Surge in Loans is Unlikely From Small-Business Plan
From: "Surge in Loans is Unlikely From Small-Business Plan", The Wall Street Journal, Marshall Eckblad, 1/29/10
President Barack Obama's plan to divert $30 billion of federal bailout funds into new small-business loans will prop up thousands of struggling entrepreneurs but is unlikely to break the lending logjam.
"This is a good start. But it's a small start," said G. Michael Moebs, chief executive of Moebs Services Inc., a Lake Bluff, Ill., research firm specializing in U.S. banks.
The $30 billion in Troubled Asset Relief Program funds targeted by Mr. Obama represent about 4.3% of the $700 billion in small-business loans held by U.S. banks and savings institutions, according to the Treasury Department. As of November, the 22 largest banks that got capital infusions through TARP had $257 billion in small-business loans, the Treasury said.
Gene Sperling, a counselor to Treasury Secretary Timothy Geithner, said, "The president's plan will mean $30 billion in capital for smaller banks, which has the potential to leverage a far higher amount of actual new small-business lending."
Many details of the plan remain unclear. In one scenario being considered, the U.S. government would let banks get an amount equal to 3% to 5% of their assets. Required dividend payments by the banks would be reduced if they substantially increase their business lending.
Mr. Obama is likely to face resistance in Congress, especially from Republicans. "It's just another use, maybe a good use, but just another use of TARP funds that wasn't originally intended," Sen. Richard Shelby (R., Ala.) said Thursday. The Senate Banking Committee's top Republican said federal officials should push for the return of all TARP funds before discussing any new uses of the money.
Rep. Nydia Velazquez (D., N.Y.), chairwoman of the House Committee on Small Business, said lawmakers "need to be open to new approaches," since many small businesses "still can't find affordable loans." Pending legislation that would allow the Small Business Administration to make more loans directly to small businesses would be a more effective way of helping companies that are struggling to find capital, she said.
The banks referred to by Mr. Obama in his first State of the Union include more than 7,500 financial institutions with assets of less than $10 billion apiece. Lenders in shaky financial condition likely wouldn't be allowed to participate in the program.
According to a Senate report last year, American businesses with fewer than 20 employees have suffered steeper job losses during the recession than bigger companies. A loan-induced jolt caused by steering TARP funds to small businesses could help Mr. Obama as he struggles to reverse his recent political slide.
Some bankers said loan volume isn't likely to surge until more consumers open their wallets. "The truth is small business is largely consumer-driven right now, and consumers aren't spending," an executive at one regional U.S. bank said Thursday. "The biggest thing is to get jobs growing, which will increase consumer spending."
Even if banks flock to the $30 billion, they could wind up deepening their exposure to loan losses. For example, Carol Lundgren said a loan would help Infinity Stone Corp., the Portland, Ore., granite-countertop manufacturing and installation company she owns with her husband, ride out the economic slump. But the company already has missed two lease payments owed to PNC Financial Services Group Inc. The couple laid off 26 of their 48 employees, and revenue shrank to $1.6 million last year from $3.2 million in 2007. Business is starting to rebound, but "it might be too late" for a loan to make much of a difference, she said. "There's a point in time where we get too discouraged." PNC declined to comment.
Separately, Mr. Obama will travel to Baltimore on Friday to flesh out details of a proposed $33 billion tax cut to spur small businesses to hire new workers or boost wages. Employers would get a $5,000 tax credit for every net new worker hired this year and reimbursement for Social Security taxes paid when they increase wages.
Though all businesses would be eligible, the Obama administration would focus on small companies by limiting the maximum credit to $500,000 per employer. The tax breaks wouldn't be available to firms that reduce employment or payrolls this year, or those that replace full-time employees with part-time workers. A business wouldn't be allowed to claim the credit by simply changing its name.
—Damian Paletta and Emily Maltby contributed to this article.
Written By: rnybeck
Date Posted: 3/3/2010
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