Effort Underway to Speed Aid to Small Businesses

By David Cho and Brady Dennis
Washington Post Staff Writers
Thursday, October 15, 2009

The federal government is developing initiatives to make billions ofdollars of bailout funds available to small businesses throughcommunity banks, according to lawmakers and other government officials.

One approach, put forward by Sen. Mark Warner (D-Va.) on Wednesday,could combine resources from the Treasury Department, Federal Reserveand private banks to create a $50 billion pool of money that would beused to lend to small businesses.

Separately, the Treasury is developing its own plan that would besmaller in scale -- using around $10 billion of bailout funds -- andwould not involve the Fed, according to lawmakers and othercongressional sources who have been in contact with the agency.

Both proposals attempt to speed aid to small businesses, whichgovernment officials say are essential to economic recovery becausethey employ so many workers. But using the federal bailout for thispurpose would be a striking shift from the program's original mandate,which was aimed more at righting the financial system than saving jobs.

"We are actively working on and reviewing several ideas for how toprovide more credit to small business and the smaller banks that aremore likely to lend to small businesses in their communities," saidGene Sperling, a senior Treasury adviser. He declined to providedetails of the plan.

The Treasury is also developing other initiatives to help smallbusinesses. It is planning to ask lawmakers to revamp Small BusinessAdministration lending programs and extend aid provided to the agencythrough the Obama administration's economic stimulus package. It isalso negotiating with a small-business financier to buy a package ofSBA loans under a long-delayed program aimed at freeing up credit.

Warner said earlier this month that he fears the programs thatTreasury officials are considering to help small businesses might notbe "big enough," and that while billions in funds from the TroubledAssets Relief Program have gone to troubled banks that haven't beenable to increase their lending, "we've done nothing for smallbusiness."

On Wednesday, Warner said he remains open to how such an effortwould be funded, but one possible structure would have the Treasuryreallocate as much as $10 billion in TARP funds to create a loan poolexclusively for community banks, which could lend the money to smallbusinesses. The Fed would loan $35 billion to the pool, using loans ascollateral to create a small-business loan fund. The small banksthemselves would contribute $5 billion and agree to absorb some initiallosses so that, as Warner said, "they would have skin in the game."

He added that he has pitched his plan to Treasury officials,independent bankers and Sheila C. Bair, chairman of the Federal DepositInsurance Corp. "The key here is that we move very quickly andaggressively to shore up small-business lending," Warner said, adding:"Small businesses are going to be an important piece of the recovery."

The topic of small-business lending also arose several times duringa Senate Banking Committee hearing on Wednesday. "We've been indiscussion with Treasury for some time about making the TARP programwork better for community banks," Bair told lawmakers.

The Obama administration is also planning to ask Congress to revamplending programs at the SBA and extend for another year programsincluded in the $787 billion stimulus package aimed at making thatagency's loans more widely and cheaply available, according tocongressional sources, who spoke on the condition of anonymity becauseno announcement has been made.

These proposals were included in legislation that was the subject ofa hearing Wednesday in the House Committee on Small Business. The bill,among other measures, would increase the maximum amount that companiescan borrow through SBA programs to $3 million from $2 million andwaives for another year the fees borrowers pay for such loans, whichare largely guaranteed by the government. The cost of these proposalshas not been determined.

"In this economy, small businesses are struggling to find affordableloans, which is why the committee is working to modernize the SBA'scapital access initiatives and ensure they meet businesses' currentneeds," said Rep. Nydia M. Velázquez (D-N.Y.), who chairs the SmallBusiness Committee.

Separately, the Treasury is negotiating to purchase a $100 millionpackage of SBA loans from Coastal Securities, a small-businessfinancier, under a long-delayed $15 billion bailout initiative to aidthe financial firms that package SBA loans together and turn them intosecurities that are purchased by investors. This process makes fundsavailable for SBA loans.

To comply with the requirements of the bailout legislation, Treasuryofficials have offered the company a deal. It would be able to issue astake to the government and then repurchase it immediately if it soldits package of loans to the government.

But this quick-flip idea has not persuaded others to participate.Still, government officials are pursuing the Coastal Securities deal tomake sure the program is operational in case the markets take anunexpected turn for the worse.

"You can't quantify how much knowing that government programs werecoming effected investors' willingness to get back into the market,"said Chris Melton, an executive vice president of Coastal Securities.

SBA loans represent only a small portion of small-business lending.The rest of the market remains frozen as lenders are still wary aboutissuing new credit to small businesses, seeing them as a risky bet in astruggling economy.

"Every member has been hearing on a repeated basis from smallbusinesses that are concerned about the lack of credit," Warner said."There is enormous need out there."