Inside Financial Services

The Small Business Lending Fund Ends With A Thud

59% of applicants declined. Just $4.3 billion funded. What was the point?

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Last Thursday, the final handful of banks the Treasury Department approved to participate in the Small Business Lending Fund finally received their investments from the government. Talk about going out with a whimper. In my opinion, the SBLF was perhaps a well-intended (albeit ineffective) program, but it was terribly, terribly administered. The scheme has essentially been a monumental waste of effort, with little good to show as a result.

To begin with, this was a program that drew little interest from small banks in the first place. Worse, the banks that did choose to participate soon found themselves caught up in an invisible bureaucratic hammerlock that helped ensure that little money from the fund will find its way to fund the small businesses that were supposed to have been helped. The only winners: employees of the Treasury Department, for whom the fund provided some vital busy-work. No wonder faith in the federal government is near all-time lows.

The SBLF, recall, was designed to help small banks by providing them with a source of low-cost capital for use to make loans to small business. Congress enacted the program last year as part of the Small Business Jobs Act of 2010. It put aside $30 billion for investment in small banks (those with $10 billion or less in assets). The banks were to get access to the capital in the form of a preferred-stock investment by the feds. The dividend rate on the preferred stock will be determined by the increase in small-business lending done by each participating bank.

That was the idea. The actual result was different-and not particularly inspiring. As we noted here last month, one of the most notable aspects of the program after it was passed was how little interest small banks had in actually participating in it. Of the country’s 7,000-plus community banks, only 932 chose to take part. They applied for just $11.8 billion, roughly one third of the $30 billion of funding contemplated by Congress. Any unused funds go back to Congress.

Still, $11.8 billion in new funding for small banks is at least something, right?

Actually, it’s less than you think. Once the Treasury Department bureaucrats who approve the applications got involved, they essentially stopped the program in its tracks. On September 6 (just three weeks from the SBLF’s drop-dead date of September 26) Treasury announced it had turned down 550 of the 932 SBLF applications–or 59% of applicants! Just $4.3 billion in funding has gotten an ok.

You read that right. In administering a program expressly enacted by Congress to funnel credit to Main Street business, the Treasury denied 59% of applications. Lest you think the applying banks are somehow chronically underfunded or fly-by-night operators, you are wrong. All applicants had to get approval from their primary regulator, before they could even apply for the funding. None of the banks I’ve spoken with indicated their primary regulators had any qualms.

Even, by the way, the FDIC, which (as we saw during the credit crunch) can be overly myopic about protecting the Bank Insurance Fund. One bank (which will remain nameless) told me, for instance, that the FDIC had no problem with it dividending cash from its bank up to its holding company so the holding company could fund the preferred’s dividends. And yet when Treasury got hold of the application, it turned the bank down anyway. The Treasury’s first, last, and only goal, it seems, was to put itself in a position where it can’t be second-guessed later on for any SBLF loans that go bad. The best way to do that, of course, is to make sure banks write as few as possible.

This is nuts. As government interventions in lending go, the SBLF isn’t especially objectionable. The government isn’t doling money out directly to politically connected cronies, but is instead providing low-cost capital to banks that will in turn use it to make prudent, profitable loans. Despite the widespread lack of participation, a number of banks were eager to participate. Surely there are small businesses around could use some additional credit. And yet the Treasury Department, in the face of Congress’ clear intent, essentially brought the entire program to a halt-all because of a primal instinct for bureaucratic self-preservation. I said it before and I’ll say it again: pathetic.

What do you think? Let me know!

9 Responses to “The Small Business Lending Fund Ends With A Thud”

  1. FreeTrader

    Government involvement in banking? Less is more. viva la market.

  2. Jim Wells

    Tom,

    Great reporting — as always.

    I was surprised you didn’t include the part about how many of the banks that did receive SBLF grants used the funds to repay their TARP obligations.

    Perhaps you know, but I saw nothing in the legislation or subsequent announcements about regular reporting from Treasury on the lending of recipients.

    Keep up the great work, Jim

  3. Ken Greenberg

    No surprise. It’s the old, “I’m from the government and I’m here to help you” joke. Puh-leez!!!

  4. No SBLF For You!

    The regulators looked at banks as they are, not as they would be after having capital added in assessing elegibility. An awful lot of banks have restrictions on paying dividends, which they would not have or need to have if they received SBLF funding. The Federal Reserve, a private entity owned by a consortium of big banks that all got their Treasury funding already, who then compete with the SBLF applicants, refuses to give blanket waivers of dividend restrictions applied to bank holding companies. Without such a waiver, the Treasury will not approve an SBLF applicant. Supposedly this knocked out at least 40% of the applicants for SBLF funding.

  5. sgr

    Buh…but…. we can’t trust the free market anymore. That’s what got us into this mess to begin with, right? Only our betters in government can save us from eeeeevil bankers.
    Sadly, this program was not anywhere close to an “exception”. This is exactly what government bureaucrats do. And when you point out the colossal failures they bring, they assure us that it would have been far worse without them.

  6. FSDA

    Tom – You continue to miss the real story here. The SBLF was political payola to the Independent Bankers of America. You know, the association without whose support Dodd-Frank would have failed. Not only did D-F screw the independent bankers’ community banks, but the payoff wasn’t worth anything either! Maybe Geitner view is correct that the community bankers just aren’t that bright. Promise anything, deliver worse than nothing!

    How does Camden Fine keep his job?

  7. Don - Retired from banking

    I’d like to see how manyof the approved banks were in blue congressional districts and how many of the denied were in red districts.

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