Federal Plan to Aid Small Businesses Is Flawed, Lenders Say

By David Cho
Washington Post Staff Writer
Wednesday, April 1, 2009

Two weeks after President Obama announced a $15 billion initiative to spark lending for small businesses, every major provider of these kinds of loans says the plan will not work as designed.

The conditions attached to the program, which require these financial firms to surrender ownership stakes to the government and limit executive pay, are so off-putting that these companies say they will not participate.

Industry officials and congressional sources said these issues were raised with the administration before the small-business initiative was unveiled. Nonetheless, administration officials accelerated the announcement, moving quickly to show they were using financial rescue funds to aid not only big Wall Street firms but Main Street businesses as well, sources familiar with the matter said.

Administration officials acknowledge the initiative is not yet ready and say they are reworking the proposal.

On the day of the unveiling, Obama said: "We will immediately unfreeze the secondary market for SBA [Small Business Administration] loans and increase the liquidity of community banks."

An administration official said it is premature to speculate on the program, noting that Obama's team has repeatedly announced the broad outlines of its financial rescue initiatives and then worked out the details later.

"The president believes small businesses are an important engine for economic growth and recovery," White House spokeswoman Jennifer Psaki said by e-mail. "He remains committed to unlocking the credit market for small-business loans, and believes this small-business lending initiative will prove critical to that effort."

Getting credit flowing again to small businesses is crucial to the administration's plans to stem the soaring unemployment rate and turn around the economy. More than half of all U.S. workers are employed at companies with fewer than 50 employees. But the lending markets for these firms have been shut off since September because the credit crisis made investors skittish about all kinds of loans. Many are now laying off workers. Others are closing their doors.

Small business lenders get much of the financing for their loans from middlemen, which buy the debt and package it into securities to be traded by private investors.

The administration's program attempts to help these financial firms by guaranteeing losses on SBA loans and reducing the fees they pay to provide this type of debt. The linchpin of the plan is the government's offer to buy the loans that are clogging the books of the middlemen and the lenders, which would free them to offer more credit to businesses.

Although industry and government officials support this approach, some noted that the specific program won't work because it is funded by the $700 billion Troubled Assets Relief Program, which would require firms that sell their SBA loans to the government to hand over ownership stakes and curb executive pay.

The pay limits were made more restrictive when Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, added an amendment in February that severely limited bonuses at firms receiving emergency federal aid.

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