White House Sorta, Kinda Thinkin’ ‘Bout Using TARP Money for Small Business Loans as Small Business Lenders Go Bust

The Washington Post has a pretty bizarre story up tonight. The Administration is thinking about releasing TARP funds as loans to small businesses.

Stress the thinking part. As in big-time thinking. As in long way from action. Which begs the question as to why this is a news story. Since I am of the view that pretty much every news story is a plant or a leak, at least if any semi-well run entity is involved, one then must ponder the purpose in having such an early-stage idea come to light. Is it to flush out support, or to give opponents a chance to rally?

Key bits of the Washington Post article. At the beginning, the confident tone makes it sound as if the program is on the runway, ready for takeoff:

The Obama administration is developing an initiative to take money from the $700 billion rescue program for the banking system and make it available to millions of small businesses, which officials say are essential to any economic recovery because they employ so many people, according to sources familiar with the plan.

The effort would represent a striking shift from the rescue program’s original mandate, since it would direct billions of bailout dollars toward a plan that aims more at saving jobs than at righting the financial system. Some economists estimate that small businesses, defined as firms with fewer than 500 workers, employ most of the country’s workforce.

A proposal being floated by senior Treasury Department officials calls for using the bailout funds to expand a government program that helps small companies borrow from banks at low rates to keep their businesses going, the sources said. These “working-capital” loans would come with few restrictions and could be used to buy inventory, hold on to employees and pay off short-term debt.

The initiative would bulk up the Small Business Administration’s most popular lending program, called 7(a). Lines of credit for small companies could greatly increase in size. If a firm failed despite receiving this help, the government would cover most of the losses on the federal loan, perhaps as much as 90 percent. Lines of credit act like the credit cards for companies — short-term, revolving debt used to pay a variety of immediate expenses.

But then, four paragraphs further down, we get to this:

Administration officials said discussions are in the early stages and that no plan is expected before the fall. Concepts now on the table may evolve or be scrapped altogether, they said. No dollar figure has been set.

But discussions about the plan have reached the highest levels of the government. In a meeting at the White House last week, Treasury Secretary Timothy F. Geithner expressed support for the proposal, but National Economic Council Director Lawrence H. Summers was more skeptical. Neither has made up his mind, officials said…

The debate over the proposal has centered on whether taxpayers would be protected and whether banks that make these loans to small firms would lower their lending standards if the government promises to cover loans that go bad, according to participants present or briefed on the discussions.

Yves here. Hhm. We didn’t hear much on worries about losses when it came to propping up housing prices. Clearly the National Association of Realtors and of course the banks are better at lobbying than small businessmen, who are not exactly a force to be reckoned with on K Street. Back to the story:

Administration officials want to prevent small businesses from closing and adding their workers to the growing ranks of the unemployed. Some officials say small companies are key to reversing the soaring unemployment rate, which has hit 9.5 percent, the highest since the early 1980s. Small businesses employ 60 percent to 80 percent of all workers, according to some economists, though others say those figures are too high.

Yves again. It is a little late to be waking up to that concern. We pointed out that American Express had entirely shut two small business lending programs last December and this January, when it was the first credit card issuer to target small businesses and had a good sized program. Banks have been cutting credit lines on credit cards, a key source of small business funding, for what, at least a year? Advanta, focused solely on small business credit cards, shut down all credit extension as of June. The damage of credit curtailment is swift for businesses that need it. Yes it is better to do something late than never. but fall (even assuming this gets up and running in the fall, fall was the timetable for merely moving this forward) is way way too late. Many small businesses have large Christmas sales, which requires them to commit to inventory in advance. which (I presume) is summer at the latest for manufacturers, fall for retailers. The failure to consider timing suggests the designers have limited real-world input, which is not a good sign.

The further you get into the story, the more apparent it becomes that this program will never see the light of day, or if it does, it will be more PR than substance:

Aiding small businesses could be a gamble because they have a poorer record than large corporations when repaying loans; it would be the riskiest government investment so far under the bailout plan. Officials are trying to design the program to exclude companies that are likely to fail even if they received federal aid, people with knowledge of the discussions said.

Some administration officials hoped to present several proposals to President Obama last week. But the meeting has been put on hold indefinitely while the Treasury conducts a deeper analysis of the problems afflicting small companies.

Yves here. I cannot believe we have this “corporations have a better odds of repayment” twattle. Did they put AIG and Citi in their sample?

This story at the Wall Street Journal. “Major Lender Faces Crunch.” may explain why this not-likely-to-be-a-program idea is being put forth now. CIT, which lends to nearly 1 million small businesses, is going down for the count. Let’s see, how many people might those businesses employ? And how many really need that credit from CIT?

From the Journal:

CIT Group Inc., a lender to almost a million mostly small and midsize businesses across the country, is preparing for a possible bankruptcy filing after so far failing to win a government guarantee to help it borrow, said people familiar with the matter….

The mere hiring of bankruptcy counsel doesn’t mean a company will actually make a bankruptcy filing. CIT has been pressing its case “with increased urgency to the government,”…

CIT has a $1 billion payment due in mid-August and it is unclear the company “will be able to handle that,”…. if CIT did file, the consequences could be considerable, because the 101-year-old company, as of March 31, had $68 billion of liabilities…

The New York-based lender has been stuck for months in a bureaucratic tangle over government assistance. It received $2.3 billion from the federal Troubled Asset Relief Program in December, after winning approval to become a bank holding company. But CIT has so far been unable to access another federal program, one that helps banks and thrifts sell debt with government guarantees. Access to that program would enable CIT, which has a below-investment-grade, or “junk,” credit rating, to sell bonds at a low interest rate….

A bankruptcy filing by CIT could affect thousands of small borrowers, from Dunkin’ Donuts franchisees to restaurant owners and clothing retailers. “If CIT were to go away, it would take a financing option away from franchisees who want to buy stores or expand their networks,” said Kate Lavelle, chief financial officer of Dunkin’ Brands, the which owns Dunkin’ Donuts and has had a 50-year relationship with CIT….

The FDIC has been considering CIT’s application for a federal debt guarantee since January and hasn’t reached a decision. The agency is concerned about CIT’s deteriorating financial position and operating losses.

Yves here. At the very end of the piece comes the real issue:

One problem with getting more aid is that the government has made it clear it doesn’t see the company as a systemic risk to the financial system. The people familiar with the matter said the government feels that other lenders, such as J.P. Morgan Chase & Co. or Deutsche Bank AG, can handle many of the same loans that CIT specializes in, such as loans to small retailers or rail-car leasing firms.

I am not saying CIT should be saved. But can someone tell these clowns that increasing the concentration at the big end of the financial system increases systemic risk?

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  1. "DoctoRx"

    Re the question early on as to why the Administration would let it be known that they are "thinking" about TARP-ing small business, perhaps it's simply good PR in their minds.

    Re the final sentence about increasing concentration, isn't that what "Goldman Morgan etc" want? And doesn't the Bushbama continuity Administration(s) comply w what Big Finance wants?

    The Masters of the US/Universe don't give a whit about systemic risk as mere mortals think of the term, IMHO. More promises (i.e. debt) or laws will handle every problem. Just so the rich get richer. Darwinian finance.

  2. Richard Kline

    The fact that 'a meeting at the issue where Big X said maybe yes while Big Y said maybe no' has got to be a plant: this is a trial balloon at best, or a spin play more likely.

    To me, the real issue is a political one, with practical considerations far to the rear. Huge sums have been made available to corporate fascist oligarchs with trivial accountability. This has played badly with the public. Concurrently, a _tenth_ as much has been made available to 'the Stimulus program,' much of which is slow to deploy, and has as yet scarcely even been seen. This has played more badly still with the public, and given That Other Party in Congress a gimlet talking point. Hmmm, "What to do, what to do?"

    "I know: let's pretend we're gonna make some of that oligarch slush fund available to the Chuck E. Cheezit's with their ol' noses to the grindstone."

    "Better and better: We can go back to Congress and argue that since they won't vote for more stimulus, they should vote for more TARP. Put That Other Party on the back foot."

    "Right: I'll ping the usual shillss, and we'll get a float out on this for the Weekend news. Are we hot shit, or what?"

    Not. Bama and Co. don't give jack for small business, and they won't see a nickel from any source. They should. It's been my proposition for two years that the Guvmint should charter a Small Business Lending Corp., so they could work around the rotting zombies like C who have intermediated themselves in the country's cash flow but who can now no longer deliver, and thus use public wherewithal to keep small business going while cutting out the oligarch's tax/rake off. But this will never, never happen under Bo Prez: He's a company man, after all.

  3. Timo @ Work

    Ouch, that article seems to have been written on a proper "spin cycle". So, the writer nicely casts doubt over the importance of small business for employment in an economy by quoting the usual unnamed economists and stating that they think the "60 to 80 percent" figure "might" too high. That is a bit odd given that several other statistics suggest that well over 90% of people are employed by small to medium sized businesses (sorry, no credible source for this at the moment but the figure has been around longer than Methusalem). Mix in the fact that large companies have been the most keen to export jobs to lower-wage economies, I would really like to see how the unnamed economists arrive at the suggestion that fewer than 60%-80% are employed by small businesses.

    I would also suggest that the "small businesses are less likely to repay their loans" assertion is another red herring. Yes, small businesses might well be harder hit by the recession/depression simply because they do not have a cushion as big as a big company has. This is especially true given they can't go to the goverment and suggest "give us money or else", which seems to be the commonly accepted measure of a financial cushion at the moment. Nevertheless, most sorts of small business finance do come with a lot of strings attached – even if you've got an LLC, lenders do often require the owners of the company to personally guarantee the debt so you would think that the overall recovery rates on bad loans would be at a reasonable level, at least compared to the usual systemic risk black holes and the other discounts that taxpayers seem to so willingly grant to those "systemic risk" companies.

    If I were ever more of a cynic, I would almost start to believe that this article could be construed as some pre-emptive spin to prevent other companies to get their snouts in a certain well-filled trough. But that would be as far fetched as banks lending money to people who clearly couldn't repay them and then selling on the debt, wouldn't it?

  4. skippy

    Whom, is living off whom, have the blood suckers, realized a flow problem, coagulation to their life support.

    Skippy…Successful parasites don't kill their host eh.

  5. Bruce Krasting

    I agree with you that there is no 'leak' of news from D.C. This story is a trial balloon to see what the reaction to a plan like this is.

    My view: Laura Tyson dropped a bomb on Tuesday with her comment that, "we need a second stimulus plan". I do not think even Obama could get a second stimulus through right now. So re-use the $150b of TARP money that has already been funded by Congress. They could probably get away with that and it could be spent very quickly. It would be advantageous to get this up and running by September so that some checks could be out there by November, just in time for some important off year elections.

    On CIT. Based on the price action in the bonds this company is not going to make another week. It is a pretty big deal as there is 70+bil in liabilities. This does not meet my definition of 'too big to fail' but it is pretty close. This one is not going to go down easy.

    There is a very small private market for financing hard assets for small franchise owners (Dunkin Donut, etc.). The deals I have seen typically have a two to one asset coverage but no personal guarantee. A few years ago these were being packaged up with a coupon of 8-10% and a four year payback. Those numbers have now moved to 15% and one year deals. There are no takers.

    In the next year or so a tremendous amount of this type of ST debt against long assets is coming due. There is no roll over money so there will be lots of defaults. The Administration must be aware of this. There is no easy solution. So bring on the recycled TARP dough.

    We have heard a million times of the critical importance of the small business owner in our economy. It would appear that there is another leg downward in front of us.

  6. X

    "Beg the question" is a phrase with a technical philosophical definition that is often misused in the media. Or rather always misused since I don't think I have ever seen it used correctly including this piece. It does not mean what everyone seems to assume it does, i.e. somehting like "a natural followup that should be asked". Question begging is a logical fallacy involving assuming something that should be proven by argument. It is similar to circular reasoning. No offense intended but the phrase is becoming so common as to almost be cliche, yet it is never ever even used correctly. The safest general rule to avoid misusing it is to never utter the phrase unless you have a philosophy degree.

  7. ronald

    The government via the SBA already provides dollars to small business which Obama beefed up several months ago. Greater main street government funding will be coming next spring in time for the election cycle.

  8. marsha donner

    My guess…….the gov't will have the banks administer and make the loans so the banks can reap the profits and gov't will guarantee against failure (all off the books of course). AGAIN, head they win..tails they still win; taxpayers on the hook for any losses.

    And by taking banks off the hook to lend to small businesses because the gov't is doing it as they were expected to from the 1st/2nd and 3rd bailouts…..they can use their money to continue to manipulate the markets for gains and profit..build the bottom line and show that the markets are up. After all, markets being up is an indication of progress, success and green shoots and a public confidence booster.

    Or they might pick just a couple banks to 'run and administer' the program…like GS or MS and pay an administration fee on top of the interest profits that will be guaranteed against losses of course.

    Why is this normal, legal..considered ok and moral?

    I quess if they use the SBA for this program they will be accused of growing gov't and doing what private (banks) should do. ironic really.

    Why don't we hear more from other banks who are being put at a disadvantage daily as the gov't continues to pick big winners in all this?? (oh, the smaller banks don't have a big voice in the MSM is probably part of the answer to this question.) and the taxpayers are too fragmented and dealing with day to day to even notice…not that they have a MSM source to help educate us…..and congress, in the bag of course along with the economic leadership of the administration. OMG!!

    Michael/Marsha Donner

  9. marsha donner

    PS it will fly in some form because it is a direct pass through to banks or some banks at least. risk free loans, dah! plus administration fees on a no bid basis, dah!
    how can summers and timmy help their friends? here is a great way..through them some risk free business opportunities.
    seems a no brainer really.

  10. DocG

    How long will it take economists to realize that there are NO good solutions to the current mess? If the gov't supports the largest institutions at the expense of the smaller then it increases systemic risk, for sure. But if it doesn't support the largest institutions to the fullest extent of its ability, then the systemic RISK already inherent in them will morph into system FAILURE, pure and simple.

    As I see it, there is no future for our current financial system, it must be allowed to collapse of its own weight.

  11. FairEconomist

    If the administration was concerned with being fair and doing what was best for the economy, they'd do with CIT what they've done with GM and Chrysler – BK the company, hand investors the losses they've earned, and move the functional, valuable operations to a new, potentially viable company.

    Sadly, companies that play important roles in the real economy don't receive the coddling well-connected banks do.

  12. NOTaREALmerican

    Re: But can someone tell these clowns that increasing the concentration at the big end of the financial system increases systemic risk?

    I think "the clowns" know this. But, if you're a socialist/fascist clown, do you want lots of small CIT's or one HUGE CIT. The answer is obvious, which is why these guys (and George Bush) aren't clowns.

  13. earthypoet

    I’m left asking myself why the concept that strength lies in the foundation hasn’t been considered when deciding where to focus bailouts and stimulus efforts. In our economy the foundation is small business and if that is weakened, the whole thing will come apart. The premise of helping only those businesses that are “Too Big to Fail” should include helping those businesses that are too important to fail.

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