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

Bloomberg

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.”

States get set to Resume Unemployment Benefits

USA Today

State unemployment agencies are gearing up to resume sending unemployment payments to millions of people as Congress moves to ship President Obama a measure to restore lapsed benefits.

After months of increasingly bitter stalemate, the Senate passed the measure Wednesday by a 59-39 vote. Obama is poised to sign the measure into law after a final House vote scheduled for today.

It's a welcome relief to 2½ million people who have been out of work for six months or more and have seen their benefits lapse.

Under best-case scenarios, unemployed people who have been denied jobless benefits because of a partisan Senate standoff over renewing them can expect retroactive payments as early as next week in some states.

In other states, it will take longer, possibly as long as six weeks.

State unemployment and labor agencies have been preparing for weeks for Congress to restore jobless payments averaging $309 a week for almost 5 million people whose 26 weeks of state benefits have run out. Those people are enrolled in a federally financed program providing up to 73 additional weeks of unemployment benefits.

About half of those eligible have had their benefits cut off since funding expired June 2. They are eligible for lump-sum retroactive payments that are typically delivered directly to their bank accounts or credited to state-issued debit cards.

The Senate continued debating the measure a full day after a GOP filibuster was defeated by a 60-40 vote. Senate rules required 30 hours of debate.

Democrats tout the economy-boosting effect of unemployment checks because most beneficiaries spend them immediately, and they say that paying for them with cuts to other programs dilutes the stimulative effect.

"Extending unemployment insurance isn't just the right thing to do. It's also the smart thing to do for our economy," said Sen. Sherrod Brown, D-Ohio.

Economists say the measure will likely have a modest beneficial effect on the economy. It represents less than one-quarter of 1% of the size of the $14.6 trillion economy and is far smaller than last year's $862 billion stimulus legislation.

Republicans have blocked Democratic add-ons, such as aid to state governments, that could have meant a greater economic boost.

States Can’t Count on Bailout, Obama Appointees Say

Bloomberg / Business Week

States can’t count on the federal government for more budget bailouts, the heads of President Barack Obama’s debt commission told governors.

States expecting Congress to authorize more assistance are “going to be left with a very large hole to fill,” said Erskine Bowles, co-chairman of the National Commission on Fiscal Responsibility and Reform. States including New York and California have urged Congress to extend stimulus spending authorized to combat the recession, including extra Medicaid funding and money to pay public school teachers.

“I don’t think we can count on the federal government again,” Bowles, White House chief of staff under former President Bill Clinton, said yesterday at the National Governors Association meeting in Boston. “They just do not have the financial resources.”

While the economy has been expanding, states have yet to recover from the longest recession since the Great Depression. The rout cut into tax collections and led them to raise taxes and slash spending on schools, social services and other expenses. States have projected total budget deficits of $127 billion through 2012, according to a report last month by the governors association and the National Association of State Budget Officers.

Call for Help

The governors of New York, Pennsylvania and Michigan on June 30 led states pressing Congress to extend higher financing for Medicaid, the health-care program for the poor whose use surged during the economic crisis.

David Paterson of New York, Edward Rendell of Pennsylvania and Jennifer Granholm of Michigan and three other governors, all Democrats, traveled to Washington to appeal for funds after the Senate failed to approve $16 billion in extra financing for Medicaid and extended jobless benefits. Congressional Republicans opposed the measure’s cost.

“We need more help from Washington to protect against job cuts and health-care cuts,” Illinois Governor Pat Quinn, a Democrat, said on July 10 at the Boston gathering. “If we don’t do that, we’re following Herbert Hoover economics.”

Earlier this year, 47 Republican and Democratic governors urged Congressional leaders to extend the Medicaid help, signing a letter asking for a six-month extension. Fewer are demanding a bailout now because the stimulus is unpopular, West Virginia Governor Joe Manchin said in an interview yesterday.

“People are concerned that the amount of debt we’ve incurred hasn’t really stimulated the economy,” said Manchin, a Democrat.

Recommendations Due

Forty-three percent of voters think the American Recovery and Reinvestment Act hurt the economy while 29 percent think it helped, according to a national telephone survey of 1,000 likely voters conducted July 1 by Rasmussen Reports, which has a margin of error of plus or minus 3 percentage points.

After championing deficit spending to counter the economic downturn, Obama this year formed a commission to recommend ways to reduce the federal debt, which is projected to reach 90 percent of the U.S. economy by 2020. The panel’s recommendations are due Dec. 1, after the midterm elections in November.

Former Republican Senator Alan Simpson of Wyoming, the panel’s other co-chairman, told governors yesterday that the depth of the federal government’s spending imbalance is “shocking,” which limits the help it can provide for strained state budgets.

“The pig is dead,” said Simpson, referring to so-called pork-barrel spending that Congress directs to states. “There’s no more bacon.”

Tax Collections Drop

State fiscal woes will be “just as tough” next year because the economy is on pace to grow at a “lackluster” rate of about 3 percent a year, Yolanda Kodrzycki, an economist at the Federal Reserve Bank of Boston, told governors July 10 at the gathering. The budget pressure will be compounded by the need to help cities and towns faced with a drop in property-tax collections, she said.

Property-tax collections fell in the first quarter for the first time since the onset of the real-estate market’s crash, to $107.7 billion from $108.4 billion a year earlier, the Census Bureau said on June 29.

South Carolina Governor Mark Sanford said the “worst is yet to come” for the states because the economy is bound to fall back into a recession as government spending contracts both in the U.S. and elsewhere.

Kodrzycki said researchers at the Fed have become “much more sensitive” to the prospect of a so-called double-dip recession. She said the economy needs to grow at an annual average rate of about 4 percent in order for the unemployment rate to fall back to 5 percent by 2015.

“The road to economic recovery is a long one,” she said. “It’s a sobering picture.”

Federal Bond Program Fuels Projects for Lansing, MSU

Lansing State Journal

WASHINGTON - The need to fix Lansing's roads and sewer systems and attract businesses didn't slow down when the economy did.

So Lansing turned to a bond program, created by the federal stimulus package, to help pay for infrastructure improvements.

The city has issued about $20 million in bonds that are subsidized by the federal government through the Build America Bonds program.

"The decision to carry on with these projects was made easier with the Build America Bonds - and cheaper," said Chad Gamble, Lansing's public service director.

The federal government picks up 35 percent of the interest. In addition to making it cheaper to borrow money, the federal subsidy also attracts investors in a tight credit market because they can get a better return than they can on traditional tax-exempt bonds issued by states and local governments.

Michigan State University has used the program, as has the state government.

The U.S. Treasury Department estimates that the combined $2 billion in Build American bonds issued in Michigan through May has saved the state and local governments about $277 million in borrowing costs.

More than 1,300 bonds - 57 in Michigan - have been issued through the program around the country.

Benefits disputed

President Barack Obama wants to expand the program and make it permanent at a reduced subsidy of 28 percent. House Democrats have pushed through the president's proposal in a bill to extend expiring tax provisions. But that bill is stalled in the Senate, where Democrats are unable to block a GOP filibuster.

Critics of Build America Bonds say all U.S. taxpayers ultimately will bear the burden of a program they say might be doing more for Wall Street banks, which are collecting hundreds of millions of dollars in fees, than for state and municipal governments.

"We certainly have concerns that because of the subsidies, communities don't appear to be doing as good a job of trying to get the best potential deal," said Steve Ellis, vice president of Taxpayers for Common Sense, a government watchdog group.

Ellis said underwriters are getting paid large fees, and investors are turning a quick buck selling the bonds at higher prices, "which means we're going to be picking up a higher tab because the interest is higher."

Better roads, sewers

Sen. Chuck Grassley, R-Iowa, called Build America Bonds "a spending program disguised as a tax cut, getting bigger each year."

"In an era of bailouts and disgust with government spending, House members should have to answer for giving yet more taxpayer dollars to Wall Street and foreign investors," Grassley said.

State and local government officials say the program has been a boon for them at a time of fiscal uncertainty.

"I would certainly like to see it continue," Gamble said. "The challenge that not only the city of Lansing has, but all governments have, is just the sheer ability to continue these very large projects at all with the current state of the economy."

In Lansing, about half of the $20 million in bonds has been used to improve roads and about half has been spent on sewer improvements. That includes work on the city's long-term combined sewer overflow program to reduce the flow of raw sewage into the Grand and Red Cedar rivers.

The city also has repaired roads in numerous neighborhoods and used funds to make Grand Avenue more attractive with benches, new greenscapes and other improvements.

"Despite the economy, we're trying creative ways to really do great things for the city," Gamble said. "We want to be very aggressive in showing people that downtown Lansing and the entire city is a great place to locate your businesses and a great place to bring your family downtown."

$59 million saved

Michigan State University has used the bond program for $205 million in infrastructure improvements. About half the money was spent improving residence halls and about half spent improving academic areas, particularly research facilities.

Glen Klein, MSU's director of investments and financial management, said the university would have done the work anyway. But using the Build American Bonds program saved about $59 million in interest payments over the life of the 40-year bonds.

"The cost savings are such that we would hope that the program would be continued," Klein said.

The state Department of Transportation issued $282 million in bonds to reduce its overall debt service, saving $21.7 million. Michigan Department of Treasury spokesman Terry Stanton said Michigan was the first state to use the program that way.

The Taxpayers for Common Sense's Ellis, for one, is not surprised by the favorable assessments from state and local officials.

"It has been a good deal for them," he said. "It's like me asking you, 'Why don't you go buy a new car, and I'll pick up a third of the interest payments?' Wouldn't you like that?"

House Fails to Pass Jobs Bill, Unemployment Extension

Reuters

 

Republicans in the House of Representatives on Tuesday blocked a Democratic effort to extend unemployment benefits for the long-term unemployed.

Democrats brought up the measure under special rules that require a two-thirds majority for passage. But they failed to win sufficient support from Republicans, who expressed concern about the measure's $33 billion cost to the federal treasury.

The bill would help as many as 1.7 million people whose unemployment insurance benefits have run out. It would extend an emergency unemployment compensation program through November 30.

Democrats said the spending was justified to help the unemployed pay their bills and to boost the economy.

"When you provide unemployment insurance to people, they spend it," House Ways and Means Committee Chairman Sander Levin said. "If Republicans are worried about growth and consumer demand, they should work to put money in the pockets of people who are desperate, who are out of work, who are looking for work."

The U.S. unemployment rate, currently 9.7 percent, has remained stubbornly high even as the economy has begun to recover from deep recession sparked by the financial crisis.

The government is due on Friday to report the jobless rate for June. Analysts are expecting a slight increase due to temporary U.S. government census workers being laid off.

But Republicans said the $33 billion price tag was too much to add to an already bloated federal deficit.

"Look around the world. Countries are sinking in debt," said Representative Dave Camp, the top Republican on the Ways and Means Committee, adding that "this reckless spending cannot go on forever."

The $1.4 trillion deficit and $13 trillion debt are becoming issues in the run-up to the November U.S. congressional elections in which Republicans hope to make substantial gains against the Democrats, who control Congress.

The extension of jobless aid for the long-term unemployed has run into solid Republican opposition in the Senate as well. A measure was attached to a bill that would extend popular business tax breaks, which stalled last week over Republican concerns about deficit spending.

Michigan gets $155M to Target Foreclosures

The Detroit News

Michigan is ready to distribute nearly $155 million to fund foreclosure prevention programs, money the White House hopes will curb the state's flood of foreclosures.

Dubbed the "Hardest Hit Fund," $1.5 billion has been earmarked for five states -- Michigan, Arizona, California, Nevada and Florida -- where home values have decreased, on average, 20 percent or more. This first round of funding will be followed by a second that will give $600 million to five states with areas of high unemployment, including Ohio.

The money comes as the Commerce Department on Wednesday reported a bleak 33 percent fall in new home sales during the month of May, the result, experts said, of a phase-out of the popular first-time homebuyers tax credit that gave up to $8,000 for qualified buyers.

Robert Rahal, president of Birmingham-based Shore Mortgage, said the tax credit helped give the market a boost. While the new round of funding from the feds won't directly spur sales, Rahal said, it could help keep the market from tanking further.

"The fewer houses we have in foreclosure the better," he said. "Anything that can help stabilize that and get the appreciation process going is very welcome."

The states in the first round have consistently topped lists tracking housing value declines and foreclosures. Metro Detroit has been one of the hardest hit, with home values plummeting as workers have fled the state seeking opportunities elsewhere, leaving behind a market with a glut of cheap real estate.

The Michigan State Housing Development Authority will administer three programs with the federal money. It submitted plans for the programs in April for approval by Treasury Department officials.

To qualify for all of the programs, the homeowner has to remain living in the house and paying the mortgage for five years after receiving money; otherwise the money would have to be paid back.

MSHDA's three programs:

• $99.8 million will go to the Unemployment Mortgage Subsidy, which will pay for up to half of the monthly mortgage for unemployed workers while they're looking for a new job, up to a maximum of $750 monthly.

• $15.5 million will go to the Loan Rescue Program, which offers grants of $5,000 to homeowners needing help to catch up on their mortgages.

• $30.4 million goes to the Principle Curtailment Program, which puts up $10,000 in matching funds for homeowners who need to refinance mortgages in which they owe more than their homes are worth.

Losing Federal Money Could Hurt Michigan Budget

Associated Press

 

LANSING, Mich. — Michigan's budget problems will become significantly worse and state programs will be put at risk if Congress doesn't revive a federal spending bill, Democratic Gov. Jennifer Granholm said Friday.

The legislation killed by a Republican filibuster on Thursday includes more than $500 million in federal Medicaid money that Granholm and state lawmakers were banking on for their spending plans for the fiscal year starting Oct. 1. The legislation also would have extended federal jobless benefits for unemployed workers. Thousands of laid-off Michigan workers will begin to lose benefits in July, Granholm said.

The governor said failing to revive the bill would have a "devastating" effect in Michigan and other states relying on help from the legislation. Granholm said she was "amazed" by what she called "obstructionism" of U.S. Senate Republicans who blocked passage of the plan.

"They're not dealing with consequences here on the ground in the states," Granholm said. "This means jobs to people, it means health care to our citizens and it means food on the table for those who are unemployed."

Granholm is among the governors who plan to lobby for Congress to revive the measure.

Medicaid covers roughly 1.8 million of Michigan's nearly 10 million residents. Granholm said one possible budget option would be further reducing reimbursement rates to doctors who treat Medicaid patients. But she worries that would prompt doctors to stop accepting Medicaid patients.

Michigan lawmakers already are debating how to eliminate a projected deficit of roughly $1.5 billion from next fiscal year's state budget. They may be forced to look at cuts in all aspects of the state budget if they have to trim another $500 million on top of that.

There's a projected surplus in the state's school aid fund, but some Democrats don't want to raid that money to fill holes in the general fund. Democrats have discussed selling off another portion of future tobacco settlement money for cash up front, but many Republicans oppose that idea.

Matt Marsden, a spokesman for Republican Senate Majority Leader Mike Bishop, said the nonpartisan Senate Fiscal Agency is being consulted to look at possible options if the money doesn't come through.

More than 400,000 unemployed Michigan workers are currently receiving either state or federally funded unemployment benefits. Michigan's unemployment insurance agency estimates that 87,000 people would exhaust their benefits by July 3 without an extension. That number could double by the end of July.