How to Really Maintain Control of Your Business

By Susan Schreter

Published June 13, 2011 | FOXBusiness

If there is a lesson to be learned from the current recession, it is the value of running a well-capitalized company. Whereas debt has spelled disaster for too many highly leveraged businesses, equity offers resilience.   

The problem with raising equity from investors is that business owners worry about losing decision-making control over their companies. My response to owners of deeply troubled, equity-starved businesses is that they have already lost control of their businesses. Without some added capital to power a business turn around, their companies will likely close or enter bankruptcy. Nobody wins in this scenario.

Here are some tips to help business owners obtain a higher level of comfort, cash and control before approaching the equity markets for financing.

No. 1: Upgrade your board of directors, now. Ideally, privately-held businesses should upgrade their board of directors every four or five years to match advancing business goals. What’s important is for you to pick your team, preferably with targeted industry expertise. Skip friends and family members. “Weak” boards always get overhauled by new investors. In subtle but meaningful ways, these new members will be more loyal to the financial investors than the business founder. 

No. 2: Get an employment contract. How can business founders get fired from the companies they started? It’s easy. This happens when founders lose voting control of the company’s shares and the loyalty of the company’s board of directors. One way to minimize the risk of getting fired from your own company without cause or adequate compensation is to negotiate a “reasonable” employment contract with your company’s board of directors prior to raising capital. New investors typically receive one or more board of directors’ seats as part of their funding agreements, which can change the board’s overall voting dynamic of a board. If a company’s sales and profits don’t meet projections, impatient new board members can push for management changes. Again, business owners are likely to get a better deal from board members that they invite to the board, not investors. 

No. 3: Hire the qualified talent. Every time business owners put unproven staff in demanding positions, they jeopardize their equity stake. Here’s why: The longer it takes a company to meet product development schedules or bring in profitable sales, the more capital founders may have to raise to cover added operating costs. More capital infusions mean more dilution to the founder. Don’t waste time or money on so-so employees.

No. 4: Stock options. With board of directors’ approval, companies can set aside a certain number of treasury shares for an employee stock option plan. Because founders can receive annual stock option awards for good performance, stock options can help founders buy back their equity stake long after the company no longer needs investment capital.

No. 5: Explore “earn backs.” To the extent business owners accept what they perceive as a “low” valuation to secure expansion funding, founders can ask investors to escrow or set aside a certain number of shares to reward exceptional performance. If management doesn’t meet agreed targets, then the lower valuation holds. If management beats projections, then the founder earns back a slice of the company’s equity pie.

No. 6: Pay attention to preferences. Most business founders get hung up on negotiating their company’s current worth, or its “pre-money” valuation. I say, pay equal attention to preferred stock “liquidation preferences.”   

When a company grows to a lucrative sale, preferred shareholders get paid one or two times their original investment before common stock holding founders receive a penny.    Investors can also add to their percentage equity stake with annual stock dividends that accumulate year after year until the company is sold. Again, founders have to wait in the wings until investors get their liquidation preference multiple plus all accumulated stock dividends.

And lastly, here’s my best advice for maintaining control of your company. Capitalize it well and don’t hide problems from investors or board members. Collaborate as partners, not foes.

Primer on Business Capitalization & Financing

The most common questions I receive have to do with Business Capitalization & Financing. Many of them are from beginners, or people who have been in business but have limited experience in this subject area. Even experienced managers sometimes find that they need help in grasping the basics of some Capital & Financing schemes.

I’ve found a presentation, posted on the internet, that serves as a primer for those who want to learn about the various approaches; including Equity, Bank Financing, and Non-Traditional Financing. The article title states that it’s geared to the Recycling Industry, but the information is broad enough for any interested business person.

Link to Article

Deferring Financial Disaster

By James West
MidasLetter.com
Thursday, October 1, 2009

 

Those who read the contrarian and alternative financial commentators may well be forgiven for wondering why the financial doomsday oft predicted hasn’t quite materialized. The financial crisis heralded by the crash in October 2008, preceded by the demise of Bear Stearns and Lehman Brothers, among others, by all accounts was the tip of the iceberg and the advent of the Great Depression of our age.

Exuberant markets and slap-happy finance ministers, combined with record profits at the investment banks of Mordor, or Wall Street, are supposed to convince us that the worst is over, calamity has been averted, and with sober and moist eyes we roll up our sleeves to prevent the ghosts in the machine from re-emerging. A more masterful symphony of optical delusion has never been conducted, and the invisible puppeteers manipulating the strings of marionettes Ben Bernanke and Timmy Geithner are smug in their continued anonymity.

Meanwhile, unemployment continues to rise, foreclosures and delinquencies ditto, and but for select industries, decline and bankruptcy are the measure of balance sheets, not growth.

The principle tool of deception for this motley crew of G7 finance ministers and the Invisible Hands that control them is currency. With these key economies now flush with capital in the uppermost layers, victory can be claimed by pointing to the balance sheets of those institutions who have averted disaster by capturing the lion’s share of this manna from heaven. That the capital is not filtering down meaningfully into the broader economy in the form of investment and lending is the clearest sign that the worst is yet to come, and we now merely pause in the eye of this economic hurricane.

Keep in mind, if the Great Depression that started in 1929 is a fair analogy, then we are in the autumn of 1930, and the peak of contraction globally did not manifest itself until 1933, when unemployment in the United States reached as high as 25% in some areas. Within that four year overall plunge were several mini-bull rallies that lent solace to the fearful, albeit temporarily.

The major difference between the period from 29-33 and now is that the governments of that era did not have either the ability or the willingness to print money with abandon, because they knew that the outcome of such policy would certainly be future inflation, which would itself handicap any chances of recovery.

Since we now live in an era where its only what is happening right now that matters, the financial overseers seek solutions that immediately repair the illusion of prosperity in perpetuity, even if it means a smaller and smaller percentage of the population is fooled.

The act of printing currency with abandon equates to deferring the financial reconciliation required to achieve balanced budgets into future generations. As long as we print money, and agree to value that money as legal tender, the illusion can go on ad infinitum.

But what happens if, from the bottom up, people start saying “Hey wait a second…this cash is counterfeit!”?

Well that’s what is happening with the price of gold. Even the government of China is hedging its bets that its own currency will suffer devaluation in lock-step with the excess of U.S. currency afloat. After all, China’s foreign reserves are the largest collection of American funny money there is outside of America.

So despite the glad-handing and cheerful sentiment echoed by the mass media controlled by about 7 men, the financial disaster continues to unfold, and the only reason the masks are still on the players in the ersatz performance is to pick clean the pockets of those susceptible to such disingenuity.

For the rest of us, preparations must be made for the next leg down.

There are two things to own going forward. Precious metals and the companies that mine them. The very worst tsunami is a boon only to the surfers crazy enough to catch the wave, and that will exactly be the situation when the fragrant chile hits the fan part 2. Instead of a thrill though, the owners of shares in mines that produce gold will be rewarded with financial security in perpetuity, barring unforeseen acts of foolishness.

Gold producing operations will soon see their valuations increase dramatically. Lifted on that rising tide will certainly be soon-to-be-producers and to a lesser extent, explorers of advanced economic deposits.

The long term deterioration of the U.S. Dollar has been underway for decades. Its days as a viable currency are numbered. History proves this. Buying gold and gold related assets will soon also reveal itself to be the only sound investment of the next 10 years.

The return of the IPO

NEW YORK – Coming off its worst year in three decades, the market for initial public offerings is starting to show signs of life.

Eight companies are looking to raise as much as $3.7 billion when they go public next week, the most activity the U.S. IPO market has seen in a single week in nearly two years and a clear sign that Wall Street’s appetite for risk is returning.

IPOs all but dried up in 2008 as investors shunned the traditionally risky bets and moved into safer assets like cash and Treasurys as the stock market tumbled.

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Stock Answers: Secondary Offerings

CFOs at publicly traded companies typically have good reasons to avoid raising equity capital if they can help it. Investors tend to interpret seasoned equity sales as a sign of poor financial health or that a stock is overpriced. That translates into an almost automatic 3% drop in share price when the offering is announced. For most CFOs, that’s a big pill to swallow.

But equity is making a comeback. Secondary offerings hit $60 billion last May, up from $19 billion in April and just $10 billion in the entire first quarter, according to the Securities Industry and Financial Markets Association.

Why the resurgence? One reason is that companies need to reduce leverage to a manageable level. Paying down debt with equity can take “the going-concern risk associated with high leverage out of play,” says William Welnhofer, a managing director at Robert W. Baird & Co. Thus, investors are more tolerant these days of issuers raising equity to pay down debt, notes David Gruber, head of equity at KeyBanc Capital Markets.

Raising capital is also becoming less expensive, on a relative basis. “The cost of debt has risen and equity has come down slightly, so the gap between the aftertax effective cost of debt and the cost to issue equity has closed,” says Joe Gentile, chief administrative officer at health-care investment bank Leerink Swann.

Finally, issuers are finding eager buyers for their shares. “Assets are flowing into mutual funds, so portfolio managers have the dry powder to buy shares,” says Gruber. In the second quarter, net inflows into equity mutual funds totaled $39 billion, compared with a net outflow in the first quarter, according to AMG Data Services.

But that doesn’t mean raising equity capital is a cakewalk. CFOs have to plan ahead to avoid the effects of dilution and squelch concerns that the stock is trading too high. “Investors have to be able to tell themselves another story about what the company is doing,” notes Charles Cuny, a finance professor at Washington University in St. Louis. “When a company is very clearly taking on new investment and equity is tied to real expansion, the negative impact on the stock price is smaller.”

Short marketing and transaction times, which enable issuers to minimize the effect of market volatility on the share price, are essential. “The longer you are out in the market — with the way the market is moving around — the greater chance you’ll be caught with your pants down,” says Christopher Malik, a senior associate at KeyBanc Capital Markets. In a so-called accelerated book build, a company can sell equity at a discount in one day, filing a press release after the market closes and pricing the transaction the next morning before the market reopens.

A PIPE with a Twist
Many companies are eschewing marketed secondary offerings and turning to private investment in public equity (PIPE). One variety, known as a registered direct deal, is gaining popularity. Of 391 PIPE deals in the first half of 2009, 19% were registered direct, up from 8% last year, according to Sagient Research. In a registered direct deal, the shares are registered with the Securities and Exchange Commission, then marketed to a small group of handpicked investors, who must sign confidentiality agreements and temporarily refrain from trading in the stock.

Regal Beloit, a $2.2 billion manufacturer of electric motors and generators, netted $150 million last May by selling the equivalent of about 13.7% of its outstanding shares through such a transaction. The shares priced at an 8% discount. Regal raised the money to preload for a possible acquisition, says CFO David Barta. “We didn’t want to find the right acquisition opportunity down the road but [then find that] the terms weren’t right,” he says.

Barta says the firm chose the registered direct route because it’s a “quiet approach” that limits the effects of market volatility. If necessary, the company could have stopped the process and pulled out. On the other hand, the transaction still put Barta and other executives in front of investors before the deal priced. “We were out on the road for three days,” Barta says. In contrast, “when you do a deal overnight, the best you’re going to do is conference calls.”

Appealing to the Base
The Regal Beloit offering also provided a twist: in a move called a wall cross, it changed to a public offering on the final day, allowing other investors to get in on the deal at the same discount. “You don’t get as wide an audience under a registered direct deal, because some firms have an absolute policy against registered direct,” Barta explains. “They don’t want to be locked up in the stock.” In addition, he adds, “we felt that all of our shareholders deserved some advanced knowledge of the offering.”

Indeed, companies are finding their current shareowners to be one of their best capital sources. When National Penn Bancshares needed to raise its equity levels late last year, it decided to go directly to its existing investor base. The bank holding company did so through its dividend reinvestment plan (DRIP), increasing the maximum optional cash contribution for purchasing stock to $50,000 and offering the stock at a 10% discount. It raised $75 million in eight months, or about 6.4% of its market cap, bringing its tangible common equity closer to the amount that analysts like to see on a banking company’s balance sheet.

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Hide and Seek Credit

Edited by Joel Bowman

Sometimes less is not more; sometimes it is even less.

According to a Federal Reserve report released by the Feds this week, consumer credit contracted at an annualized rate of 10% in July.

“Non-revolving debt,” which includes loans for automobiles and mobile homes, plunged by $15.4 billion in July…even as the government’s “Cash for Clunkers” program artificially bolstered auto sales to a pace not seen since the heady days of May, 2008. Revolving debt, such as credit cards, fell by $6.1 billion over the same period.

Less really is less.

How does the situation look on the ground, we wonder? Could it be…gasp…even worse than what the Feds would have us believe? Could it be that the next round of economist forecasts will be off the mark?

Here’s what our humble, unpaid correspondents had to say…

First up, let’s hear from the Rude dentist: “I am the owner of a dental practice. I have been dealing with a bank that bought the community bank I worked with for the previous five years. I had an open 100k line of credit at the community bank that was reduced to 25k when the new bank took over. Of course, they charged doc stamps and changed the terms and this was last year in November.

“A few months later they reduced it to 10k because I was not using it. Then, this last weekend, they added an additional 25k line of credit (that i did not ask for) and because they “valued my business,” said they would only charge me one half the doc stamps and loan origination fees.

“As far as refinancing my home…forget it. It seems this bank is not loaning money, only churning existing accounts for additional fees wherever possible.

“I am looking for a new bank.”

Rude reader Charles writes with a similar story. “We have a 7 acre piece of property assessed at 1.3 million and looking to improve it by renovating an existing retail and residential operation. Current rents will cover payments for a $400K loan, which was denied because we do not have enough business experience.

“On the other hand we applied for a refinance of $125,000 on a home assessed at $210,000 and everything looked good until the bank found out we would use the money to improve this commercial property they then lowered the available money to 85K. There is money but it ain’t easy.”

Rude reader Kenny agrees, “To corroborate your private capital vs. government credit jet fuel story, my brother has several commercial buildings which he has contracts on to sell but nobody can actually get the financing to go through with the deals. Obviously no matter how bullish the end consumer is, if he cannot secure financing he can’t follow through.

“The phrase, ‘Show me the money’ comes to mind.”

“There’s no doubt about it,” writes Mike, an Agora Financial Reserve member. “[There is] absolutely NO MONEY out there to borrow for new projects unless you have the same amount of cash to back it up and no such thing as collateralization for any kind of loan. NO CASH, NO LOAN.

“As for current loans on real estate; banks are doing whatever is necessary to bleed cash out of you for principal paydowns. I came prepared and pushed all the keys across the conference table. They backed up. [The bank] essentially told me to go pound sand. So much for having loyalty to a bank, especially when it was they who were prospecting and throwing cash at me just two years ago.

“What really galls me it that people actually treat bankers as though they are intelligent. They got us into this mess and are keeping us in it. Most of them are just building up cash balances as they’ve figured out that their loan portfolios aren’t worth squat or anywhere near their current balance sheet figures and bad loan holdbacks. I’m sure this is a duplication of every note you’ve received thus far.”

Finally today, for our Rude contingent back home, a quick look at the Australian story…

“Our company is a start-up contracting company working in the electrical supply industry with work guaranteed from a large multinational company,” writes our Aussie correspondent.

“I am currently employed on wages by this multinational company as I am being trained to become a contractor for them. We have work for four years in advance with ongoing negotiations for an eight-year contract.

“After investing $60,000 of our own money to purchase some of the equipment our company requires we were advised by our accountant to purchase the remaining equipment with a bank loan for tax and operational reasons. We could buy the required equipment outright and have $120K of capital tied up which we have been advised against.

“We approached our own bank and were knocked back even though we have money to cover the loan and tangible assets of $5.00 for every $1.00 of the proposed loan.

“We have spent the last five weeks negotiating with all manner of financial businesses and, fingers crossed, may have finally found a company to assist us; but they require additional paper work to be completed.

“There is no doubt in our minds that the banks know the economic bubble is going to burst again and they (the lenders) don’t want to be burnt again. The Government-offered incentives have just been a quick fix with no real substance behind it to sustain it into the future.”

The Quest for Capital

The economic downturn has caused CFOs to hone their negotiating skills for maintaining their access to capital. To keep the money they do have flowing and to make sure they have backup lines for future capital needs, finance executives are having more back-and-forth discussions with their customers, suppliers, and bankers.

Link to article:

http://www.cfo.com/article.cfm/13853898

An Often Overlooked Issue – Cash Flow

An Often Overlooked Issue!

Professor von Braun
The Rocket School of Economics

May 22^nd, 2009.

 

What I have referred to before in earlier articles as the great credit contraction is now well and truly underway. The credit expansion period is over and what we are seeing now is the effects of what happens when a fiat monetary system reaches the limits of its ability to both inflate the value of non productive assets and defer settlement, via the ongoing renewal of existing debt.

Attempts by governments and central banks to reinflate declining asset prices via large infusions of psuedo capital into the banking system so that the issuing of credit can be ‘kick started’ are doomed to fail.

House prices will continue to decline, unemployment will rise, tax revenues will decline further, government debt levels will continue to rise and peoples net worth will also decline. This is a given!

This is what happens when you get a major credit contraction. In simple terms it is like the tide going out prior to the tsunami coming in.

Since a monetary debacle of this size has not been seen before, there is nothing to compare it with, for not even the depression of the 1930’s comes close. Then people still had savings and the US $ was, until late 1933, pegged to gold at $20.67 per ounce.

Today all debts are now due, since the banking system can no longer lend its way out of its own dilemma and this is what needs to be clearly understood by investors. The dollar is a liability and as such being in cash is also a liability. Government securities are also liabilities but the issue of liabilities versus real assets is more widespread than that.

The precious metals are not a liability and ownership of them is a very wise move given the uncertainty surrounding everything else that is happening. We have seen calls by some market analysts for the Dow to be at 400, 600 and ‘under a 1000.’ What does that mean you may well ask?

It means that you have a collapsed banking system along with massive unemployment and no cashflow of any consequence being generated within the system itself. What will happen to brokerage houses if you have the Dow at 400? What will stock exchanges look like if there is a collapse through to these levels? How will capital be raised when there is no capital left?

Cashflow during the credit expansion period was ‘created’ by the banks themselves via home equity lines, credit cards, and a series of market bubbles. Productivity, which should have been the benchmark by which to measure cashflow went off to all sorts of different places such as Asia, India, China and now we have a situation that the holders of US dollar denominated ‘reserves’ are located outside the US. There is little by way of actual ‘reserves’ within the US itself, hence the need to issue more debt.

In addition money that has been spent within in the US by its residents has mostly been spent on items that have little, if any, appreciative value. On the contrary electronic gadgets tend to depreciate, as do autos, as do fridges, freezers, washing machines and dryers. The real estate bubble has now clearly demonstrated that house prices can and do decline. Those who have been saving for their retirement are in a double bind, since in most cases what they believed was assets are now being seen as liabilities. That second house purchase is now a liability and even the primary residence is, in many cases, under water.

The root cause of all of this is the banking system itself and its mismanagement, with some not so little help from both Congress and the Senate, along with the failure of the deregulation of the systems put in place during the 1930’s to stop this from happening. There still seems to be a complete lack of understanding of what the problem actually is, which is clearly demonstrated by the attempts so far to fix the banking systems dilemma.

The often overlooked issue is CASHFLOW! Where is your income going to come from now that the capital gains machine is broken? Even if you are sitting in cash and own high quality government securities (whatever they are), with a 3% return, what can you buy into that can offer a cashflow that is reasonably safe and secure?

What is going to be left to buy when the music stops, when Mr. Fiat finally succumbs to Alzheimer’s disease and you are left holding his empty bag of promises to pay?

Anything that has debt attached to it is a liability that won’t go away. Any sector that is dependant on people spending money on goods or entertainment that provides revenue to service their debt has a problem and all aspects of the economy are at risk. Real estate, both residential and commercial, travel & leisure, retailing, the auto industry, even the medical profession will be facing lower revenues. The economy is not something that can be easily isolated into safe & unsafe sectors as it is all interconnected via the banking system which can no longer inflate the value of the underlying assets, regardless of what they are.

The example given by President Roosevelt’s revaluing of gold in 1934 is of interest and contains pointers to the issue of cashflow. Small mining operations sprung up in many parts of the US. The reworking of tailings dumps from previous operations became common and with the increase in price gold mining became one of the few sources of consistent cashflow. Employment for miners was assured and towns that were close to producing mines did not nearly suffer the downturns and bank closures of areas that were not.

The production of gold is as close to guaranteed cashflow as you can get, even if gold is confiscated and a new ‘official’ price created, the gold that is being mined does have to be purchased and paid for by somebody. Will there be a resurgence of small privately owned gold mines?

Very few have understood the predicament the banking industry is in. The banks have been in the business of asset inflation and for a while it seemed to be working. But when it became the only game in town, everybody joined in and the ability to keep a lid on the issuance of debt was lost. Productivity was forgotten about as the technological advances gave people access to what appeared to be the goods, but was nothing other than an image.

The need for savings was ignored and now we have a compounding to the downside as assets continue lose their value. Ownership of debt is now being seen for what it is, something that can become problematic very quickly. Investors with capital are few and far between and assets that have strong cashflow potential are also few and far between.

The coming cashflow shortage will affect all entities from the Federal Government, to the states, the counties, pension plans, investors and homeowners alike.

An Updated Take on the Economic Situation

IMF Bombshell

Neville Bennett

There is a disconnect between the real world and Wall Street. Wall Street prices surge while real economy difficulties increase daily. Exports are falling, house prices are declining, and no-one can sell cars. However, There is a perception of “green shoots” indicate that that the real economy may recover quite soon because the financial sector has recovered, and a bull market is underway.

The financial sector, however, has been singled out by the IMF for a thorough review. It emphasizes the key challenge of breaking the downward spiral between the financial system and the economy. The IMF believes that “promising efforts” are under way to redesign the global financial system to provide a more resilient platform for sustained economic growth.

OVERVIEW

The financial sector needs mending. Banks and corporates need refunding, balance sheets have to be bolstered, and capital needs to flow across borders, especially to the merging countries. There is on-going destruction or corruption of assets, and the latest IMF estimate of write-downs has increased from US$ 2.2 trillion in January, to a possible US$4 trillion in April. The increase arises partly because of worsening picture of economic growth and the spread to other mature market-originated assets. About a third of newly-emerging write-downs will be incurred by non-banking institutions

There have been some improvement in interbank markets but funding remains a difficult issue, especially long-term funding. In some jurisdictions banks can issue government guaranteed, longer term debt. But the funding debt is big, with the result that many corporations are unable to obtain bank-supplied longer term debt or even working capital.

Present Risks

The crisis has deleveraged asset prices causing much distress. Some Pension funds and Life Insurers are now underfunded. Some managed their risks prudently, but others undertook risks which they did not really understand. The greatest problem is, however, the decline of cross-border funding. Emerging market economies desperately need refinancing, probably to the tune of $1.8 trillion in 2009. They had relied on private capital flows but these have been reversed.

Although there have been massive fiscal stimulus packages already, further policy action is necessary to restore confidence and thereby relieve uncertainty. Uncertainties are “undermining the prospects for an economic recovery”. The cost of these packages is causing concern, especially when the debt burden combines with longer-term pressures from an aging population. There is a “home-bias” as officials encourage banks to lend locally and consumers to keep their spending domestically orientated.

These are extremely challenging times as officials try to break a downward spiral which is dragging down the financial sector and the real economy.

Recommendations

The economic recovery will be protracted. The deleveraging process is not over and will continue to be slow and painful. Credit growth will contract in the US, UK, and EU, and only recover after a number of years. But political support for more fiscal and monetary aid by the state is waning. There is a risk that governments will be reluctant to allocate sufficient funds to solve the problem.

Restoring the banking system will take several years. Governments should co-ordinate policies to ensure that the banking system has access to liquidity; the impaired assets are identified and dealt with; and weak banks and other viable institutions should be recapitalized. Lessons from previous crises suggest that very forceful measures are required to resolve financial sector weakness.

The IMF has tried to assess existing losses and possible future write-downs in Western banking systems in 2009-2010. Its lowest estimate is $275 bn for US banks, $375 for Euro and $125 for British banks, and about $100 bn for other European banks. But the banks must first increase certainty identifying their capital needs and disclosing impaired assets. Bank supervisors must be very strict in evaluating bank claims and business plans. Viable with insufficient capital could get sufficient capital injections from the state to encourage private capital to join in raising capital ratios.

While banks use public money, their operations must be closely monitored, dividends and restricted, and compensation closely examined. There will be cases to replace top management. Non-viable banks could be merged with others or undergo orderly closure.

The difficulty in attracting private capital means deep government involvement is necessary, even to the extent of taking control. But ideally, the bank will be returned to the private sector as quickly as possible. It would be helpful to convert Government holdings of preferred shares to common stock.

Funding Needs

Bank funding remains highly stressed. Some governments have guaranteed deposits and some forms of bank debt, but wholesale funding is inadequate. Central banks will continue to need to provide ample liquidity for the foreseeable future.

Emerging markets are hemorrhaging capital and this will continue over the “next few years”. Their central banks will also need to provide ample liquidity, and also perhaps foreign currency through swaps or outright sales. IMF’s enhanced resources can buffer the financial crisis. The larger problem in emerging markets is a lack of capital to roll over corporate debt. Government support seems warranted to keep trade flowing and limiting damage to the real economy. The situation warrants devising contingency plans to prepare for large-scale restructurings in case circumstances deteriorate further.

Pressure to support domestic lending may lead to financial protectionism. In several countries authorities have stated that banks receiving support should expand their domestic lending. This could crowd-out foreign lending as banks face on-going pressure to delever balance sheets, sell foreign operations and remove risky overseas assets. These policies can damage the global economy.

Fiscal issues

Credit growth is necessary to sustain economic activity. In countries with fiscal room for maneuver, fiscal stimulus will be welcomed by markets. But markets are showing concern in countries where debt is an issue, and bond yields have increased and currencies weakened.

There is a universal need for stimulus now, but this clashes often with issues of sustainability. Governments risk a loss of confidence in their solvency if there are no plans for debt reduction

Conclusion

Policymakers have to address urgently the present crisis as well as devising a more robust financial system. Improved financial regulation and supervision are key components in preventing future crises by mitigating future systemic risk. The financial system will remain under pressure for years and require massive new funds.