Y2K, Banking, Small Business (SBA) And Discussing Our Near Future (Conversation With A GI Banker) ...

While visiting Portland, Oregon for the past week and attending the Seattle Year 2000 Expo, I was involved in several different Y2K-related meetings. A couple of us met with a bank executive, specializing in small business loans (SBA), for a fair-sized financial institution with over $1 billion in assets.

First off, this banker is a serious Y2K GI and avidly follows the inside and outside Y2K news. In fact, this individual just sold their house and is moving out of the Portland area, about an hours drive away, to a location that has well water and land to grow food. Partly, this move has been a long-desired dream, and it is also being nudged by Y2K. They are currently prepared for a months disruptions and longer for their food storage. They are keeping paper records of all key documents and money transactions and ARE NOT having any payments made electronically ... just by check.

On a scale of one to ten, this banker is a firm 5, for reasons other than the banking industry, per se. (It was a great opportunity to pepper an insider with questions so I took advantage of the time).

Prognosis for the banking industry? ... Surprisingly positive on the IT side for the larger institutions. Also for the insurance industry and the stock market.

The banker flatly stated that most, not all, of the the banking industry mergers weve seen recently are directly Y2K related. For many banks when they completed assessment, the costs of fixing the IT problems were so high and prohibitive, that merging with a bank supporting better information technology systems was the best strategy for Y2K problems. Also said expect to see continuing mergers up until October. The not ready are likely to move under the umbrellas of the Y2K compliant and ready before years end. Said the biggest problems would be with the smaller banks, and that we are likely to see bank closings in that sector. Also, this person expects to see their own bank taken over, since the banks size is ripe for the bigger pickings. Its possible this individual could be out of a job, IF the bank is taken over, so they are preparing for that unknown as well.

In citing the reasons for the banking industry being more on top of the Y2K remediation situation, key is that they are heavily regulated by the FDIC, etc. Recommended looking at the overseeing government agencies Y2K regulations for their industry to determine what actions are being required from behind-the-scenes. The industries causing most Y2K concern are those not regulated. (Water?) Last September, their bank and all FDIC insured banks had to provide the regulators with profiles of their business customer base, especially those with outstanding loans, and to determine their customers Y2K readiness was: High Risk, Medium Risk or Low Risk.

An area of great concern for this banker was with the overseas, international repercussions from both Y2K unreadiness and the worsening economic situation. In illustrating the point, Boeing was used as an example. They have thousands upon thousands of suppliers, many just providing a very specific almost hand-crafted part. Boeing counts on being able to sell planes to the international markets. Those sales are being dramatically impacted by shrinking world markets. That reduction then ripples down to significant loss of sales for those suppliers. Now heres the key point .... many of those smaller suppliers are FUNDED by bank loans. There is the expectation that a good portion of those loans will be defaulted on. It is a KEY area for banking concern.

Another area for concern is public confidence, or lack of it, that could trigger bank runs. They are prepared and the Federal Reserve is prepared with cash reserves. However it is wise to remember, according to this banker, that most of a banks funds are invested out and its the loan payments they count on for cash flow. Its a cash flow driven industry. Impact that, and there are shortage problems. Did say the larger banks can weather public confidence problems, and cash flow disruptions better. The smaller ones cannot.

As pertains to the stock market, the banker is concerned that the investment funds managers and stock brokers are not taking Y2K impact on company profits seriously. But this is not surprising. There is no regulatory agency pushing that concern, so the brokers dont look at the potential problems in the same way a bank does. Expect that awareness level to change and for problems to increasingly occur.

Also mentioned that for the first time in history you have the smartest, most informed group of individual investors, Baby Boomers, who watch the stock markets closely. Said these people will be poised to take advantage of market opportunities as they develop. The banker also said there is a huge pool of cash sitting on the stock market sidelines waiting for the right time to reinvest. The lessons learned from the 1929 crash were, that those who had cash to invest when the market bottomed out, made a pile of money. The Baby Boomers are wise to those earlier lessons learned.

Said there is also a lot of money to be invested in loans to new businesses, providing they have a good plan and are Y2K savvy. Another LARGE area for concern is the small business sector. In sampling the Y2K readiness of their loaned portfolios, this is the group least ready and not paying close attention to potential Y2K problems ... almost to a company. The banker showed us red buttons put out by the SBA Small Business Administration reading Are You Y2K Okay? The SBA is pushing an all-out awareness effort, but the current attempts may not be enough to get small businesses to pay attention in time. (Think fix-on-failure).

The banker expects that we will see problems with the power grids and telecommunications systems and is personally planning accordingly. In discussing Y2K with their small business customers, they often suggest ... Go to your main circuit braker and shut it off, then shut off your phones. Now tell me how you are going to conduct business. That tends to shock the business owners into at least thinking about their Y2K exposure problems. Also recommends that small business owners think now about how they will pay their employees during the 2000 rollover period. Some suggestions are that companies have one to two months cash on hand to pay employees.

Two other areas for concern ... ability for employees to show up for work, and, the larger one ... the health care industry. Said the hospitals are far, far behind and dont have the money to fix everything. Problems with medicare payment disruptions could be disastrous for the cash flow to the health care industry. Expect to see inabilities to pay health care workers, if this is not sorted out. The banker feels this is the looming disaster for all of us, waiting-in-the-wings, so to speak.

Says the current challenge to communities is to now figure out contingencies and ways to lesson potential deaths caused by hospital equipment failure. Its going to take huge community effort to plan contingencies around the core problems, and many cities, although preparing, are still uncertain as to how to inform the public about Y2K without causing greater problems.

The bankers bottom line recommendations? Be prepared for Y2K and a host of related and unrelated uncertainties. Its just smart.

Diane

(Just reporting in and throughly impressed with this bankers depth of knowledge and attention to the Y2K situation)

-- Diane J. Squire (sacredspaces@yahoo.com), February 05, 1999

Answers

Diane,

THANK YOU for this very interesting and informative report.

Jeannie

-- jhollander (hollander@ij.net), February 05, 1999.

Excellent report Diane!

Thanks...

-- Texas Terri (DeepInTheHeart@Texas.com), February 05, 1999.

Small businesses begin to awaken to Y2K reality

http:/ /www.oregonlive.com/technw/9902/tn99020101.html

More than half of small employers who are using computers or data- sensitive chips have done nothing to prepare for the bug, a study says

Monday, February 1, 1999

By Steve Woodward of The Oregonian staff

Bit by bit, small business is catching the Millennium Bug.

The bug bit Carol Gray a year ago.

Her credit card verification machine began to reject customers' credit cards, but only the ones that had year 2000 expiration dates. The machine said they had expired.

But Gray, a licensed massage therapist in Sellwood, didn't panic. The solo practitioner called the machine's manufacturer, which helped her reprogram the date function.

Nowadays, Gray isn't worried about the year 2000 problem. She said her son, a computer engineer, has installed "all-new spaghetti" on the inside of her personal computer and the latest version of Quicken personal finance software, which she uses to keep her books.

Besides, she pointed out, the tools of her trade -her hands-have always been Y2K-ready.

Meanwhile, across town at Moore Lithographic Inc., founder Bill Moore has taken no chances since first hearing about the problem in mid- 1997.

The $2.5 million-a-year printing company has checked its five main desktop computers-twice -for Y2K compliance. It has assessed its production computers and printing presses. It has hired a consultant to search for holes in production vice president has attended a year 2000 seminar at the Portland office of the Small Business Administration.

Moreover, the company will ask its suppliers for assurances of their own Y2K compliance by June 1.

But will the rest of the nation's small businesses be ready for Jan. 1, 2000?

Big business is spending millions of dollars on year 2000 computer repairs and contingency planning, but small businesses are widely considered laggards in the race to prepare for year 2000. Many small- business owners don't have the time, money or expertise to devote to the effort. Some think their businesses are too small or too low-tech to be affected. Others intend to repair problems only as they occur.

More than half of all small firms that use computers or date-sensitive microchips have taken no steps to inoculate themselves against the Millennium Bug, according to a study released last month by the National Federation of Independent Business' Education Foundation.

Of those who know about the problem and have time/date-sensitive software or equipment, about a third - roughly 1.5 million smallemployers-don't plan to assess their Y2K risks, the study said. Five percent of small firms aren't even aware of the Y2K problem.

Sen. Kit Bond of Missouri has introduced legislation to make money available to small businesses for Y2K repairs. The bill would permit the SBA to guarantee the principal of loans made specifically for such repairs.

In introducing the bill, Bond estimated that year 2000 problems could affect as many as 4.75 million small businesses nationwide, with 750,000 of them at risk of temporary shutdown or significant financial loss.

Year 2000 repairs, however, need not be prohibitively expensive.

Fixed for $160Rae Hernandez, who has operated a solo practice tax service for 15 years, paid $160 to have her Packard-Bell personal computer, operating system, and tax and accounting software checked and fixed.

"I've gone ahead and taken the time to have all of my equipment ready and all my software ready," she said. "My equipment is my business."

Hernandez, who first started paying attention to Y2K during the fall, went to a free seminar and got a big lesson hammered home: She might be liable for mistakes made by a noncompliant computer or software - unless she made a reasonable effort to fix potential problems beforehand.

Since then, she has received verification that her accounting and tax software are certified by their manufacturers as Y2K-compliant. She also learned that her Microsoft Works program is not compliant, but she doesn't plan to upgrade it because she uses it only for word processing.

Hernandez's Y2K guidance came from Synergy Consulting Inc., which has taken on Y2K work for small businesses in addition to its client- server work for big clients such as the Bonneville Power Administration. For small clients, Synergy charges a discounted $160 rate to run diagnostics and date repairs on PCs that are brought into its of fice near Lloyd Center.

"We've evaluated fairly old machines that passed and fairly new machines that haven't passed," said Davis Henely, a Synergy programmer. "I tested a year-old Compaq that failed, and it had a Y2K- compliant stamp."

So far, Synergy has done work for a handful of small businesses - ranging from churches to accounting services to a construction company, an engineering company, a credit union and a law firm.

The numbers are small at the weekly "Are You Y2K OK?" seminars sponsored by the Portland office of the SBA. The administration has trained only 45 people-from businesses as diverse as manufacturers and hair salons-since it began offering the $25 Friday morning class in October.

To drum up awareness, James Steiner, district information resource manager for the SBA, has been on the speaking circuit at chambers of commerce throughout the state.

"Some of the chambers are starting to tune in," he said. "But there are pockets out there not getting the word or the right word."

One small-business person who has gotten the word is Jeff Merrifield, vice president of sales for Best Manufacturing, a Portland-based maker and distributor of professional quality hand held tools for cooks.

"We probably became aware of the problem just in the local media coverage of it a few years ago," he said. "We gave no real thought about how it would impact our businesses ."

That is, until early last year. That's when Best's largest customers started demanding to know if the 26-employee company would be Y2K- compliant. The question was crucial for Best, which engages in electronic data interchange - direct, online business to business transactions-with its big customers.

Best has replaced its noncompliant data interchange software and its accounting software-at a cost of thousands of dollars.

And Merrifield came away from an SBA seminar with a CD ROM that allows him to check the com pany's PCs for compliance. "I haven't finished yet," he said, "but so far, everything checks out OK."

Problems "downstream"

At Ascot Laser in Northeast Portland, co owners Paul Della Valle and Don Roach have updated their hardware and software. But Della Valle still is worried about the effect that others could have on their business, which repairs laser and inkjet printers and remanufactures toner cartridges.

"You can take care of everything at your place, but there are lot of people downstream," Della Valle said. Despite fastidious safety precautions, for example, Ascot's building burned to the ground last year after a fire started next door.

Ascot plans to divert precious cash flow into stockpiling a month's worth of toner and cartridges in case shippers run into Y2K problems in January.

"You could see your whole business go out of business," he said.

-- Diane J. Squire (sacredspaces@yahoo.com), February 05, 1999.

Diane,

Nice report, and thanks. What it does is reinforce the notion of interconnectivity. The banks may, indeed, be ready, though even the largest bank cannot satisfy the cash demands of even a small portion of its customers. And with interconnectivity comes the spectre of the domino theory. I still think the greatest threat will proceed from the global aspect of this thing, and in that regard, our dependence on foreign oil may be that first domino.

-- Vic (Roadrunner@compliant.com), February 05, 1999.

Very interesting Diane. Ask your banker friend to join the forum.

-- Puddintame (dit@dot.com), February 05, 1999.

Diane: Terrific post. I had not thought of that key point regarding the small supplier and loan defaults. BTW, anything about the Know Your Customer proposal come up?

-- Rob Michaels (sonofdust@net.com), February 05, 1999.

Thanks Diane! Did you happen to get into the area of data corruption, especially regarding international transactions?

-- Brooks (brooksbie@hotmail.com), February 05, 1999.

Excellent info, Diane. I doubt anyone has a good handle on how to handle 'corrupted' data transfer between banks. Foregn Bank A sends a wrongly calculated (but within edit checking parameters) amount to domestic Bank B. Bank B is fully compliant but now has bits and pieces of bad data filtering through its systems. This could be a major problem with any company doing international business and has data coming back from overseas banks to the US. Oh well, maybe Boeing should ask for cash (or gold) on delivery!

-- RD. ->H (drherr@erols.com), February 05, 1999.

What I was wondering was whether/how much the banker corrupt data to be a threat to the banking industry. Diane covered so many other areas, I thought this one was noticeably absent. Just wondering whether it was on his radar screen as a major concern.

-- Brooks (brooksbie@hotmail.com), February 05, 1999.

GAACK, HTML foils me again! should read: "... the banker PERCEIVES corrupt data..."

-- Brooks (brooksbie@hotmail.com), February 05, 1999.

Diane, as usual, your input was excellent. I printed up the bit about the banker so I could let others get the straight scoop. Thanks. newbie

-- newbiebutnodummy (listening&learning@home.com), February 05, 1999.

Sorry we didn't discuss data corruption or the Know Your Customer issues. (Had other things to talk about in the time alloted). Perhaps as we work up an e-mail correspondence, these topics can be discussed.

The individual is going on vacation soon, but has asked me to "e" any interesting Y2K articles and info I run across.

Diane

-- Diane J. Squire (sacredspaces@yahoo.com), February 05, 1999.

Diane,

Your banker report is quite good, and in fact touched on a few points that I've been aware of, but have not seen mentioned anywhere else. One that is definitely real is this merger situation, and not just in the banking industry. There are some big players in various fields who are just quietly waiting in the wings for others to fail, so they can move in & take them over.

The stuff about the boomers being sophisticated in terms of stocks is generally true; however, a better way to phrase it would be that a higher *percentage* of boomers are more knowledgeable about markets than previous generations. In point of fact, in 1929, 1930, 1931, and even into 1932, everyone thought (for a long time, anyway) they were buying at the bottom. Yet the market kept going down anyway. These lessons were completely lost on the supposedly more "knowledgeable" investors of the 1960s, 70s & early 80s, when the market was a mess. Business Week during this time even did its famous "The Death of Equities" cover story (1979, I think). Y2K is a different animal, though, and given that so many people expect the same thing- a selloff followed by a rally- it will be quite fascinating to see how the market ultimately does react.

I think one thing that could hurt the market is when it starts to realize that Y2K is actually a more serious situation than Wall St has heretofore realized. They think they know a lot more about it than they actually do. Don't forget, though, that the stocks of small companies have been absolutely smashed since last April-July, and have never recovered- and it is small companies which are most at Y2K risk, is it not? (I wax poetic, I know)

Your banker friend is also right that the US banking system is just miles ahead of everyone else on this thing. I mean, I know of banks who were quietly doing systemic testing *last*year.* While I certainly acknowledge the serious problems of international data corruption, my own belief has long been that the banks' biggest problem will be bad loans rather than bad code. So it's interesting to see that view essentially validated by your friend's statements about checking loans for Y2K compliance (although I knew that was going on anyway, duh). That said, it does show that both bankers and regulators are concerned about Y2K's business & economic impact, regardless of whatever happy-face statements they may otherwise make...

Good post. Thanks for passing it on.

-- Drew Parkhill/CBN News (y2k@cbn.org), February 05, 1999.

Hi Diane! Sorry we missed going to the meeting with you, but had a sudden unexpected but welcome hospice immersion. Love the frenzy of Y2K brainstorming but also gotta pay da bills. Now, settled in job enough to start looking at, lessee, 4076 unread posts, oy ;^}

Thanks for taking good notes, remembering, & writing & reporting. Now you're off to another Expo! Y2K has overtaken your life ... know that feeling of wanting to run to the hills to escape, on many levels. LOL See ya later ...

Pretty cool how we met so many GIs coming outta da woodwork, enlisting in our cause :)

Ashton & Leska, soggy in Cascadia, 81 mph wind gusts tonight

xxxxxxx xxxxxxx xxxxxxx xxxxxxx xx

-- Leska (allaha@earthlink.net), February 05, 1999.

Drew,

Thank you. I appreciate your comments as well. It's always good to hear more confirming data points.

Leska, sorry you couldn't make it either. Still have lots more to report from Seattle but have to spend the next couple days in Oakland.

Fun but tiring.

Diane

-- Diane J. Squire (sacredspaces@yahoo.com), February 05, 1999.

Thanks Dianne! You know that we have a small business.. So we are keenly interested in what you had to say..Printed the whole thread just now, and Will be watching for the rest of your report! (We are still sorting out all the info we got from the Seattle Expo) Suzanne

-- SuzanneL (SuzanneL@-webtv.net), February 06, 1999.

Hi Suzanne L! Plus she's got two weeks of Cascadia stuff to sort thru, plus this weekend's Expo ... but we have found a powerpoint + web page GI designer -- thing are moving along with the mountain of paperwork & research :)

xxxxxxx xxxxxxx xxxxx

-- Leska (allaha@earthlink.net), February 06, 1999.

Hi Leska, Don't know how she does it all, but I'm sure glad she's doing it! :-) Suzanne

-- SuzanneL (SuzanneL-@webtv.not), February 07, 1999.

Yeah, Suzanne our friend, us too, as you can well imagine! Been waiting up late tonight for Diane's blow-the-socks-off post to rattle *all* our cages, but she must actually be resting from the Oakland Y2K Expo. Prolly too late to eMail her a latte to eek out that one hair-raising expose she's rooted out. Mebbe manana ~ ~

xxxxxxx mmmmmmm xxxxx

-- Ashton & Leska in Cascadia (allaha@earthlink.net), February 07, 1999.

I hate to throw a fly in the ointment here, but exactly what percentage of those big banks funds are loaned out to foreign countries and industries located overseas? What default rate on these loans will be sufficient to bring these big banks down? What percentage of their domestic loans are out to companies which will fold under either supplier problems or y2k induced self implosion? As I see it the code is only a very small part of the problem the banking industry as a whole is facing. How much credit card debt are they carrying which will be defaulted on by unemployed workers? If they are vulnerable to panic runs from a population with one of the lowest savings rates in the civilized world I don't think they have a snowballs chance in hell of staying solvent when all of these factors come into play simutaneousely with worldwide code failures and communications outages. You might as well face it, the banking industry is doomed, and you are not going to save it by losing your money when it falls.

-- Nikoli Krushev (doomsday@y2000.com), February 07, 1999.