for deposits, TCCU has increased its deposit base since the financial crisis started. And like several others profiled here, it has profited during the down times. While not pleased about the country’s financial woes, Stoppel noted that the credit union’s market share usually increases when times are tough and tends to normalize when the economy is stable. “Our greatest increase in assets has always been when there is trouble in the economy,” he said. “It’s a flight to quality. We’re better capitalized than most banks (10 percent vs. 5-6 percent). We were at $52 million in assets when I started six years ago. Now we’re at $84 million.” So to quote an old Supertramp album title: “Crisis? What Crisis?” Brian Simon is a freelance writer living in El Segundo.

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FINANCIAL INSIDER Continued from page 9 tax exemptions ($12,000 per donor per beneficiary in 2008) and therefore incur a gift tax liability or force the use of a portion of the lifetime gift tax exemptions ($1,000,000 per person). Though life insurance can for many reasons warrant the use of these exemptions, most planners want to try to avoid using them if other avenues exist. Financing the Premiums Through Private Sources For high net worth individuals, the money needed for life insurance premiums almost always exists; it’s just in a different place than where it needs to be. There are three common sources of private loans as well as several commercial lenders who participate in premium financing arrangements. Typically a private loan to the children or their trust comes from: • The estate owner’s personal funds. • The family business. • Another family member. Private loans are often attractive because the lender is more open and friendly to the cause, the interest rates are relatively reasonable, and the insurance proceeds remain within control of the family system. Loans are arranged in legitimate, fully disclosed terms with interest rates declared by the IRS for such loans (the “Applicable Federal Rate” or “AFR”). Care must be taken so that nothing about the arrangement could cause incidents of ownership of the policy on the part of the estate owner, as that would bring the insurance proceeds into the individual’s taxable estate. The attorney who is drafting the estate planning documents can keep you out of trouble in this area. Financing the Premiums Through Commercial Third Party Sources For situations in which private loans are either not available or not desirable, there are third party commercial lenders who specialize in premium finance programs (this is not “Stanger Originated Life Insurance” that has been heavily promoted through seminars and direct marketing and relies heavily on third party financing). Loan underwriting will be necessary. Interest rates are usually based on “prime plus” or “LIBOR plus” formulas and thus carry interest rate risk into the arrangement. Interest is generally not deductible. Regarding collateral requirements, commercial lenders not surprisingly want the premium loan to be fully collateralized. The cash value of the policy will provide some portion. If the insurance trust does not own assets that can be allocated for this purpose, a personal guarantee may be required.

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In any case, whether financing is private or commercial, care must be taken when posting collateral to ensure that the client is not deemed to have incidents of ownership in the insurance policy. Again, a qualified attorney will make sure this is handled properly. Interest Payments Are a Fraction of the Premium One of the great advantages of premium financing is that instead of paying the annual premium from cash flow, an individual can pay only the interest on the borrowed premium. Not only are the annual payments a fraction of the premium, but they are typically small enough to fit within the annual gift tax exemption limits ($12,000 per donor per beneficiary). If a portion of the lifetime gift tax exemptions must be used in the family’s estate plan, the key is to use them wherever the greatest impact can be made. Life insurance is very often offers that opportunity more than any other asset. It is also possible to accrue interest, though doing so is rarely available with commercial loans. It is more common with private intra-family loans, not only because the lender is not subject to regulatory conditions, but also because ultimately all the money remains within the family system. For example, assume a $10,000,000 policy calls for an annual premium of $150,000. If the premium loan grows at 5% interest, it would accrue to approximately $5,500,000 in 21 years (the actuarial life expectancy for two 65-yearolds). The trust would use death proceeds to first pay back the loan, leaving $4,500,000 for estate liquidity. But the other $5,500,000 is still within the family’s economic control, whether it be in an investment account or a business. The bottom line result is that 4,500,000 new dollars are introduced into the family’s control. This is particularly critical for the type of situation the Subos have, in which liquidity is needed not only for estate taxes, but also may be needed to “equalize” the estate for the heirs who will remain in the business and those who will not. Having an Exit Strategy It is more prudent to pay annual interest in whole or in part (for example, to put a ceiling on the accrual) so that the loan balance does not grow to consume all the death proceeds. Indeed, there are scenarios in which it could actually grow larger than the death benefit. So proper planning must be done. Though many premium financing arrangements assume that death is the only exit strategy, it is better to employ the premium financing method when there is a definable exit strategy. Two common scenarios will illustrate: 1. Fund the insurance sufficiently for the cash values to grow over time, such that they can eventually be withdrawn to pay back the loan without collapsing the insurance coverage. 2. Fund the trust with other assets that are anticipated to 3RD ISSUE 2008

appreciate over time and can be used to repay the loan. Funding the trust can be done in a way that triggers little or no gift tax (when done in conjunction with special trusts that are commonly and legitimately used in this circumstance). The Proper Use of Life Insurance A skilled life insurance professional will work with the family’s other advisors to construct an effective estate plan. Again, efforts will first focus on reducing or even eliminating the estate tax. But the taxes that cannot be avoided need to be paid somehow. Insurance delivers a block of income tax free dollars precisely at the moment they are needed.

Continued from page 29 cover this daunting obligation as a nation in short order. That’s the dark secret no politician wants to see put into sound bites. So most of them, whether they be conservative or liberal, stump for policies that continue to roll the debt over with unrestrained borrowing at the central banking level. The recent federal stimulus package and these bank bailouts are classic examples. Not to mention the enormous sum being spent on the War on Terror. Consumers are just now feeling this strain form the latest round of unprecedented expansion of debt. By the way, $2 trillion of our reported $9.6 trillion national debt is owned by foreign governments. These are the same governments whose domestic industries are getting fabulously wealthy selling us cheap imports driving the trade deficit up to over $700 billion. We saw that figure drop from over $750 billion to near $711 billion recently because the weakening dollar is driving demand for U.S. exports. However, unless economic fundamentals change, expect the long-term trend to continue. This includes money supply disappearing at a faster rate as more is needed to cover the debt, more money being issued without appropriate backing exacerbating the debt, citizens screaming, “Don’t tax us for God’s sake, the inflation is killing us!” while our political leaders, most of whom don’t understand this situation very well, are taking desperate actions to ensure their own reelections and continue the game as long as possible (as more debt continues to mount, of course). You see, when foreign governments step in to save our economy by continuing to invest in it, they aren’t merely lending to an insolvent borrower. They are making payments towards the nation they ultimately plan to own when the borrower ultimately defaults. Tell me why there is practically no one in government who considers this an issue of national security? In this election year, I have no interest in arguing about John McCain’s age, Barack Obama’s aloofness, Joe Biden’s hair plugs or Sarah Palin’s lipstick. Let’s get real, folks and put the puzzle together so we can get some semblance of

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The premium and the source of premium represent the solution, not the problem. Dennis J. Branconier, CLU, is Vice President of M Advisory Group in Torrance. For affluent clients and entrepreneurial companies, the firm provides wealth preservation and executive benefit planning, insurance expertise and retirement plan consulting. He is past president of the South Bay Estate Planning Council and active in several local community organizations. Dennis can be reached at (310) 530-5525 or [email protected]. This material is not intended to present advice on legal or tax matters. Please consult with your attorney or tax advisor, as applicable. Securities and investment advisory services offered through M Holdings Securities, Inc., a registered Broker/Dealer and Investment Advisor, Member FINRA/SIPC. Services provided through Cal-Surance Benefit Plans, Inc. Both Cal-Surance and M Advisory Group are independently owned and operated.

national consensus and avert the disaster we seem committed to experiencing. There is too much at stake here to play games anymore. If any one of those folks said anything that made me believe they understand this problem and can propose any reasonable policy that can address it in a meaningful way, I would vote for them. David Whitehead is the publisher of Business Insider Magazine. You can read the full transcript of Richard W. Fisher’s speech posted on the Federal Reserve Bank of Dallas website at website at: http://www.dallasfed.org/news/speeches/fisher/2008/fs080528.cfm

Continued from page 14 all choking guests must be saved? Then, if we decide they are worth saving, what should be done? Is it possible they could stop choking without any assistance? How about a slap on the back, the Heimlich maneuver or a 911 call to let the paramedics handle it? If you try and help and the guest doesn’t make it, do you have exposure to financial liability? Should the choking guest be required to sign a liability waiver and a statement of financial responsibility before doing anything?.. You get the picture. Sometimes the less than optimal action taken immediately is better than the best action taken too late. Time is of the essence. We now have an economic stabilization proposal that needs to be swiftly implemented. The financial markets are ablaze. For most Americans, Wall Street is a distant reality far removed from Main Street. I don’t know about you, but I think I smell smoke! Is it warm in here or is it just me? Ken Roberts is a mortgage planner with nearly 30 years experience in the South Bay real estate market. Ken can be reached at (310) 534-6200.

Continued from page 8 nology works just about anywhere, you can’t work anywhere. Sure, there is a lot of stuff you don’t need anymore for an office to be an office, but whatever you do, you need a decent place to do it. So I suggest you text this message to all of your mobile workmates struggling to be productive on the road. David Whitehead is the Publisher of Business Insider Magazine

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