Banking in the United States – The Civil War

In the midst of the Civil War, banking in the United States was chaotic and unruly. With no central regulation by the states there were thousands of financial institutions and no confidence by Americans because they didn’t know if their Bank would be open the next day. In today’s financial market, it was the equivalent of banking with venture capitalists. In 1863, the National Banking Act privatized all national banks and created the Office of Comptroller of the Currency (OCC) for regulation. This created a check and balance system between private industry and the government to make the country’s money more secure. All the bank notes issued by these financial institutions were backed by an interest in the U.S. Treasury which created a transparent picture of the money supply in the country. Although State chartered banks remained, they were not a part of the U.S. Treasury and were more likely to fail than the national banks.

The National Banking Act was the seed that created the Federal Reserve System we have today, but the road was rocky. After The Civil War and up to World War I, 100 years of financial insolvency had severed the trust that that citizens had with their banks. This period of growth was tough because banks were still failing, the stock market was down, currency was disappearing, and people were panicking. The fear that financial institutions would fail became a self-fulfilling prophecy and for every step forward the country took two steps back.

School: commerce, drexel

Banking in the United States – Colonization to the Civil War

When the United States was still a colony, the financial system here was a complete mess. Unregulated, both the colonies and private institutions could issue paper money at will. Since there was absolutely no regulation, there was a likely chance that the institution would fail making your money worthless. Caught in the Revolutionary War without a way to finance it, the Continental Congress began printing its own currency. However, they saturated the market causing inflation; when too much money follows too few goods, making the money worth 1/100th of its face value.

To cure inflation, the First Central Bank of the United States was started in 1791 and was fully backed by the United States government. Any bank notes printed by the First Central Bank were redeemable in coin, which has tangible value. The bank was politically controversial and its charter (or authorization) was not renewed in 1811. Without a central bank, the states returned to authorizing their own bank notes and over-saturated the market again. With inflation running rampant, the Second Bank of the United States was started in 1816 to help finance the war of 1812. It faced the same political pressures as the First Central Bank and its charter wasn’t renewed when Andrew Jackson was elected president in 1832.

Through the civil war, the financial institutions in the united states were in a chaotic state. These banks were chartered and supervised by the states and were not heavily regulated. This created an opportunity for any institution that wanted to to print its own currency. At the peak, the United States had over 10,000+ variations of paper money making counterfeiting simple and hard to trace. As the Banks started to fail and consumer confidence dropped, the government needed a central system that worked.

School: drexel, commerce

Template: Excel Construction Cash Flow

Previously I discussed my sample of a construction cash flow and have received requests for an excel file to use as a template. Attached below is the workbook that I used to create the construction cash flow, and includes a permanent cash flow with sensitivity analysis.

As always, if you have any questions, please feel free to contact me.

Links:
Construction Cash Flow Template

Tags: Real Estate

Quick Tip: UCA Cash Flow Analysis

It is important to watch accounts receivable growth, because any increases to A/R from year to year are an immediate reduction to cash.

Links:
Cash’s effect on the balance sheet.
Traditional Cash Flow versus UCA Cash Flow

Cash’s effect on the balance sheet.

Here is a chart on how cash is affected by changes to the balance sheet.

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A detail that is commonly overlooked on financial statement analysis, is that A/R growth is a use of cash. Consecutive periods of A/R Growth, is an indicator that a company is becoming insolvent. In the UCA Cash Flow, these changes are reflected in net cash after operations (ncao) and are not available for debt service. A sign of further insolvency is a company has several layers of debt, with escalating balances outstanding and interest rates.

To mitigate this situation, growth must be limited.

ma.gnolia: CNN

Community Banks

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Increased inventories from the sub-prime mortgage crunch are affecting loans to prime borrowers that have borrowed against excess equity in their properties. These borrowers have over extended themselves, primarily funding undersold, speculative construction projects.Signs of a distressed community bank include:

• rapid growth - increases to loans receivable outpace receivables collection, which reduces cash.
• homogeneous portfolio – high risk if primary asset class becomes distressed.
• credit quality – sudden and sharp increases to bad debt allowance and non-amortizing loans are an indicator of distressed assets.
• cost of funds - the legal lending limit is directly tied to deposits and some community banks pay a premium to increase deposits. This is demonstrated through high-yield savings, money market, and three-month C/Ds. The higher the yield, the narrower the interest rate margin which leaves little flexibility for rate reductions.

For more information, please read the text.

Tags: Money

Market Depreciation

An excellent article, Why the private equity bubble is bursting, by Shawn Tully.

Tags: CNN

Consumer Confidence

Earlier this week, the Conference Board announced July’s Consumer Confidence Index (CCI) at 112.6, its highest level since August 2001 (Consumer Confidence Hits 6-Year High). The CCI is a lagging indicator, reflecting where the economy has been, but not necessarily where it is going. Lynn Franco, Director of The Conference Board Consumer Research Center states:

“An improvement in business conditions and the job market has lifted consumers’ spirits in July”

The monthly survey from which the CCI data is compiled, was completed on July 24th, two days before the Dow Jones Industrial Average (DJIA) fell 310 points. Yesterday, a fluctuating week for Wall Street ended with the DJIA falling 281 points and government data demonstrating weaker than expected job growth, and unexpected rises in unemployment (Job growth weaker).

There was a net increase of 92,000 jobs in the month, down from 126,000 added in June, a reading that was revised lower in the latest report. Economists surveyed by Briefing.com had forecast a 135,000 gain in July.

The unemployment rate was 4.6 percent, up from 4.5 percent in June. Economists had forecast that the rate would remain unchanged.

The events from the past week suggest consumer confidence has peaked, which compounds the ongoing credit issues.

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Interpreting the conversation.

Throughout the past several months I have received great feedback from the blogosphere which allowed me to learn how the community works. I have received several twitter messages from several people discussing their difficulty in keeping up with the numerous news feeds that they monitor in a given day. One that comes to mind is from Brad who at times can have close to 3,000 news stories to read.

Taking the contrarian approach to the worldwide conversation known as the internet, I watch fewer feeds through netvibes and bookmark the articles I like in ma.gnolia. This affords me an opportunity to find value, create a brief synopsis of why I liked the article, and categorize them for later. My ma.gnolia bookmarks are what drive the research section of this website.

Recently, I began utilizing RSS to watch my research through netvibes. This allows me to efficiently watch trends in a given market segment to see how the landscape changes over a given period of time.

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Overall, I am satisfied with the results.