By: David Cho
April 5, 2010
In March 2009, President Obama vowed to address the drought of bank lending to small companies and announced an initiative to use $15 billion from the federal bailout to unfreeze the markets that finance Small Business Administration loans.
The program is one of several small-business lending initiatives developed by the administration that have struggled to get off the ground. Meanwhile, lending to these companies has fallen. Federal data show that lending to small businesses by community banks declined by about $8 billion, or 2 percent, between September 2008 and September 2009.
Administration officials say helping small businesses get credit remains a top priority. It is a critical component of the strategy to address the nation's high unemployment. More than half of all U.S. workers are at companies with fewer than 50 employees. Without access to loans, many of these firms are laying off workers or shutting their doors altogether.
Obama's economic team has put forward several major programs to increase small-business lending.
The first, unveiled in March 2009, focused on helping the SBA get loans into the hands of small businesses. This initiative proposed spending $15 billion to aid the markets that provide the financing for SBA loans. But in the months after the government's announcement, these markets recovered on their own, administration officials say. As a result, there was no need for a more expensive program.
Officials at the Treasury Department decided to launch a tiny $21 million pilot version of the program last month, just in case SBA lending falls back into turmoil. If that happens, the Treasury could easily ramp up the initiative now that it is operational, officials said.
While the financing markets for SBA loans improved, virtually all other kinds of small-business lending remained troubled.
To address this broader problem, the administration in January proposed taking $30 billion from the $700 billion Troubled Assets Relief Program and offering that money to banks that lend to small businesses.
The aid would be given to these institutions at favorable annual interest rates, as low as 1 percent. The banks must show how they are using the funds to help small companies.
Administration officials also asked Congress to drop conditions attached to bailout funds, such as limits on executive pay, in order to encourage banks to take the money. They noted that hundreds of smaller banks last year did not take federal aid because of the stigma and the conditions attached to the funds.
It is unclear, however, when lawmakers will take up the issue. Administration officials said they hope a bill could pass Congress before Memorial Day. But they acknowledged that there are no guarantees given Capitol Hill's busy agenda. The administration also has to convince skeptics, on both sides of the aisle, that this program will attract enough banks to increase small-business lending.
Some Democrats prefer to expand SBA programs rather than use bailout money to help banks lend to small businesses. Republicans object because they say that any money leftover in the TARP should go toward the reduction of the nation's deficit rather than new programs.
At the same time, industry officials said the program might not persuade lenders to loosen credit for small businesses. Many banks have a lot of money in their coffers, but have become cautious about lending in the wake of the financial crisis. In addition, regulators are urging banks to lend carefully, industry officials said.
Other bank lobbyists are pressing the administration to open the aid program to weak banks. But administration officials do not want to turn it into a bailout. Their aim is to give the money to healthy banks that are in the best position to increase lending.
The development of the Treasury's small-business initiatives may soon be suffering a blow as Gene Sperling, a senior counselor to Treasury Secretary Timothy F. Geithner and the agency's assiduous point man on the issue, is expected to leave in coming weeks to take the No. 2 post at the White House's Office of Management and Budget. Treasury officials appeared unclear as to who would shepherd the small-business efforts at the agency if Sperling leaves.
Sperling declined to comment on his possible departure. The OMB's press office did not return two phone messages.