One of the issues that small business owners face when seeking an SBA loan is the need for someone to actually buy the loan once it is made. You go to the bank, you get SBA backing for the loan; the bank gives you the loan and then sells it as part of a package to an investor. One of the reasons banks have been reluctant to make loans to small businesses—with or without the SBA guarantees—has to do with the lack of investors willing to buy up those loans.
Enter the Treasury Department with a brand new idea: Spend $15 billion on buying up these loans! In an effort that could begin in a matter of days, the federal government will now own a huge number of these small business loans on the pretext that if they fill the place of reluctant investors, then banks will make loans and the credit crisis currently afflicting small business will be lessened. According to officials, the use bailout money to buy loans will assure lenders and financiers that reliable funding will be available even if private investors begin to balk again.
This is not a new idea, President Obama first announced this back in March, but this time there is a new element to the deal. Here is the deal as reported by The Washington Post:
The government program to buy up SBA loans includes a concession to small business loan providers aimed at resolving a problem that had hamstrung the effort: These financial firms were balking at conditions imposed on this and other initiatives by the bailout law adopted by Congress. For one, firms selling SBA loans to the government are required to give it ownership stakes. But many have no stock to offer; others are divisions of large corporations.
Treasury officials are now considering offering these financial firms a deal. They would be able to issue stakes to the government and then repurchase them immediately. The officials have concluded that this quick flip would fulfill the requirements of the bailout legislation.
There is, however, disagreement among industry experts as to whether this initiative is too little and too late. Some see the program as a nice fall-back, but according to Anthony Wilkinson, chief executive of the National Association of Government Guaranteed Lenders, it isn’t enough. More incentives—in addition to the $15 billion—have to be offered to banks, he says, to get them to increase the amount of credit they are willing to offer to small businesses. Moreover, he feels that the amounts small business can borrow need to be increased, saying, "Historically, its small businesses that lead us out of recessions. They can't do that if they can't get access to capital."
Normally, anything that would make it easier for small businesses to get capital is a winner, and this may be a winner; but a wait and see attitude may be more prudent. There seems to be an awful lot of strings attached to this money and for it to work, the government would have to do the right thing by the financial firms, allow them to repurchase those ownership stakes as promised and that, in this era of stress tests and onerous conditions for paying back government money, is far from certain. In other words, if it does not work as advertised, then it will go very bad very quickly.
CIT was a case in point for government assistance. The company—the first to try out the new SBA loan scheme—was soon on the verge of bankruptcy when the feds declined to intervene. CIT was saved by loans from its own stakeholders. Still, CIT’s participation encouraged others to get involved. However, what if it had not received that last minute funding? What effect would that have had on the other lenders? More to the point, what happens when the next CIT comes along?
Einstein said that things should be made as simple as possible, but no simpler. If this is as simple as it gets, with difficult questions and ownership stakes in lenders being flipped around like so many casino chips just to allow the government to buy this debt, then I have to wonder what else will come of this. What will happen when the first domino falls? We will find out in a few days, probably, so stay tuned! It should be interesting.