When Gene Sperling, a high ranking Treasury Department official, testified in favor of the Small Business Lending Fund last month, he emphasized to House members that the program is for "your community banks... these neighborhood banks."
The implication was clear: if the Troubled Asset Relief Program was for the big Wall Street banks, then SBLF was for the little guys. The program is designed to inject $30 billion into small banks - defined as those with less than $10 billion in assets --- with the idea that they will in turn lend that money to small businesses.
But the administration already has a lending program for small banks - and that's TARP itself.
While the perception may be that TARP was exclusively a Wall Street bailout, that's not necessarily the case. Under the program's Capital Purchase Program - the bank bailout - $204.9 billion was invested in 707 banks and financial institutions. About 99 percent of those banks had assets under $10 billion - the maximum for eligibility in the new program. And 88 percent of the Capital Purchase Program recipients had assets under $100 million.
In other words, TARP benefitted many of the same types of banks that would benefit from the small business loan effort.
"Big banks received a lot of the TARP money, but there are more than 600 smaller banks that received TARP funds," former Congressional Oversight Panel member Paul Atkins wrote in an e-mail to BailoutSleuth. "You cannot say, as the administration claims that TARP money has not gone to community banks."
Many of the banks that are having trouble paying back that money -- or even keeping up with the dividends they owe the federal government -- also are the type of small banks that Treasury is targeting with the Small Business Loan Fund.
According to the latest report from the TARP Special Inspector General, 104 institutions have missed one or more dividend payments to the government through March 31, shorting taxpayers by $188.9 million. And 94 percent of the smallest banks that sold stock to the government through the Capital Purchase Program -- those with assets under $100 million -- have yet to redeem those shares.
Treasury's goal for that program was to "invest in healthy, viable banks as a way of promoting financial stability, maintaining confidence in the financial system, and permitting lenders to meet the nation's credit needs," according to the inspector general's report. But now critics are saying that the Small Business Lending Fund - which is structured similarly to the Capital Purchase Program - risks duplicating a flawed program.
A report released by the Congressional Oversight Panel shortly before the lending fund was approved by the House Financial Services Committee questioned whether the program would do any good. When that committee held a hearing on the program earlier this month, little mention was made of that report.
The oversight panel noted that the banks that received TARP money were not required to expand credit, and that the Small Business Lending Fund may be implemented too late to have a meaningful impact. It also said shrinking demand for small business loans could stymie any impact the lending fund may have.
However, Treasury officials cited a survey by the National Federation of Independent Businesses, which found that 45 percent of small businesses seeking to borrow money last year couldn't get the credit they wanted, suggesting the issue is a supply-side problem.
The report noted that, given TARP's poor record at improving credit access, it's questionable whether yet another capital infusion to small banks would jump-start small business lending.
"The real problem is ... there's no guarantee," said Veronique de Rugy, a senior research fellow at the free market-oriented Mercatus Center at George Mason University. "If you can pocket it, and then not do the thing you got the money for, that's a terrible incentive. Why would they do it? Small business lending is risky."
Banks that get public money through the Small Business Lending Fund would pay dividends to the government on the amount of public money invested. Those that increase lending would see their dividend rate fall, while those that don't would see it rise.
Still, the program has defenders who say the lending fund has an important role and could work if it's properly implemented.
"If you were to measure TARP by dollars of investment, it clearly was not directed toward community banks," said Robert Klingler, an associate at Bryan Cave LLP, who advises financial institutions on securities compliance and capital raising, and blogs about TARP.
He said the Small Business Lending Fund is crucial because Wall Street banks cannot spur small business activity in local communities. He believes the program offers enough incentives to banks for them to make loans, and even if the demand for lending is not high at the moment, the lending fund ensures that the capital will be available when that demand eventually increases.
"It's priming the pump," Klingler said. "We're removing one impediment, in hopes that something else serves as a spark."
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