The Administration offers a package of help for small businesses, but the program carries some risks for Uncle Sam
In a move that took even some of his allies by surprise with the timing, President Barack Obama on Mar. 16 unveiled a package of measures aimed at boosting lending to small business by freeing up the frozen markets for credit that serve the nation's entrepreneurs.
With Treasury Secretary Timothy Geithner by his side, Obama told roughly 200 small businesses representatives gathered in the East Room of the White House that he would commit $15 billion from the Troubled Asset Relief Program (TARP) so that the government can purchase loans backed by the Small Business Administration from the banks that have originated them. The moves come on top of earlier Administration efforts to ease the strains on small business lending. As part of the stimulus package, the government agreed to increase the guarantee it provides to banks on SBA-backed loans from the current 75% to 90%, as well as temporarily reducing some fees linked to Small Business Adminstration loans.
The idea behind the moves? To get the once vibrant secondary market for SBA-backed loans going again. President Obama told the assembled crowd that he had come to realize that without an additional boost to get the securitization market started, the earlier measures to increase lending wouldn't be enough.
New Reporting Requirements
As with other parts of the financial sector, the secondary market for SBA-backed loans has shrunk to a fraction of its former size. That's meant many banks have been forced to keep earlier loans on their books. As a result, they don't have new capital with which to make new loans. By buying up many of those loans from current lenders, the Administration hopes to free up capital so the banks can make new loans to small businesses.
Now, the President said, "any lender that provides SBA small business loans will have a buyer for those loans."
But it's not all carrot: The day's event came with a mild stick as well. Geithner also announced that Treasury will increase the reporting requirements on banks to tabulate the lending they offer to small business. The top 21 banks receiving federal funds will now be required to report their lending to small businesses on a monthly basis, and Geithner said he will push bank regulators to require the rest of the banking system to provide quarterly reports on small business lending. The hope is clearly that more public scrutiny of their records will lead to more lending; the threat, just as clearly, is that they will be made to do so if they don't improve small business lending voluntarily.
"I want to deliver a clear message to our nation's banks," Geithner said before the President spoke. "The government of the United States has put in place extraordinary protections for the banking system … so that they have access to the liquidity they need. We need you to put that assistance to work for the American economy."
Scoring Political Points
Small business owners and their representatives were clearly happy with the moves.
"There were two things I liked: the help for the securitization markets, and the President's call to make the banks report how much lending they are doing," said Keith Ashmus, a Cleveland-based attorney and chairman of the National Small Business Assn. "We are seeing business after business with a history of promptly paying their bills just get their credit lines canceled." The new moves should help ameliorate some of those pressures, he added.
Congressional allies were also quick to back the measures. "The financial crisis has hit small businesses where it hurts the most—drying up access to capital as banks are becoming more hesitant to lend," said Senator Mary Landrieu (D-La.), chair of the Senate Small Business and Entrepreneurship Committee. While the frozen secondary market for SBA-backed loans has discouraged new lending to small businesses, the Administration's plan "will allow banks to leverage existing SBA loans to provide new loans to entrepreneurs looking to grow and create more jobs."
At the same time, there's no question the move made for good politics—something the Administration sorely needed in the face of growing questions about its economic priorities. Several of the attendees said they received calls late Friday afternoon and were asked to attend the quickly scheduled meetings. The Administration faces a growing populist backlash over criticism that too much of the bailout efforts so far have focused on big banks, insurers, and other large companies—a backlash fueled even more by the fury over revelations that executives at insurer AIG (AIG) could pocket bonuses of $165 million despite the company having received some $170 billion in government aid to remain solvent. To turn that fury around, the White House not only needed to hit back hard at AIG—something the President also did, with an aside promising that the Administration will take all legal measures possible to get those bonuses back—it also needed to make clear that it isn't just Wall Street that is being helped by the Administration's efforts.
Getting the Message
Congressional allies and others had been urging the President to step up efforts to help struggling small businesses. In a meeting Mar. 10 with 65 members of the Congressional New Democrat Coalition—a grouping of moderate Democrats, many of whom have close ties to their local business communities—attendees pushed hard for more help for small companies.
"I asked 'What is the government doing specifically for small businesses; I haven't heard anything," says Representative Melissa Bean (D-Ill.) the vice-chair of the New Democrat Coalition and a member of the House Small Business Committee. "We need this kind of help."
Obama clearly got that message. But if the moves were greeted warmly by small business advocates, they nevertheless raised plenty of questions elsewhere. For starters, some argue that business lending is down significantly simply because business is bad: Revenues for many companies are down, and their valuations have also fallen. In that environment, it makes sense for small business loans to have fallen off considerably.
"The Administration is putting the cart before the horse," worries Daniel Clifton, the Washington-based policy analyst for institutional broker Strategas Research Partners. "Loan demand is down; people aren't taking out as many loans because they aren't bringing in as much money. No small business loan is going to fix that."
The program also raises the risks that poor-quality loans will be made that could end up on the government's books. A critical question: How will the government manage the program without adding to the potentially large losses Uncle Sam could suffer on the loans? Already, points out Karen Shaw Petrou, managing director of Federal Financial Analytics, the SBA program suffers from a reputation for weak underwriting standards and supervision. With the government increasing the amount of SBA-backed loans that it will guarantee, the potential problems could grow higher.
"The SBA loan program has been plagued for years with fraud and waste," she says. "They are taking on terrific risks with the huge size of the loan guarantee."
Pricing could also be an issue. In buying the loans from the banks or firms that have pooled them into securities, the government will have to come up with a price that doesn't leave it overpaying. That problem has plagued the government's efforts to buy up toxic mortgage assets from the banks for months. It could be no less crucial to success with SBA loans.
Analysts also said the new program raises questions about the potential effectiveness of the separate program of up to $1 trillion being put in place by the Treasury and the Federal Reserve to get securitization markets restarted for a wide array of consumer and small business loans. That program, known as the Term Asset-Backed Securities Loan Facility (TALF) was announced in late November and is just now getting off the ground; the first funding round is expected to occur this week. SBA-backed loans were initially included in the TALF program, so market participants and analysts now say it is unclear why a separate dedicated program is needed to deal with SBA-backed loans. They worry that it means the TALF is off to a troubled start.
"The implication is they can't get people to participate in TALF; there could be a realization that TALF is going to be up running later than expected," says Strategas' Clifton. But if they don't start to get money flowing into small businesses quickly "in order to get job creation going, it's hard to see how they will get the recovery going." Clifton believes that the need to funnel help faster to entrepreneurs than would be possible through TALF, along with the political need to do more for Main Street and small businesses, may explain the speedy launch of the new program.
Loans to Strongest Businesses First
Still, backers of the program say those fears are overblown. One senior Administration official says the goal is to unfreeze the secondary market as quickly as possible, and the new structure simply gives the Administration an additional tool to do so. "This will affect actions starting today, because the guarantee is there," the official says. Moreover, pricing will be "dramatically easier" than has been the case with toxic mortgage assets, because the SBA has far more detailed data on what similar loans have traded for in the past. "This is not the super-complicated, sliced-and-diced CDOs" that exist in mortgage markets, the official adds.
As for fears about the quality of any new lending that could occur thanks to the increased government guarantees and willingness to be a buyer of last resort, the official denies that will be a problem. "We are completely confident" that the loans guaranteed will be sound and that oversight will be strong, the official says. Some who attended the White House briefing say the Administration made clear they should concentrate on the strongest companies that would normally be able to get loans. "They are saying to the banks: 'Go to the people with good credit. Start there,'" says Michael Grant, president of the National Bankers Assn., the trade association representing minority-owned banks. "We don't want to compromise on loan quality; we want to make it easier for small businesses to have the cash flow needed, but focus on those with good history."