Over on the homepage, my estimable colleague Steve Spruiell details another potential federal foray into the world of commercial lending: Uncle Sam wants to buy into community banks and then bribe them into making loans that comport with the political mandates of whoever happens to win the next couple of elections. How could that possibly go wrong?
Between the remains of TARP, the new “TARP Forever” program that Steve examines, the Fed’s ever-growing portfolio of dodgy securities, ongoing investments in private companies, and the unlimited line of credit to Fannie Mae and Freddie Mac, it’s beginning to look as if our government is dedicated to very little other than finance and war-fighting. It’s like a hedge fund with an army attached to it — the world’s greatest military married to the world’s worst hedge fund. Make that the worst hedge fund in the history of hedge funds, going out of its way to buy the very worst investments in the marketplace at the very highest price.
The big Wall Street–level interventions get all the press, but the government acts as a shadow bank all the way down through the system. Consider the curious case of the Small Business Administration, which was created in 1953 to “aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns,” but which has evolved into a mini-Fannie, replete with corruption-enabling incompetence.
The SBA, like Fannie and Freddie, is in the business of buying loans. Just as Fannie and Freddie helped to inflate the housing bubble by making sure that mortgage-lenders could write liars’ loans without taking much of the risk upon themselves, the SBA tries to keep credit easy and cheap for small businesses — at least, for certain kinds of politically favored small businesses — by buying loans and offering loan guarantees. They’re not very good at it: A 2006 investigation by the SBA’s inspector general found that 44 of the 45 loans examined in its audit sample contained undetected “lender deficiencies.” In other words, in 97.7 percent of the SBA loans examined, the agency was backing the small-business equivalent of a no-doc mortgage. It was the usual mix of incompetence and petty corruption: The SBA’s lenders were all over the map when it came to the kind of documentation they would accept, and so money was handed out when it should not have been, to people who should not have received it, who used it for things for which it was not authorized.
The SBA calls this using “loan proceeds for an unauthorized purpose.” The SBA puts the price tag of improperly reviewed disbursements at $130.6 million in the audit. Naturally, the thing to do in that situation is to double down. Or triple down: The so-called Small-Business Jobs Bill wending its way through the bowels of Congress would nearly treble the size of loans made available through the SBA Express program, from a maximum of $350,000 to a maximum of $1 million. Here’s a radical thought: A government program that as late as 2006 was messing up its lending documentation in 97.7 percent of the cases it handled should not be handing money out in $1 million increments. The SBA should not be allowed to run a pawn shop, much less hand out money in million-dollar buckets.
The same legislation would also radically expand the SBA’s mischief-making opportunities in other ways. It would define “small” businesses in such a way as to include much larger businesses than are currently eligible for SBA backing: Up to $15 million in net worth and $5 million a year in net income. (And you know how easy it is to camouflage those “net” numbers.)
There are other lending subsidies in the bill as well: Lending fees are waived in many programs and the SBA will continue to guarantee 90 percent of most of the general-business loans it supports — and the maximum size of those loans will be raised from $2 million to $5 million. Special fee subsidies enacted by the stimulus bill — the temporary stimulus bill, remember? — will be extended. Loans made under its “certified development company” program — loans of up to $5.5 million a shot — will be “temporarily” made available for refinancing commercial mortgages. Which is to say, while the rest of the financial system is deleveraging, reducing risk, and getting its credit-rating housing in order, particularly when it comes to real-estate lending, the SBA is sprinting heels-and-elbows in the opposite direction.