The Disaster That Is The Obama Small-Business Plan

By Marc Tracy

Soon after President Obama and his administration launched their initiative to get credit flowing again to small businesses, we took issue with the plan. For one thing, we felt--and feel--that the true problem facing small businesses, and particularly truly small businesses, is not credit but consumer spending and the economy generally; and, therefore, that the $15 billion that is to be used to purchase securitized small-business loans on the secondary market might be put to better use as further stimulus, for example.

But broader has been our concern that, as with previous efforts at greasing banks' credit wheels, such as the Troubled Asset Relief Program, the true problem is that the federal government has chosen not to compel lending as a condition of receiving government help. No wonder, as we pointed out only last week, that four financial institutions that together made up 4% of all Small Business Administration-backed loans last year have essentially shut off such loans this year. No one has told them--and "they" include Bank of America, among the absolute largest benefactors of taxpayer largesse--that they must do otherwise! This is not a problem we would have if small-business lending were a condition for receiving bailout money.

Well, now that particular chicken has come home to roost. It turns out, the Washington Post reports today, that the Obama administration's small-business credit plan is essentially D.O.A. (Karen G. Mills's morning just got a lot worse.) The problem is that all the major holders of small-business loans are not agreeing to the conditions that the plan anticipates--accepting limits on executive pay and new government oversight, primarily--in exchange for the federal goverment's buying up the loans. Actually, the conditions exist because the $15 billion is coming from the old TARP fund (remember that?), and those conditions are Congressionally tied to the use of that money. Anyway, now the current holders of the loans--who are middlemen who buy the loans from lenders and repackage them for sale as securities--say: no deal.

Um, ooops.

Specifically, the six largest middlemen, who together hold 80% of all such loans, have said it is more worth it to them to hold onto the loans (and continue to collect on the non-defaulted ones' interest payments, after all) than to sell them in exchange for those onerous conditions. Sounds logical to us.

Indeed, can you blame them? Dan Ford, the community banker we spoke with recently, refused TARP money because it would have subjected his bank to any future conditions the government decided upon. And whaddya know--yesterday, four banks became the first to return TARP funds they had received, for similar reasons.

So now the administration is apparently scrambling to salvage this. Some of the ideas are just crazy and convoluted enough to be for real. One proposal envisions a separate vehicle set up to buy the loans and then sell them to the federal government. This would create the same end result, with the loans off the middlemen and with the feds (although, we would think, at least slightly more expensively than the current proposed way), but would get around, if in only the most technical and legalistic and not entirely honest way, TARP conditions because it wouldn't literally be the federal government that was using the money directly (it would be the vehicle, rather than the middlemen, that would be subject to TARP conditions).

Other ideas have included some sort of public-private partnership (these are really zeitgeist-y!), partnership with the Federal Reserve (which is not subject to the pesky limitations imposed by Congress), or the use of funds from the stimulus package (because why should that money be spent on actual stimulus?).

We'll discuss this further as we learn more about how this screw-up happened (apparently the Treasury Department people knew all along it was a possibility) and about how the administration will respond.

For now, we leave you with the following thought: what if, instead of all of this, Obama, Secretary Geithner, and whoever else had announced that the $15 billion, the 2% of the TARP fund that the goverment has so generously decided can be used to help small businesses, would go not to more financial institutions in order to do, ultimately, whatever they want to do with it but instead was going to go directly to small businesses, through the SBA, except for the parts of it that were going to beef up the SBA dramatically so that the agency could administer the loans and could be transformed into the permanently Cabinet-level department it probably deserves to be?

Well, for one thing, we wouldn't have these problems to worry about. This is what we meant in saying that that particular chicken--the federal government's continued refusal to compel any sort of action for the public good from the banks that are, at this point, quasi-wards of the state--had come home to roost.

Comments (3)

April 1, 2009 1:25 AM