Posts Tagged ‘TARP’

How Not to Help Small Businesses Access Loans

Tuesday, May 19th, 2009

Harder to FindIn a recent address to a conference of community bankers, U.S. Treasury Secretary Timothy Geithner invited them to participate in the federal government’s Troubled Asset Relief Program (“TARP”). Geithner’s stated reason for offering TARP funds to community banks, those with less than $500 million in assets, was to expand the pool of capital available to underwrite small business loans. Expanding access to capital for small businesses is one of the stated reasons that the federal government is offering the bailouts to large financial institutions. I wonder whether the government is sincere in this effort, and fails to appreciate the unintended consequences of its policy decisions, or if this is cynical pandering to the small business constituency.

Consider the idea of including community banks, which have generally been friendlier to small business borrowers than the big banks receiving TARP funds. Last fall, when certain banks were rumored to be takeover targets, small business owners transferred their accounts to other banks perceived to be more stable. While the protection of the Federal Deposit Insurance Corporation would make depositors of failed institutions whole, the relief is not instantaneous. Customers of the failed IndyMac, for example, had to wait several days or longer than a week for reimbursement. Many small business owners, out of an abundance of caution, transferred their accounts out of IndyMac upon hearing the concerns of Senator Charles Schumer (D-N.Y) of the Senate Banking Committee.

The reason is simple: small businesses cannot weather the disruption in their cash flow if they have funds tied up in a failed bank. Small businesses generally cannot defer their obligations. Laws vary from state to state, but generally employees must be paid their salaries within two weeks of their having performed the work. Failure to meet this obligation is one of the few instances in which the corporate veil can be pierced and the small business owner exposed to personal liability. In addition, small business owners often have to provide personal guarantees for many of their commitments. If small business owners continue to behave as they have in the past, they will likely withdraw accounts from TARP-participating banks. It would be a shame if community banks, which have been pillars of small business support, failed to appreciate the consequences of public perceptions of TARP and institutional stability.

Don’t Scare the Policyholders

Tuesday, March 10th, 2009

Rising Without Limit

The escalating cost of bailing out financial conglomerate American International Group (“AIG”) is staggering. Last week, Federal Reserve Chairman Ben Bernanke testified at a Senate Budget Committee hearing that AIG, which has recently benefited from multiple government rescues, made him “angry” because it had made “huge numbers of irresponsible bets” and “was a hedge fund, basically”. He reported that AIG’s investment vehicles lacked oversight. Last week, AIG confirmed it would give the US government a large stake in its two largest divisions as part of a more than $30 billion rescue package for the company, which lost nearly $100 billion in 2008. The Federal Reserve Chief defended the bailouts on the ground that as the world’s largest insurance company, AIG was too big to fail. In fact, the insurance operations of AIG that serve policyholders for property casualty, health and life insurance are regulated and presumably adequately reinsured and reserved for expected claims. It was the non-insurance financial businesses of AIG, in particular AIG Financial Products which took extraordinary risks on credit default swaps, that caused the fiancial losses of the company. Our policymakers should be clear in their use of language to avoid misleading the public as to what is really at risk here. And as economist Nouriel Roubini reported, this current round of bailouts for AIG was for the benefit of the large banks that were counter-parties to the aggressive financial trades made by AIG Financial Products. One would have thought that sophisticated Wall Street institutions would have diversified their risks to limit their exposure to any single counterparty and would have set aside allowances for expected credit losses. It is disingenuous to pretend that the bailout actions are being taken to protect the integrity of our financial system.