Tuesday, February 2, 2010

$30B For Small Business Lending A Boon To Banks

Jobs, Jobs, Jobs is the new mantra. One conventional way to create jobs is t0 foster a healthier small business climate as it is accepted that job growth begins with mom and pop companies. Since the administration has decided that small business job creation will not be encouraged by lower taxes, and instead will let the Bush tax cuts expire, the next best initiative would be to rev up small business lending.

This new program is unlikely to produce the intended results. Whether the funding is doled out directly from government agencies or through bank SBA [ Small Business Administration ] lending, it will help banks more than small business. Why? Because the banks have the collateral already pledged and assigned and stand in a first lien position. Any new lending would be junior to the banker and that would only make the bank loans more secure, thereby helping bank balance sheets and loss reserves. If a bank would agree to additional lending, it would likely be with a government SBA guarantee. That would likely lessen their exposure. Again, that helps the lender. Finally, should another lender appear, government or financial, that wanted the entire business then they would need to payoff the bank's first lien.

We are not going to get a big bang for our bucks here if the goal is job creation. The Administration will get publicity for their claim that they are stoking the engine of growth, small business, but, in reality, they are again helping lenders and taxpayers will be footing the bill through either additional government borrowing or guarantees. The unintended consequence here is not totally bad as the financial firms do need to reduce poorer quality assets if they are going to regain a firm footing for the future.

This $30 Billion will improve bank credit quality, lessen the need for loan loss reserve growth, and future FDIC assessments as the FDIC may end up as the biggest winner since fewer community banks may fail. But don't look for job growth as businesses don't add jobs until they see demand and banks don't release collateral until they see cash or a guarantee.

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