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Quaboag Chamber Spotlights an Intriguing Region

Lenny Weake

With the passing of gaming legislation, Lenny Weake says, the Quaboag chamber is now committed to fully harnessing whatever a Palmer casino would bring to the region.

When the state Legislature passed a comprehensive gaming bill last fall, it did more than usher in the casino era in the Commonwealth.
It also changed Lenny Weake’s job description. Well, sort of.
“Let’s just say they broadened it in a way,” said Weake, president of the Quaboag Hills Chamber of Commerce, which is headquartered less than a mile from where Mohegan Sun wants to build a resort casino on a hillside just off the Mass Pike exit in Palmer.
Elaborating, Weake said that, in the years leading up to that historic vote, the Quaboag chamber was in many respects a spectator on the gaming issue, taking a Switzerland-like stance of neutrality on a matter that sharply divided its membership. But with the passing of gaming legislation, the chamber understood that it could no longer stand on the sidelines, he told BusinessWest, adding that the issue now isn’t whether casinos are right for the state, it’s about jobs and economic development, the foundations of the chamber’s mission.
And, more to the point, it’s about effectively “harnessing” (a word Weake would use often) the vast potential for commerce and economic vitality that comes with a casino in one’s backyard.
“Everything has shifted … this isn’t about gaming anymore; it’s about what Palmer could be in the next five years,” he explained. “We’re not going to sit by and let this thing develop without making sure that we’re part of the process.
“Our role is changing; if Mohegan Sun is going to bring 4 million people into the region each year, we need to figure out how to work with those people and get those visitors off the mountain, in a sense, and get them into our communities,” he continued. We can’t let this economic development go by and not be a part of it, and not figure out a way to harness those 4 million visitors and have them explore the region.”
In recent months, this mindset has manifested itself in many ways, said Weake, but mostly through meetings with Mohegan Sun officials, town administrators, members of the Gaming Commission itself, and other players, including Northeast Realty, a development group that is advancing a number of additional development plans in and around Palmer, most of them contingent upon a casino being built in that community.
The broad assignment in each case, he said, is to make sure the Quaboag region’s business community has a voice in the proceedings, and that its interests are clearly understood. And in many ways, this simply represents a logical extension of the chamber’s ongoing work to promote and advance business in the region, Weake noted, adding that his work often comes down to putting the Quaboag area on the map — in a figurative sense.
Indeed, one of Weake’s priorities since he arrived at the chamber more than a decade ago has been to create and expand initiatives that will help people discover this region that lies roughly halfway between Springfield and Worcester and boasts attractions ranging from the Quabbin Reservoir to the giant antiques show in Brimfield — and, while doing so, support its businesses.
His latest effort in this regard is what he calls a “treasure hunt.” Still very much a work in progress, the initiative, based loosely on the hobby known as letterboxing (in which small, weatherproof boxes are hidden in publicly accessible areas, with clues distributed about how to find them), is designed to encourage people to get out and explore a region still in many ways saddled with the label ‘best-kept secret.’
“We want to expose people living right in our region to all there is to see and do here,” said Weake. “And while they’re out exploring, we want them to experience the restaurants we have here and other types of businesses and attractions.”

Exploring All Options
As he talked about the Quaboag chamber, Weake said it is similar to most such organizations in the Bay State, but has some unique challenges.
First, there is its sheer size; it stretches from Palmer east to Spencer, just outside Worcester, covering three counties (Hampden, Hampshire, and Worcester) and two area codes, a region covered by 10 different newspapers. Meanwhile, the communities represented by the chamber — Belchertown, Brimfield, Brookfield, East Brookfield, Hardwick, Holland, Monson, New Braintree, North Brookfield, Palmer, Spencer, Wales, Ware, Warren, and West Brookfield — are small (total population is about 36,000), and the business community is dominated by small (in most cases, very small) businesses.
Many of the communities, including Palmer and Ware, are former manufacturing centers trying to reinvent themselves and attract new sources of jobs, with many focusing on tourism.
As a result, much of the chamber’s work involves promoting and branding the region, and thus driving visitorship, said Weake, citing the Brimfield antiques shows, which the chamber promotes extensively through its Web site, as one primary example. The chamber also prints an annual recreation guide, which includes information on accommodations, attractions, events, farms, orchards, restaurants, shops, and more.
The ‘treasure-hunt’ concept is the latest manifestation of these efforts, he said, adding that much of the Quaboag region, despite the chamber’s best efforts, remains an unknown quantity to many Baystate residents. By compelling area residents and visitors to look for the various clues, the chamber is expecting them to learn about the area, individual communities, and, yes, specific businesses.
“We want to create something that will make people search through the region, learn about history, learn about the towns, but also have fun doing it,” he said, adding that the chamber is working to create what he called a prototype involving the town of Monson. “We want to come up with a treasure hunt, where, in the process of finding clues, people can learn all about this area.
“It’s in its beginning stages — we have to develop the concept, and then we have to sell it,” he continued, adding that the program will be akin to but not exactly like letterboxes. “We want people to see what we have; we want them to learn about people like [Hall of Fame baseball owner and manager] Connie Mack, who grew up in Brookfield.”
But there is much more to the chamber’s work than tourism, said Weake, adding that services to members have included everything from assistance in the wake of last summer’s tornadoes (Monson and Brimfield were especially hard-hit) to an annual resources directory, to a concept called Hot Deals, which enables businesses to post promotions on the chamber’s Web site.
The passing of gaming legislation last fall simply adds another comprehensive layer of advocacy to the chamber’s workload, he said, adding that the coming months will be both exciting and challenging.
Summing up the chamber’s involvement in the broad gaming issue, Weake repeatedly came back to that notion of harnessing everything that casinos bring to the table, from those projected 4 million visitors to actual commerce (hopefully to be conducted with local vendors), to hundreds of employees, many of whom might need a map to find Palmer.
“When Mohegan goes out to bid on products and services, we want to make sure that our businesses can competitively bid,” he explained, citing just one example of how the chamber will attempt to assist Quaboag-area companies and make sure their voices are heard. “We want to be able to educate businesses on how to work with Mohegan.”
Another example, he went on, is the point systems used by casino resorts to reward repeat customers. “We want to work with Mohegan and try to make sure businesses in this region can redeem those points,” he explained, “so people can go to the Salem Cross Inn [in Brookfield], for example, with points they’ve earned in Palmer.”
Weake said that individual casino developers looking to win the approval of the five-member Gaming Commission must make their applications as attractive as possible, and a big part of this involves commitments to partner with the community as a whole and the business community as well.
He said part of the changed, expanded role for the Quaboag chamber is to shape those partnerships in mutually benefiting ways.

Doubling Down
Weake stressed repeatedly that the chamber’s current work with regard to the matter of gaming should not be described as efforts to support a casino in Palmer. Rather, it is about job creation, economic development, and giving the business community stretched across those 15 Quaboag towns a strong voice in the matters of the day.
In that respect, the Legislature’s vote last fall did not technically change his job description — it merely added many new dimensions to what he was already doing every day.
And there’s a good bet — literally and figuratively — that these efforts will only become more elaborate, and intriguing, in the months and years to come.

George O’Brien can be reached at [email protected]

Banking and Financial Services Sections
Some of the Old Rules May Not Apply When it Comes to 2013
Jim Barrett

Jim Barrett

By JAMES W. BARRETT, CPA/PFS, MST

Once tax filings are taken care of for the prior year, there is always the temptation to tuck current taxes away until the end of the year, when the tendency is to focus on tax strategies that can be executed quickly because of the short period of time remaining.
It would be prudent to take a moment before summer gets into full swing to focus on strategies that may take a little more time to implement but have the potential to reap significant tax savings.
Tax circumstances can change with a single event. Life events, such as marriage or divorce, the birth or death of a family member, retirement, relocation, or a job change, will generally alter your tax position, often dramatically.
Conventional wisdom is to avoid paying taxes for as long as possible by accelerating deductions and/or deferring income. But conventional wisdom may not apply in 2012. Two ominous tax clouds loom on the horizon for 2013, adding a significant level of uncertainty and reducing the value of traditional planning techniques.
The most broadly applicable change is the imminent expiration of the so-called Bush-era tax cuts. The scheduled arrival of the new 0.9% tax on earned income and 3.8% tax on investment income, enacted to pay for the 2010 health care legislation, also should not be overlooked.
We recognize that tax planning requires you to consider a series of unknown future events. Educated guesses and reasonable assumptions go a long way, but keep in mind that no tax strategy is final until the time for changing course has passed.

Planning in Times of
Tax-rate Change
Intentionally raising taxable income in the current year is contrary to the long-standing general guidelines to tax planning. Historically, tax planning has focused on accelerating deductions into the current year and deferring income into future years. But, with rates scheduled to increase, what has worked in years past may not produce the best tax outcome for the future.
The basic framework to help shape your overall income-tax planning in 2012 is as follows:
• If you expect to be in a higher income-tax bracket in 2013, consider accelerating income into 2012 and deferring deductions to 2013.
• If you are forecasting a lower income-tax rate in 2013, reverse the strategy: consider deferring income and accelerating deductions.
This year and going forward, keep in mind that the focus should always be on your marginal tax rate, the highest rate at which your last, or marginal, dollar of income will be taxed. Even though overall tax rates may rise in the future, if your income will be substantially lower in 2013 than in 2012, your marginal tax rate may decrease under the graduated-tax-bracket system.
It’s also important to keep in mind a couple of additional key income-tax concepts while mapping out tax techniques for 2012:

Alternative Minimum Tax:
In years you are subject to the alternative minimum tax (AMT), your deductions may be limited. If you anticipate being subject to AMT in either 2012 or 2013, consider timing those deductible expenditures limited under the AMT regime to maximize deductibility.
Standard Deduction:
If you expect to claim the standard deduction in either 2012 or 2013, shift itemized deductions into the year in which you will not claim the standard deduction to take full advantage of the deductions.

Rising Tax Rates
Individual income-tax rates are set to rise on Jan. 1 of next year to a top rate of 39.6%, a 13% increase over the customary rates in recent years. In addition, limitations on both itemized deductions and personal/dependency exemptions are scheduled to return for 2013, potentially raising the income-tax rate another three to four percentage points for taxpayers subject to these limitations.
Further still, dividends are set to once again be taxed as ordinary income in 2013. The 15% rate enjoyed on qualified dividends for a number of years could potentially become a 39.6% rate. The top tax rate on long-term capital gains is also set to increase by roughly one-third to 20%.

Provision 2011 2012 2013
Ordinary Income Rates 10.0% No Change 15.0%
15.0% No Change  15.0%
25.0% No Change  28.0%
28.0% No Change 31.0%
33.0% No Change 36.0%
35.0% No Change 39.6%
Long Term Capital Gains 15.0% No Change  20.0%
Qualified Dividends 15.0% No Change 39.6%
AMT Exemption – Single 48,450 33,750 No Change
AMT Exemption – Married 74,450 45,000 No Change

Unfortunately, the increasing rate news does not end here; since the Supreme Court did not overturn the health care legislation, the tax impact of the legislation begins in 2013.
Taxpayers with modified adjusted gross income above $200,000 ($250,000 on a joint return) will be subject to two additional taxes:

Hospital Insurance:
A 0.9% hospital insurance (HI) tax will apply to earned income, such as wages.
Unearned Income Medicare Contribution:
A 3.8% unearned income Medicare contribution (UIMC) tax will apply to investment income, including interest, dividends, and capital gains.

For taxpayers above the threshold, the impact of these two new taxes will be broad-reaching. With the addition of the UIMC, the top rate for long-term capital gains will rise by more than 50% to 23.8%, while the top ordinary income rate will rise by more than 15% to 40.5%.
Planning now may reduce the tax burden in years to come, and the timing and composition of earnings become critical. Potentially, a bonus from your company during 2012 instead of 2013 or a 2013 capital transaction accelerated into 2012 could save significant tax dollars. With uncertainty in these rates — and all tax rates this year — midyear may not be the time to initiate the transaction, but it is an ideal time to lay the foundation.
Although the new health care taxes apply to most types of earned (HI tax) and unearned (UIMC tax) income, the new taxes will not apply to retirement-plan distributions, IRA payouts, or tax-exempt income, such as interest from state and local government bonds.
Increases in tax rates are generally adverse for most taxpayers, but with increased rates comes increased value in your deductions, making this a great year to strategize with your tax adviser about the best timing for your deductions.
Here are some 2012 and 2013 planning points to consider if the new health care taxes go into effect Jan. 1, 2013:

Mind the Income Threshold: If you expect that your 2013 modified adjusted gross income (MAGI) will be close to, or just above, the $200,000 (single filer) or $250,000 (joint filers) threshold, you may be able to avoid the HI and UIMC taxes by accelerating income into 2012. The UIMC tax applies only to taxpayers who have both net investment income and MAGI above the threshold amounts.
Adjust Your Investment Portfolio: Seek out investments that produce tax-exempt or tax-deferred income, such as non-dividend growth stocks, tax-deferred annuities, and state or local government bonds. Since it may take time to realign your portfolio, you may want to start well in advance of Jan. 1, 2013.
Spread the Gain:
Installment reporting spreads the investment income from the gain on a sale over a period of years, reducing MAGI and deferring recognition of the investment income. However, electing out of installment reporting in 2012 results in gain recognition before the higher tax rates go into effect.
Transfer Investments to Family Members: Although your children’s investment income may be taxed at your marginal tax rate under the ‘kiddie-tax’ rules, an unmarried child is subject to the UIMC tax only if the child’s MAGI exceeds $200,000. You may be able to use a family limited partnership or other technique to spread some of your investment income among your children prior to Jan. 1, 2013.

Planning Your Estate and Gifts
Absent congressional action, the $5.12 million estate-tax exemption and current top tax rate of 35%, in place for 2012, will revert to a $1 million exemption with a top tax rate of 55% beginning Jan. 1, 2013. Moreover, the estate-tax exemption will no longer be portable between spouses.
With the lifetime gift exclusion also at $5.12 million for the rest of 2012, there exists what could be a once-in-a-lifetime opportunity to transfer significant assets to the younger generation without incurring any wealth transfer taxes. On Jan. 1, 2013, the lifetime gift-tax exclusion is scheduled to revert to $1 million.
Along with the high gift-tax exemption, the generation-skipping transfer-tax exemption is also $5.12 million during 2012. So the door is open to bypass children and defer the impact of estate taxes for many years into the future.
It’s uncertain where the estate-tax exemption and tax rates will end up in future years. And with the expiring provisions, it’s a good idea to review your plan to ensure that it is up to date.
Legislation proposed in Congress limiting valuation discounts attributable to minority interests or lack of marketability also potentially affects wealth transfer. The tax cost of gifts could increase should the changes be enacted.
Since these rules have not yet gone into effect, planning potential remains. Before transferring interests in family businesses or family limited partnerships, consult with your tax adviser to discuss potential tax and valuation pitfalls.
The gift-tax annual exclusion remains at $13,000 per donee, or recipient, for 2012. With gift splitting, spouses can transfer up to $26,000 to each person before the lifetime gift-tax exclusion comes into play.
Gifting techniques you may want to consider this year include:
• Outright gifts to family members;
• Transfers to family members through a family limited partnership; and
• Transfers in trust, including irrevocable life-insurance trusts, defective grantor trusts, and charitable trusts.
Following are a series of other tax-planning opportunities to consider:

Timing of Payments
Reviewing your withholding and planned quarterly estimated tax payments now provides the flexibility to adjust payments to limit or prevent penalties and manage cash flow.
Underpaying your taxes over the course of the year will subject you to underpayment penalties, which can be reduced or eliminated by increasing your withholding or quarterly estimated tax payments. A quirk in the penalty rules treats withholding, even if it occurs late in the year, as if it had been taken evenly throughout the year, making it a powerful planning tool for individuals.
On the flip side, why remit payment too soon when you can invest those funds until April 15, 2013? As long as you will not be subject to an underpayment penalty, consider holding on to your cash as long as possible by cutting back on your withholding or lowering your remaining quarterly estimated tax payments.

Retirement Funding
You can reduce your current tax obligations and help save for your retirement in a tax-efficient manner by contributing to a tax-qualified retirement plan. Qualified plans provide tax deferral — or tax avoidance, in the case of Roth accounts — on earnings until you receive distributions.
The earlier you make the contribution, the sooner your tax-deferred or tax-free earnings begin. If you already have a retirement plan in place, consider funding it as soon as possible to allow funds to start growing now.
To qualify for a tax deduction in 2012, your retirement plan generally must be in place before the end of the year. Exceptions are IRA and SEP (simplified employee pension) plans, which can be set up and funded through April 15, 2013.
Establishing a new retirement plan requires thoughtful decision-making. Small employers (generally those with 100 or fewer employees) that set up a qualified retirement plan may be eligible for a tax credit of up to $500 per year for three years. The credit is limited to 50% of the qualified startup costs.
The following contribution limits, along with the catch-up contribution limits for those 50 and older, apply for the 2012 tax year:

Limit Limit w/Catch Up
401(k) 17,000 22,500
IRA 5,000 6,000
Simple IRA 11,500 14,000
Self-Employed 50,000 55,500

Individuals with earned income, including alimony, are generally eligible to contribute to traditional IRAs. Claiming a deduction for your contribution is another matter. It depends on your income and whether you or your spouse is covered by an employer-sponsored retirement plan.
If neither you nor your spouse are covered by an employer’s plan, you may deduct your contribution to your traditional IRA. If you or your spouse are an active participant in an employer-sponsored plan, the deduction for your IRA is phased out at adjusted gross income (AGI) levels:

Filing Status  AGI Phase-out Range
Single 58,000 – 68,000
Married filing jointly 92,000 – 112,000
Married filing separately 0 – 10,000
Spousal IRA 173,000 – 183,000

 
Many taxpayers find the long-term benefits of contributing to a Roth IRA or a Roth 401(k) outweigh the short-term financial benefits of tax-deductible contributions. While Roth contributions are not tax-deductible, none of the income earned in the Roth account will have tax consequences unless there are early distributions, in which case penalties may apply. In addition, the Roth account is not subject to the required minimum distribution rules that apply when you reach age 70.
Eligibility to contribute to a Roth IRA depends on the amount of your income level. Contributions are allowed if your modified adjusted gross income for 2012 is between $110,000 and $125,000 for singles or between $173,000 and $183,000 for joint filers.
You can still roll your retirement savings from your traditional IRA or other qualified retirement plan into a Roth IRA. However, you must pay tax on the rollover amount. Unlike in past years, income limits no longer apply to Roth rollovers.
You might want to consider a Roth rollover in 2012 if you expect to be subject to the unearned income Medicare contribution tax in future years. Although distributions from a traditional IRA are not subject to the UIMC tax, taxable IRA distributions increase your modified adjusted gross income. If your MAGI exceeds the $200,000/$250,000 threshold, your investment income will be subject to the UIMC tax.
By rolling over your traditional IRA to a Roth IRA in 2012, you will recognize the additional income before the UIMC tax goes into effect. Once you have had a Roth IRA account in place for five years, future distributions from the Roth IRA will be non-taxable and will not increase your modified adjusted gross income.
If you own a business, you may be able to avail yourself of a defined-benefit type of retirement plan. These plans often allow higher retirement contributions than other types of plans. The higher retirement benefit must be weighed against the additional cost of providing comparable retirement benefits for your employees.

Charitable Contributions from IRAs
The tax rule allowing those over age 70 to make charitable contributions from their IRA without the need to include the distribution in income expired at the end of 2011. Making these contributions directly was generally advantageous because it didn’t raise the contributor’s income for limits on itemized deductions and certain phaseouts.
Although Congress has a track record of reinstituting expired tax provisions and applying them retroactively, it is certainly not guaranteed. If you are confident that you want to make the donation regardless of the tax treatment, you can still transfer the contribution directly from your IRA to the qualified charity. If Congress decides to retroactively reinstate the donation rule, the transfer will be excluded from income just as under the pre-2012 rule.
If Congress does not reinstate the rule, any charitable donation made from your IRA will be treated in the same manner as a donation made from any other source. The distribution from the IRA will be recognized as income, and the contribution will be included on your return as an itemized deduction. While the deduction should offset the income, the benefit will not be as great as it would have been if the income had not been recognized in the first place.

Employee Health Plans
If you are not currently providing health coverage for your employees, a tax credit for small businesses may make the cost of purchasing this coverage more affordable. The maximum credit is 35% of the premiums paid by the employer.
To be eligible for the credit, the employer generally must contribute at least 50% of the total premium. The full credit is available for employers with 10 or fewer full-time equivalent employees (FTEs) and average annual wages of less than $25,000. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages of less than $50,000.

New Employees
Congress extended the Work Opportunity Tax Credit for employers that hire eligible unemployed veterans after Nov. 22, 2011 and before Jan. 1, 2013. The credit can be as high as $9,600 per veteran for for-profit employers or up to $6,240 for tax-exempt organizations.
The amount of the credit depends on a number of factors, including the length of the veteran’s unemployment before hire, the hours a veteran works, and the amount of first-year wages paid. Employers who hire veterans with service-related disabilities may be eligible for the maximum credit.
If you own a business and have children, consider putting them to work during summer vacation or after school. You will be able to deduct their wages as long as you make their pay commensurate with what you would pay a non-family employee for the same services. For 2012, they can earn as much as $5,950 and pay zero income tax. If they earn $10,950 and contribute $5,000 to a traditional IRA, they will also pay zero income tax.

Capital Expensing
Generous expensing rules apply to most non-real-estate assets acquired and placed in service during 2012. The expensing election limit under Section 179 is set at $139,000 if the total amount of qualified asset purchases does not exceed $560,000. The deduction is available for most business equipment, furniture, and off-the-shelf computer software.
There are limits to the Section 179 deduction, including a requirement that the deduction not cause or increase a taxable loss. But the 50% bonus depreciation election, also available through the end of 2012, can cause or increase a taxable loss.
The key to qualifying for these enhanced deductions is that the asset must be placed in service by Dec. 31, 2012. Just ordering or paying for the asset is not enough. Considering the time it may take to identify the appropriate equipment, obtain competitive bids, order the product, have it assembled and shipped, and then get it installed and operational, now may be the time to begin the acquisition process.
With tax rates on personal income scheduled to rise in 2013, those who operate businesses as S corporations, partnerships, LLCs, and sole proprietorships will have to consider carefully whether to take advantage of the enhanced business deductions available for assets placed in service during 2012. Particularly for assets with shorter depreciable lives, forgoing the enhanced deductions for 2012 may result in more tax savings in 2013 and later years.
No one can predict the future, and predicting future actions of Congress is particularly hazardous. Congress can — and all too often does — change the tax law at a moment’s notice.
Tax planning is an ongoing process. Saving taxes is generally a good strategy, but making a bad business, investment, or personal decision just to save some tax dollars is never a good strategy.

James Barrett is managing partner of Meyers Brothers Kalicka in Holyoke; (413) 536-8510; [email protected]

Banking and Financial Services Sections
Latest Acquisition Would Take United Bank into Connecticut Market

Richard Collins

Richard Collins says the acquisition of New England Bancshares promises to give United Bank entry into a new and potential-laden market — Connecticut.

Richard Collins calls it “growing into our capital.”
That’s one of the many ways he chose to describe United Bank’s recent announcement that it would acquire Enfield-based New England Bancshares.
Elaborating, Collins, the bank’s president since 2001, said United, like many financial institutions in this region, has large amounts of capital at its disposal, and one of its challenges is to find methods to put it to work in ways that will position the bank for future organic growth, strategic acquisitions, and what he called “continued capital-deployment strategies.”
And he believes this acquisition, the bank’s second major expansion in four years — it merged with Worcester-based Commonwealth National Bank in 2009 — accomplishes all that and more.
For starters, it takes the bank’s footprint into Northern and Central Conn., and, more specifically, into areas with attractive growth potential (more on that later).
“This combination presents a tremendous opportunity to expand our presence in Connecticut, where United Bank currently does not have any branches,” said Collins. “Connecticut is a growing banking market, one we’ve had our eye on for some time.”
Meanwhile, the merger, subject to regulatory and shareholder approval, would also bring the institution to $2.4 billion in total assets, making it the 10th-largest bank headquartered in New England and the largest based in Greater Springfield.
And with that additional size comes strength, flexibility, greater efficiencies, a capacity to do larger commercial loans, and better ability to absorb the higher costs of doing business in an age of greater government regulation, he told BusinessWest.
“The burden of government regulation is becoming greater every year,” he explained. “And a small bank has a lot of trouble staying on top of all the things they have to do to satisfy government regulations; we can take our compliance efforts and spread them over a broader base.”
For this issue and its focus on banking and financial services, BusinessWest looks at United’s latest expansion initiative and what it means for this instiution and its long-term strategic plan.

Branching Out
Collins said informal talks between United and New England Bancshares started a few years ago.
He told BusinessWest that, again, like most banks in the region with capital at their disposal and strategic plans in place, United, which converted from a mutual bank to stock ownership over two stages in 2005 and 2007, has been looking at a number of opportunities for expansion.
“Our board saw opportunities to grow our franchise and expand our brand of banking into other markets,” said Collins, noting quickly that there has been organic growth over the past several years as well. “In going public, we raised a lot of capital, and the idea of having all that capital as a bank is that you grow into it over time.
“And, in essence, that’s what we’ve been doing — growing into our capital,” he continued. “The Worcester acquisition helped us in that regard, and it’s worked out very well for us, but we still have a lot of capital — 17% tangible common-equity ratio, which is a lot more than you need, really — and so we’ve been looking for opportunities.”
And, like the acquisition of Commonwealth National, the New England Bancshares gambit, a $91 million transaction in cash and stock, makes sense on a number of levels, Collins continued, adding that it was consummated after considerable due diligence that determined that United was receiving value for what it was offering, but was not overpaying.
“What I do in these situations is put myself in the shoes of our shareholders — “if I’ve got $91 million to spend, how much should I be earning on that $91 million?” he explained, adding that a detailed assessment concluded that the bank could certainly earn enough to justify that cost.
When asked to quantify why this deal makes sense for United, Collins said a quick look at a map would be a good place to start. It would show that the best opportunities for widening the footprint lay to the east and the south, with the latter being the most attractive.
“We have a branch in Northboro, and if you go north of that, it gets rural very quickly. If you look at Southern Vermont, there’s not much there in terms of real opportunity to grow,” he said. “And we’re probably not going to expand to our west; first, you have to cross the mountains, and then you get to the Pittsfield area, which is pretty heavily banked.
“So looking south made a lot of sense to us,” he continued. “If you look at the demographics of the Greater Hartford area, you see a lot of people there, and many of the communities are growing and fairly wealthy; there are probably four times as many deposits in the Greater Hartford area as there are in the Greater Springfield market. You have people, demographics, and favorable bank deposits — it looks like a place where our kind of banking can take root and flourish.”
Elaborating, he said New England Bancshares offered access to Connecticut markets with more-promising growth potential, meaning areas where large regional institutions, which have taken the brunt of public criticism over excessive fees, hold a good deal of market share.
Specifically, the institution has 15 branches — assembled through some previous mergers and organic growth —that are positioned mostly north and east of Hartford or west and south of the capital city. There are six branches in what Collins calls the southern tier, which stretches into New Haven County, and eight more in the northern tier, which progresses almost to the Massachusetts line and east to Tolland County. The resulting gap is similar to the one United has between Springfield and Worcester.
Beyond geography and specific branch locations, though, New England Bancshares made sense as an acquisition target on several other levels, said Collins, adding that the two banks are similar in many ways, from operating philosophy to loan-portfolio mix.
“They’re a smaller version of us,” he explained. “When it comes to deposits and loan percentages, the two banks are a lot a alike and take the same approach to doing business.”
These similarities should help facilitate the assimilation process, said Collins, who noted that, while there is some degree of apprehension associated with most bank mergers (especially for customers of the acquired institution), this absorption process should go smoothly.
“It’s a matter of making the right introduction,” he explained, adding that the bank will borrow many lessons from its experience in Worcester. “That’s marketing; that’s letters to the customers introducing ourselves and explaining how we do business.”
This communication process will begin several months before the closing and continue right up to that date of conversion and beyond, he continued, adding that the banks share a common data system, which should facilitate the process.
Looking ahead, Collins said that, after the merger has been completed, United will still have “comfortable levels” of capital with which to possibly add branch locations across its now-broader coverage region, perhaps closing those gaps, or pursue other possible acquisitions.
“We should be able to find branch-location opportunities in parts of that territory that are not saturated,” he explained, adding that New England Bancshares has not penetrated Hartford itself or many surrounding communities. “And, conceivably, there could be another acquisition — but right now, we’re focused on New England Bancshares and making this work.”

Interest Bearing
If the planned merger goes through as expected, United will have some impressive numbers to put behind its name.
These include those $2.4 billion in combined assets, $1.7 billion in combined loans, $1.8 billion in combined deposits, and 37 branches in seven counties across Massachusetts and Connecticut.
More important than the numbers, though, will be the capacity they provide for continued growth and a better ability to serve existing customers.
In short, this acquisition provides even more opportunity for the bank to grow into its capital.

George O’Brien can be reached at [email protected]

Banking and Financial Services Sections
O’Connell Eyes Continued Growth as He Takes the Reins at Wolf & Company

Mark O’Connell now oversees Wolf & Co. from his office in Tower Square in Springfield.

Mark O’Connell now oversees Wolf & Co. from his office in Tower Square in Springfield.

Mark O’Connell says he can usually get from his house in Belchertown to Wolf & Company P.C.’s Boston offices in less time than most of his colleagues who live within the Route 128 beltway.
That’s good, because he’ll be making that trek much more often in the coming months and years as he takes the helm of the century-old accounting firm. He’ll still be working primarily out of the downtown Springfield office that he helped open and that has been his business address for the past 15 years, but he will obviously have more responsibilities as he takes the reins from long-time president and CEO Daniel DeVasto.
At the top of that list is ongoing execution of a long-term strategic plan that has put the company in a strong growth mode, said O’Connell, who assumed his new position on July 1.
Indeed, Wolf was named one of the five fastest-growing CPA firms in the $20 million to $30 million category nationally by Inside Public Accounting magazine, he told BusinessWest, adding that it has achieved such status through a number of strategic initiatives.
These include attaining greater market share in many geographic areas, including Western Mass., as well as within specific sectors of the economy, including the nonprofit realm, manufacturing, family and closely held businesses, and higher education, he noted. Meanwhile, Wolf has succeeded in providing more services to existing clients, he said, adding that the company’s WolfPAC software (a suite of enterprise risk-assessment tools and risk-management plans) has opened many doors and ultimately allowed the company to handle additional needs for clients as well.
Such growth strategies are necessary in areas where there is little economic growth, such as Western Mass., said O’Connell, and also in a regional economy that is in many ways still recovering from the Great Recession, producing an operating environment for accounting firms that he described as “the new normal” (more on that later).
Looking ahead, O’Connell said the company, which has offices in Boston, Springfield, and Alabany, will consider expansion into additional markets in the Northeast and perhaps nationally, and in the meantime will continue to exploit growth opportunities in existing service areas.
And it will do so through continuous promotion of what he said is known simply as the “Wolf culture,” or VIRTUE philosophy, an acronym created by the words vision, integrity, respect, trust, understanding, and excellence.
Overall, he said, this will be an exciting time for the company, and also for him professionally.
“I’m very excited about this opportunity, and am focused on making the transition as smooth as possible,” he said, while praising his predecessor for putting a solid road map in place for the company. “There is not a need for dramatic change; there is a need for continued growth and focus on those efforts, but the core operations of our firm have been humming along very well.”
In this issue, BusinessWest talked at length with O’Connell on the occasion of the arrival of his new business cards with the title ‘president & CEO’ under his name, thus getting some clear insight into where he wants to take this company.

By the Numbers
O’Connell told BusinessWest that, while most of Wolf’s 175 employees work in the Boston office, the company is officially headquartered there, and the president and CEO traditionally works out of that facility, he has no plans to relocate to that part of the state or put his office there.
As he said, he can get to the High Street office quicker than most who live in the Hub and its immediate suburbs, and besides, he grew up in Springfield and enjoys the quality of life in this region.
A graduate of Classical High School and Western New England University, where he majored in accounting, he started at a small firm and eventually moved on to KPMG, which was then one of the so-called Big 6 national accounting firms, and had an office in downtown Springfield.
As the spate of mergers and consolidations that reduced the number of ‘big’ firms continued, KPMG closed its Springfield office in the mid-’90s, and O’Connell went to the company’s Hartford office. He said it soon became clear that, if he wanted to ascend within that firm, he would have to go to New York or another major urban center to do it, and this was not his preferred career course.
“By that time, Wolf had been making some inroads into the financial-services marketplace in Western Mass.,” said O’Connell, “so I reached out to them with the idea of starting an office here.”
Company officials in Boston were intrigued, and a Springfield office became reality in 1997, starting in what is now the TD Bank building. Wolf quickly gained some traction in this region, and the office was eventually moved into larger quarters — ironically, space that KPMG was subleasing out in Tower Square.
Over the years, the Springfield office has achieved substantial growth — it has done particularly well in the nonprofit and higher-education sectors — and the company has made some further inroads in Northern Conn., said O’Connell, adding that, while overseeing the progression of that office, he became part of Wolf’s executive committee.
And when DeVasto announced his intention to retire early this year, O’Connell became one of the candidates to succeed him, and eventually prevailed in what became an extensive search.
The transition process, O’Connell said, will come in many forms. Elaborating, he noted that he will be assuming new responsibilities and direction of the company’s three offices, which will require an inevitable reduction in direct accounting work for clients in his own portfolio.
“I will be keeping some of my clients,” he explained, “but my goal is to reach a balance in the size of my practice that will enable me to keep a good-sized practice but also handle the responsibilities I have as CEO. We have a very professional organization, so the ability to delegate responsibilites to other shareholders in the firm or to our administrative infrastructure should enable me to do that.”
Beyond that, though, he is expecting a very smooth transition at the top, mostly because of the systems and philosophies that DeVasto put into place, the experience he gained while serving on the executive committee, and the simple fact that very little, if anything, is broken and in need of fixing.

Bean Aggressive
And that includes the overall long-term strategic plan, which calls for growth both organically and through expansion into new geographic markets.
“Our firm takes on a niche structure,” O’Connell told BusinessWest. “We have individual niches that are focused on specific industries; some of those niches are going to be able to expand within our existing geographic footprint, and others, especially our financial-services niche, we’ll look to grow through geographic expansion.
“There’s been a lot of consolidation in the banking industry,” he continued. “And as that consolidation continues, we have to go further afield to get the work.”
And while much of the growth strategy involves expansion into new regions — the company recently gained its first audit client in New Jersey, for example — or gaining market share in existing service areas, another component involves providing a wider range of services to existing clients.
And this brings him back to the WolfPAC software.
“This product is sold throughout the country — we have clients using it in Califiornia,” he explained, noting that many banks now use the software. “It has allowed us to gain name recognition in other parts of the country. In New Jersey, for example, we’ve sold several WolfPAC modules, and people would seek us out and ask, ‘can you provide other professional services to us?’
“That’s an exciting way of breaking into the marketplace,” he explained. “From an audit, tax, and risk-management perspective, this business is built on trust, and it takes a long time to build those relationships and gain the work, and this is one way to facilitate that process.”
Looking at the current picture, O’Connell said that, in many ways, the state and this region are still recovering from the recession and its many aftereffects, and this means the accounting profession as well.
Firms had to adjust to a changing climate in which there was little if any new growth, and many ventures went out of business, downsized their operations, or had trouble paying their bills — all key contributors to that “new normal” he described. In this environment, many firms, including Wolf on a small scale, took the opportunity to “rightsize,” as he called it, and many have stayed at the new, smaller size.
Conditions are improving somewhat, he continued, and many accounting firms, Wolf included, are hiring again.
“We hired four people last year, and we will be hiring three more in September,” he explained, adding that another of the company’s challenges moving forward, especially with its intention to grow and expand geographically, is to find and cultivate new talent. “We’re continuing to build a pipeline.”
And as it does so, it faces heavy competition from what are now the Big 4 firms — PwC (PricewaterhouseCoopers), Deloitte Touche Tohmatsu, Ernst & Young, and KPMG.
“We have to sell people on a way of life and a well-defined career path,” O’Connell explained. “But it’s hard to talk a young, aggressive accountant out of wanting to get Big-4 credentials under their belt.”

Firm Commitment
O’Connell told BusinessWest that, for the foreseeable future, meaning until the formal transition process is over, he expects to be in Boston perhaps two or three days a week.
After that, he anticipates being able to reduce his time on the Turnpike, especially with the help of technology, specifically in the form of a new conferencing system.
And beyond putting a lot more miles on the car, he is projecting only a smooth transition and further momentum as the company continues its second century in business.

George O’Brien can be reached at [email protected]

Construction Sections
High Performance Computing Center Touts Energy, Security Innovations

The MGHPCC, which will open along the canals in Holyoke this fall.

The MGHPCC, which will open along the canals in Holyoke this fall.

For John Goodhue’s father, it took a tour through the Massachusetts Green High Performance Computing Center to understand exactly what goes into housing — and protecting — computers.
“When my dad toured the center,” said Goodhue, the center’s executive director, “he came out the other end and said, ‘I finally get it! It’s not about computers; it’s about bringing electricity in and creating a lot of heat and then removing that heat from the building.’”
Bingo.
Of course, that has been just one of the challenges — albeit a critical one — of preparing the MGHPCC to open in Holyoke later this year. The $95 million facility is a joint venture between UMass, MIT, Harvard University, Boston University, and Northeastern University, as well as technology giants EMC Corp. and Cisco Systems Inc., to create a high-tech research center.
To create that all-important cooling effect, the facility will use a continuous water loop in and out of the building. A chilling system will cool the water, which will then be pumped into air-conditioning units placed beside the computers; the heat generated by the equipment will then be exhausted outside, and the process begins again. Constantly.
“The cooling took an enormous amount of effort,” Goodhue said, explaining that the two major techniques used for the process involve air and water, respectively. After six weeks debating which technique to use, architects and builders decided on the chilled-water option. “And we’re bringing it quite close to the computers; for every two racks full of computers, right next to them is a little air-conditioning rack. It takes water into it and cools the air around the computers, and takes the water out.
“Water is actually much better at carrying heat and absorbing heat than air is,” he continued. “A very small volume of water, relatively speaking, can carry the same heat as a much larger volume of air, and it’s one of things that allows us to run the center more efficiently. The cooling system really allowed us to cool these computers that are very, very hot. Some machines pack a considerable amount of electronics into a very small space, and we have to be extra vigilant about cooling — and water is better at doing that.”
But that raises challenges regarding energy efficiency — another goal of the computing center’s leaders. Meanwhile, designers were also faced with protecting sensitive equipment and data from more than heat, so decisions about building security were high on the priority list as well.
For this issue, BusinessWest delves into some of these questions, and how the MGHPCC is proving to be an innovative facility long before going online this fall.

Green for a Reason
From the start, the Holyoke center was designed to be energy-efficient, Goodhue told BusinessWest. “One of the things that drew us to Holyoke is that the power came principally from renewable energy. Holyoke Gas & Electric generates 70% of its power from renewable sources — primarily the dam, but it also has the largest solar array in the state, and also has ideas about adding other resources to their portfolio.”
Holyoke’s dam on the Connecticut River generates hydroelectricity that is then sold to industrial users for about 8 cents per kilowatt hour, compared to a state average of more than 12 cents, according to the U.S. Energy Department.
That’s good, because data centers tend to suck up a lot of energy — partly because they never shut down, partly because of the power the equipment uses. “There has been a trend in recent years toward operating computers and servers at higher and higher temperatures,” Goodhue noted.
In fact, according to a 2011 Stanford University report, data centers account for about 2% of the nation’s energy consumption, and many use electricity generated by coal-fired power plants, not exactly a clean energy source. Because of its power supply and design, the MGHPCC is expected to use at least 25% less energy than the typical data center.
Goodhue said the computing center has applied to be a Leadership in Energy and Environmental Design (LEED) project, aiming for Gold status — the second-highest accreditation — from the national recognition program run by the U.S. Green Building Council.
“Again, that’s by paying attention to hundreds of details, from how we manage stormwater to the white reflecting roof; from what landscaping materials we use to the chemical basis for our paints,” he explained, noting that the paint must not contain what are known as volatile organic compounds, or VOCs; when breathed in, these are not acutely toxic, but can cause long-term health effects.
“There are dozens of small things that, taken individually, add up to a very different way of designing and building this center, so that it has a much lower environmental impact,” Goodhue continued. “The good part about it is, people have thought very carefully about the environmental impact, so you don’t have to reinvent the wheel — just follow the best practices you know, none of which are crazy or over the top. They just make good design sense.”

The Springfield Data Center, currently under construction on the former Technical High School site.

The Springfield Data Center, currently under construction on the former Technical High School site.

Some of the same focus on energy efficiency is evident at the Springfield Data Center (SDC), set to open in 2013 on the site of the former Technical High School. The facility will be one of the state’s two primary data centers, backing up and supporting the Massachusetts Information Technology Center in Chelsea.
New York-based Skanska USA, the contractor for the SDC, has also incorporated a number of energy-efficient elements in aiming for Silver certification under LEED. “This is one of the most energy-efficient buildings of its type in the United States right now,” said Steve Eustis, senior vice president and project executive for Skanska.
The design includes selecting materials that are energy- and water-efficient and incorporates ‘daylight harvesting,’ which uses sensors in the lighting system to shut off the lights when there is sufficient daylight; 90% of the occupants will have daylight views. The roof will be also be a reflective white, and HVAC systems were designed with energy conservation in mind. In fact, the air-conditioning system that cools the computers will capture the waste heat and reuse it.

Securing the Data
Of course, protecting computers from heat damage while keeping energy costs low is only one balancing act a data center must perform. Another is keeping data private while not hindering the ability of the facility’s users to conduct and share their research.
“Security is of critical importance. If you’re doing medically oriented research, for instance, you might have sensitive patient data in the center, and it’s very important to protect that,” Goodhue said. “At the same time, this is a research center, and it’s very important to give people as much flexibility as possible to share data.
“So we have these two conflicting constraints, and we handle that in two ways,” he continued. “One has to do with the physical infrastructure. There are maps that label every room as a security zone, with relatively small lists of people who are allowed to go into each room in the building, and that drives our keycard-access system. Your ID will let you inside doors and won’t let in others.
“So, if you’re an electrician servicing the transformer,” he went on, “you probably don’t need to go into the computer room, so that person’s card will let him into the transformer room and maybe one or two other adjacent rooms. Similarly, if you’re operating a computer in the computer room, you probably have no business hanging around the transformers.”
The other element is how networking is handled, Goodhue continued.
“Every institution that uses the facility — Harvard, MIT, UMass, and so forth — already has well-developed methods of protecting data when it flows across their networks,” he said. “So, imagine that, on the floor, there’s one network that we’ve arranged so it’s an extension of the MIT campus network, and one we’ve arranged as an extension of the Harvard campus network, and so on. Each exists here in parallel universes; they don’t see each other, but are kept separate. If you’re at MIT, you can think of the building as just another building on campus, but farther away, and BU folks can see it the same way.
“That gets you the protection,” he noted. “So how do you get flexibility?”
For that, the center uses what Goodhue called a “meet-me switch,” which allows two or more users from different networks to exchange data. “Again, it’s the balance between access and flexibility and making sure the data is protected and controlled.”
In addition, each rack of computers has its own set of keys, so only authorized people can access each one. “This isn’t like the movies where you see these places with barbed wire and armed guards and so forth,” he said. “We are a high-tech facility, and we’re very careful about protecting it, but we’ll put on a slightly friendlier face than what you see in the movies.”

Little Things
Goodhue said the MGHPCC will open on time and under budget, but that’s far from the only positive aspect of it.
“People often ask me, ‘what’s one unique thing about the data center that makes it the best in some way?’” he told BusinessWest. “But there’s not just one thing. It’s lots of attention paid to literally hundreds of details that gets you there.”
And that’s when the real excitement — the research itself — begins.

Joseph Bednar can be reached at [email protected]

Banking and Financial Services Sections
PeoplesBank Expands Its Mobile Offerings for Customers

Karen Buell says younger customers are particularly open to mobile banking.

Karen Buell says younger customers are particularly open to mobile banking.

Considering that banking a generation ago always involved visiting a branch — or at least an ATM — it says something that even logging on to a Web site may be too slow for some customers.
But when PeoplesBank added text banking to its growing stable of online and mobile services, it established a new standard for speed.
“It’s pretty quick and efficient,” said Karen Buell, the institution’s Internet branch manager. “You don’t have to call or anything like that, and it’s faster than a browser; if you want a quick balance check, you don’t have to log on.”
To use the option, customers can text a short code — just a few characters — to the bank to access balances, transaction history, and other information immediately. Its functionality may be limited compared to the bank’s other remote-banking services, but Buell said it’s a logical next step for customers on the go needing quick information.
“PeoplesBank has been a leader in mobile banking since 2008, since we introduced our first mobile app, one of the first in the country,” she told BusinessWest. “A lot has changed since then. We try to continue to innovate as technology changes and advances.”
For example, “we have a mobile banking app that will work for any platform — iPhone, Android, BlackBerry,” she said. “We also have a mobile browser which allows you to have the mobile-banking experience from any phone that has an Internet plan, so you don’t have to download the app.”
To develop these offerings, the bank partnered more than a decade ago with Online Resources Corp. (ORCC), which provides Web- and phone-based financial services, electronic payments, and marketing services to financial institutions. “PeoplesBank and Online Resources have been working together for more than 12 years. We started with online banking, then merged into mobile solutions,” said Lori Mark, ORCC’s director of Product Management.
The company estimates that the total number of mobile-banking users in the U.S. will grow from 25 million in 2011 to 42 million by the end of 2013 — a surge driven by the continuing uptick in smartphone adoption, a wider range of modes (mobile apps, text banking, etc.) appealing to a wider range of customers, and ever-improving usability. In addition, according to the Forrester Research Mobile Banking Forecast 2012-2017, 47% of all adults online in the U.S. will be using mobile banking by 2017.
The shift is evident locally, Buell noted. “We continue to see great increases. Browser sessions are going up about 5% month over month; people are logging in to check their balances, transfer money, and pay bills. Personally, I like it; when a bill comes, I pay online, and I’m good to go.
“We’re seeing huge increases in mobile visits to our Web site,” she added. “In the second quarter of this year, mobile devices were 14% of our total Web site volume. We know that there’s demand for it, and people are using it.”

Addressing Concerns
Buell said she recently attended a conference in San Francisco on mobile banking and e-commerce. There, the American Bankers Assoc. presented poll results showing that increasing numbers of people plan to adopt mobile banking if they haven’t done so already; the biggest percentage increase is in the 18-34 age group, followed by the 35-49 crowd.
“We know that Generation Y and Generation X are searching for this technology, and they want to do things on the go,” she told BusinessWest. “That’s being confirmed nationally.”
Some potential users might be put off at first by wireless transactions, worried about the security of their data, but Mark said those anxieties are baseless.
“Financial institutions, just because of how highly regulated they are, tend to be very security-conscious, and so are we,” she said. “We have the same parameters, and we take a lot of time educating our client base about security from hackers. We do what we can to allay those fears.”
Breaking down that trust barrier is key, Buell added.
“When they trust it, they embrace it,” she said. “Out of all our online customers, 25% to 30% are using mobile banking. I think, if you’re already comfortable doing something online or electronically, mobile banking becomes just another way to do transactions electronically.”
She conceded that many customers, particularly of the older generations, prefer to bank only in physical branches, “but if you’ve already embraced the technology, mobile is just another step. There don’t seem to be any barriers.”
Mark said the numbers of users across all platforms — browser, app, and text — continue to grow. “On our side, the smartphone usage is where we’ve seen the growth,” she noted. “Today, 6% of all Internet banking activity comes from mobile devices, and it’s increasing on a daily basis, with the vast majority of that usage coming from iPhones and Androids.”
Buell said PeoplesBank, where the mobile-user percentage is even higher, markets its high-tech banking options through its Web site — a logical place to attract customers who are already comfortable online, many of whom are happy not using brick-and-mortar branches at all.
“We’ve also done a lot of online advertising, Facebook and Twitter posts — and we had a billboard recently, just trying to spread the word that, if you’re looking for technology, PeoplesBank has it.”
The numbers back up the demand, as total mobile visits at PeoplesBank in the second quarter of 2012 were up 178% over the same period last year.
“We know customers are using smartphones, which are changing their lives in meaningful ways,” Buell told BusinessWest. “Our commitment is to answer that desire for convenience.”

Joseph Bednar can be reached at [email protected]

Opinion
A Simple Remedy for a Wall Street Danger

Over the past several weeks, the financial community has paid rapt attention to trading losses at JPMorgan Chase, estimated to be anywhere from $2 billion to as much as $9 billion. The sudden emergence of such a large loss sent a disturbing tremor through an already-vulnerable economic landscape. The lesson to be learned here is emphatically not about the bank or its leadership, but about the structure of our financial system.
The loss by the much-admired bank was more than a case of a private-sector company taking a private-sector hit because of a private-sector error. First, if a bank this important were to become endangered, the contagion to global financial confidence would surely necessitate a bailout. Losses in institutions to which we entrust the soundness of our money, or where deposits are guaranteed, put the rest of us at risk. Second, and less widely appreciated, JPMorgan’s trading loss is a minuscule fraction of the bank’s more than $75 trillion in notional value of its current positions in derivative securities. The trading of derivatives — securities whose prices are dependent on valuations of underlying assets but do not represent direct ownership claims on those assets — is exempt from the sensible regulation of disclosure and leverage normally applied to stocks, bonds, and other direct claims. This is still, despite all recent attempts at financial reform, the Wild West of trading markets.
Banks say their trading positions are properly hedged by countervailing positions, leaving them little risk. They ‘prove’ this using statistical models anchored in past price behavior and by noting that market pricing indicates a proper balance between their opposing positions, leaving little residual exposure. The problem is that the models are oversimplifications. They rarely predict unfamiliar possibilities, sometimes called ‘black swans,’ or the impacts of external events such as geopolitical disruptions.
All three of the largest U.S. banks have open derivatives positions in excess of 24,000% of their equity capital. Neither models nor markets can protect them from small percentage imbalances. In addition, bank-trading relationships around the world are so interconnected that, if one goes down, all are threatened. No CEO or board of directors, however talented and honorable, can oversee trading at the multi-trillion-dollar scale with perspective and precision enough to assure the avoidance of systemic impairment. Nor can any government oversight body.
Bank lobbyists insist that all this trading is needed to facilitate commercial transactions, but don’t be fooled. The open derivatives positions at the three largest U.S. banks exceed twice the GNP of the world. Add in large European and Asian banks, and the commercial-hedging argument becomes a parody. Hedging is useful in commerce, but its systemic risk should never outweigh its commercial value.
Under present rules, banks are free to put us all at risk in derivatives trading without creating any offsetting cushion. Every derivatives transaction involves some basis risk (that two paired commodities will not continue to move in unison), some counterparty risk (that the trade will not be honored by the other party), and some human-error risk. Accountants and regulators know well that netting massive positions to zero cannot reflect true exposure.
Whenever a new position is taken, there should be a mandatory accompanying reserve or capital charge. This would have a twofold benefit. It would increase protection for both the public and the banks, and it would dull the appeal of hazardously oversized trading accounts. Although regulators should set the actual amounts, imagine that the charge was uniformly 0.1% of the notional position value. Open positions of $75 trillion in derivatives would require $75 billion put aside, an amount large enough to make that trading scale unappealing. Charges to match the risk created would bring trading volumes back to sensible size with a minimum of new regulations and no need to outlaw useful commercial practices. They would simply acknowledge that all derivatives positions, however useful, impose some risk on the holders and the public. Current scale imposes an unmanageable risk.

James M. Stone, former chairman of the Commodity Futures Trading Commission and commissioner of Insurance for Massachusetts, is CEO of the Plymouth Rock group of property and casualty insurance companies.

Opinion
Brownfield Challenges and Opportunities

The compelling photographs on page 42 tell an intriguing story about the redevelopment of the sprawling former GE transformer-manufacturing complex in Pittsfield — and about brownfield redevelopment in general.
There are always three tenses involved with such projects, of course: the past, present, and future. The past is represented by images, stories, and recollections of what once was. In this case, and in most all cases, it’s about a large corporation that employed generations of people and brought economic vitality to a neighborhood, city, or region, and often gave it an identity. The present is usually represented by images of idle land where factories that employed thousands of people once stood.
The future? Well, that’s the hard part. The really hard part.
It’s often difficult to imagine what it can be — although people try mightily — and even more difficult to make reality. We’ve seen it repeatedly, at places like the former Uniroyal complex in Chicopee, the former Westinghouse site in Springfield (now one of many locations under consideration for a Western Mass. casino), the former Chapman Valve complex in Indian Orchard, and, to a lesser extent, the Ludlow Mills complex, now in the hands of Westmass Area Development Corp.
While there has been some encouraging progress with the Ludlow initiative — two projects, a new HealthSouth rehab hospital and some senior housing, were announced earlier this year — there have been mostly speculation and frustration involving the others.
That’s especially true in Chicopee, where the Uniroyal site has been a nightmare for mayoral administrations for more than 30 years, and Chapman Valve has been equally frustrating, with only a large solar-power array to be put in the category of new ‘development’ (there aren’t many jobs attached to solar farms).
Still, these brownfield sites are important to the region, and for many reasons. First, there will eventually be a severe shortage of developable land in Western Mass., although the ongoing sluggish economy has kept existing supplies virtually intact. This means that, to attract and retain companies and bring jobs to the area, brownfield sites like those listed above are a critical part of the region’s economic-development strategy.
Equally important is the fact that most of these sites are in urban areas, cities that were former manufacturing hubs and are now in the complicated process of trying to reinvent themselves as something else. These brownfield projects could provide a key piece to that puzzle.
We’re encouraged by what is happening in Pittsfield, and believe officials there are on the right track. The GE complex was indeed a center of innovation, and the transformers built there helped light up the world — literally. The Pittsfield Economic Development Authority, the entity created to redevelop the sprawling complex, has landed one tenant, a financial-services company, and is forwarding plans to build a life-sciences complex that will house companies that have moved beyond the startup stage and are looking for a place to grow.
As we’ve said many times, it is through the nurturing of small businesses such as these — rather than trying to lure large employers from other parts of the country or the world — that the region is most likely to secure more of those good-paying jobs that every community wants and needs. It may take more time to do it this way, but the results may well be more permanent.
It will take a long time — years, if not decades — to fill in the land left vacant when the GE buildings were torn down, and create a third picture to go with the two on page 42. The same is true in Chicopee and Indian Orchard, and it may likely be the same if a casino isn’t built in East Springfield on the Westinghouse site.
But with some patience, imagination, and, yes, the kind of innovation that made these sites so important to the region 50 and even 100 years ago, they can again be key contributors to the area’s economy.
And maybe give some of these cities a new identity.