Obama Small-Business Lending Program Could Create Billions In "Junk" Loans, Bankers Argue

Bloomberg:

President Barack Obama is on the verge of creating as much as $300 billion in credit for small businesses as bankers raise doubt about whether there's demand for new loans and how much will be repaid.

Read the whole story: Bloomberg

Comments

[Knightwolf John]

06:15 PM on 08/20/2010

your blog is very nice Well, it’s amazing. The miracle has been done. Well done.
--------------------------------

Mortgage Loans

[Fredd Greenn]

08:34 PM on 07/27/2010

wasn't the starting event of this mess making banks give loans to people who could not pay back. (Thanks Barney Frank and Chris Dodd and Fannie and freddie). This looks very similar. Have we learned nothing.

[VoteThemAllOut]

07:25 PM on 07/27/2010

To quote the article:
“Bankers say the problem isn’t scarce credit, it’s lack of demand from creditworthy firms in a weak economy. The result may be more loans given to distressed firms and higher losses. While bank regulators don’t compile default rates, the biggest lenders have charge-offs of 4 percent to 14 percent tied to small businesses. Eliot Stark, managing director at Capital Insight Partners Inc., said their credit record resembles “junk.”
“The highest demand for loans is from the companies least qualified, the companies that have really struggled because of the economic downturn,” said Stark, a former Comerica Inc. executive whose Chicago-based investment bank helps community lenders raise capital. The way lawmakers see it, “everyone’s a good borrower, and that’s just not the case.”

Does this sound similar to giving loans to anyone who could walk and chew gum at the same time getting housing loans they would never have a chance of repaying? I have to wonder what the taxpayer is going to be paying for on a ‘vote garnered for the dems’ basis?

[KOSMOCITIZEN]

03:23 PM on 07/27/2010

look who is talking about junk loans
are they for real these banksters?
two years ago their multitrillion junk loan fiasco blew-up
and everybody pays the price now, exept them?
WOW!

[FLRealist]

03:12 PM on 07/27/2010

I'm absolutely SHOCKED that the banks don't want to lend money to small businesses, instead chosing to stockpile it. After all, they earned that money fair and square - by whining to their buddies in the government who then bailed them out.

[jazgr8]

06:18 PM on 07/27/2010

It's not that the banks don't want to lend the money. Yes, they have tightened up their lending standards, but the bigger problem is the small businesses don't want to borrow it. For the most part, the small businesses that want to get a loan need it because they are in trouble from the recession, not because they will hire anybody. Banks make money by lending it and these are not the mega-too-big-to-fail banks anyway.

[socialmistfit]

02:31 PM on 07/27/2010

We should expect that this will result in some percentage of problem loans. However, it will not result in a high percentage of junk loans as all participating banks have financial risk skin in the game, and credit standards must be met and the government must approve all loans funded by the SBA guaranteed loan programs.

We need to increase credit available to small businesses accepting some risk. Small businesses are the job-growth engine for this country. The banks raising concerns are banks not participating in these government loan programs. Those that do participate (and this is most banks) fully support the legislation to increase funds to lend to small business.

The legislation is supported by most Democrats, many Republicans and many industry trade groups, including ABA, ICBA, and the U. S. Chamber.

[madatnewsmedia]

01:46 PM on 07/27/2010

What else would you expect bankers to say! Another scare tactic to make Obama the bad guy. Obama didn't have to bailed out; Obama didn't send jobs overseas and fire employees, some who had spent their lives at these organizations; Obama didn't make bad loans! Bankers will never be held in high esteem again, unless you're a republican!

[cgeorgan]

02:14 PM on 07/27/2010

So based on experience, and your understanding of finance, this plan has "no risk" of creating a significant (billions) junk loans? Please do explain, I'm all ears.

[madatnewsmedia]

02:23 PM on 07/27/2010

You can stay all ears! That's my opinion and you don't have to agree, but I don't owe you an explanation!

[econ1]

01:16 PM on 07/27/2010

Please stop with the help.

Trying to select the winners (or worse anoint them) in small business, cars, energy generation, home owners, health care delivery, rail routes, and so on is not going to work. The ethanol debacle that is amazingly getting bigger is a perfect example of wasting billions of dollars.

No wonder businesses and consumers are holding back. Who wants to invest or buy something if you expect the government may shortly give you thousands to do something different or even do what you were going to do.

[cgeorgan]

02:14 PM on 07/27/2010

Excellent post. F&F.

[raphaelbonee]

12:47 PM on 07/27/2010

I've come to the conclusion the best thing the President could do is create an environment good for jobs rather than profits. That means tariffs indexed to our CPI relative to any other countries.

There's no reason we should have to lose our standard of living in trade. Corporations are making profit on the difference and it needs to end.

Throwing money at the problem only perpetuates the myth that ricardian economics is working. Obviously ... it's not.

[jazgr8]

12:00 PM on 07/27/2010

First, I am as liberal as anyone. Second, this program is a joke and indicative of the fact that Washington lawmakers, both parties, do not have a clue how business works. They can provide the community banks all the free money they want and tell them to loan it, but most small businesses that are still around do not need loans, they need customers!

There will be little demand for this capital as a result and the demand that is there will be from companies that are poor credit risks. The cost of capital is already at historic lows! Put the money into job creation via infrastructure projects or something. Small businesses that are fundamentally sound are dying not because they cannot procure a loan, but because there is no demand for their services.

[raphaelbonee]

12:55 PM on 07/27/2010

"most small businesses that are still around do not need loans"

most small businesses that are still around are running in the red. Any loans given to them are going to go to paying off preexisting debt. In other words the money is going to end up right back in the bank and no economic activity will be generated.

I'm all for something being done. But let's make sure we're addressing the problem not some outcome of the problem. The problem is we don't make our own stuff. The solution is figuring out a way to make that happen.

In the way are all these finance people who want the profit made by letting other people make our stuff and importing it. They think we're too stupid to know the loss of jobs means eventually we can't afford the stuff we import. They make it easy to get credit so we drive ourselves deeper in debt.

[cgeorgan]

02:15 PM on 07/27/2010

"most small businesses that are still around are running in the red"

REALLY? Where did you get the information that led you to this conclusion?

[optimist7]

10:46 AM on 07/27/2010

It amazes me that people still cite what the financial "experts" at the big banks have to say as authoritative or even enlightening, because a) they can't be trusted to give an accurate account of anything that might negatively affect their own banks profits or even cast shadows on their own operations, and b) we've all witnessed how brilliantly they executed the operations of their own banks over the past five or so years.

[Mafdet]

10:56 AM on 07/27/2010

Exactly. And add to that, the banks are worried about losses that will be 75 to 100% federally insured. My concern is that the last time a bit of money was made available to small business, back in the summer of 2009 ($5b), it was routed through the SBA, so borrowers had to qualify under the SBA rules and they had to qualify under commercial banking rules (because you can only get SBA money by applying through commercial banks). The only small companies that "qualified" for it were "consulting" firms or Beltway Bandits - firms fronting for big businesses. So all THAT money went to big businesses.

Now the Obama Administration and the SBA are suppressing information about who got the money, and small business orgs are having to sue for it.

[optimist7]

11:42 AM on 07/27/2010

I'm not familiar with small business financing, but can understand the concern.

I think a similar problem exists with the programs aimed at helping homeowners facing foreclosure. It's a Catch-22 situation. Once foreclosure is impending, the homeowner no longer has a good credit score. Why? Because the banks have refused to work with them until they were already in default. But, the programs intended to assist these homeowners require a good credit score. President Obama has frequently used the term "responsible homeowners" in his explanations of who the programs are designed to benefit. It has struck me that if they're going to revert to traditional standards for lending money, after having given loans with inferior standards, the problem won't be solved.

What I think needs to be done for the troubled housing market, especially now that local economies have languished for so long and housing values have declined so much, is that the lending standards have to be kept low, but ways of facilitating repayment have to be provided. I would think the same concept would apply to small businesses.

Imagine if credit scores were calculated on the big banks' financial performance over the last 7 years, would any of them qualify for credit with their failures in 2007-2008? Such failure to perform is held against individuals, and presumably most small businesses for 7 years. For the big banks, that would mean they wouldn't qualify for credit for several years. Ah, well....

Best wishes ;-)

[cgeorgan]

02:17 PM on 07/27/2010

There's a difference between banking - which is the business of managing financial transactions - and speculation, which is trading on ones' prediction of the future.

I might be bad at guessing which stocks might go up or down, but I could run a fairly effective financing outfit. It's not rocket science - people have been banking for millennia.

[optimist7]

02:45 PM on 07/27/2010

I think you've made my point. The big banks no longer rely on traditional banking to make their profits. They rely on speculation. So why should their financial experts whose expertise is in speculation, be given credibility on old fashioned banking, which is what is needed by small businesses? Do these experts really know anything about small business? And, why should we listen to what they have to say about what's going to happen in the future when they were recently so wrong?

[Mafdet]

10:20 AM on 07/27/2010

Small businesses that hire people are not in crisis because we aren't viable or were managed badly but rather because massive fraud caused the banks to collapse. No small business was healthier than mine in the spring of 2008, but the big banks were pooling their cash reserves and locking them down and the small banks couldn't get cash flow from them so we couldn't get funding from any bank.

Then Dimon and Blankfein decided to deepen the cash flow crisis. Originally, they were to have bought back their fraudulent securities with tax dollars, sending it back through the banks, but then Henry Paulson decided that the bail out money should be given as straight cash for operations. Well, now the big banks say to themselves: "Bonus! We don't have to resolve our fraud with this. Let's sit on it, strangle 500 small banks prolonging the cash flow crisis to small business and trigger the most massive unemployment in 80 years. Then we can snap a bunch of assests up with this here tax money Hank gave us."

Small businesses had to pull back on our capital intensive offerings to conserve cash flow. Then we took out credit cards. We raided our IRAs. We fired people.

An extraodinary thing happened that caused us to tail spin. There is much less risk in getting us funding now to fire up our ops again than funding new start ups that fail at a rate of 50% even in good economies.

[switchrat666]

12:32 PM on 07/27/2010

Bingo..OBAMA's PLAN nice thread

[raphaelbonee]

01:10 PM on 07/27/2010

"Henry Paulson decided that the bail out money should be given as straight cash for operations."

Good synopsis of what happened and good insight into what could follow. I was sad to see the President seduced into going along with Bushes money giveaway to his friends as he went out the door.

I was disapointed with the choice of Geitner. Volker would have been a better choice for this economy. I remember the screams as he locked down on interest to starve inflation. It's going to take some pain to get through this now that we've bailed out the perpetrators. It should have been their pain.

Now the Sachs and the banks and the coporations are looking at it as a chance to take another bite out of the apple.

[plan-uts]

10:01 AM on 07/27/2010

If Reaganomics was VooDoo economics then Obamanomics is BooHoo economics. Sub-Prime is Sub-Prime.

[raphaelbonee]

01:13 PM on 07/27/2010

If reagan didn't mke you feel like a dog at the dinner table then you're just foolish. Trickle down economics means you're being fed scraps if you're not a corporation.

[Mafdet]

09:32 AM on 07/27/2010

Exactly. Because the banks overnight cut off all lending to small businesses in the spring of 2008, the small businesses that actually hire people - manufacturing and service firms - don't qualify for them.

THAT'S THE PROBLEM. We were driven under. Now we can again hire our workers back, we can again offer the range of goods and services we had to discontinue in order to keep our capital close while the banks refused to lend, BUT WE NEED THE FUNDING WE WERE DENIED 2 YEARS AGO WHEN OUR BUSINESSES WERE WAY HEALTHY IN ORDER TO DO THAT.

And when are Blankfein, Dimon, Fult, Lewis and friends going to be proescuted?

[HotSpringsSteve]

09:19 AM on 07/27/2010

Nobody is requiring anyone to make loans. If it isn't well founded, don't make the loan.

[Mafdet]

10:00 AM on 07/27/2010

2 years ago small manufacturing businesses like mine were very healthy. When we went to our banks in the spring of 2008 to get new lending based on the past year's growth, the banks were in collapse but they didn't say: "Sorry, we can't lend to you because we're going under..." They denied us loans for obscure causes. Mystified, we went to one bank after another but were similarly rejected. In a 2 or 3 month period my credit rating probably plummeted 60 points because my attempts to find funding which I more than qualified for were reported to the credit agencies who interpreted my activity as "attempting to debt stack."

This is where the slippage started. Then when the collapse was made public banks became overt in stripping business of funding we already had. Overnight, BofA stripped every single small business of any unsecured line of credit. The last bit of cash flow for most businesses. That was a year ago.

Small businesses like mine pulled back on any captial intensive operation that didn't promise a return within 30 days. The full time employees who served those operations became part time then marginal employees. Our financials showed a corresponding decline in business. We started funding our operations through credit cards, our credit scores went into free fall.

The banks MUST start lending to small businesses that don't qualify, because funding new start ups is even riskier. We aren't stressed because we were not viable.