Posted by: John Tozzi on February 26, 2010
Back in December I wrote a story about a Michigan program to help manufacturers trying to diversify into new industries get the loans they need to do that. The $13.2 million state fund ran out of money in four months. Now three Michigan Congressmen want to roll the program out on a federal level with $20 billion in TARP funds.
The Manufacturing Modernization and Diversification Act would draw on $20 billion in TARP funds to let states create their own versions of the Michigan program. The bill was introduced Feb. 22 by Reps. Sander Levin, John Dingell, and Gary Peters, all Michigan Democrats.
The state program in Michigan was designed to aid manufacturers that face a huge barrier to borrowing: the value of their collateral — the plant, property, and equipment that would typically secure a loan — has plummeted through no fault of their own. The recession put a glut of industrial property and equipment on the market. If borrowers default and their lenders have to sell that collateral at auction, they’re going to get much less than they would two years ago. So lenders understandably want more collateral.
The Michigan program addressed that by depositing cash from a state fund directly into banks as “collateral support” to make up the shortfall for the borrowers. Wolverine Metal Stamping was in a typical situation:
To buy the robots, steel, and presses it needs to diversify, Wolverine had lined up a $2.5 million loan from GE Capital as of September 2008. While a spokesperson says GE doesn’t comment on individual credit decisions, Wolverine’s chief financial officer, Bruce Weber, says GE backed out the day after Lehman Brothers collapsed. For over a year, he says, “we’ve been trying to get the exact same financing done”—but during that time Wolverine’s machinery had depreciated by 20%. Meanwhile, the company booked $10 million in new business with such appliance makers as Whirlpool.
In the Michigan program, the state earns interest on the cash it deposits with lenders. Banks don’t have to loosen their underwriting standards and they bolster their capital with more cash on their books. If borrowers default, taxpayer money is only at risk after the other collateral has been liquidated.
Ned Staebler, vice-president for capital access at the Michigan Economic Development Corporation, told me in December that by his estimates Michigan companies created or saved 2,000 jobs through the first $10.4 million in collateral support the fund used to help them get loans. A $10 billion national program, he estimated, could create or retain 1.5 million to 2 million jobs.
It’s hard to tell how realistic such an estimate is. And it’s also hard to say whether the House bill has any chance of becoming law. (Among other barriers, the politics of using remaining TARP money for new purposes has been tricky.) But of all the proposals that have floated out of Washington to help small businesses access credit, this one directly addresses the falling asset values that have kept some manufacturers from getting loans to diversify or expand.