Inside Financial Services

Even More Useless Than First Thought, If You Can Believe It

The Small Business Lending Fund was a failure every step of the way

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If the Durbin Amendment and its entirely foreseeable unpleasant unintended consequences haven’t yet convinced you of how hapless the government is when it involves itself in the nuts and bolts of the lending business, let us return for a moment to another recent government-instigated banking fiasco: the Small Business Lending Fund. For sheer pointlessness, this one has been hard to top. Yesterday’s Wall Street Journal provides an exclamation point to the whole, sorry saga:

More than half of $4 billion in federal funds disbursed this year to spur small-business lending by community banks was used to repay bailout funds that the banks received under the government’s Troubled Asset Relief Program.

The Small Business Lending Fund was meant to raise capital at smaller banks, which tend to lend more heavily to small businesses, in the hopes of jump-starting growth and employment. But instead of directly lending to small businesses, many of the banks used the money to rid themselves of higher-cost TARP debt and tougher restrictions. [Emph. added.]

Of course! We should have known it would end this way. Just to re-cap: most banks chose to not even participate in the SBLF in the first place. Then the Treasury decided to turn down most of the banks that did sign up. Now it turns out that the bulk of what money that was doled out didn’t go, as was intended, to fund small-business loans. Banks used it to repay TARP instead. What else should anyone have expected? Your tax dollars at work.

How pathetic. Let’s review the sorry math:

SBLF funding authorized by Congress $30 billion

Amount of funding banks bothered to apply for $11.8 billion

Amount of funding approved by Treasury $4.0 billion

Amount actually lent to small business $1.8 billion

You read that right. Just 6% of the funding originally approved by Congress actually ended up going where it was intended to go. I suspect the government spent more on the salaries of the bureaucrats who turned the banks down than it did on SBLF capital used to fund small-business loans.

Are you sensing a pattern? Congress enacts the Durbin Amendment limiting interchange fees on debit cards-and fees on debit cards shoot up. Congress enacts the CARD Act restricting term and rate changes card lenders can impose-and credit card loans become more expensive and harder to get. The Fed restricts overdraft protection programs-and free checking disappears. And in the piece de resistance, Congress sets up a $30 billion fund for small-business lending, and essentially no small businesses get loans from the fund.

At best, these programs have done no harm to banking customers and, at worst, they’ve made things worse. Message to Congress: you’re not helping! You should want an industry full of healthy banks, operating in a stable, predictable regulatory environment, willing to make prudent loans and without having to worry about second-guessing from on high. That’s not happening. Instead, government meddling is interfering with credit creation, not enhancing it. Nobody wants that.

What do you think? Let me know!

13 Responses to “Even More Useless Than First Thought, If You Can Believe It”

  1. a greenspan

    SBLF = son of tarp…….
    after the whole tarp experience – i dont know why any bank would touch this money other than those who used it to re-fi tarp … if you take it , you are just waiting to be labeled as taking “bail out funds”

  2. csb

    Is this a matter of bureaucratic ineptitude or the bureaucrats doing exactly what the legislation directed it to do? Someone should look at the question of faulty statutory language. Are the Dems accepting language which destoys the potential utility of propsaed legislation in order to get “something” through? Are the Rs inserting destructive language rather tha voting something down which is stupid and should not be passed at all?

    Yes, the government is feckless – but exactly how in what way? Pointing fingers is useless. Putting the finger on exactly what went wrong is useful.

  3. MC

    Honestly, Tom
    Should ANYONE (other than our Congressional halfwits) be surprised.

  4. Cliffe Cheston

    Is anyone in Congress getting your commentaries? Do they have any idea how ineffective/perverse their actions are? Do they care?

  5. APC

    A reminder: Banks cannot have TARP and SBLF at the same time, so banks must use their SBLF funds to repay TARP. It is still in the best interest of banks to promote small business lending, since it will lower the rate they pay on SBLF. Nonetheless, poorly handled.

  6. Hal Rubenstein

    Hard to believe the Government can be so inept ! No not really just a way of life. Durbin is such a fool why is he not getting any bad press form the banking industry ? Love your rants keepem up

  7. oy

    I’d feel more outraged if the banks hadn’t brought a lot of this on themselves through their singularly inept practices in the past. Leaving matters to them was a disaster. Mussing around trying to figure out a way to clean up their messes is leading to new messes, but maybe something wil stick that will actually work. How will we know until we try? But let’s learn from mistakes and not repeat them..

  8. Fed Up

    How about this thought; instead of blaming the inept gov’t for well intention program let’s call the greedy sob bankers for once. What’s wrong with doing right thing?

  9. Lioness

    The prime objective of government is to provide for government and to grow it’s interests. Very little benefit after a certain level of accomplishment flows to people outside of government. ‘The EPA is a prime example. Once safety levels of chemicals in water were reached…EPA expanded its own interest by increasing regulations where no increased regulations were needed for public safety. The ATF is another example were self interest has lead to disasters for people outside of government…government must be limited by ther people because government has no judgement as to when to stop or limit growth. By design government will always be inept and never be self-limiting.

  10. FSDA

    Actually, the Small Business Lending Fund was quite useful, as political payoff of the Independent Community Bankers’ Association (ICBA) to buy its support for Dodd-Frank. Moreover, the administration bought the ICBA on the cheap, making it doubly useful. How do Camden Fine and Karen Thomas keep their jobs, after having sold out their members?

  11. Former Banker

    They seem to do exactly the opposite of what they should be doing

  12. Anonymous

    A persuasive argument for nationalizing the banks we bailed out.

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