With fewer jobs available through on-campus recruiting and job boards, alumni networks are becoming more critical

By Anne VanderMey

For Alex Cavallini, the financial crisis hit home as he was preparing to begin a job with Cummins Inc. (CMI) Less than 24 hours before he was set to fly out to his new office, the diesel engine manufacturer rescinded his offer, leaving the recent graduate jobless—even though just a few months before he had his pick of offers from two companies. "I felt like I was losing two jobs at once," he says.

So Cavallini turned to his school, which turned to Brian Hancock, a vice-president at Whirlpool whom Cavallini had worked for and impressed during his internship the summer before. As important as that good impression, Cavallini says, was that Hancock was a fellow alumnus of Brigham Young University. The alum sympathized with Cavallini's plight, and placed a call that afternoon to the CEO of a Whirlpool supplier. Company executives interviewed Cavallini within days and then offered him a job. He accepted, and in less than a week the 28-year-old went from being unemployed to being upwardly mobile.

The MBA alumni network is an integral part of the package at most business schools. Stories like Cavallini's, involving an alumnus making a crucial introduction or putting in a good word, were never uncommon, but they're becoming increasingly critical as companies tighten their belts and more traditional recruitment forums such as career fairs run dry.

An old saying, "It's not what you know, it's who you know," rings particularly true as recruiters are deluged with qualified applicants and seemingly flawless résumés get lost in the shuffle. But even absent a professional connection, schools are turning toward alumni as a source for fresh job offers, relying on the foundation of trust many school networks automatically confer. InCircle, an alumni networking site used at several U.S. schools, reflects a common sentiment with its revision of the old axiom: "It's not who you know," InCircle's slogan says, "it's how you know them."

Kevin Knox, director of the alumni association at Southern Methodist University's Cox School of Business, puts it even more directly: "The network has never been more important."
THE OLD COLLEGE TRY

The exact number of job offers that come through alumni contacts is hard to measure and varies from school to school. In a recent survey by the Graduate Management Admission Council, 28% of MBA graduates reported receiving their first job offer as a result of networking. Kristin Irish, deputy director of career development at the Yale School of Management, cautions that that number may be artificially low, as networks play such a fundamental role in the job search that their role is sometimes overlooked. At Notre Dame University's Mendoza College of Business, Patrick Perella, director of MBA career development, estimates that about 50% of students get a job through an alumni connection. Given the recent slump in recruiting, he says, "That number can only go up."

Perella isn't alone in his prediction. As the nation faces the highest unemployment levels in a quarter century, many schools are looking to offset decreases in recruiting with job leads from alumni. At the University of Pennsylvania's Wharton School, Director of Career Management Michelle Antonio says about 40% of offers come through formal, school-organized events like job fairs. This year, she said, that ratio could flip, with 60% of offers coming from other sources—primarily networking.

Across the country, schools are attempting to help that process along with appeals to alumni to come together in the wake of the financial crisis.

At Wharton, Dean Thomas Robertson sent a letter to all alumni seeking input, and career services will reach out to all alumni clubs—not a new tactic, Antonio said, "but it will clearly be more critical than ever this year."

At Notre Dame, career services recently finished a "phone-a-thon," contacting 150 MBA alumni working in sectors likely to receive stimulus funds, as well as the government itself. And at the University of California, Berkeley's Haas School of Business, Dean Richard Lyons penned an open letter asking alums to look "deep into your organizations" for jobs, signing off with the entreaty: "Hire Haas!" The letter, says Haas' Executive Director of Career Services Abby Scott, yielded 14 new job postings in just 24 hours.

"People like to be asked," says Dipak Jain, dean of Northwestern University's Kellogg School of Management. Kellogg has conducted a targeted outreach to alumni in certain fields, but hasn't yet sent out a mass mailing. The school, like many others, has also redoubled support for struggling alumni, and plans to offer more services to bring them back to campus, where they can both regroup and connect with current students. Says Jain: "We need them as much as they need us."
A TWO-WAY STREET

Alumni networking has its perks for employers as well. Given the dismal market for MBA hires, many recruiters find themselves with hundreds of résumés for just a few slots. For online applications, it can be even worse.

The logical next step is to limit the applicant search through networks "rather than getting a thousand applications from every average Joe out there," says Wharton's Antonio. It's easier for many employers to single out a few people who are qualified and come recommended, instead of opening the search more widely. "Of the opportunities that do exist, which are obviously fewer and farther between, a lot of those will never hit a job board," she says.

G.R. Christon, a senior director at crisis-management firm Alvarez & Marsal and a graduate of the Cox School of Business at Southern Methodist University, says he contacted his alma mater when his firm was set to take on new recruits simply because he knew they would have a list of qualified résumés ready for him. "Putting ads in the paper or on Monster.com is kind of inefficient for us," says Christon.

An added benefit to recruiters is a network's reliability, especially in an economic climate where making a hire is taking a gamble. "It does help lower the risk when you can use [your contacts] to check into what you're getting," says Greg Bolino, a partner at Accenture (ACN) and chairman of the University of Michigan's Ross School of Business's alumni board of governors. At the consulting firm Business Talent Group, Vice-President Michelle Cline, a graduate of the Stanford Graduate School of Business, says the firm regularly seeks out talent through alumni networks, and hires largely along those lines. Once she has the recommendation from a person whose judgment she trusts, "There's not much more that I need," she says.

Of course, almost without exception, employers caution that a diploma doesn't automatically confer connections. It's far more effective to build genuine relationships, and only later ask for a job.

Those who don't heed that rule are eyed suspiciously, employers say. It's better to start earlier, or just ask for career advice or an informational interview. In those cases, says Bolino: "It's easy for me to say yes because somebody said yes to me."

"A LITTLE BIT OF PANIC"

As for students, the writing is on the wall. Formerly casual networking events have become a little more tense—with more industry-related introductions and swapping of business cards. At the University of Chicago's Booth School of Business, Senior Alumni Affairs Director Tracey Pavlishin says she's seen more professional connections made at the school's alumni-student gatherings—which include such things as happy hours, wine tastings, and golf outings—even though that's rarely the core purpose of the events.

At the Thunderbird School of Global Management, Associate Vice-President of Career Services Kip Harrell says there's been about a 50% increase in the number of students asking for alumni contact information since last year—meaning more requests than ever. Harrell, who is also the director of the MBA Career Services Council, says he advises students to dress professionally every day on the off chance they run into someone on campus who might serve as a professional connection. He's made a point to call students when alumni visit him, saying: "Whatever you're doing, drop it and get over here to talk to Jim, or Tony, or whomever it may be."

"You see a little bit of panic on everybody's faces," said Mary Lousteau, a first-year MBA at the Robert H. Smith School of Business at the University of Maryland, who has been organizing events for students and alumni in the marketing sector. She has two potential leads on internships—both through her work setting up alumni events. "It's becoming more important as students realize the reality that some of those opportunities are filled up," she says.

Most students realize their networks will be more crucial this year than ever before and are preparing accordingly—whether it be joining the business networking site LinkedIn, perfecting their golf technique, or methodically mapping out extended networks on Excel spreadsheets. Lousteau said the internship search sometimes takes precedent even over her wedding planning.

Even though many MBAs obsess over their networks, it may not do them much good. In the wake of sweeping cross-sector layoffs, MBA alumni aren't always in a better position than students. "More people are going to look for alumni for those connections," Harrell said. "But whether they prove more fruitful than they have in the past remains to be seen."

Here, view a slide show of the schools with the most active alumni networks and a video describing the importance of alumni networks.

Anne VanderMey is a B-schools writer at BusinessWeek

Posted by: Louis Lavelle on March 26

With the economy in turmoil, many MBA graduates are finding the job search tough going. To give readers some insight into the strategies they’re pursuing and the difficulties they face, BusinessWeek has recruited four out-of-work MBAs to write about their experiences for a new feature called “The Hunt” that will appear periodically on the Getting In blog. Comments, as always, are welcome.

By Bryan Glover
I know many people are experiencing the same frustration I am, and I sincerely hope this blog can help relieve the feeling of “aloneness” that can permeate a job hunt. My bio has more information about who I am and my background, but I thought it appropriate to share with my audience a synopsis. I finished my MBA program in December and had been working part-time during my final semester at a company that had said my job would become full-time after I graduated. Unfortunately, I was notified on my graduation day that I was going to be laid-off.

I would describe myself as a driven, intelligent, hard-working generalist with a diverse background and experience at a number of world-class companies. My career goals may sound a bit vague and fuzzy for a 35 year-old MBA graduate, but they work for me. My overarching goal is to find a career that I enjoy and that is challenging. I can better tell you what kind of organization I want to work for than what position I want to have in the future.

My job hunt can best be described as a series of peaks and valleys up to this point. Almost weekly I will hear from a potential employer whether it be a phone interview or in-person. I have been offered jobs only to have the company run out of money the week I was supposed to start. I have had one company contact me to set-up and interview, delay the interview one week, then ultimately fill the opening with an internal candidate. I had another company e-mail me to set up a lunch meeting, which went well, and then follow it up with a phone call that I couldn’t answer because I was in a meeting, and that manager not bother to return my voicemails.

My job-hunting approach has been multi-faceted. I have been networking, attending job fairs, sending resumes through contacts, and using various online job sites. I am treating my job search like a full-time job. In general, I will pick a site or sector a day and dive in. For example, one day I spent researching and applying to jobs with the federal government, the next was with my state, and so on. I have had a few offers so far that were at salary levels so low that I could not pay my bills if I took them. So, for now I am turning those jobs down with the hope that I can find a job in my salary range before my bank account reaches a critical level.

Emotionally, this job hunt has been trying. I think much of this stems from seeing so many of my classmates unable to find jobs upon graduation. Of the 27 people I graduated with, only three have been able to find full-time employment. Of those three, only one has found a job in a field and at a level that would be considered MBA caliber. One has gone to work for a non-profit and teaching GMAT prep classes on the side; the other recently took a job as a waitress. I think much of this is due to the macro economy, but there does seem to be a stigma against MBAs that plays out in not getting interviews/offers or in the form of low salary offers.

Things change day-to-day. I go through mini depression cycles weekly. I don’t mind rejection and I have been through lay-offs and bubble bursts before (I worked at a dot com when the bubble burst in 2001), but to see so many widespread reports of economic problems, the struggles of my classmates, the overnight evaporation of jobs, and the “we can be as picky as we want and you will take what we give you” attitude on behalf of so many employers is really souring me on this whole process and my future prospects when the economy does turn for the better. I am trying to stay positive because I expect to have 30 years of career in front of me and starting out bitter and resentful isn’t going to help me be successful. I will admit that some days are harder than others. I know a number of people who have been laid off in the past six months (over 30 in my network alone) and this weighs on me. While I know I am highly qualified, I also know that companies can be (and are being) very picky in their hiring right now.

Thanks for reading and please feel free to share any thoughts, questions, or feedback as appropriate.

Business Week

President Obama recently unveiled plans to spur lending to small businesses. Experts detail the benefits and drawbacks of taking on debt

By Karen E. Klein

Over the past few weeks, President Obama has unveiled multiple plans for aid to small businesses, including lowering loan fees, increasing guarantees on government-backed loans, and buying up to $15 billion in Small Business Administration-backed loans. But will the new programs unfreeze credit as they are intended to do? And how can entrepreneurs take advantage of the warmer climate if they do?


Sanford Ehrlich, executive director of San Diego State University's Entrepreneurial Management Center, says the lending initiatives are likely to provide some relief, but he worries it won't be enough to help companies that are really struggling.

"Anything that will increase lending will be good for small business, but you have to be a fairly liquid small business to take advantage of this program. If you have too much inventory, too little cash flow, you're currently carrying debt that's been called, or balloon payments are staring you in the face, adding more debt to your current situation isn't going to help," Ehrlich says. "So many small businesses are in serious trouble that the number this will help will be limited."
Take Advantage of the Downturn

Ehrlich says he would have preferred to see government increase its spending in the SBA's Small Business Innovation Research or Small Business Technology Transfer programs. With the overall decline in wealth, he says, there's no longer much private investment money for the innovative, high-technology startups that often have an outsize impact on high-wage job growth.

If, however, small business owners can position themselves to take on new debt to fund future growth, Ehrlich says, they should begin looking for credit as the Obama plan goes into effect. "Companies currently in decent cash positions should consider plowing money back into their marketing and branding efforts, buying competitors, and accumulating more market share in this economy," he says.

But Ehrlich cautions entrepreneurs struggling to keep their heads above water not to think of loans as life preservers. "If your company is going under, do a realistic evaluation about whether you need to liquidate. Don't take on more debt just to keep treading water."
Time to Expand

Maria Minniti, a professor of entrepreneurship at Southern Methodist University's Cox School of Business, agrees. Companies in good financial situations are likely to benefit from increased access to credit under Obama's plans, particularly when combined with a market in which costs are down for human capital as well as commercial space. "This may be the time to upgrade your location or hire some fantastic talent," she says.

And would-be entrepreneurs with good credit scores might find this a good time to borrow some funds, she adds. "Small businesses, especially young ones, tend to operate on a tight budget, stretching earnings from year to year. If you've operated on a budget and you're holding some reserve, this may be the time to borrow and make improvements or expand."

Daniel Meyerov, a small business consultant and founder of OnlyBusiness.com, says companies looking for new credit should approach lenders by emphasizing the part they'll play in economic stimulus. "Banks won't want to lend to small businesses that are going to hold the money and try to survive through the wilderness," Meyerov says. "They will want to see it invested in the economy in a way that will support surrounding businesses in the supply chain."

Filling out Forms

A compelling loan application will include detailed plans for how you'll use the money—along with forecasts of results, he says. Also make sure your paperwork is completed properly before you deliver it to a lender.

"This is often an issue with small businesses, and it affects their credibility and accountability," says Meyerov. "If you're unsure and you fill out the paperwork wrong, it'll go into a very large pile marked 'more detail needed' that can sit on a desk for a very long time. Position yourself properly, have your documents ready, and if you're a viable business, you'll get access to capital sooner rather than later."

Demand for loans has dropped in 2009, according to the U.S. Treasury, perhaps because many companies are pulling back on spending or fear they wouldn't get a loan if they applied for one. But demand is likely to increase if banks feel more comfortable lending under the new government guarantees, says Minniti.
Drawbacks Nonetheless

While she commended the Obama Administration for putting a spotlight on small business, she says she is wary of the idea that government—not the free market—may play a greater role in determining which companies get loans. "Economists like myself tend to believe that the market incentive structure does the best job of selecting and channeling financial flow to the right places," she says.

Minniti worries that with higher loan guarantees and government providing a secondary market for small business loans, bankers will be tempted to abandon their strict monitoring role in lending. "In spite of their best intentions, the government's attempts to monitor and implement these programs correctly will add to a huge bureaucracy." she says. "Will a large government plan do a better job than the market would? It's tricky to work that out."

Dan Mica, chief executive of the Credit Union National Assn. and former U.S. Representative from Florida, agrees that creating a small business "lending bubble" would be a mistake. "You have to draw that line very carefully," he says, "but people who do lending for a living are very good at making the distinction between businesses that need extra help without being imprudent in their decisions."
Trying to Raise the Ceiling

Mica, whose organization represents the nation's 8,000 credit unions and their 90 million members, is working to get laws changed that cap credit unions' ability to lend to small companies. "Our credit unions are the best-capitalized financial institutions left in America, and we could put $10 billion into the economy almost immediately," he says.

Mica spoke to Obama adviser Valerie Jarrett, and his chief counsel spoke briefly to President Obama, at the small business press conference on Mar. 16, Mica says. Under current law, credit unions can use up to 12.25% of their total assets on small business loans. But most have reached that cap and would like to extend more loans to small businesses, where he says credit unions have default rates of less than 2%.

"We have a record of lending to small companies, and we know how to do it," Mica says, noting that Senator Charles Schumer (D-N.Y.) is planning legislation to raise the cap on credit union lending later this year.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

Business Week

Though the SBA doesn't give stimulus package loans directly to small businesses, savvy scammers would have you believe otherwise

By Karen E. Klein

Q: My sons own and operate an architectural/engineering firm and a steel fabrication firm. These are Main Street firms, needing operating capital. What department of the stimulus package do they apply to for a loan?

—J.R., posted online

A: The American Recovery & Reinvestment Act (also known as the "stimulus package") signed into law last month provides $730 million to beef up the loan guarantee programs of the U.S. Small Business Administration. Part of that sum is supposed to reduce the fees that borrowers pay for SBA-backed loans and to increase government guarantees on the loans, making them more attractive for bankers. These measures are designed to help thaw the current credit freeze.


Another program in the works, a joint Fed and Treasury program known as the Term Asset-Backed Securities Loan Facility, or TALF, also aims to get credit flowing again to Main Street borrowers.

However, it is important for your sons and other small business owners to realize the government does not give loans directly to small businesses. The government works through commercial lenders, such as banks, by guaranteeing the small business loans of banks that participate in their loan programs.

The confusion on this point has unfortunately opened the door to fraudulent operators who charge fees purporting to help small business owners and individuals get government money, says Alison Southwick, spokesperson for the Council of Better Business Bureaus in Arlington, Va. "Anytime there's a story dominating the headlines, scammers are going to take advantage of it," she says. "When people hear the word 'stimulus,' they know that's something they heard about in the news, so it must be legitimate."

Hundreds of complaints have poured in to the BBB in the weeks since the stimulus package was passed, she says, most of them from people who responded to Internet ads leading to Web sites featuring "testimonials" from individuals claiming they got government money to start businesses or pay off bills. For a fee, many of the Web site pitches say, they'll send you a CD or a mail-order kit explaining how to have access to government stimulus money.
Lucky Winners?

These Web sites are extremely misleading, Southwick says, including some that incorporate blogs that appear to be written by the lucky winners of all that stimulus cash. However, not only is the government not cutting checks to would-be entrepreneurs, you don't need to pay for information about SBA loans or government grants (most of which are available only to nonprofit organizations or very specialized research companies).

"They're charging you for free information, in the first place. And maybe they send you a CD or maybe they don't. But what happens is that people's credit cards start getting billed and there's no way to stop it," she says. "A woman I talked to today said she started getting billed not only for the stimulus information but also $25 per month for a newsletter she didn't want, either."

Victims often wind up paying $60 to $80 a month, and if they don't realize it, the scam can go on indefinitely. "They keep on billing and hope that a certain percentage of people aren't going over their credit-card statements closely," Southwick says. Even those who catch the unwanted charges often find there's no way to stop the billing unless they cancel their credit cards.

The bottom line: Provisions of the stimulus package and other government programs are aimed at increasing access to government small business loans and getting the banks back in the business of loaning money again. Good information about SBA loan guarantee programs is available here. Other government sites offer free information about grants, student aid, and government benefits.

There is no reason to pay for software or guides to apply for government loans or grants. Companies that offer such information for a fee—when it is already available for free online—are likely to be scams, so stay away from them.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.
Business Week

Faisal Chaniago , Contributor , Jakarta

Life is like a wheel that turns round and round until one's destination is reached.

It is most important not to stop and to feel satisfied when one attains success, because around you there are still many people who need your help.

That is why you have to be unselfish. Budiyanto Darmastono believes in this philosophy and he credits his success as an entrepreneur to this philosophy.


Budi, as he is called, is in the courier and cargo business. His company, PT Nusantara Card Semesta (NCS), is considered one of the largest players in the city courier business. His company has a good reputation with major banks, because banks like BCA, HSBC, ABN Amro, Standard Chartered, Bank Mandiri, Bank Niaga, Bank Permata, GE Finance, Bank Bukopin, Bank Bumiputra and Bank Danamon frequently use his services.

Apart from banks, major insurance companies are also his clients, such as Manulife, Sequislife, Prudential, Axa Mandiri and AIG Lippo. Other clients include Sharp Indonesia, Macindo, Garuda Indonesia, Coca-Cola, Makro, Abbot, Olympus and Datascrip. In total, his clients number about 300 large companies.

Before becoming a successful businessman, he worked for Diners Club for 15 years. After such a long time he felt that his career was going nowhere, so Budi, who was born in Karanganyar, Central Java, in 1961, established his own courier company.

"If I had stayed on as an employee, there would not have been any major changes in my life and I would have had to depend on my salary there as my only income," he said smiling.

He once tried to open a mini market and all the time he dreamed about becoming a wealthy man and living a comfortable life.

Finally at the end of 1996, he decided to leave his job at Diners Club and established NCS, hoping it would grow into a big company. At first his wife, Reni Sitawati Siregar, did not agree with his decision.

She was afraid of him losing a regular income, while a new venture was not a certainty. However, Budi persisted.

To avoid any tension with his wife, he brought her around to his way of thinking. He told her that once he could fully focus on the business it would have a huge potential. Initially, he collected as much data as possible and made a database containing details about all his potential clients so that the company's operations would be efficient and effective.

He had learned from his experience at Diners Club that information technology helped a lot. When he established his company, especially during the early years, very few other courier companies used IT in their operations as the work was mostly manual then.

It was hard to answer clients' questions about the whereabouts of their goods as they had to look through manually recorded data. Only giant-sized companies used IT for their business, such as DHL and TN T.

When he established NCS, his starting capital was just Rp 50 million and he had only eight employees at a rented 200-square-meter house on Jl. Tali, West Jakarta. Budi said it took him about a month to get the business permits and get the office organized.

But that was then. Today, NCS has its own five-story building in Slipi, West Jakarta. From the initial eight employees, the company currently has about 2,600 employees and 27 branches in major cities, such as Greater Jakarta (including Bogor, Bekasi, Tangerang, Depok) Bandung, Padang, Medan, Palembang, Yogyakarta, Surakarta, Manado, Gorontalo, Banda Aceh, Surabaya and many more.

NCS has spread its wings even farther by opening a branch in Singapore."NCS is no longer a domestic courier company, but much more as it handles international air and sea cargo, moving, trucking, warehousing, logistics and distribution," Budi explained.

His choice of courier and cargo business was related to his previous job in the finance department of Diner's Club where he had firsthand knowledge of the business.

At that time, Diners Club used to send a very large amount of cards and letters to its customers. After observing how few courier companies there were in the country, Budi, who graduated from the School of Accountancy at Gadjah Mada University, Yogyakarta, got the idea of opening a courier company.

"The number of such companies at that time was still small and they were not that professional in their business. So I said to myself that here was an opportunity to open up a courier company," he said. Feeling confident, he started the business and determinedly competed with established players.

In the beginning, he wanted to focus on the card center business, so it is not surprising that his very first clients were banks. His wife was the operations manager of the company in the early years of the company, while he still initially worked for Diners Club.

However, he was directly involved in the marketing side. He did all the company's presentations when introducing its services to potential clients.

He did all this in his spare time, but he did his best so that his employers could not find fault with his performance and realize that he was working elsewhere.

However, today the situation is different. He does not have to hide his business from anyone and can develop his business further. The father of one admits that it has not been an easy job developing the company into a big entity.

Budi said there were a number of strategic keys to the success of NCS. First, one has to be optimistic and determined.

"As an entrepreneur, I have to be confident of what I am doing and of my capability. Obstacles are only natural in any venture," said Budi, who loves reading.

Second, establish commitments to build trust on the part of customers and clients.

Third, use the right technology. To satisfy his clients, Budi keeps developing his infrastructure by upgrading the company's IT system. He has spent more than Rp 2 billion on the company's hardware, software and consultant's fees.

With the latest IT system, NCS can always report or track the whereabouts of customers' goods and consignments at any time.

As a leader, he never treats his employees as subordinates, but more like partners. He realizes that his success is inseparable from the role and hard work of his employees. This is why they like working for him and many stay for years.

Before turning into an entrepreneur, he dreamed that one day when he became successful he would stand by their side and treat them like friends.

"That was my dream then. Now, every year I go on the haj pilgrimage or umroh and in front of the ka'bah I always pray that I can send these friends of mine on the haj pilgrimage or umroh. And my prayers have been granted. Before sending them to Mecca, I took my family, including my wife's family, on the haj pilgrimage," he concluded.

Background

Name: Budiyanto Darmastono

Place/date of birth: Karanganyar, Central Java, April 5, 1961

Status: Married

Education

1990: Accountancy, Gadjah Mada University

Experience

President director, PT Nusantara Card Semesta

Jakarta Post

The SBA's forthcoming loan-relief program can't be used to pay down existing SBA loans -- but past borrowers will still be eligible for help with other debts.

NEW YORK (CNNMoney.com) -- The Small Business Administration is still drawing up guidelines for its forthcoming emergency loans program, a stopgap measure intended to shore up small businesses struggling to keep up with payments on existing debt. But the agency this week confirmed an unexpected twist: Businesses with current loans backed by the SBA won't be able to use the new loans to cover payments on their existing SBA debt.

The upcoming program, tentatively dubbed the "America's Recovery Capital" (ARC) loan program, is a measure mandated by last month's stimulus bill. The bill requires the SBA to create a new "business stabilization" program to back loans of up to $35,000 to small businesses "experiencing immediate financial hardship." The loans are intended to be used to make interest and principal payments on a "qualifying small business loan" for up to six months.

In several announcements this week, SBA officials said that SBA-backed loans made before the stimulus bill's passage on Feb. 17 won't be eligible for ARC loan relief. The reason: The American Recovery and Reinvestment Act, the stimulus bill, forbids it. A provision Congress wrote into the bill explicitly prevents the new stabilization loans from being used to pay down SBA-backed loans made before the bill's enactment.

A staffer with the House Small Business Committee said that restriction was mandated by the Congressional Budget Office to comply with pay-as-you-go prohibitions against increasing the federal deficit through new direct-spending measures.

Still, both the House Committee and the SBA emphasized that businesses with existing SBA-backed loans can still apply for the new ARC loans. The only catch is that they'll have to use their new loans to pay down debt other than their SBA loan.

"Private loans made for any legitimate business purpose -- including credit card debts, bank loans and real-estate loans -- would be eligible for the program," the House Committee staffer said. "The Committee is also pushing the SBA to work with borrowers on loan modification and forbearance to provide relief to small business borrowers who have SBA-backed loans."
Talk back: Have you had trouble getting a loan?

The new ARC loans will be offered on extremely compelling terms for both business owners and lenders. The loans will come directly from banks, but the SBA will offer the banks a 100% guarantee on the loans -- something the agency has never done before. If the business owner defaults, the SBA will repay the bank for the full value of the loan.

The SBA will also fully subsidize the interest on the loans, making them essentially cost free for business owners. No payment on the loans will be due for a year, and businesses will have up to 5 years to fully repay them.

The SBA is still creating the guidelines for the new ARC loans program and doesn't yet know when the funds will be available.

"The details have not been worked out yet," SBA spokesman Michael Stamler said earlier this week. "It a very complex undertaking, but we are hurrying as fast as we can, consistent with making sure we have a thoughtful, effective program in place."

Congress allocated $255 million in the stimulus bill to fund the ARC program. That money will be used to pay for the program's loan guarantees and interest subsidies, so the actual lending volume it will support will be higher. The SBA is still working out the formulas to calculate how far the ARC funding will stretch.

It's also still determining what businesses will qualify for aid. The ARC loans will come directly from banks, and in a Web presentation this week, an SBA official said that only "viable" small businesses will be eligible.

That's an important caveat for a program that offers banks complete immunity against loans going bad. The SBA is already trying to cope with soaring default rates for its traditional loan programs, which only ensure banks against losses on a portion of their losses on qualified small business loans.

"A 'viable' small business is a business that has a demonstrated earnings history and proven record for success that may just need a little extra help to get through a short-term downturn," Eric Zarnikow, the SBA's associate administrator for capital access, said during the presentation. "We will be issuing additional guidance to lenders when the ARC program is released."

While many aspects of the program remain nebulous, small business advocates say it can't arrive soon enough.

"This stimulus, while small, will clearly help many existing small business borrowers to weather the storm," said Edward Tuvin, a former SBA lender who is now managing director of factoring firm Creative Capital Associates in Silver Spring, Md.

"It sounds like a good plan, but where is it, and why is it so difficult to put it into action?" asked Martin, the owner of Nu Wray Inn, a bed & breakfast in Burnsville, N.C.

Martin, who asked not to have his last name used because he's currently consulting part-time for a bank, has been hit hard by rising operating costs at the same time as sales dry up. To buy Nu Wray Inn three years ago, he took out a private bank loan, one not backed by the SBA. That loan is currently at a 10% interest rate, and the bank has turned down Martin's requests for a modification.

"I'm taking money from my other job to make those payments. If it wasn't for that, my business would be bankrupt," Martin said.

The SBA's ARC program could help his business -- if it gets moving in time.

"It frustrates me a lot to see banks and auto makers and these other companies getting a quick response, and small business as a whole getting a very slow response," he said. "The inn I run has been operating since 1833. If I go out of business, that's a hardship to my local community. I'm right in the middle of the town square." To top of page
First Published: March 20, 2009: 1:59 PM ET

CNN

From The Economist print edition
Lending to the poor has held up well but it is not as safe from the credit crisis as its champions hoped

A GLOBAL credit crisis caused by subprime mortgages is hardly the ideal backdrop for a business making unsecured loans to poor people without a credit history. Yet big microfinance companies, which do exactly that, seem to be in rude health. Mohammad Yunus, the unflappably optimistic founder of Grameen Bank in Bangladesh, a microfinance institution for which he won the Nobel Peace Prize in 2006, is adamant that business remains unscathed. “We have not been touched in any way by the financial crisis,” he said on a recent visit to Japan. “The simple reason is because we are rooted to the real economy—we are not paper-based, paper-chasing banking. When we give a loan of $100, behind the $100 there are chickens, there are cows. It is not something imaginary.”


He is not alone in thinking that microfinance is insulated from the problems of the global economy. Its proponents argue that any similarity with subprime loans is misleading. Microfinance institutions (MFIs) lend relatively small sums of money to people in developing countries to start small, profitable businesses, not to buy overpriced homes. Many of those businesses serve local needs, which has more merit at a time when exports are collapsing. And microfinance’s reliance on peer pressure for repayment must be the envy of any mainstream banker struggling with rising foreclosures and “jingle mail”; delinquency rates are microscopic.

Some MFIs, however, do not enjoy the same isolation that their borrowers do. Many of them are funded internationally. According to the Consultative Group to Assist the Poor (CGAP), a research centre in Washington, DC, foreign-capital flows into microfinance tripled between 2004 and 2006. About half the industry’s funding comes from aid budgets, but the share of private money is growing. The World Bank’s private arm, the International Finance Corporation (IFC) gave 55% more each year to microfinance lenders between 2004 and 2007. MFIs, especially those in eastern Europe and Central Asia, also borrowed from foreign banks. Meanwhile the microfinance portfolios of private investment funds grew from $600m in 2004 to $2 billion in 2006.

Funding from development institutions like the IFC is likely to be stable, but aid budgets are being cut and other sources of funding are threatened, too. Kimanthi Mutua, who runs K-Rep Bank, a big Kenyan microlender, says that in 2007 he fielded calls from prospective investors every couple of weeks. For the past six months he has not had a single call. According to CGAP’s Elizabeth Littlefield, borrowing costs have risen by up to four and a half percentage points in some markets. Foreign-currency borrowers may have exchange-rate fluctuations to cope with. And some global banks are pulling out altogether. Even MFIs that borrow locally may find their banks’ funding is constrained by global conditions.

An even more pressing concern is refinancing existing debt. Most MFIs have loans with one- or two-year tenures. According to the IFC, there is a potential refinancing gap of $1.8 billion over the next 18 months. The IFC and the German government have put together a $500m fund to help microfinance firms with refinancing.

All this, some experts argue, should encourage the institutions to start raising funds by collecting deposits rather than relying on fickle markets or donors. In Africa many MFIs already do this. The slow slog of attracting depositors can be off-putting, however, and may become harder if the crisis deepens. The World Bank estimates that worsening economic conditions could push an additional 65m people under the $2-a-day poverty line. These people—formerly known as the “nearly poor”—were just the sort whose savings deposit-taking MFIs had hoped to target.

The squeeze on credit could expose additional frailties in the microfinance model. Many observers suspect that at least some microfinance loans actually finance consumption, not investment, and that borrowers use new loans from one MFI to pay off their debts with another. As long as new credit is readily available, this strategy works—much as paying off one credit card with another once did in the rich world. But the credit crunch may expose this as a problem, reckons Justin Oliver, who runs the Centre for Microfinance, a research centre in Chennai, India. Meanwhile, the IFC reports that data from the top 150 microfinance institutions show that the share of borrowers 30 days delinquent on their loans has increased from 1.2% before the crisis to between 2% and 3% now. This is still very low by most standards and Mr Yunus says that repayment rates at Grameen remain impeccable. But the worry is that a prolonged credit crunch could make microfinance clients start to look more like those hapless subprime borrowers.

Economist.com

Advice for recently laid-off workers considering going into business for themselves

By John Tozzi

So you lost your job. Now what? As an employee, you had a daily routine, health insurance coverage, and a regular paycheck. You liked the security—while it lasted. And if you sometimes daydreamed about the freedom of working for yourself, leaving a full-time job never seemed worth the risk.

But now, laid off into a recession and the worst job market in decades—2.6 million Americans lost jobs in 2008, with 524,000 eliminated in December alone—you may be thinking self-employment sounds like the best path out of unemployment. Rather than try to land one of the few open jobs out there, maybe you could work as a freelancer or consultant, at least until the job market recovers. You're in good company: There were nearly 9 million self-employed workers in December, according to the Bureau of Labor Statistics. But if you're among the thousands of unemployed now trying to go it alone, where do you start?

First, step back. Decide what your goals are and how freelancing will help you achieve them, says Pamela Slim, author of the Escape From Cubicle Nation blog and a forthcoming book of the same name. "It's obviously very easy at the point of being laid off to really come from a position of fear and desperation," she says. Thinking about long-term goals from the start will keep you grounded and help you determine how to proceed. Once you're clear on your goals, Slim says, you should ask: "What are the specific skills, knowledge, money, resources, information, and contacts [you] need to bring that picture to life?"
Health Care

There are plenty of nuts-and-bolts concerns that can overwhelm first-time freelancers, especially those who suddenly lost steady jobs. Chief among them is health care. The health insurance system does not accommodate independent workers well. If you can't get coverage through a spouse's plan, you can continue your old employer's plan at your own expense under COBRA. You may also be eligible for group health insurance through a group like New York-based Freelancers Union, which launched a health insurance company last year offering plans in 31 states.

Freelancers Union's executive director, Sara Horowitz, suggests checking with local chambers of commerce to see if they offer plans for sole proprietors. She also points self-employed workers to local health insurance information on a site run by the Actors' Fund called Access to Health Insurance/Resources for Care. Whatever option freelancers choose, Horowitz says they should avoid going uninsured for even a month, even if they buy high-deductible plans. "So many states have preexisting-condition clauses. If you go and buy the most catastrophic plan, you will not have a break in coverage—and if you get another plan it will all be counted," she says.

Another hurdle for any new freelancer is how to land your first gig. Slim suggests looking to former employers, even if you have been downsized. "Many times, strangely, the same companies that lay people off do hire them back on a contract basis," she says. You can use that first client to show others that you're capable of delivering value as an independent contractor.
Network Full-Time

In addition to maintaining ties to your old company, you should prepare to make networking a full-time job. But realize that the people who can help you succeed may be different from the contacts that helped in the corporate world. "Freelancers, it's kind of an underground culture, and once you tap into it, people know everything about where to go for what," Horowitz says.

One of the most important referrals you can get is for a good accountant. Knowing what to write off as business expenses can save enough on your tax bill to make hiring an accountant worth it, Horowitz says. Still, be prepared to write hefty checks to the IRS. Since your employer isn't withholding taxes anymore, you'll need to pay estimated taxes four times a year. You're also on the hook for the employer's contribution to Social Security now. Horowitz says freelancers should set money to pay taxes aside in a separate bank account. "Nobody ever puts away enough," she says. "That's the biggest way that people get themselves in a hole."

Besides paying taxes, finding health care, and landing clients, self-employed workers face another big challenge: motivation. It's easy to procrastinate when there's no boss looking over your shoulder. Slim suggests freelancers establish a schedule and put themselves in environments where they know they'll do their best work, whether that's having a clean home office, going to a co-working event, or plugging in at the local coffee shop. Regardless, she says, the newly self-employed have a powerful incentive to deliver, particularly in a tough economy: "There's nothing more motivating than knowing that if you do not complete your work you will not get paid."

Flip through this slide show for a 20-step checklist for recently laid-off workers considering going into business for themselves.
Business Week

Melanie Lindner, 03.24.09, 05:15 PM EDT
Social-lending sites pair willing lenders with cash-strapped borrowers. Here's how.


Credit remains as tight as springtime sinuses. But rather than wait for the Federal Reserve's maneuvers to get things flowing again, antsy borrowers are asking their neighbors for a little help online, thanks to a rash of so-called social- lending Web sites. These operators charge fees to broker and service the loans--about 1% from the lender and 2% to 4% from the borrower--as well as penalties for late payments to cover the costs of chasing deadbeats.

While still tiny, the social-lending business is gaining serious momentum. The dollar amount of outstanding loans jumped 41.7% in 2008 to $102 million, according to Jim Bruene, founder of Seattle-based NetBanker, which tracks the online finance world. Bruene figures that figure could hit $1 billion by 2013.

Credit that growth to locked-up credit markets--and potentially rich returns for lenders. While social-lending outfits like to crow about saving borrowers money, lenders through those sites can command interest rates up to 30%, better than even some of the steepest credit cards.

With reward comes risk, of course: Late payments and defaults on loans facilitated by social lenders have crept up recently due to the economic climate. At Prosper.com, the oldest social-lending site, launched in 2005, nearly 17% of all the loans since inception have been charged off--meaning that Prosper had not received a payment in more than four months and has since written down the value of those loans to zero on its books.

Comment On This Story

Social-lending sites come in different flavors. Some, like GreenNote, aimed at the student-loan crowd, connect lenders and borrowers directly. At GreenNote, students roust backers by posting engaging profiles to its site; interested beneficiaries lend a hand by lending $1,000 to $50,000 at a fixed 6.8% interest rate, in line with the federal Stafford loan program. The funds flow straight to the school--not into students' late-night Domino's pizza fund. Students must pay down their debt within six months of leaving school and must pay the aggregate amount within a decade. GreenNote collects 2% of the loan amount off the bat when the deal is struck and also charges 1% of the outstanding loan amount every month as a servicing fee.

Other social lenders run online auctions, a la EBay (nasdaq: EBAY - news - people ). One of these, called Lending Club, matches borrowers and lenders based on loan size, risk tolerance and social familiarity (think co-workers, fellow alumni and hometown residents).

In an auction model, borrowers don't borrow directly from lenders. Instead, they receive loans from a third party--in this case, a bank--with which Lending Club has contracted. Lenders purchase promissory notes, backed by the interest on the loans, from Lending Club. (The site also runs a secondary market online where investors can trade those notes.) As for default rates, 2.4% of borrowers have fallen 31 to 120 days behind in their payments, while 3.6% are more than 120 days behind.
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"The problem with this industry is that the borrowers most desperate for loans who turn to these companies are often the ones who are likely to [default]," says Bruene. "The upside is that it's pretty powerful to be able to go to a Web site and tell your story to thousands of potential lenders rather than a handful of banks. If the industry can properly manage the risk involved, there's a lot of potential for success."

The growth of auction sites--and their potential risks to lenders--has since caught the glare of the U.S. Securities and Exchange Commission. While there's no law against borrowing money from friends, family members or even strangers, the SEC had a bone to pick with lenders generating a return on those security-like notes.

When the agency came after Prosper.com, the largest auction-style player, last year, Chief Executive Chris Larsen pushed back, arguing that given the site's transparency, lenders knew full well the risks they were taking. Still, in November, the SEC served Prosper with a cease and desist order, asserting that it violated the Securities Act of 1933 by selling as much as $174 million in unregistered securities. Days later, a group of 20 states filed a class action lawsuit against Prosper for selling unregistered securities. The company has since paid $1 million to settle that suit and is now in a quiet period while it registers as a broker of securities.

GlobeFunder Ventures is yet another breed of social lender, one that acts as a liaison between borrowers and traditional lenders like banks and hedge funds. Say you want to buy a deep fryer for your restaurant. The equipment retailer plugs your information into GlobeFunder's online system; if your profile matches a willing lender's specs, you get the loan right there on the spot, forgoing a trip to the bank. Each lending institution sets different minimum FICO scores and debt-to-income ratios.

Borrowers pay only the stated interest rate, 7% to 20%, while GlobeFunder takes an undisclosed cut of the sale from the retailer. If Globefunder services the loan, it charges the lender 1% to 2.5% of the loan amount; if the lender services it, Globefunder charges a one-time (again, undisclosed) brokerage fee.

Social lending alone can't thaw out the credit markets, but every little bit helps. "Now, even those with excellent credit are having trouble getting traditional loans," says James Van Dyke, founder of Javelin Strategy & Research, a Pleasanton, Calif.-based financial services consultancy, who has high hopes for social lending. "With new regulatory clarity, we should see a pop soon."

That would be nice.
Forbes

Gerri Willis gives tips on how to save on air travel, gyms, clothing and even more by bartering.

NEW YORK (CNNMoney.com) -- If you're worried about getting laid off, there are companies out there dedicated to helping you overcome your spending anxiety.

Let's look at the details of JetBlue's Promise Program. You can get a refund on your flight if you've booked your trip with JetBlue between Feb. 17 and June 1 this year and you were laid off, by no fault of your own on or after February 17.

To get your refund, you will have to put the request in writing two weeks before you're set to fly. The program does not cover corporate or group travel bookings. For more information, go to jetblue.com/promiseprogram.

Gyms are also trying to make it easier for you to join or keep your membership if you were laid off. Some YMCAs for example have waived sign-up fees. You may qualify for a reduction in membership costs or your membership may be extended at no charge on a case by case basis. To see what offers may be available at your YMCA, visit your local branch.

Even clothing stores are marketing to the unemployed. JoS. A. Bank Clothiers announced a program that offers a full rebate on the price of a suit if you lose your job. The good news is that you can keep the suit.

And when you're out of a job - saving money is at the top of your priority list.

Here are some places to go on the Web if you want to exchange items or barter.

Check out Freecycle.org. This is a community recycling organization where you can find things for free locally.

Swapthing.com lets you post what you're looking for and you can swap with someone else.

And finally, Craigslist.com has a barter tab where you can trade your stuff.
CNN

Report says refinancing applications made up the bulk of last week's gain. Interest rates fall to historic lows.


NEW YORK (Reuters) -- U.S. mortgage applications jumped last week as record low interest rates spurred a surge in demand for home refinancing loans, data from an industry group showed on Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, increased 32.2% to 1,159.4 for the week ended March 20. Refinancing accounted for 78.5% of all applications.

Interest rates on mortgages fell after the Federal Reserve last week said it would buy Treasury securities for the first time in more than four decades as well as more than double its planned purchases of mortgage-related securities, according to Orawin Velz, associate vice president of economic forecasting at the MBA in Washington.

"The drop offered a sizable refinance incentive for most homeowners, sparking a pick-up in refinance activity," she said in a statement.

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 4.63%, down 0.26 percentage point from the previous week, reaching a record low, the MBA said. It has been conducting the weekly survey since 1990.

Interest rates were well below year-ago levels of 5.74%.
0:00 /02:30Fed's trillion dollar gamble

Leif Thomsen, chief executive of Mortgage Master in Walpole, Massachusetts, said his company is doing more business now than every before, with just over $1 billion in total mortgage lending since the beginning of the year, 85% of which has been in refinancing.

"The housing market is coming back, but not roaring back," he said. "We have gone from a crawl to a brisk walk and we will still have to navigate some pitfalls before we are able to get running again."

The Fed's purchases are part of its ongoing efforts to reduce mortgage rates to stimulate borrowing and boost the U.S. housing market, currently in the throes of the worst downturn since the Great Depression.

However, so far, the low rates have had only a moderate impact on demand for loans to buy homes.

The MBA's seasonally adjusted purchase index rose 4.2% to 267.8. The index, however, was 33.7% below its year-ago level of 403.7.

Overall mortgage applications last week were 20% above their year-ago level. The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was up 13.9%.
Weekly refinancing activity surges

Mortgage Master, to keep up with sales, has hired over 100 people in the past 90 days alone, Thomsen said.

"There are some fantastic deals out there and as more people begin to realize that, competition will come back and drive a significant amount of activity," he said.

The Mortgage Bankers seasonally adjusted index of refinancing applications surged 41.5% to 6,363.2. The index was up 49.5% from its year-ago level of 4,255.2.

The refinance share of applications increased to 78.5% from 72.9% the previous week. The adjustable-rate mortgage share of activity decreased to 1.4% in the latest week, down from 2% the previous week.

Fixed 15-year mortgage rates averaged 4.48%, down from 4.52% the previous week. Rates on one-year ARMs increased to 6.22%from 6.2%. To top of page

CNN

Hannover Re's top executive cites economic conditions and higher cost of capital for stricter terms, price hikes for its move out of U.S. property-catastrophe.

By CYRIL TUOHY, managing editor of Risk & Insurance®

Warning to reinsurance buyers: Hannover Re will not participate in June 1 and July 1 renewals if all you're looking to do is reinsure the U.S. property-catastrophe slice of your portfolio with the German-based reinsurance giant.


That was the message of Hannover Re Executive Board Chairman Wilhelm Zeller last week, during a conference call with reporters on the property-catastrophe reinsurance market.

"We will not reinsure buyers looking for property-catastrophe only," said Zeller. "We will reward buyers who reinsure the entire portfolio with us."

Hannover Re has 525 clients in the United States.

Though just "a handful" of Hannover's 525 U.S. clients look for property-catastrophe coverage only, these clients typically require the lion's share of the reinsurer's capacity, Zeller said, and that capacity will be allocated to those cedants that reinsure big chunks of their coverage portfolios with Hannover Re, not just their property-catastrophe exposures.

The reason for the blunt message was simple: The cost to Hannover Re to reinsure its risks in the retrocessional market has gone up, said Zeller. In addition, reinsuring U.S. property-catastrophe risk only, without the hedge offered by a diversified risk portfolio, has always been a money-losing proposition.

Reinsuring property-catastrophe risk in Europe and the rest of the world outside of the United States remains profitable, said Zeller.

SIMILAR TO 2006

He added that Hannover Re would impose rate increases on June and July renewals similar to levels buyers saw in 2006. In addition, Hannover Re will look to reinsure risks in regional and superregional coverage programs rather than risks in national programs.

If the reinsurer can't get what it believes to be a fair price to reinsure a client's property-catastrophe risk, Zeller said, then Hannover Re will consider investing in alternative reinsurance strategies such as catastrophe bonds and insurance-linked securities.

"If we can't get the rate in the traditional market, which we think we need then we will diversify capacity to insurance-linked securities," he said.

The company, which has set aside $200 million to invest in these types of securities, won't hesitate to increase its ILS budget, he said.

After five or six months of dormancy in the second half of 2008, the market for catastrophe bonds, a type of insurance-linked security, is showing signs of life, said Thomas Holzheu, senior economist for Swiss Re Economic Research & Consulting.

"The fact that we've seen three bond issues in the past two or three weeks shows some confidence is coming back," he said. "Some of the technical issues have been resolved, and the potential is there. Demand is there from sponsors to place some of the bonds, and there's dedicated capital that wants to invest in this space."




March 23, 2009

Copyright 2009© LRP Publications

Risk and Insurance

David Serchuk, 03.24.09, 06:00 AM EDT
Not all credit is alike. Investors should think twice about using plastic for discretionary items, but remember that all debts aren't bad debts.

This January saw Americans rekindle, in a small way, their romance with credit. As measured by the Federal Reserve, total consumer credit totaled $2.56 trillion, up 0.8% from December 2008. Prior to that, though, the consumer had been on something of a borrowing diet, as the fourth quarter of 2008 saw consumer credit spending fall 3.2% versus the third quarter. November, in particular, saw a steep 4.2% contraction in consumer credit; not coincidentally, November also saw the markets crash and market volatility skyrocket.

The catalysts for such savings are clear: market volatility and fear. When people are unsure about the future, they run for the banks. As measured by the Bureau of Economic Analysis, Americans' personal savings rates topped 3% in the fourth quarter of 2008, the highest its been since the third quarter of 2001.

Back in the third quarter of 2001, a few factors converged to motivate people to save out of fear. The obvious are the terrorist attacks of Sept. 11, 2001. But what most people might not know is that markets were afraid even before the bombings. On Sept. 10, the CBOE Volatility Index (VIX) was at 31.8, quite high, as anything above 20 is considered excessive volatility. By the time of the next VIX reading, Sept. 17, the index spiked to 41.8, and it topped out at 43.7 on Sept. 20, right around when the market experienced its bottom for the year.


Today we are experiencing similar savings rates, in addition to high levels of market fear. Until Jan. 9, the market bottom for the past five years has been on Nov. 20, 2008, when the VIX hit 80.9. Late 2008 also saw people running to the banks, despite the irony of a bank meltdown being one of the main factors in why people were so afraid of markets to start with.

But the multitrillion-dollar consumer credit market isn't going to truly shrivel soon. Indeed, it seems to move in lockstep with spending, as January saw U.S. consumer spending rise 0.6%, nearly inline with the increase in consumer credit. The consumer may be fearful, and they may even be saving, but the death of borrowing is premature.
Comment On This Story

With this in mind, we asked the Forbes.com Investor Team how consumers should best use credit. After all, it can be enormously useful when it comes to financing homes and educations. But you might want to pay for that second flat-screen TV in cash.

Ken Shubin Stein, founder and managing member of Spencer Capital Management, says homeowners they should be prepared to put down 20% deposits; anything less and they shouldn't get a mortgage. He also advises against using credit to get a car. If you can't pay upfront, you should either get a cheaper car or buy it used.

Marc Lowlicht, head of the wealth management division at Further Lane Asset Management, recommends consumers use a credit card for financing purchases, but not as actual credit. He also noted that many of the people now being trapped by bad credit payments failed to plan. They didn't have enough cash and became overextended.

But P. Brett Hammond, chief investment strategist for TIAA-CREF Asset Management, sees things from a slightly different perspective. While it's commonplace to look at consumer credit issues from the demand side, he sees it from the supply side. During most of this decade credit was all too available to nearly everyone, leading to inevitable gorging. It couldn't happen any other way.

This observation lead to the most fruitful part of the discussion, as Shubin Stein, a medical doctor as well as an investor, noted that certain investment products are designed to act as the financial equivalent of high fructose corn syrup; i.e. a product known to create demand instead of sate it. What we ended up with, in a sense, was the monetary version of our national obesity epidemic.

One thing investors should know are the credentials of those pushing the credit. For example, mortgage brokers are pushing a product, not giving financial advice. Investors also need to know how their advisers and financial planners are paid.

Investors also need a good, healthy dose of financial self control, because even if credit is too easy, we allow ourselves to fall prey to it. Lowlicht says that telling investors "no" is often the hardest part of his job. "I think there are too many people in the business who give the client what they want, so they continue to be a client and they're placated," he says. "For the clients who are not going to listen, you are not doing them justice by giving them what they want. Because you're going to harm them more over the long term."

Credit Rules

Forbes: What should be the role of credit for the small fry? Should we borrow money for mortgages? For college? What about for investing? What are sound uses of credit for individual investors?

Marc Lowlicht: I believe that would be a client-specific question, depending on the client's circumstances, and you know, their liquid funds. And what they'd be using their other assets for. And the cost of borrowing for each individual. You know, I mean, obviously college loans, depending on whether they're subsidized or not, are fairly standard.

So, it's going to be across the board. You know, a mortgage is going to depend on your credit rating and the terms of the mortgage. So, I believe that if you're going to look at who should have credit, and who shouldn't, versus what--you really need to consider the client you're dealing with, the age, their income, their cash flow, their credit rating, the cost of credit, vs. other sources, uses, sources of capital. I would say that would be the first step in determining any of that.

Credit cards, I think, should almost never be used for consumer credit. Outside of that, the other forms of credit, I believe you should pay off the balance, obviously, immediately. But consumer credit, I think, to buy a TV on credit is ludicrous. If you can't afford it, wait.

Ken Shubin Stein: My opinion on credit is, if you need to use credit for your home, if you can buy a home and put down 20% and take a 30-year fixed rate mortgage, then that's an appropriate use of credit. I personally think people should try to avoid, unless they have to, buying a home that they can't meet that criteria for. Because if they need more lenient types of mortgages with earlier teaser rates or different structures that allow them to own the home, then they're essentially engaging in types of investing and decision making they may not be aware of, and putting themselves at risk for catastrophic outcomes they may think of as very improbable. But in today's environment, we've certainly learned, everybody's learned that very unlikely but severe outcomes do happen a few times over a lifetime.

So, credit for a home and for college, or other types of education, if necessary, seems perfectly reasonable. And I personally think people should avoid using credit in all other circumstances. I don't think people should finance cars unless they have to. And if you need a car to get to work, and the only way you can do it is to finance it, then you have to. But I would recommend to people that they buy a less expensive or a used car before buying a new car that's financed.
Comment On This Story

I also don't think people should ever have credit card debt. You should have credit cards, because you need them for emergencies or for unforeseen circumstances. But I believe that's the purpose of credit in a day to day life. Try to have a great credit rating, try to have credit availability, so you have availability to borrow when you need it. But don't use it unless it's absolutely necessary. And then pay it off and get back to not having it. Because it's really a safety net.

Brett Hammond: Well, I could kick in a different perspective on this. These have been terrific comments from, in essence, a demand side. And they stimulated me to think about the supply side, as well as a macro view. From the supply side, I think that we have to add that in, in the sense that, the decision about credit is certainly up to the individual, you know, with advice. But the supply of credit does create demand. We've seen that happen in the last few years--the explosion of credit availability. And so, in many ways, the decision about credit is in the context of: Is credit tight or easy? And when it's easy, you can't necessarily depend on people to be their own best advisers.

And you can't depend on people to be able to hire somebody or to figure out how to get somebody who's going to tell the kinds of wonderful advice we just heard. So, I think that's sort of one aspect to it. You know, credit gets pushed, it doesn't just get pulled. So, the second thing is the macro question. Which is, that credit is great for the economy when times are good. The economy expands, etc., etc. And now we're seeing the other side of it in the sense that, as credit contracts the whole economy falls apart.

And so, in a macro sense, if everybody were to stop buying cars on credit, as they have, if everybody were to stop taking out credit card debt, which they should, I don't disagree. We have had a huge economic contraction and a bad economic situation for quite some time. And I think we're experiencing that.

So, I guess the summary of what I'm saying is, and I think I pointed out, that there are enormous dilemmas from the point of view of the supply side and from the macro point of view to taking a much more conservative attitude toward credit. Which many individuals should do.

Shubin Stein: Is that a version of sort of the paradox of the thrift concept?

Hammond: Exactly. What we've seen in the last few months is the savings rate skyrocket. I mean, in the American context the skyrocketing is now 3% to 5%. Whereas in the Chinese example, it's a 40% household savings rate. We all think that's great. Oh my gosh, we're actually saving again. Of course, the problem is that means we're not spending. And the consumer has been 70% or more of U.S. gross domestic product growth.

And so, if the consumer is spending less, then we're putting a big hit on our GDP. And that's basically the paradox. Individuals should save. Right now, in order to keep the economy going or to keep it from falling further behind, in a macro sense, we shouldn't be saving.

Shubin Stein: But don't you think, as a follow-on concept, clearly we've had a very abrupt transition. Kind of like, we were driving a car at 100 miles an hour and then we slammed on the brakes. And the car at 100 miles an hour represents people borrowing a lot of money to buy things they couldn't afford, and not saving for inevitable, but unexpected, problems.

For instance, significant health care costs. And unexpected health care costs are one of the big contributors to people going bankrupt in this country. Unexpected job losses combined with health care costs lead to people losing their homes and other sort of very uncomfortable and painful things that are occurring now. But if the car never got to 100 miles an hour, because we didn't finance so much of our consumption with debt instead of saving it, do you think it would've been easier and a better long-term policy in any case?

Lowlicht: I agree with that. I mean, I feel that we had this conversation at a roundtable not long ago. People don't plan. They're reactive more than anything.

So, you change the way you handle it. You know, there are certain figures that are utilized that determine what's an appropriate amount of credit based on your net worth or your income. And they've been standards for years. People treated them almost with disregard when credit got cheaper. If people had planned for this, people wouldn't be suffering as much. The massive unwinding you're seeing is for people who didn't have enough of an emergency cash cushion, overextended themselves and didn't prepare properly.

Shubin Stein: Well, in fairness, those people got bad advice, too. Because people thought mortgage bankers were actually giving them advice, as opposed to selling them a product. And you know, famously, mortgage bankers don't have any duty of care to the consumer, right?

Lowlicht: Yeah, and I'm noticing this in the current environment. In environments like today, even though you're providing advice that's appropriate for the client, you receive a good amount of resistance. Because they feel like it's not working currently. And it isn't. But what tends to happen with a lot of people in the business is--because a lot of people in the business are compensated by commissions rather than fees--there are a lot of people in business who are trying to just hang on for whatever they can to keep the business alive, and instead of doing what's best for the client, they do what the client wants. And that's not always what's best. It's almost like going to your doctor, and your doctor saying, you should do this. And doing the opposite, because you don't want to.

Hammond: I think the medical analogy is really a good one. Because when you were talking, it made me think I completely agree with you. It made me think about obesity in America. You know, most of us are not as fit as we'd like to be. And we all know what we'd like to be. But when we see the availability of things that we shouldn't eat, and the not just the types of things but the amount of things. Some of the theorists have, in the medical field, been talking about how it isn't just willpower. It's the fact that there's so much stuff around, compared to you know, 50 years ago, or compared to other countries. That we gorge ourselves. And we've gorged ourselves on credit because it was so available.

Shubin Stein: We did. And I think a very fair analogy between the medical world and the obesity, specifically the obesity argument and the lending argument, I think are really good analogies. Because our brains are wired to crave certain things, right? So, if there are certain types of chemicals in foods, that will stimulate overeating. We know that. Like, high fructose corn syrup directly stimulates overeating. And similar to your argument about, you know, pushing credit vs. pulling credit; if we offer people lots of credit with terms that are opaque at best, they're going to use as a group, as a population, we will use that credit. And probably unwisely, right?

So, I think one of the most helpful things we can do as a society, because we don't want an Orwellian society where people dictate precisely what we're doing, but I think truth in lending is a really important concept, right? Having people really understand the impact of the difference between an adjustable rate mortgage with the teaser rate, and a reset pause vs. a fixed, certain payment over 30 years.

I think the No. 1 way to judge human behavior is to look at incentives. Where are the incentives in the system? And part of the trouble with finance, part of the problem people are having interacting with the financial system is, incentives are often not clear to people.

We could, as a system, make it much more explicit. Where people know when they're interacting with a mortgage broker, or a real estate agent, or a wealth manager of some type, you know, exactly how do we get paid. And I think if we make it very clear to people exactly how we get paid, they can make better decisions, because they'll at least understand where the incentives lie.

Lowlicht: The hardest part in our business is to consistently continue to provide advice, especially during stressful times. And for the clients who are not going to listen, you are not doing them justice by giving them what they want. Because you're going to harm them more over the long term.

Forbes

Non-profit Kiva.org plans to launch system of small loans in the U.S.

By Jeffrey M. O'Brien, senior editor
Last Updated: March 23, 2009: 2:52 PM ET


SAN FRANCISCO (Fortune) -- When the economic downturn took hold last autumn, the management team at non-profit Kiva.org made a calculated bet to curb investment, anticipating that donors would slow the volume of small loans they make to entrepreneurs in the developing world. That slowdown never came. Now, the non-profit site is racing to keep up with user demand even while planning to bring its unique form of charity to the U.S.

Nearly 500,000 users have lent almost $65 million, interest-free, to developing-world entrepreneurs through Kiva.org. The nearly four-year-old site received a major boost during its early days from a wave of media publicity (including FORTUNE's The only non profit that matters) and the very public endorsement by former President Bill Clinton.


Media attention has waned in the last year or so, but growth has only accelerated due both to friend referrals and loyal users who repeatedly re-loan money rather than withdrawing it. The site distributed $3.5 million last month. "The good news is that we're doing more loans than ever," says Premal Shah, president of the San Francisco-based organization. "The flip side is that we under-estimated demand. [Our growth] rate exceeds the rate at which we can scale."

Kiva takes no cut of the loans allocated for entrepreneurs. Instead, it solicits an optional 10% fee of every loan to help pay salaries and keep the lights on. The organization uses microfinance institution partners to vet entrepreneurs before allowing them to solicit funding. By asking a series of questions to assess roots in the community and the legitimacy of a business, Kiva is able to establish a risk profile for each entrepreneur. Before offering money to, say, the proprietor of a Dominican fruit stand, any lender can read the entrepreneur¹s profile, history of defaults, and a bit about the business.

Default rates are low --­ 2% total ­-- and users can lend a minimum of $25 to any single person. Spreading loans across a series of entrepreneurs further lessens a lender's exposure to risk, and gives more people an opportunity to put money into the system. Lately, however, lenders are putting up more money than Kiva can distribute. Several times in the last month, the site has displayed a message saying there were no entrepreneurs to lend money to.

"This is pretty much a fault of management," says Shah. "We assumed things were really going to fall off. We didn¹t sign up enough microfinance institutions. That turned out to not be the right assumption. There are plenty of poor people out there."

Now, in addition to trying to keep pace in the developing world, Shah and CEO Matt Flannery plan to bring Kiva to the U.S. in the next few months.

They're signing on microfinance partners in the Bay Area and in the Northeast, and are targeting the 30 million or so Americans who don't have bank accounts and the 18 million or so "micro-enterprises" that often rely on high-interest loans or payday advances to buy supplies -- in Shah's words, "folks who don't have a FICA score or a credit history, but run a small enterprise. At least for the last year, we've been thinking, wealth is everywhere, poverty is everywhere. When I was out in West Africa, and I said 'we plan to let you loan to someone in U.S.,' they loved that idea, that money would flow both ways."

Shah is close to signing a partnership agreement with two microfinance institutions, but refuses to name them until the deal is official. The rules will be slightly different once the partners sign on. An American entrepreneur will be able to seek as much as $10,000 (versus just $1,200 in the developing world). And while Kiva has done very well in Africa and elsewhere, Shah isn't totally sure how the effort will fly domestically. "This is definitely a social experiment in the US. I don't know if the secret sauce in Kiva is that $25 goes really far in Uganda," he says.

"Another interesting challenge, you could go drive to south central LA. What if you don¹t get paid? Are you going to go bully those guys?" To top of page

CNN

Rebecca Ruiz, 03.11.09, 01:00 PM EDT

It seems that the recession has touched every corner of American life. From factory workers to those in finance, Americans have been shaken by a contracting economy that has shed 4.4 million jobs since December 2007.

But a report released this week by Gallup and disease management company Healthways suggests that reality is less grim in certain states. In these places, residents enjoy their jobs, express deep optimism about future prospects and even manage to stay healthy.

Utah earned the highest marks. Here residents reported a high level of satisfaction in several areas, including work environment, emotional health and their local communities. One major factor for Utah's strong performance might be its unemployment rate: When last reported in January, it was 4.6% compared with a national rate of 7.6%.

Hawaii ranked second, followed by Wyoming, Colorado and Minnesota. West Virginia ranked last, and manufacturing-reliant states like Michigan and Ohio also landed in the bottom 10.


The results were based on a year-long, random-dial telephone survey of 355,000 Americans. Though the sample size for each state varied widely--with 37,000 Californians polled vs. 950 North Dakotans--each was controlled to reflect population and demographics.

In addition to state rankings, Gallup and Healthways also measured quality of life in congressional districts. The 14th district, which stretches from south San Francisco to just north of Monterey, Calif., ranked as the most content.

Amy Neftzger, director of surveys and assessment for Healthways (nasdaq: HWAY - news - people ), says the survey is meant to draw attention to quality of life beyond the standard indicators, which have traditionally included statistics like median income, poverty rates and life expectancy.


"When you look at well-being," Neftzger says, "you have to look at [the] whole person and all facets of their life."
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Behind the Numbers
Using that approach, the Gallup-Healthways team came up with six important measures: life satisfaction, work quality, healthy behavior, physical health, emotional health and basic access to necessities like food and shelter.

Participants were asked a range of questions that addressed each area, including if they were satisfied or dissatisfied with their job, if they had health insurance and if they'd laughed or smiled the previous day.

Dr. George Loewenstein, a professor of economics and psychology at Carnegie Mellon University, says the survey's strength is its mix of subjective and objective measures. But he also warned that the grouping all of the indicators into one index might produce misleading results.

Hawaii, for example, scored in the top 10 in every category except for work environment, where it placed last. So while Hawaiians may have an excellent quality of life with respect to physical and emotional health, life satisfaction and basic needs, that's despite poor job prospects. In fact, Hawaii's 6.1% unemployment rate has reached a 10-year high.

A similar lopsided trend appeared in the states at the bottom of the list. Work environment in Ohio and Michigan unsurprisingly ranked 44th and 47th, respectively, but those states received better marks in the basic necessities category, ranking 30th and 23rd.

West Virginia ranked last in life satisfaction, physical health and emotional health, but surprisingly came in 13th for work environment, perhaps due to a 5.3% unemployment rate. Matt Turner, communications director for the governor's office, says the rankings also don't reflect recent progress in areas like declining youth obesity rates and increased spending on infrastructure.

Dr. Betsey Stevenson, an assistant professor of business and public policy at the University of Pennsylvania, says the differences across states could reflect a number of factors, including policy, social services and even the types of people who choose to live there. Social scientists also established long ago that per capita gross domestic product and happiness are linked.

Best Places To Raise A Family

The median incomes in the top and bottom three states reinforce that point: Those at the top range from $50,000 to $62,000 while states at the bottom range from $36,000 to $40,000, which is significantly lower than the national median income of $50,000.

Still, Stevensen warns against relying on that sole indicator. "A lot of things go into happiness," she says, "and it's not all income."

Revising the American Dream
If the Gallup-Healthways survey and other new polls are any indication, Americans are becoming acutely aware of other factors they might have neglected in years past when the economy was much better.

In a MetLife (nyse: MET - news - people ) online survey of 2,200 people released this week, participants expressed changing opinions on what matters most when trying to achieve the American dream. In years past, "financial security trumped family by a long shot," says Beth Hirschhorn, senior vice president and chief marketing officer for MetLife. This year, 44% of respondents reported spending more time with friends and family.

The trend isn't generational either. More than a quarter of Gen-Xers said that marriage was important to achieving the American dream, up from 18% in 2008.

Americans are also changing their attitudes about consuming. Four in 10 respondents expressed buyer's remorse about past purchases and wished they had spent less and saved more. Boomers also reported that the pressure to acquire more possessions was down significantly from last year.

The findings of a Northwestern Mutual survey, also released this week, were similar. Many of the 1,000 Americans polled online reported that spending more time with family and being healthy was more important than "owning the home of your dreams" or "earning a high income."

While the Gallup-Healthways index doesn't plan on tracking answers to these types of questions, it will continue to survey 1,000 Americans each night for 25 years in an effort to better understand how well-being changes over time.

Healthways' Neftzger says that circumstances might seem bleak at the moment, but survey participants have more optimistic thoughts about life five years from now.

"You might think it's terrible now," she says, "but a lot of people are hopeful about the future."

Forbes

As job cuts spread nationwide, experts say the key to maintaining health coverage is quick thinking and quick research.

By Parija B. Kavilanz, CNNMoney.com senior writer
Last Updated: March 18, 2009: 12:05 PM ET


NEW YORK (CNNMoney.com) -- With pink slips accelerating nationwide, health care experts say it's a good idea for everyone - even those who feel their job isn't at risk - to know about their health care rights and options.

"Being proactive about your [health care] coverage is vitally important, especially if you want to protect your family in these times," said Ankeny Minoux, president of the Foundation for Health Coverage Education.

Here are some tips to get you started:

Sign up for COBRA. If you are laid off, immediately ask the company exactly when your employer-paid coverage expires, according to Devon Herrick, health economist with the National Center for Policy Analysis.

By law, employers have to provide laid-off workers information about COBRA, a government mandate that gives workers who lose their health benefits the right to choose to continue coverage under their group plan for a limited period.

The typical monthly premium for COBRA is $300 for an individual and $1,000 for family coverage. You have to sign up for COBRA within 60 days of being laid off or you lose that option.

"People always think COBRA is too expensive," said Minou. But it's more affordable now under the stimulus bill" signed last month by President Obama. Specifically, the government will provide a 65% subsidy to businesses who continue COBRA premiums for laid-off employees for a period of 9 months. The subsidy will continue until Dec. 31, 2009.
0:00 /2:40Health care 2.0

COBRA coverage typically extends for 18 to 36 months. Once the COBRA coverage is exhausted, Minoux suggests people convert to an individual plan under HIPPA (Health Insurance Portability and Accountability Act) to avoid any gaps in their coverage.

Put the children in a CHIP plan. If you or your spouse can't afford the COBRA family premium, the parents can stay on COBRA but move the kids to the State Children's Health Insurance Program, which provides coverage for children living in families with income that is modest but too high for them to be eligible for Medicaid.

"Mix and match coverage options to keep the costs down," Minoux said.

This is also a good option to for low to mid-income families in which one or both parents are working but need to save money, Minoux said. In California, for example, families with a household income of $66,150, or 300% above the federal poverty level, can still enroll their children in a SCHIP plan.

In February, President Obama signed legislation extending the SCHIP program, expanding health coverage by an additional 3 million children, to 11 million children.

Put yourself on SCHIP. Some states offer programs that allow adults to enroll in SCHIP programs.

In Connecticut, the Health Care for Uninsured Kids and Youth program includes parents, relatives, caregivers and pregnant women in families that have household incomes between 185% to 235% above the federal poverty limit, or between $38,000 to $55,000.

Your job shipped overseas? Look into the Health Care Tax Credit (HCTC).

"If your company has moved overseas, or is outsourcing its operations, the government will pick up part of the [insurance] premium," said Minoux.

She said the "displaced" worker would pay 20% and the government would pay as much as 80% of the premium as long as the unemployed worker receives benefits under the Trade Adjustment Assistance (TAA) program.

About to retire? You have to be 65 years old before you are eligible for Medicare.

So what happens if you are 55 years old, are laid off and have a pre-existing medical condition? If you were on your employer's health plan, you will qualify for COBRA and subsequently for an individual plan.

However, if you weren't on your employer's health plan, then you won't qualify for COBRA. In that case, Minoux said people should look for "high risk pool" insurance options in their state, such as the MRMIP (Major Risk Medical Insurance Program) offered in California.

This is a 36-month program that provides coverage to people with pre-existing medical conditions.

Prescription assistance. Organizations such as non-profit Partnership for Prescription Assistance offer free programs to provide discounts of as much as 20% on prescription drugs, which can help save on drug costs, especially when there's no income coming in.

Lastly, Minoux said several of these state-funded programs have waiting lists, so it might be worth while to sign up for more than one.

"Don't be deterred," she said.


CNN