The Sunshine Report

Tag Archive: SBA

1. Forget the Fiscal Cliff. There Are Only 9 Days Left To Help Small Businesses

   December 26, 2012 3:59 pm Leave a Comment

   The Sen­ate has only 9 days to climb off the leg­isla­tive cliff and pass a bill that will help small busi­ness through­out America.

   No, I am not count­ing days until we fall off Fis­cal Cliff. I am count­ing the days remain­ing for the Sen­ate to approve the Small Busi­ness Invest­ment Com­pany Mod­ern­iza­tion Act of 2012, also known as H.R. 6504.

   H.R. 6504 is only a one sen­tence bill that changes a sin­gle word in exist­ing leg­is­la­tion and mod­estly increases the max­i­mum allow­able size of small busi­ness invest­ment companies.

   There is no pork attached to HR. 6504 and no implied polit­i­cal state­ments in the pre­am­ble of the legislation.

   It just doesn’t get any leg­isla­tively eas­ier or more straight­for­ward than H.R. 6504. But once the new Sen­ate is sworn in at 12 noon on Jan­u­ary 3^rd, it will be too late. H.R. 6504 will die.

   The Small Busi­ness Invest­ment Com­pany Mod­ern­iza­tion Act of 2012 changes the amount of lever­age a fam­ily of small busi­ness invest­ment com­pa­nies can receive from the Small Busi­ness Admin­is­tra­tion from an aggre­gate cap of $225 mil­lion to $350 mil­lion. That means that cer­tain types of small busi­ness lenders and investors called small busi­ness invest­ment com­pa­nies can bor­row more from the SBA than before.

   The bill doesn’t change the over­all lim­its for the small busi­ness invest­ment com­pany pro­gram, or oth­er­wise touch any other aspect of the pro­gram in any way. It makes it a lit­tle more attrac­tive for spon­sors of small busi­ness invest­ment com­pa­nies to spend time and money in the small busi­ness sec­tor by allow­ing a lit­tle more scale to indi­vid­ual pro­gram par­tic­i­pants. Since the pro­gram was formed in the late 1950s it has been stan­dard oper­at­ing pro­ce­dure for Con­gress to make sure that the pro­gram remains rel­e­vant by approv­ing increases in allow­able pro­gram par­tic­i­pant size to match infla­tion and eco­nomic growth.

   The small busi­ness invest­ment com­pany pro­gram, also known as the SBIC Pro­gram, has been around since 1958 and has not cost the Fed­eral gov­ern­ment a dime since its for­ma­tion. The SBIC Pro­gram is an exam­ple of gov­ern­ment “work­ing” for the ben­e­fit of every­one through public-private partnership.

   The equity for small busi­ness invest­ment com­pa­nies comes exclu­sively from pri­vate investors. The SBA’s role is to pro­vide loans to small busi­ness invest­ment com­pa­nies instead of these invest­ment pools get­ting their loans from banks. The SBA loans are made on attrac­tive terms and the SBA charges a fee to pro­gram par­tic­i­pants. It is through these loans to small busi­ness invest­ment com­pa­nies that the SBA helps get money into the hands of small business.

   How­ever, it is the man­agers of the small busi­ness invest­ment com­pa­nies who make invest­ment deci­sions and allo­cate cap­i­tal, not the SBA. And, if small busi­ness invest­ment com­pa­nies make good invest­ments, it is the pri­vate share­hold­ers of the small busi­ness invest­ment com­pa­nies who ben­e­fit. On the other hand, if small busi­ness invest­ment com­pa­nies lose money, their share­hold­ers bear the bur­den of loss.

   The small busi­ness invest­ment pro­gram does not cost the Fed­eral gov­ern­ment a dime. It charges pro­gram par­tic­i­pants a fee which cov­ers all costs. The SBA seems pretty good at charg­ing the right amount of fee for the pro­gram because they have got­ten it right for the last 54 con­sec­u­tive years.

   How­ever, there is a catch. For pri­vate investors to receive the ben­e­fits of the small busi­ness invest­ment com­pany pro­gram they must actu­ally make invest­ments in small busi­nesses in the United States. The invest­ments can be debt or equity, but they have to be actual invest­ments in U.S. small businesses.

   So just to review, H.R. 6504 changes a sin­gle word in exist­ing leg­is­la­tion relat­ing to a suc­cess­ful pro­gram that doesn’t have any attached pork or polit­i­cally charged lan­guage. The pro­gram is self-funding and has been a suc­cess­ful and non-controversial con­trib­u­tor to the econ­omy since 1958.

   How did the bill do in the House of Representatives?

   Sur­pris­ingly well. In the parochial atmos­phere of the House, H.R. 6504 passed with over­whelm­ing bi-partisan sup­port. The offi­cial vote was 359 yea to 36 nea, which is approx­i­mately a 90% vote to approve.

   I esti­mate that Approx­i­mately 25,000 employ­ees of small busi­ness will ben­e­fit in 2013 from H.R. 6504, as well as a like num­ber of employ­ees in 2014, 2015, 2016 and every year there­after. Over 10 years that’s a quar­ter of a mil­lion Amer­i­can jobs.

   It is not like there is a lot of con­tro­versy in the Sen­ate over this bill. After all, there were three bills intro­duced in the Sen­ate that did the same thing as H.R. 6504. It’s just that the House passed the res­o­lu­tion while the Sen­ate didn’t.

   The Sen­ate does not need to incon­ve­nience itself by actu­ally com­ing to Wash­ing­ton and vot­ing. It can sus­pend its rules and approve H.R. 6504 tomor­row, or the next day or the next; only a hand­ful of Sen­a­tors are needed to get this done. But, includ­ing what is left of today, Sat­ur­day and Sun­day, New Year’s Eve, New Year’s Day and the morn­ing of Jan­u­ary 3^rd, there are only 9 days to pass H.R. 6504 before it dies.  Of actual nor­mal work days there are only two days left, Decem­ber 27th and Decem­ber 28th.  And unfor­tu­nately, accord­ing to the Sen­ate web site H.R. 6504 isn’t sched­uled to be con­sid­ered either day.

   One must admit that 25,000 jobs in 2013 isn’t a lot of jobs in the greater scheme of things for the U.S. econ­omy. But to the scheme of 25,000 indi­vid­u­als who would imme­di­ately ben­e­fit from this bill, and the quar­ter of a mil­lion who would ben­e­fit in the years to come, this bill could mean the world. It means the dif­fer­ence between self-reliance and reliance on gov­ern­ment; it means the dif­fer­ent between bring­ing home the bacon and real­iz­ing that a food stamp does not afford a slice of meat.

   9 days and count­ing for the Sen­ate to say “yes” to small busi­ness, “yes” to jobs and “yes” to the Amer­ica peo­ple. I know the Sen­ate can pass H.R. 6504; all they have to do is try.

2. SBA Policy Restricts Small Business" rel="bookmark">28-Year-Old SBA Policy Restricts Small Business

   January 27, 2011 10:44 pm 2 Comments

   It’s tough to explain why the Small Busi­ness Admin­is­tra­tion favors banks over non-banks in its flag­ship SBA 7(a) loan pro­gram.  For the last 28 years, the SBA has refused to license a sin­gle new non-bank lender and has restricted the abil­ity of exist­ing non-bank 7(a) lenders to finance their portfolios. 

   Since 1982, the SBA has been work­ing to solve its 1970s oper­a­tional prob­lems by lim­it­ing the num­ber of non-bank 7(a) licenses at 14.  This Rea­gan Admin­is­tra­tion era pol­icy was adopted in response to per­ceived poor man­age­ment and high losses of the SBA dur­ing the pre­ced­ing Carter Admin­is­tra­tion.  Oddly, the SBA and it’s Con­gres­sional over­seers haven’t seri­ously con­sid­ered whether a restricted access pol­icy still makes sense. 

   So while non-banks can’t become licensed 7(a) lenders, lit­er­ally thou­sands of banks only need to fill out a few forms to get into the program. 

   The SBA 7(a) pro­gram is the most pop­u­lar source of SBA backed loans and liq­uid­ity and accord­ing to Karen Mills, the SBA Admin­is­tra­tor, the most impor­tant pro­gram that the SBA runs.  Through the 7(a) pro­gram, the SBA pro­vides 90% loan guar­an­tees on loans up to $5 mil­lion in size and deliv­ers liq­uid­ity to thou­sands of busi­nesses that might oth­er­wise be frozen out of the lend­ing markets. 

   The SBA 7(a) pro­gram is a great way for sick banks to be able to make loans but is only mar­gin­ally use­ful for healthy banks.  Healthy banks don’t need the SBA 7(a) pro­gram to lend money to small busi­ness because they don’t need the liq­uid­ity that the SBA guar­an­tee pro­vides and they have plenty of cap­i­tal to sup­port their loan portfolios. 

   On the other hand, unhealthy banks make a lot of SBA 7(a) loans because the pro­gram solves two prob­lems for weak insti­tu­tions, a lack of cap­i­tal and liq­uid­ity.  Banks can both reduce their equity require­ment and raise liq­uid­ity by sell­ing the gov­ern­ment guar­an­teed por­tion of newly orig­i­nated SBA 7(a) loans into the sec­ondary markets. 

   The SBA 7(a) pro­gram should be gen­er­at­ing mas­sive inter­est from healthy non-bank lenders which could get a lot of liq­uid­ity in the hands of small busi­ness owners. 

   Non-bank lenders don’t have the advan­tage of fund­ing through insured deposits and the SBA 7(a) pro­gram should largely elim­i­nate that disadvantage. 

   But, instead of being able to man­age fund­ing with­out inter­fer­ence from the SBA, cur­rent non-bank lenders must get SBA per­mis­sion before using their SBA 7(a) loans for liq­uid­ity.  The SBA reg­u­la­tory process for the 14 exist­ing non-bank lenders is gen­er­ally per­ceived to be cum­ber­some and slow and takes away most of the advan­tage of being a SBA 7(a) lender. 

   As a result, since 1982, the SBA has been hit­ting non-bank lenders with a one-two punch.  They have refused to license new lenders and have rationed liq­uid­ity for exist­ing lenders. 

   How could it pos­si­bly be a good idea for the SBA to con­tinue to pre­vent healthy, well cap­i­tal­ized and well man­aged non-banks from par­tic­i­pat­ing in the 7(a) pro­gram while being the back door bailout of choice for weak and fail­ing depos­i­tory insti­tu­tions?  Espe­cially in light of the Obama Admin­is­tra­tion empha­sis on job cre­ation through the growth of small busi­ness and bi-partisan sup­port for the small busi­ness sec­tor of our economy. 

   Now is the time for the SBA and its Con­gres­sional over­sight com­mit­tee to ditch the 28-year-old restricted access pol­icy and instead bring all healthy lenders into its flag­ship 7(a) program.

3. Obstacles To Small Business Lending

   January 19, 2011 10:47 pm Leave a Comment

   On Jan­u­ary 13th I attended the FDIC Small Busi­ness Forum titled Over­com­ing Obsta­cles to Small Busi­ness Lend­ing and got an extra­or­di­nary glimpse into why many small busi­nesses are miss­ing the recovery. 

   Even though the forum pan­elists agreed that “what’s good for small busi­ness is good for Amer­ica”, they had few ideas about how to ener­gize the finan­cial sys­tem to help Main Street. 

   While I have a lot of respect for sev­eral of the forum par­tic­i­pants, includ­ing Ben Bernanke and She­lia Bair, I left with an unset­tled feel­ing that the panel wasn’t in touch with what makes Main Street tick.  The con­sen­sus plan is to wait until the eco­nomic recov­ery gets down to Main Street and then hope every­thing will be OK.  Unfor­tu­nately, it’s going to be a long wait. 

   About 30 min­utes into the forum, Sen­a­tor Mark Warner said that to gen­er­ate employ­ment gains Amer­ica needs to nur­ture small busi­ness “gazelles”.  He pointed out that fast mov­ing com­pa­nies often turn into big employ­ers.  The other pan­elists agreed and said that export growth was also key to fix­ing unemployment. 

   Once every­one agreed on the impor­tance of gazelles and exporters, one by one, the pan­elists pledged their alle­giance to com­mu­nity bankers.  They were cer­tain that com­mu­nity banks would be the pri­mary small busi­ness lender of the future.  FDIC Chair­woman Bair sup­ported this the­sis by point­ing out that com­mu­nity banks own almost 40% of small busi­ness loans held by banks. 

   As I lis­tened to Chair­woman Bair’s artic­u­late and enthu­si­as­tic com­ments, I was reminded of the movie<em> It’s A Won­der­ful Life</em>.  Unfor­tu­nately, it’s not cred­i­ble that America’s Bai­ley Build­ing and Loan Asso­ci­a­tions are sud­denly going to become the pri­mary resource for rapid growth man­u­fac­tur­ers who are active in inter­na­tional markets. 

   Maybe a review of prac­ti­cal real­ity and facts would help. 

   Accord­ing to Trea­sury, in 2007 less than 50% of all small busi­ness loans were owned by banks (the rest were owned by non-bank lenders).  Small banks owned about 40% of the bank loans, mean­ing that small banks only owned about 20% of all small busi­ness loans, which isn’t an over­whelm­ing mar­ket share.  More­over, over the past 30 years com­mu­nity banks have been shrink­ing in num­bers and los­ing mar­ket share. 

   Mar­ket share and capac­ity prob­lems con­tinue.  Cur­rently, the FDIC has clas­si­fied around 1,300 small banks as “trou­bled” which means that com­mu­nity banks, as a class, are shrink­ing and under cap­i­tal stress. 

   Put sim­ply, com­mu­nity banks lack the cap­i­tal and oper­a­tional capac­ity to finance a resur­gence of Main Street’s fast growth com­pa­nies and exporters.  Inter­est­ingly, Sen­a­tor Warner artic­u­lated his doubts about com­mu­nity bank capa­bil­i­ties but didn’t receive any agree­ment or sup­port from other panelists. 

   Even healthy com­mu­nity banks have major struc­tural hand­i­caps that pre­vent them from meet­ing the needs of many fast growth com­pa­nies and exporters; namely their small legal lend­ing lim­its and lim­ited prod­ucts and geo­graphic oper­a­tional capabilities. 

   Small banks have a small cap­i­tal base and there­fore a small legal lend­ing limit.  Fast grow­ing inter­na­tional busi­nesses need their banks to have large legal lend­ing lim­its that they won’t quickly out­grow.  Com­mu­nity banks have local oper­a­tional capa­bil­i­ties.  Com­pa­nies that buy and sell goods and ser­vices through­out the U.S. and around the globe need broader trans­ac­tion pro­cess­ing prod­uct offer­ings and the abil­ity to finance inter­na­tional pro­cure­ment and sales.  Com­mu­nity banks, more or less by def­i­n­i­tion, don’t typ­i­cally have such capabilities. 

   I was sur­prised when for much of the sec­ond hour of the forum, the panel stopped talk­ing about financ­ing small busi­ness and turned to issues that every­one on the stage agreed had noth­ing to do with why they were there. 

   Sud­denly, every­one had some­thing to say about Dodd Frank rule­mak­ing, BASEL III reg­u­la­tion, health­care reform, tax cut leg­is­la­tion and the fore­clo­sure mess. 

   When the con­ver­sa­tion got more or less back on point, most speak­ers whined about how declin­ing asset val­ues are hurt­ing small busi­ness.  Of course, not a sin­gle speaker men­tioned that the largest asset class owned by most small busi­nesses, i.e., accounts receiv­ables, didn’t at all drop in value.  Inven­tory, typ­i­cally the sec­ond largest asset class for man­u­fac­tur­ing com­pa­nies, was men­tioned once or twice in pass­ing and not in the con­text of lend­ing or banking. 

   It wasn’t until late in the day that any­one spoke of equip­ment finance, inven­tory finance, trade finance or any other type of loan or ser­vice that a fast grow­ing man­u­fac­tur­ing or ser­vice com­pany would be inter­ested in.  No one talked about how to finance imports through the sup­ply chain.  I’m pretty sure that most of the speak­ers had no idea that some­thing called sup­ply chain finance exists or why it is impor­tant to small business. 

   Karen Mills, SBA admin­is­tra­tor, was the most artic­u­late and rel­e­vant speaker, but she was last to talk and only had 15 min­utes allot­ted to her.  While every­one had agreed with Sen­a­tor Warner at around 1:30 PM that export gazelles were the key to grow­ing small busi­ness employ­ment, it wasn’t until 3:57 PM, with 3 min­utes of time remain­ing, that Ms. Mills men­tioned trade finance.  She was the only per­son to say any­thing remotely use­ful on the topic.  Her two sen­tence ref­er­ence to trade finance secured my vote for the “most rel­e­vant speaker of the day” award.

   With the excep­tion of the SBA, it’s clear that Washington’s eco­nomic power elite is almost totally out of touch with the needs of Main Street.  The FDIC Forum high­lighted that per­haps the biggest obsta­cle to small busi­ness lend­ing is the dis­con­nect between well inten­tioned pol­icy mak­ers and the real­ity of Main Street U.S.A.  Until pol­icy mak­ers pro­vide ini­tia­tives that are rel­e­vant and prac­ti­cal, we have a long wait before small busi­ness restores its sta­tus as the U.S. employ­ment growth engine.

4. Create Jobs Quickly By Capitalizing Small Business Lenders By Robert Blum

   February 26, 2009 9:06 pm Leave a Comment

   In my post­ing last Fri­day with Mark Sun­shine, TARP Isn’t Work­ing For Small Busi­nesses; Two Sim­ple Solu­tions For Small Busi­ness Lend­ing, we dis­cussed the severe fund­ing stresses being faced by small and medium sized busi­ness enter­prises (“SMEs”). Unfor­tu­nately, most of the gov­ern­ment aid announced to date does not help in deploy­ing cap­i­tal to SMEs any faster. In par­tic­u­lar, the non-bank lend­ing sec­tor is shrink­ing dra­mat­i­cally as their lever­age lines get pulled and other cap­i­tal dries up, which is bad because these pri­vate finance com­pa­nies and other lend­ing sources have tra­di­tion­ally been the source of a sig­nif­i­cant por­tion of SME fund­ing. SME’s, of course, are the well­spring for north­ward of 75% of the jobs that are cre­ated in this coun­try, so help­ing SMEs is crit­i­cal to national recov­ery.
   

   In our post­ing last week, we sug­gested mod­i­fy­ing tax rules and amend­ing the mutual fund rules to attract and free up cap­i­tal for senior secured SME loans. A third idea, dis­cussed below, involves the government’s mak­ing direct equity or pre­ferred equity invest­ments in pri­vately man­aged loan funds, which would use this money to make new senior, junior and mez­za­nine loans to SMEs. This would not be gov­ern­ment aid, down the sink­hole, but gov­ern­ment invest­ment, achiev­ing mar­ket returns on cap­i­tal to the ben­e­fit of all Amer­i­cans, while also cre­at­ing long term jobs, help­ing sta­bi­lize the econ­omy and encour­ag­ing more pri­vate invest­ment. Addi­tion­ally, the invest­ment of Fed­eral monies as equity in smaller, SME-oriented loan funds would bet­ter enable those funds to attract cur­rently frozen pri­vate cap­i­tal, through the reas­sur­ance of gov­ern­ment reg­u­la­tion, decreased risk of fraud and com­mu­nity of inter­ests due to the invest­ment of Fed­eral funds along­side pri­vate cap­i­tal, not above it.
   

   Mod­els for this type of pro­gram have existed in gov­ern­ment for decades, at the SBA, OPIC and a host of com­mu­nity rede­vel­op­ment invest­ment pro­grams. The prob­lem has been that they take years to obtain approval – time that we do not have – and these pro­grams typ­i­cally involve the gov­ern­ment inject­ing debt or debt guar­an­tees rather than equity into these invest­ment funds (e.g., SBICs). Market-appropriate struc­tur­ing of the government’s equity par­tic­i­pa­tion would enable stream­lined approval processes for Fed­eral invest­ment. Cus­tom­ary fund struc­tural fea­tures, that have worked for decades at pro­tect­ing pri­vate investor cap­i­tal, would do the same for the government’s money, and incen­tivize a prof­itable out­come (some­thing we prob­a­bly will not see from most of the TARP invest­ments).
   

   Fund man­agers, who would be required to have some of their own cap­i­tal at risk (as is almost uni­ver­sal with pri­vate funds of this sort), would charge a man­age­ment fee, but most of their expected com­pen­sa­tion would be based on the suc­cess of their invest­ments, i.e., for every dol­lar of real­ized profit on the government’s equity invest­ment (and of other pri­vate investors par­tic­i­pat­ing in the vehi­cle), the man­ager would earn a twenty per­cent per­for­mance fee, per­haps above a pre­ferred return hur­dle rate. In order to min­i­mize expo­sure to inex­pe­ri­enced man­agers, this pro­gram would only be open to man­agers for their sec­ond (or later) fund­ing pool, with at least three years’ expe­ri­ence run­ning invest­ment vehi­cles of sim­i­lar invest­ment objec­tives, and their prior fund(s) would have to have been audited by a major audit­ing firm and received clean opin­ions. The government’s equity con­tri­bu­tion, together with privately-sourced equity con­tributed to that fund, would be capped at an amount equal to twice the equity level of the largest of their pre­vi­ous funds, capped at $200 Mil­lion per fund man­ager, to ensure that they can effi­ciently and quickly deploy the cap­i­tal to SMEs for growth (after all, the whole pur­pose of this pro­gram is to effi­ciently deploy cap­i­tal as quickly as pos­si­ble, to obtain fis­cal stim­u­lus NOW, within the next 6–12 months). Fur­ther to that point, the government’s equity would only be draw­able for twelve months from com­mit­ment, renew­able at the government’s option (pri­vate funds typ­i­cally allow an invest­ment period that is any­where from two to three years – the point here is that, within rea­son, we need the cap­i­tal deployed quickly).
   

   This pro­gram could either be admin­is­tered out of the SBA, which has rel­e­vant expe­ri­ence in these mat­ters but is hope­lessly under­manned to move quickly, or by the Trea­sury Depart­ment, in either case employ­ing third party invest­ment con­sult­ing firms with rel­e­vant domain exper­tise,
   work­ing off an expe­dited set of approval cri­te­ria. With this pro­gram, applied with urgency and using pri­vate indus­try deci­sion processes, money could be flow­ing to SMEs within three months of final­iza­tion of the plan.
   

   No sin­gle magic bul­let will solve our finan­cial cri­sis. This SME pro­posal, though, would more than carry its weight in cre­at­ing long term jobs quickly.
   

   Click here for Rob Blum’s bio.

5. TARP 1.0 Didn’t Get Lending Going and TARP 2.0 Won’t Be Much Better" rel="bookmark">TARP 1.0 Didn’t Get Lending Going and TARP 2.0 Won’t Be Much Better

   February 12, 2009 11:35 pm 7 Comments

   TARP 1.0 didn’t get lend­ing going and TARP 2.0 won’t be much bet­ter. The prob­lem is that TARP 2.0 con­tin­ues to focus on banks as the pri­mary lend­ing insti­tu­tions despite the fact that banks aren’t the pri­mary source of non-real estate credit for con­sumers or busi­nesses. Most non-real estate lend­ing takes place through the “shadow bank­ing” sys­tem which was bypassed by TARP 1.0; and, it doesn’t look like TARP 2.0 is going to help non-bank insti­tu­tions either. Until Gei­th­ner addresses the liq­uid­ity issues of non-bank lenders and investors, nor­mal lend­ing won’t restart.

   TARP 1.0 didn’t restore the nor­mal func­tion of the con­sumer and com­mer­cial credit mar­kets because it used flawed logic. Paul­son incor­rectly believed in a “cause and effect rela­tion­ship” that didn’t exist. He thought that increas­ing bank equity would result in increased lend­ing. Unfor­tu­nately, he was wrong because most non-real estate lend­ing takes place out­side of the bank­ing sys­tem and lenders and investors out­side the bank­ing sys­tem didn’t get helped by TARP 1.0. So, while banks ben­e­fited from TARP 1.0, it didn’t help the com­pa­nies that lend the most to con­sumers and businesses.

   Also, TARP 1.0 didn’t work because it was “back­ward lean­ing”, i.e., it didn’t pro­vide cap­i­tal for new loans but tried to fill in cap­i­tal holes cre­ated by old loans turned bad. To stim­u­late new lend­ing, TARP 2.0 needs to be “for­ward lean­ing pol­icy” and focus on new loans while hav­ing other pro­grams fix past prob­lems. Replac­ing lost cap­i­tal and a melt­down are great pol­icy objec­tives but they are dif­fer­ent from mak­ing new loans.

   While one sec­tion of TARP 2.0 is for­ward lean­ing, it doesn’t work because it almost entirely misses non-bank insti­tu­tions. Instead of look­ing for ways to restart non-conventional lenders and investors, Gei­th­ner reverted to what he is famil­iar with and focused on using the ulti­mate bank­ing insti­tu­tion, the Fed­eral Reserve, to restart lend­ing. But, non-bank lenders and investors don’t nor­mally inter­face with the Fed­eral Reserve, and, the AAA rat­ings require­ments to qual­ify for Fed­eral Reserve stim­u­lus puts even more dis­tance between non-bank lenders and Treasury’s pro­grams. Gei­th­ner made the rookie mis­take of retreat­ing into his “com­fort zone” to solve the prob­lem with­out exam­in­ing alter­na­tives. He is com­fort­able in the ster­ile world of Fed tech­nocrats and not expe­ri­enced in the down and dirty world of decen­tral­ized non-bank institutions.

   But, Gei­th­ner is a quick learner so there is hope that he will ditch pol­icy ini­tia­tives that don’t work.

   Set forth are four sug­ges­tions for ini­tia­tives that will get the non-bank sys­tem work­ing again.

   • 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.