SBA bailouts draw little attention despite high expected default rate

Sen. Olympia Snowe (R-Maine) said the SBA loan program is a needed lifeline to small businesses during the recession.
Sen. Olympia Snowe (R-Maine) said the SBA loan program is a needed lifeline to small businesses during the recession. (Susan Walsh/associated Press)
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By Kimberly Kindy
Washington Post Staff Writer
Friday, November 6, 2009

A federal bailout of AIG last year attracted angry protesters who for weeks gathered outside the insurance giant's headquarters in New York and stalked company executives at their homes.

But there has been little response to the bailout of Peter Miller, who runs a two-person lobster-fishing crew in Maine.

Miller, who gets 50 cents on the dollar for his catch these days, a few months ago received a $35,000 loan from a new Small Business Administration program that was crafted in February during final negotiations on the federal stimulus package. The loan program offers an unprecedented 100 percent guarantee to banks, vs. the SBA's standard 75 percent. The loans' anticipated default rate is 60 percent, compared with the agency's average 10 percent. And all of the funds must be used to repay other delinquent loans -- another first for the SBA.

"Logic tells you this is a bad idea. By definition these businesses are already failing, but we are lacking standards right now; our world has been turned upside down," said Barry Bosworth, an economist with the Brookings Institution.

Just how $255 million in federal funds was set aside for the program -- called American Recovery Capital -- is a classic Washington story.

When Congress negotiated the final details of the American Recovery and Reinvestment Act, Democrats needed to secure a few key votes from Republican colleagues for the stimulus bill to pass. This allowed Sen. Olympia J. Snowe (R-Maine) to ask for a few concessions -- including a loan program aimed at helping her home state's ailing lobster industry.

The small-business owners in this industry are fishermen whose companies typically consist of little more than a boat, some traps and a small crew.

And their attitudes about the big guys' bailouts -- coupled with complaints that the SBA rescue for them may be too risky -- are shaping a new conversation as the money rolls out to a variety of small businesses.

"The way I feel about it is if we all default, it's just a drop in the bucket compared to what they gave AIG," said Miller, whose son also owns a lobster boat and who also secured his own SBA loan. "We're not looking for charity. We will work hard to pay it back."

Snowe also defended the program as a crucial "lifeline" to small businesses during "this particularly difficult economic time." But Snowe said she was troubled by the estimated default rate of 60 percent and hoped the SBA would take "corrective action" to ensure that only "viable" businesses receive the funds, as the legislation stipulates.

For their part, SBA officials said their borrower requirements are already so strict that they face growing criticism from the small-business community for creating too many barriers to the money. The first loan wasn't made until June, and so far $121.9 million of the $255 million has gone to 3,767 business owners.

The biggest problem that economists see with such rescue programs is over the long haul. The SBA loan is supposed to be a one-time thing, set to expire as soon as the money is doled out, which should be some time next year.

But how will federal agencies and Congress roll back such programs if there has been no economic rebound by that time? What about when things do bounce back?

Bosworth and other economists said history shows that taking away such programs can be difficult. As evidence, they cite programs that have lingered long past their sunset dates, such as the Agriculture Department's production flexibility contracts (now called direct payments) in the 1996 Freedom to Farm Act. That program was supposed to phase out over seven years as farmers transitioned to a market system that did not rely on government subsidies. More than 1 million farmers who received the original payments continue to receive them, according to data from the Environmental Working Group.

"When the crisis is over, we will have to find a way to clean up this mess," Bosworth said. "But how the hell are we going to turn this back to common sense again?"

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