Our Anonymous Banker Takes On Obama

By Anonymous Banker

President Obama’s small business lending plan calls for increasing the maximum size of SBA 7(a) and 504 loans to $5 million. It also would increase the limits on micro-loans. The plan would lower rates (the bank’s cost of funds) for small community banks and give them greater ability to access capital--presumably so they can lend money in the communities in which they do business. I won’t criticize the plan as mere rhetoric; not just yet. But I think a look at the relevant precedent gives one cause for the opposite of hope. More profoundly, I think there is a fundamental problem that is damning all of the Obama administration's attempts to help small business: a failure to properly define "small business" in such a way that truly small businesses--the ones most capable of helping the economy at large--are effectively aided.

It is possible that the administration's reduction of fees and increase of guarantees for Small Business Administration loans did improve those loans' position. However, other than that, previous plans to stimulate small business lending were unsuccessful. To wit:

* Early on in its tenure, the administration reduced SBA fees and increased government guarantees to 90%. It also said that the Treasury would buy $15 billion in SBA loans. But the $15 billion came from TARP money, and they couldn’t find that many intermediaries to involve themselves in the transaction for fear that they would then be subject to the government’s new restrictions on salaries and bonuses.

* The America's Recovery Capital microlending program has been an unmitigated failure. While it certainly would help many of the smallest “small businesses” weather this economic crisis, it is hard to find a bank that is actually participating in the program. They can taketh, but they find it hard to giveth some back.

* The TALF program, designed to jump-start the securitization market that is the engine behind bank lending, provided financing to buy credit card, auto loans, student loans, commercial real estate loans, equipment loans, and finally SBA loans off the banks' balance sheets. The actual figures? $21 billion were credit-card loans, $10 billion were auto loans, and a mere $580 million were SBA loans.

As I said before, though I believe that the real problem lies in how small business is defined. The SBA Office of Advocacy has some interesting stats that pertain to the matter, though they do not include the 21 million non-employer firms. Here's my summary:

5.3 million firms employ under 20 people each, and in total they employ 21 million people. Annual payroll for this group was $726 billion.

406,464 firms employ between 20 and 49 people each, and in total they emply 12 million people. Annual payroll for this group was $420 billion.

129,401 firms employ 50 to 99 people each, and in total they employ 9 million people. Annual payroll for this group was $321 billion.

99,534 firms employ 100-999 people each, and in total they employ 24 million people. This segment had annual payroll of $906 billion.

9097 firms employ over 1000 people, and in total they employ over 53 milion people, with annual payroll of $2.4 trillion dollars. More than half of that is from companies that employ over 5,000 people.

From where I am sitting, our government needs to decide where this country and our economy will get the best bang for our bucsk. It is the truly small business owner, the one that employs fewer than 20 people, that will make a difference. There are over five million of these firms across America. If only one quarter of them are each able to employ one additional employee, that would create 1.3 million new jobs, with an average salary of $34,000.

Conversely, the 9097 firms that employ over 1000 people would each need to hire an additional 142 people to have the same impact on employment across America! And it is this size company that seems to be producing the greatest number of across-the-board job losses so devastating to our economic recovery.

I’m not a statistician. But when I hear President Obama speak about increasing the size of SBA 7(a) and 504 loans from $2 million to $5 million, it makes me wonder exactly how HE defines small business, and if there is any hope for economic recovery.

Anonymous Banker is a 35-year veteran of the banking industry who has spent much time as small-business banker and credit underwriter. He blogs at anonymousbanker.com.

This post was cross-posted, in slightly different form, here.

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October 27, 2009 12:35 PM