Congress passes new TARP-like program

Politicians on both sides of the aisle often decry TARP as a necessary evil that they had to pass at a time of crisis.

Now, just days before TARP was set to expire, Democrats have enthusiastically passed new legislation that would create the Small Business Lending Fund -- which is remarkably similar to TARP's Capital Purchase Program.

On Thursday, the House passed its final version of the Small Business Jobs and Credit Act of 2010 bill 237-187, on a largely party-line vote. Just one Republican, Rep. Walter Jones (N.C.) supported the bill, which originally passed in the House in June and in the Senate earlier this month.

President Obama is scheduled to sign the bill Monday.

The legislation creates a $30 billion fund that will provide government money to banks that would then, theoretically, loan that money to small businesses in their communities that are seeking to expand and hire workers.

"As we work to recover from the greatest economic crisis since the Great Depression, our small businesses remain the job-creating engine of our economy," House Majority Leader Steny Hoyer (D-Md.) said, following passage of the bill. "Supporting small businesses, and making products in America, are key to creating well-paying, secure, middle-class jobs."

The program is for small- and medium-sized banks, defined as those with less than $10 billion in assets.

Banks that get public money through the fund would pay dividends to the government. Those that increase lending would see their interest rate fall, while those that don't would see it rise. (More information on that formula is available here.)

"Putting capital in the hands of our small businesses and entrepreneurs is one of the best things we can do to spur job growth," said Rep. Gary Peters (D-Mich.), a member of the House Financial Services Committee. "The new lending will allow small businesses to put people back to work."

But the bill -- referred to by its critics as "son of TARP," among other derisive titles -- has come under heat.

A report released earlier this year by the Congressional Oversight Panel, the government's TARP watchdog, questioned whether the program would do any good.

The oversight panel said shrinking demand for small business loans could stymie any impact the lending fund may have, and the Small Business Lending Fund may be implemented too late to have a meaningful impact.

Others have noted that despite being structurally similarly to CPP, it is technically separate from TARP -- and thus not subject to scrutiny from the TARP Special Inspector General's office. Instead, it's oversight comes from the Government Accountability Office and the Treasury Department Inspector General.

Other critics have suggested that the program is a subsidy for banks and point out that nothing in the legislation forces the banks to increase their lending.

Even Rep. Nydia Velázquez (D-N.Y.), who chairs the Small Business Committee, voted against the legislation for that reason.

"Taking $30 billion and simply handing it to banks -- in the hopes that they will make loans -- is not sound policy," Velázquez said earlier this year during hearings on the legislation. She has called the program a "blank check" for banks.

John Dugan, who formerly lead the bank regulator Office of the Comptroller of the Currency, has also said the program would work better if money was lent directly to businesses as opposed to being funneled through banks.

Others have questioned whether the banks will repay their funds. Linus Wilson, a Univesity of Louisiana-Lafayette finance professor, and Dobrine Georgieva, a professor of finance at St. Thomas University in Minneapolis, published research indicating that "smaller banks, banks with lower tier 2 capital ratios, and banks with more problem assets" have been those most likely to skip the quarterly payments they owe under CPP. Those are the same type of banks that would receive funding under SBLF.

"Since pending legislation proposes to inject $30 billion more preferred stock into small banks with less than $10 billion in assets, the current study lends support to the notion that that program may be a very risky proposition," the authors wrote.

Rep. Spencer Bachus (R-Ala.), the finance committee's ranking member, has called the legislation "ill-conceived" and likely to run up the national debt. The Congressional Budget Office has estimated that the program woudl cost about $3.3 billion from 2011-2015.

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