Behind the latest headline grabber, health care reform aka health care insurance reform, the battle to keep the US economy buoyed continues. There is something fishy about an administration that is more concerned with taking over companies than in job creation programs. In fact, after receiving bailout monies, some banks and GM laid off workers. Not the kind of stimulus for which we were hoping.
Small business is the backbone of the US economy. Sadly, “the government does not give loans directly to small businesses. The government works through commercial lenders, such as banks, by guaranteeing the small business loans of banks that participate in their loan programs.” http://www.businessweek.com/smallbiz/content/mar2009/sb20090317_224326.htm.
Regardless of the difficulty small business recently has had getting the loans they need to survive and grow, they are still expected to lead us out of this “depression.” Well it looks as if the “depression” will be tougher to get out of than we think because small businesses lead medium and large businesses in hiring. They need capital to live up to expectation and they need it fast. http://www.businessweek.com/smallbiz/running_small_business/archives/2009/09/298000_jobs_she.html
But banks who received bailout money have been busy elsewhere completing, say, mergers and they aren’t in the mood to help small businesses:
Wells Fargo hit the jackpot. It was one of the first banks to get bailout funds – the biggest amount awarded in a single shot: $25 billion tax dollars.
So how’s all that money being used? CBS News asked repeatedly and Wells Fargo told us it is “positioned well to continue lending across all sectors and satisfying customers’ financial needs, which is in the spirit of the Treasury’s plan.”
In other words, they didn’t give specifics. And the fact is, neither Congress nor the treasury department required them to. But there’s one big change at Wells Fargo that’s hard not to notice.
Troubled Wachovia has been bought out by Wells Fargo for $12.7 billion, creating the nation’s second-largest bank in terms of deposits. But it might not have happened without the generous support of the federal government and your tax dollars.
Here’s how. Last fall, in the span of just six days, Wells Fargo flip-flopped: first rejecting then accepting a deal to buy Wachovia.
What changed so drastically in less than a week? Two things.
First, Treasury Secretary Henry Paulson quietly issued a document revising the tax code, giving enormous benefits to some banks that buy other banks. For Wells Fargo, it could be worth up to $25 billion.
Then, Congress passed the giant bailout that would provide $25 billion in direct funds to Wells Fargo.
The very same day the bailout passed, Wells Fargo announced the surprise turnaround to investors: It would buy Wachovia after all.
On a call, Richard Kovacevich, the chairman of Wells Fargo, said: “This is of course a very exciting moment in the long history of Wachovia and Wells Fargo.”
Wells Fargo became one of nine banks to receive bailout money and quickly close deals with other banks. The takeovers are so politically dicey that a Wells Fargo executive assured Congress his company did not use bailout funds to buy Wachovia.
“We completed our own capital raise to assure that we have the appropriate levels of capital to complete that transaction,” said Jon Campbell, the CEO of the Minnesota region of Wells Fargo bank.
But nobody from Wells Fargo would explain how that squares with their press release from two weeks earlier. It says money raised by issuing stock and “the capital investment from the government” – that’s the taxpayer bailout – “will enable us to finance the Wachovia acquisition.”
And Wells Fargo may not be done. It’s also said to be looking into possibly buying a piece of Swiss banking giant UBS, which got its own bailout – $60 billion – from the Swiss government.
It doesn’t look as if Wells Fargo or other of its competitors such are Bank of America have been intent on giving small business loans. That is last on their list. Even programs specially created to help small businesses at this time have not lived up to expectations:
Washington officials and some lenders predicted that the program, providing emergency bridge loans as part of the economic stimulus package, would save jobs and provide a lifeline for vulnerable businesses. Many in the banking industry expected it to be fully subscribed in months.
But the program is off to a slow start, and many banks, including some of the largest, appear reluctant to take part.
With $255 million, the program is prepared to make about 10,000 loans of up to $35,000 each. As of Monday, the agency reported that only 1,127 loans, totaling $36.8 million, had been extended.
While the agency maintains that the program is on track, some in the banking industry say the banks are moving slowly because they have little incentive. “There’s not a lot of profit motive in a $35,000 loan stretched over six years,” said Paul Merski, chief economist for the Independent Community Bankers of America, a trade association.
Bob Seiwert, of the Center for Commercial Lending and Business Banking at the American Bankers Association, says “stringent underwriting standards” will require as much work as larger loans, making these even less economical.
Alex Cooper, a counselor at the Pima Community College Small Business Development Center in Tucson, says he has helped nearly 30 clients apply for the loans. None has received one.
http://www.nytimes.com/2009/08/13/business/smallbusiness/13small.html
On Cnn.com’s Business page, a video on the situation with loans for small business tells the sad tale that small businesses are forced to go to specialty financing companies and pay higher rates because banks have tightened loan policies. Clearly, something has to be done to change this picture or the US economy will not soon recover from its malaise. Don’t look to the banking, financial or production sectors of the economy as bell weathers of our plight. Look to small business – that overlooked sector.
Posted on September 8, 2009