The 1980s supermodel Linda Evangelista once said. “We don’t wake up for less than $10,000 a day.” That seems to be the motto of American bankers, (save Citigroup’s Andrew Hall, who needs 40 times that much per business day). Not only do they not care about things banks used to deem as important, like playing a role in their community, now they can’t even be bribed to go along with pretending that they care.
The latest object lesson is the complete lack of interest in banks in a new SBA lending program. The banks say the loans are too small and too much trouble to be worth the bother, even with a Federal subsidy. I gather it doesn’t occur to them if banks don’t lend to small businesses, which have been the only engine of job growth, we won’t have much improvement in unemployment, and if unemployment doesn’t fall, we won’t have a much in the way of recovery, and if we don’t have much of a recovery, they won’t have much of a business. The banks want to be a free riders on someone else doing whatever it takes to get the economy back in gear.
From the New York Times:
Small-business owners hoping for some assistance of the sort given to the nation’s biggest banks applauded when the Small Business Administration unveiled a lending program in May….
But the program is off to a slow start, and many banks, including some of the largest, appear reluctant to take part.
With $255 million, the program is prepared to make about 10,000 loans of up to $35,000 each. As of Monday, the agency reported that only 1,127 loans, totaling $36.8 million, had been extended.
While the agency maintains that the program is on track, some in the banking industry say the banks are moving slowly because they have little incentive. “There’s not a lot of profit motive in a $35,000 loan stretched over six years,” said Paul Merski, chief economist for the Independent Community Bankers of America, a trade association.
Bob Seiwert, of the Center for Commercial Lending and Business Banking at the American Bankers Association, says “stringent underwriting standards” will require as much work as larger loans, making these even less economical….
Yves here. This is one of my pet peeves. Can no journalists be bothered to point out that the Community Bankers of America and the ABA are lobbying groups? They are hardly the place to go to get an objective read. You are sure to get the heaviest spin there. Lobbyists should clearly be branded as such. Back to the article:
Part of the problem for borrowers like Mr. Rusin may be that Congress restricted loan eligibility to companies that are simultaneously struggling yet viable. That means the business must face an “immediate financial hardship,” meaning a 20 percent reduction in a critical operating number, such as revenue.
But the company, which has to have been in business at least two years, also has to have shown positive cash flow, if not an actual profit, in one of the last two years. It also must do a two-year cash-flow projection to show it can repay all its obligations.
The effort required to verify all of this probably explains why those banks that are participating in the program are lending primarily to existing clients. “From a financial perspective, it really is a loan that makes sense for an existing customer,” Mr. Merski said. “You’re not going to have to put out a lot of resources to do a very costly underwriting. You know the business.”
Yves here. That explanation does make some sense….up to a point. Why shouldn’t a bank want to acquire new customers? That does cost money. You expect customer acquisition to be less profitable initially than an existing relationship. It is a spurious argument to say a new customer is less profitable than an existing one. So? You banks are telling the public you are against growing? Chase seems very eager to attract small business accounts. What do they see in them that you don’t?
That is what is troubling about this piece. We a formula for these stories. Sad anecdotes from struggling individuals or businessmen. Defensive “we are really on track” pronoucements from the officialdom. Industry lobbyists saying the program is stupid because anything that tries to make their industry change behavior is defined to be stupid. And there is no probing of the economics or the justification for the program’s shortfall.
Why should they lend money to small businesses when they can trade and make a killing in their capital markets divisions? It's all about Casino Capitalism and the banks are collecting huge fees on trades and spreads. They do not care about small businesses.
The most telling structural element in these disparate tales to me is this: we do not have government officials 'selling' the program. Instead, any defense of the concept is left to those who want to avail themselves of the service—with full rebuttal time and more given to 'industry' practitioners who deride the notion. Right. Government won't defend its own putative policies. In print. But said print and broadcast media are mooorrrrrree then ready to offer a platform to self-interested parties to discuss why said policy/program is a non-starter. So what's the public to think? "Dumb idea costing me money."
Not to talk conspiracy or anything, but this all stinks. Of all the stimulus things the Federal government could and should do, supporting small business would be one of the most essential, with the greatest economic and employment bang for the buck. Instead, we can barely get the Guvmint to even admit that they are 'in the business' of supporting small business. Let alone actually, y'know, delivering the goods. I get the feeling that their heart isn't in it; how about you?
It was you who told me that banks extend credit to credit worthy borrowers. Credit worthy means having the cash flow to meet the obligation, there are standard ways to measure that, and to have the collateral to secure the credit. They prefer real estate. It’s what they know. A loan officer doesn’t have to justify his decision to his superiors if he can show the loan to be so collateralized. And the volume is such that a portfolio of those loans can be commoditized. Though one might assume a govt. guarantee to be intrinsically more secure than real estate, SBA guarantees have never been among preferred securitizations. I assume it’s something to do with the spreads. Mortgage business must be better. Why put capital into a low interest loan?
But most importantly is the lack of training or ability to evaluate a business proposal. Yeah, that’s hard work, but somebody’s got to do it. Banks – loan officers – can’t do it. Wrong background. Wrong training. Wrong incentives.
On the other level, big business, the entire focus is on maintaining your attraction to capital – the rating agencies’ AAA lender list. And all kinds of shenanigans go on in accounting depts. to maintain that position. It’s there they hire the best & brightest plus there are conference calls, golf outings, investor relations depts., etc. But when you hit that threshold the cash comes in. Big time. It’s hard to spend all that money without getting into things you shouldn’t. I’m reminded of the way Nardeli lost $2b at HD. He got a $200mm bonus and went to Chrysler! Hall’s $100mm bonus might be in line! The truly astonishing thing is the way these people land on their feet.
But back on point, the issue isn’t just small business’ importance to employment and recovery. In an age where production is out-sourced and commoditized, margins on that production can seldom fund innovation. And there is a gaping problem in the capital formation process which is necessary to funding that innovation. Nobody has the right incentive. The cash going into those big guys is rent-seeking money. They don’t care a thing about next quarter. So, the accounting depts. accommodate them. And eventually it gets written down – or not.
Hmm….What was that again about having to save Wall St in order to save Main St?
"You must have heard us wrong."
Oh, my mistake.
The banks are intent on surviving. The treasury needs a collection of banks to bid on its debt offerings. Banks have a lot of worthless loans and paper that if the market value of these assets were recognized, the banks would be bankrupt. So, the banks get cosmetic money from the government. Holding that cosmetic from the government as excess reserves, for which they are paid interest (.25%), they are borrowing short at roughly 0% and lending long at 3.5%. Now given the washes in the accounting it appears that the banks are not lending, especially to small businesses.
If I was a bank with a lot of worthless asets, I would do the same thing. The Treasury and the Fed will quietly (not public) affirm such action. The Fed and the Treasury see the problem as being the preservation of the fractional reserve fiat currency system. They see employment as a problem at the margin.
It would be nice if the banks could lend more, but then that would simply be a continuation of an important cause of the recession.
The core problem here is borrowing more than we can repay!
Leo Kolivakis and Siggy cover it. By the way, the US banking industry IS bankrupt. The fact that lack of price discovery allows them to "camouflage" this fact is another story.
Banks are VERY rational economic "agents": They do their cost-benefit analysis and that's it. It seems the cost of lending to small business exceeds the benefit. And bailout culture has changed the rules in a very fundamental way as well.
Yves: Yes indeed, if banks do not lend to small business, the hope of recovery is nill and one would think that "rational" banks should get this. The problem is one of game theory: INDIVIDUALLY, each bank seems to think it is too much trouble to lend but they hope OTHERS will do it to restart the economy. The is thus a classic case of second best "Nash" equilibrium.
I do not want to defend banks, but some information is always missing from reporting on small business, including Yves piece. Most small business loans are real estate. Real estate sucks.
Few small businesses have a real balance sheet to borrow against. Credit lines against profits usually are granted as part of a larger banking arrangement and are both expensive and small. The exception is real estate which has collateral, which makes up the bulk of SBA loans.
Any surprises that there aren't a lot of viable SBA loans?
Real Estate should be viewed as an agent of production. To a certain degree, production tends to create it own demand. Even so, production that leads to excess supply leads to a market correction in the price of production and in that price correction there follows a correction in the price of the agents of production.
Asking the banks to lend in the face of profligate borrowing and a distorted price structure that flows out of a fiat currency is naive beyond my comprehension.
Clearly the more immediate pain flows out of repaid deleveraging. Delaying the process, however well intentioned, leads to a more serious consequence that impairs the basis of our society.
The anger being expressed is that of a middle class thatis beginning to recognize that it is being impoverished by idealogues and kleptocrats. Our society is periously down the road of becoming a two class society. When that happens, the concept of 'America' will have evaporated.
My impression is that the Government (Administration and Congress), the Treasury, and the Federal Reserve believe that our fiat currency regime is salvagable.
This Great Recession is all about a great self delusion that we can simply throw money at a problem and make it go away. If we are going to solve this problem we are going to have to face up to the fact that as a society and as a nation we are going to have to save our way to a recovery and that given the 50 plus years of profligate spending and borrowing, it going to take a long time to set the ship right.
Failing to acknowledge and deal with that which is cancer upon our society is to commit suicide.
As always a great post.
One thing though. Of course journalists should note when they are quoting a lobbying group, but in this instance, it would make no real difference. These guys told it like it is. No apologies. We don't want to loan to small businesses.
Agree with Siggy that we have to save our way to recovery, but was trying to make the additional point that those savings would have to be invested productively and that innovation is today more a function of small business than big businesses in mature industries. There is no more bell labs. What seems naïve beyond my comprehension is that we would entrust our fiat currency savings to the same banksards expecting them to roll the dice on the same tired non-productive investments and ever expect to see a return.
The banks want to be a free riders on someone else doing whatever it takes to get the economy back in gear.
Absolutely the best business to be in. I would want the same thing. Their size has made them lazy and they probably have richer sources of wealth than plain-old SBA loans.
Siggy, the only thing I'd add is the observation that the debt has shifted from private to public. As much as individuals may become savers, the aggregate behavior hasn't changed. Institutions are still equating growth and leverage.