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?