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Small Business Lending Programs Aren’t Working and Need To Change

Pro­grams to get small busi­ness lend­ing mov­ing aren’t work­ing. Instead of a resur­gence of small busi­ness lend­ing the sit­u­a­tion is get­ting worse.

Last week the Wall Street Jour­nal reported that the White House was search­ing for ways to help small busi­ness by unlock­ing frozen credit. This week CIT, the largest small busi­ness lender in the U.S., fought for sur­vival. Funds just aren’t get­ting to small business.

I believe that the Obama Admin­is­tra­tion has good inten­tions and is try­ing hard to do the right thing but is trag­i­cally out of touch with the real world. Obama, Sum­mers and Gei­th­ner lack of actual busi­ness expe­ri­ence and haven’t fig­ured out that no mat­ter how smart they are there is no sub­sti­tute for real life. Study­ing small busi­ness lenders and small busi­ness just isn’t the same thing as run­ning a busi­ness and until they get some­one to help them who has real world expe­ri­ence they are going to con­tinue to flounder.

In Feb­ru­ary and March I warned that pro­grams to get small busi­ness lend­ing going weren’t going to work. I thought that they were DOA and I was correct.

Soon after becom­ing Trea­sury Sec­re­tary Gei­th­ner observed that most small busi­ness lend­ing was funded through the “shadow bank­ing sys­tem”, i.e., non-bank lenders. Yet, Obama’s recov­ery plans ignored non-bank lenders and instead focused upon push­ing banks to lend even though they weren’t the pri­mary source of lend­ing before the cri­sis began. Recov­ery plans also relied upon the SBA to get liq­uid­ity into the hands of busi­ness­men. Unfor­tu­nately the SBA hasn’t been rel­e­vant or effec­tive since the Rea­gan Administration.

Back in Feb­ru­ary I thought that Gei­th­ner was a quick learner and that he would ditch pol­icy alter­na­tives that didn’t work. I was wrong. The Admin­is­tra­tion con­tin­ues to oper­ate in their “com­fort zone” which is bank­ing even thought the small busi­ness lend­ing cri­sis is play­ing itself out in the non-bank finan­cial com­pany arena.

Below are the four sug­ges­tions that I made in Feb­ru­ary to help small busi­ness lend­ing. These appeared in an arti­cle I wrote in Feb­ru­ary and was the first in a small busi­ness lend­ing series writ­ten by myself and Rob Blum. Each of the arti­cles can be read by hit­ting this link, this link and this link. Also, I wrote an arti­cle for which can be read by hit­ting this link.

  • Form new gov­ern­ment spon­sored finan­cial guar­anty and bond insur­ance com­pa­nies. The fail­ure of the finan­cial guar­anty and bond insur­ance indus­try led the U.S. into the finan­cial cri­sis and the restart­ing of this indus­try will help lead Amer­ica out. These insur­ance com­pa­nies work because they cre­ate oper­at­ing effi­ciency for investors and back up their work by assum­ing risk. The bond insur­ers serve a func­tion sim­i­lar to rat­ing agen­cies but unlike rat­ing agen­cies, the bond insur­ers align their inter­ests with investors by putting “skin” in the game. Bond insur­ers were essen­tial to the cap­i­tal mar­kets for decades. Newly formed and well cap­i­tal­ized bond insur­ance com­pa­nies can be started by Trea­sury in a mat­ter of weeks and, if formed, will help restart­ing lending.


  • Amend the mutual fund and tax laws to pro­mote the for­ma­tion of tax effi­cient pools of invest­ment money for lend­ing. The inter­play of the laws gov­ern­ing mutual funds and taxes make it dif­fi­cult, if not impos­si­ble, for investors to form tax effi­cient invest­ment pools that orig­i­nate and own high qual­ity com­mer­cial and con­sumer loans. The laws are anti­quated, restrict cap­i­tal for­ma­tion, inad­ver­tently encour­age risky behav­ior and make lit­tle com­mon sense. A pas­sive invest­ment in a non-mutual fund direct lend­ing pool can have dis­as­trous tax con­se­quences for for­eign­ers, not for prof­its, pen­sion funds and indi­vid­u­als (because of state tax­a­tion issues in the case of indi­vid­u­als). And, the laws reg­u­lat­ing mutual funds have the unin­tended side effect of encour­ag­ing risky behav­ior instead of pru­dent lend­ing. Gei­th­ner can fix these laws and encour­age the for­ma­tion of invest­ment cap­i­tal to restart lend­ing. And, there will be no impact on Fed­eral spending.


  • Expand the Com­mu­nity Devel­op­ment Finan­cial Insti­tu­tions Fund. Every year the IRS grants sev­eral bil­lion of tax cred­its to lenders through the Com­mu­nity Devel­op­ment Finan­cial Insti­tu­tions Fund (“CDIF”). This pro­gram is sup­posed to encour­age eco­nomic devel­op­ment through tax cred­its that are earned by lend­ing in low income and blighted areas. Unfor­tu­nately, over the years the CDIF has favored real estate related lend­ing rather than core busi­ness lend­ing. If CDIF was reori­ented to encour­age busi­ness lend­ing, an exist­ing pro­gram that is annu­ally cost­ing tax­pay­ers bil­lions could be con­verted into an impor­tant tool to restart com­mer­cial finance.


  • Encour­age the SBA to license non-bank lenders and update and mod­ern­ize the pro­gram. The last non-bank lender to receive a new “Sec­tion 7A” license was dur­ing the Rea­gan Admin­is­tra­tion. Under pres­sure from crit­ics, SBA pro­grams have been cut back year after year and are almost totally depen­dent upon banks. The SBA lend­ing indus­try is almost vir­tu­ally irrel­e­vant.

30 years ago the SBA had a ter­ri­ble rep­u­ta­tion because its pro­grams were badly admin­is­tered. Since then the SBA has shrunk as a pro­por­tion of the econ­omy. But, the SBA’s poor his­tory doesn’t mean that the SBA can’t restart itself and con­tribute to Amer­i­can busi­ness health. A top down review of SBA pro­grams with an eye towards mod­ern­iza­tion and inclu­sive lender eli­gi­bil­ity, includ­ing non-bank par­tic­i­pants, could fix the SBA.

Geithner’s cur­rent pro­pos­als won’t get bank lend­ing going again and cer­tainly aren’t going to get non-bank lenders excited. The Trea­sury Sec­re­tary needs to get out of his com­fort zone and start to look at sup­port­ing non-bank lenders and investors. They make up most of the mar­ket for con­sumer and busi­ness loans and ignor­ing non-bank lenders won’t get the econ­omy going again.  4mse9b6vyu

Posted in: Credit Crisis, economy, Finance, Obama, Politics, Public Policy, Robert Blum, Small Business Lending


  1. jonathan

    Gov­ern­ment should be more seri­ous and con­cern­ing about the lend­ing pro­grams. It should actu­ally work well. Thank you.

  2. Sara

    I recently came across your blog and have been read­ing along. I thought I would leave my first com­ment. I don’t know what to say except that I have enjoyed read­ing. Nice blog. I will keep vis­it­ing this blog very often.


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