Washington tries to put more junk in the SBA’s trunk.<\/p>\n
The pre-recession economy saw more than its fair share of credit alchemy as lenders ignored equity.\u00a0 With bank loans to small firms\u00a0dropping 5.6% to $670 billion from heights of\u00a0$710 billion\u00a0as recently as\u00a0June of\u00a02008, the Administration has become increasingly desperate to get credit into the hands of business.\u00a0 The only problem?\u00a0 The companies that need the credit can’t afford to accept it<\/a>:<\/p>\n Bankers say the problem isn\u2019t scarce credit, it\u2019s lack of demand from creditworthy firms in a weak economy. The result may be more loans given to distressed firms and higher losses. While bank regulators don\u2019t compile default rates, the biggest lenders<\/a> have charge-offs of 4 percent to 14 percent tied to small businesses. Eliot Stark<\/a>, managing director at Capital Insight Partners Inc.<\/a>, said their credit record resembles \u201cjunk.\u201d<\/p>\n \u201cThe highest demand for loans is from the companies least qualified, the companies that have really struggled because of the economic downturn,\u201d said Stark, a former Comerica Inc.<\/a> executive whose Chicago-based investment bank helps community lenders raise capital. The way lawmakers see it, \u201ceveryone\u2019s a good borrower, and that\u2019s just not the case.\u201d<\/p><\/blockquote>\n Washington’s lending advice is currently as practical as a baseball coach telling his hitter he can swing away – but under no circumstances will he be allowed to get out.\u00a0<\/p>\n Worse is D.C.’s legislative panacea of having the Treasury Department make preferred stock investments in “small” banks (those with assets of $10 billion or less) in order to stimulate loans.\u00a0\u00a0$30 billion in capital will be transferred to small banks in hopes that most of these lenders will leverage the funds to help create new small business loans –\u00a0a figure that some in\u00a0Washington estimate could be as high as $30 billion.\u00a0 Despite assurances from Treasury that the program will earn $1.1 billion over 10 years for taxpayers, the legislation sounds like TARP for Herv\u00e9 Villechaize-sized lenders.<\/p>\n Considering the bailout<\/span> investment program targets largely community banks which\u00a0account for most of\u00a0the 240 banks that have failed since 2009, it becomes even harder not to see the effort as an attempt to inflate a TARP into yet another credit bubble.\u00a0 Which may be precisely the point:<\/p>\n Small borrowers are higher risks because their size leaves less room for error, bankers say. Half fail within their first five years, according to the SBA, and the recession eroded the value of hard assets such as property and equipment to pledge as collateral, said Alfred Osborne<\/a>, senior associate dean of the UCLA Anderson School of Management in Los Angeles.<\/p>\n