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The Biz Roundup April 16

What happens when your bank fails? Your overextended small biz loan becomes toxic.

Clashes like this are increasingly taking place across the country, as banks struggle through their worst crisis in a generation. And Mr. Williamson is part of a niche industry that buys at bargain-basement prices the hard-to-collect commercial loans that the Federal Deposit Insurance Corporation auctions off after it seizes a failed bank. They take on the most troubled assets, the ones others aren’t willing to touch, in exchange for potentially lucrative returns. . . .

The borrowers [small business borrowers] suddenly find themselves dealing with aggressive out-of-state loan consolidators, rather than local banks with long-standing community ties. And the consolidators’ primary objective often is to immediately collect on the debt, or seize the collateral. . . .

Some of the debts are so hard to collect that the F.D.I.C. lets these loans go for a song. LeMire Schmeglar, a mortgage broker in Chicago, bought 191 delinquent loans with a book value of $6 million. He paid just over $15,000. . . .

In Arizona, Michael W. Bauer, 53, an electrician and owner of a vending machine business, said that after 15 years in business, and never once defaulting on a loan, he might have to file for bankruptcy because an entity called SMS Financial XVII, which bought his loans from the F.D.I.C. after the failure of First National Bank of Nevada, had filed a foreclosure lawsuit against him.

(“No Easy Workout,” New York Times, April 16) I have always stated that borrowers should have the opportunity to purchase loans at essentially the same price as vulture investors (that’s their name for themselves, not mine). If you have a performing loan or a reasonably non-performing loan (for instance, you stop making payments because the lender goes out of business), you should be offered the opportunity to immediately retire the debt based on the purchase price that a vulture lender snatches it up for. Let’s say you, as a small business like the one profiled here, has around $100,000 principle debt. You stop making payments because the bank that lent you the money folds. Six months go by (you are now six months behind on payments). Another bank buys your debt for $10,000. You should be offered a limited time (say two months) to retire the debt at $10,000 plus reasonable expenses. This, in fact, is what happened to the small biz in the Times article. When their lender went belly-up, the owners offered to pay 70% of the loan to the FDIC. The FDIC refused and sold the loan for 34% of its value. The new owner of the loan demanded full payment in 10 days and began foreclosure proceedings. Now, it seems to me that if the borrower offered 70 cents on the dollar and the loan fetched a high bid of 34 cents on the dollar, then the small business owner wins. Is that unreasonable? And not at 70 cents on the dollar, but 35 cents on the dollar. Now, mind you, small business owners and others who are unreasonably not making payments (the borrower just stops paying and refuses to work out payment), but it’s in the best interest of everyone involved to let the small business owner “win” the auction at a fraction of the loan’s principle. Finally, all borrowers of all stripes should be allowed to make regular payments on their loan rather than having it called by the buyers of the loan.

Fiat means “let it be done.” Let it be done, already!

Even as Fiat SpA Chief Executive Officer Sergio Marchionne continues talks to partner with Chrysler LLC, he has acknowledged in interviews that Fiat would consider buying parts of Chrysler if the Auburn Hills-based automaker filed for bankruptcy.

(“Fiat: Is it savior or shark for Chrysler?,” Detroit Free Press, April 16) Marchionne ruffles millions of feathres with this remark, but, really, Fiat is looking to acquire Chrysler. It can do it now or it can do it after Chrysler marches shame-faced into bankruptcy court. Either way, Fiat will get what it wants. The question is how many American jobs we’re willing to see lost before that happens.

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