FUD Redux

Before I landed this college professor gig I worked in the financial industry for a couple of decades. I spent some time at a small community Savings & Loan, and then moved on to a large international commercial bank. I don't claim to be an expert, but I do believe I have a decent understanding of the banking industry. In fact, I was at a reunion this weekend of former employees of the large commercial bank. As you might expect, much of the conversation revolved around the economy and the bungling efforts of obama and his stooges. The general consensus was that no one in his administration understood business or the economy, and their reaction to things they don't understand is to try and control them. Hence ridiculous pieces of legislation like the financial overhaul bill passed in July and the just-passed $30 billion small community business lending program.

Back in July I explained why I thought the reform bill would do more harm than good (summary: it was even longer than the obamacare bill; no one had read it; it piled on over 5000 pages of new regulations, but left interpretation and enforcement up to the discretion of regulatory agencies; and most damaging of all, further contributed to the fear, uncertainty, and doubt (FUD) that is hamstringing American businesses).

I went on to elaborate about FUD in a later post.

Fast-forward to last week. The clown-in-chief and his cohorts managed to pass a bill that authorizes $30 billion for small banks to lend to small businesses. The idea is that if banks lend more money to small businesses, the businesses will expand, hiring more people and creating jobs. Only two small problems: (1) the banks don't want the money, and (2) neither do the small businesses. Why? FUD.

President Barack Obama's $30 billion small community business lending program faces one big challenge: many of the community banks and businesses it's supposed to help don't want it.

The lending program is part of a bill that passed the House of Representatives on Thursday and now awaits the president's signature. The legislation contains a mix of tax cuts and credits aimed at helping small businesses. The centerpiece of the bill is an effort to make billions of dollars available to community banks for loans to small businesses.

It seems like a simple effort to unclog a credit pipeline that has been blocked since the financial meltdown two years ago. But interviews with seven community bankers, as well as small business owners, show a reluctance to participate.

Bank executives say their customers don't want loans, even at low interest rates, because the sluggish economy has chilled expansion plans. Some say the federal money isn't worth it because they fear it will come with too much regulatory oversight.

"We have taken a strategic decision not to have our primary regulator, the government, also be a partner in our bank," said William Chase Jr., CEO of Triumph Bank in Memphis.

Chase said the bank already has enough capital to meet the paltry demand for loans. "Our business customers are mired in uncertainty and are reluctant to invest in their businesses," Chase said.

The previous two paragraphs just about say it all. The banks don't want the money because of fear of what the government might do to them after they accept it, and the customers don't want to borrow because of uncertainty about the economy.

Ninety-one percent of small business owners surveyed in August by the National Federation of Independent Business (NFIB) said all their credit needs were met. Only 4 percent cited a lack of financing as their top business problem. Plans for capital spending were at a 35-year low.

The bill is a solution in search of a problem Ninety-one per cent of the businesses it is supposed to help say they don't need it. So who decided we needed to commit $30 billion to this program? The same people in charge of managing the economy. No wonder we're in this mess.

Jack Rajala just laughs when asked if he wants to take out a loan today. He's in a fight to save his family's lumber business that has been buffeted by the recession and housing meltdown.

"I've seen many ups and downs; this is unquestionably the toughest," said the 71-year-old Rajala, the third-generation owner of Rajala Companies of Deer River, Minn. Since 2008, his company closed two factories and halved the number of employees to less than 100 as orders plummeted for windows, floors and door frames. Annual revenue is down 50 percent since 2008 to $5 million, and the company is losing money.

Rajala is symbolic of the challenges faced by Obama's small business lending initiative... 

Unfortunately, Rajala is probably laughing to keep from crying. His business is half of what it was before obama took office. The last thing he needs now is to borrow money to finance an expansion.

"The crucial questions facing business owners are does it make sense to make an investment right now, and will it generate positive returns?" Josh Lerner, professor of finance and entrepreneurial management at Harvard Business School.

It seems that the small business owners' answer is a resounding "NO!"

Noah Wilcox, CEO of Grand Rapids State Bank, with two branches in Minnesota, said he already has more capital at his $250 million bank than he can lend out.

"Many of our clients, business owners, put their projects on ice in 2008 because their job number one is to see their company through to the other side of this economic crisis," said Wilcox.

When firms are struggling to hang on to what they've got, expansion is the last thing they're worried about.

And then there's concerns that the government money will have strings attached.

The fears stem from what happened under TARP, the Troubled Asset Relief Fund, formed at the height of the financial meltdown to pump money into banks. Banks that accepted TARP money had to later cut dividends to shareholders and limit compensation to top executives. They were also penalized for early repayment.

Got that? The rules were changed after the fact. And banks that did well were penalized - PENALIZED!?! - for early repayment. That sounds like a typical government program. Reward the incompetent and punish the successful.

In this new legislation, the government is taking steps to avoid the tarnish that accompanied TARP. The key part of this effort: Banks can return the money without penalty if rules governing the small business loans change.

But Chase, the bank CEO in Memphis, isn't convinced.

"The rules can be changed any time," said Chase.

Smart man. Run as fast as you can as far away as you can from this nonsense. 

I'm from the government, and I'm here to help...