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White House Eyes Bailout Funds to Aid Small Firms

By David Cho
Washington Post Staff Writer
Saturday, July 11, 2009

The Obama administration is developing an initiative to take money from the $700 billion rescue program for the banking system and make it available to millions of small businesses, which officials say are essential to any economic recovery because they employ so many people, according to sources familiar with the plan.

The effort would represent a striking shift from the rescue program's original mandate, since it would direct billions of bailout dollars toward a plan that aims more at saving jobs than at righting the financial system. Some economists estimate that small businesses, defined as firms with fewer than 500 workers, employ most of the country's workforce.

A proposal being floated by senior Treasury Department officials calls for using the bailout funds to expand a government program that helps small companies borrow from banks at low rates to keep their businesses going, the sources said. These "working-capital" loans would come with few restrictions and could be used to buy inventory, hold on to employees and pay off short-term debt.

The initiative would bulk up the Small Business Administration's most popular lending program, called 7(a). Lines of credit for small companies could greatly increase in size. If a firm failed despite receiving this help, the government would cover most of the losses on the federal loan, perhaps as much as 90 percent. Lines of credit act like the credit cards for companies -- short-term, revolving debt used to pay a variety of immediate expenses.

The scope of the Troubled Assets Relief Program, or TARP, has been expanded several times already, first to save General Motors and Chrysler and then to help life insurers. In both cases, government officials argued that emergency assistance was critical for preventing economic upheaval. Making the bailout funds available to millions of small businesses would be a far more dramatic expansion.

"Small business is the backbone of American jobs and innovation," said Matthew Vogel, a White House spokesman. "We are deeply committed to continuing to work every single day to devise and implement policies that will help small businesses through these challenging economic times."

He added, "This concept, among many others, has been raised in discussions on small business, but certainly no proposals are imminent."

Administration officials said discussions are in the early stages and that no plan is expected before the fall. Concepts now on the table may evolve or be scrapped altogether, they said. No dollar figure has been set.

But discussions about the plan have reached the highest levels of the government. In a meeting at the White House last week, Treasury Secretary Timothy F. Geithner expressed support for the proposal, but National Economic Council Director Lawrence H. Summers was more skeptical. Neither has made up his mind, officials said.

"[Summers] has supported every small-business idea we have implemented so far," said Gene Sperling, a counselor to Geithner who has been coordinating small-business issues at the Treasury. "When we have a brainstorming session on new ideas, Larry, as always, asks the toughest questions in the room."

The debate over the proposal has centered on whether taxpayers would be protected and whether banks that make these loans to small firms would lower their lending standards if the government promises to cover loans that go bad, according to participants present or briefed on the discussions. They spoke on the condition of anonymity because the conversations were considered private.

Administration officials want to prevent small businesses from closing and adding their workers to the growing ranks of the unemployed. Some officials say small companies are key to reversing the soaring unemployment rate, which has hit 9.5 percent, the highest since the early 1980s. Small businesses employ 60 percent to 80 percent of all workers, according to some economists, though others say those figures are too high.

Aiding small businesses could be a gamble because they have a poorer record than large corporations when repaying loans; it would be the riskiest government investment so far under the bailout plan. Officials are trying to design the program to exclude companies that are likely to fail even if they received federal aid, people with knowledge of the discussions said.

Some administration officials hoped to present several proposals to President Obama last week. But the meeting has been put on hold indefinitely while the Treasury conducts a deeper analysis of the problems afflicting small companies.

The administration has carried out several other programs to help small businesses through the $787 billion economic stimulus package passed by Congress in February. That measure doubled the SBA's budget to help it spark new lending. Since the bill passed, $6 billion worth of small-business loans have gone out the door, said Karen Mills, the administrator of the SBA.

"If we are going to move out of this recession and into recovery, it's going to be small businesses that leads us," Mills said. She added that her appointment to the NEC, the council led by Summers, is a sign that the administration has made this sector a priority.

The Treasury is working on a separate $15 billion effort, announced in March, to provide more credit for small businesses by aiding the financial firms that package SBA loans together and turn them into securities. The administration is considering purchasing these securitized loans as a way of helping lenders, but conditions in the TARP program that require aid recipients to surrender ownership stakes and submit to executive pay restrictions have discouraged participation.

Rep. Nydia M. Velázquez (D-N.Y.), chair of the House Committee on Small Business, expressed concern over the administration's plans to use bailout funds to help small firms but said she had not yet been briefed on the details.

"The committee has long recognized that a shortage of capital is the fundamental problem facing entrepreneurs right now," she said. "While it is promising to hear the administration acknowledges the importance of addressing small businesses' capital needs, it is critical that these efforts build on existing programs, and not needlessly duplicate them, undercut them or create additional red tape."

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