29 July 2010

Obama Plan to Fund $300 Billion of Small-Business Loans Faces Senate Vote


President Barack Obama visited a New Jersey sandwich shop to bolster support for his plan to create $300 billion of small-business loans and more jobs as the Senate neared a vote on the package.

“When you listen to the struggles that small business owners are still facing, it is obvious we need to do more,” Obama said today at the Tastee Sub Shop in Edison, where he met with business owners.

A vote may come as early as this evening if agreement on amendments can be reached, according to Richard Carbo, spokesman for Senator Mary Landrieu on the Small Business and Entrepreneurship Committee. The package includes $12 billion in tax breaks and $30 billion of capital for community banks to promote small-business lending. Banks could leverage that sum into $300 billion of loans that create jobs, according to a Senate summary.

Obama’s plan must overcome doubts among lawmakers about the cost, whether it’s a bank bailout and how many of the loans will get repaid. Maine Senator Olympia Snowe, ranking Republican on the small business panel, says the plan promotes risky loans by rewarding banks that lend more and punishing those that don’t.

The goal is to create jobs and bring down the 9.5 percent jobless rate. Entrepreneurs create 64 percent of new jobs, according to the Small Business Administration.

Job Creation

“There’s nothing more important to our economic expansion now than getting small businesses and entrepreneurs in a position where they are investing and hiring,” Gene Sperling, counselor to Treasury Secretary Timothy Geithner, told reporters on a conference call yesterday.

The plan calls for the U.S. Treasury Department to buy preferred stock with a 10-year term in lenders that have assets of $10 billion or less. The shares will pay an initial dividend of 5 percent, dropping to 1 percent if the banks increase small- business loans or rising as high as 7 percent if the loans stay the same or decrease. For all recipients, the dividend resets after 4-1/2 years to 9 percent to encourage repayment.

Democrats are pushing for final approval this week before the Senate’s August recess, according to Carbo. The panel has heard banks aren’t lending to healthy firms, he said.

While the fund is no “silver bullet,” it will help get money to creditworthy firms, said Todd McCracken, the National Small Business Association’s chief executive officer.

‘Good Businesses’

“There may be some businesses right on the line that banks don’t feel comfortable lending to right now that might get funds when this goes into effect,” said McCracken, whose Washington- based lobby says it represents 150,000 firms. “These are good businesses, not dead businesses, which are going by the wayside due to record-tight credit.”

Snowe sees a “red flag” in linking lending to the dividend rate. “If the bank fails to increase its small- business lending, the interest rate it pays could rise to a more punitive 7 percent,” Snowe said in an e-mailed statement. “Banks would make risky loans to avoid paying higher interest rates.”

Snowe cited a May report from the Congressional Oversight Panel, which said the incentives may spur lax lending practices. “As evidenced by recent events, imprudent lending activity may in turn inflate a small-lending and commercial loan bubble,” the report said.

Risk Assessment

Congressional supporters say the program will make a profit, and the limited term of the investment will encourage banks to avoid losses, according to the Treasury.

“Banks will ultimately need to repay this money in full to exit the program,” Sperling said in an e-mailed comment. “They should have a strong incentive to make sure the loans they make with that capital will eventually be paid back.”

The program also faces a “TARP Stigma” because of its resemblance to government’s Troubled Asset Relief Program that may limit participation, according to the report. Community bankers complained that healthy banks were tarred when funds were used to save faltering lenders, and about TARP’s restrictions on pay and retroactive rule changes. The small- business program doesn’t do that, according to Carbo, and the bill sets minimums for profit, reserves and liquidity.

Supporters include The Independent Community Bankers of America, whose Washington-based lobby represents almost 5,000 lenders, and the American Bankers Association, which represents some of the largest financial firms.

Cash Needs

“If I had cash, there are people ready to work,” said Geoffrey Lenart, 47, owner of Eastpointe, Michigan-based Seven Seas Travel. Lenart said his 5-person firm was denied a loan in 2009 to improve its exterior. “I’m not the exception by any means,” he said.

Frank Sorrentino III, CEO of the North Jersey Community Bank, said his company didn’t take TARP money and won’t use this program, either, citing concern about rule changes.

“Nowhere in the TARP program did anyone realize they would be subject to compensation rules,” said Sorrentino, whose Englewood Cliffs, New Jersey-based bank has $560 million in assets and seven branches. “What will be in this program and what will you be subject to? A bank tax? God knows what.”

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