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Project on Government Oversight
 

 

 

 

Small Business Bailout Program Needs Big Oversight

June 10, 2010 

 

At a recent ceremony honoring small business owners from across the country, President Obama announced a batch of initiatives to encourage greater lending to small businesses, which have been hit particularly hard by the economic downturn. The most prominent of these initiatives is the Small Business Lending Fund (SBLF), which was further advanced last month when the House Financial Services Committee passed the Small Business Lending Fund Act of 2010 (H.R. 5297).

The idea behind the SBLF is to siphon $30 billion from the Troubled Asset Relief Program (TARP) into a new fund that would be used to extend capital to community banks with assets of less than $10 billion, in an effort to increase their lending to small businesses. H.R. 5297 would require participating banks to submit a plan outlining their small business lending strategy. It also comes with incentives for banks to participate, such as a low starting dividend that could be decreased even further if the banks make more loans to small business.

POGO takes no position on the bill’s goal of increasing lending to small businesses. However, we can’t help but notice that the SBLF is strikingly similar to the TARP’s Capital Purchase Program (CPP) and Community Development Capital Initiative (CDCI), two initiatives that were also created to provide capital to financial institutions in order to strengthen their lending capacity and improve the economy. So the question is: Why create the SBLF as a completely separate entity from TARP?  

At a hearing last month before the House Financial Services Committee, Treasury Secretary Counselor Gene Sperling remarked that “fear of stigma and retroactive punitive measures made community and smaller banks increasingly unwilling to take part in any TARP program.” But even though the TARP is widely viewed as a bailout program for Wall Street giants, Ryan Holeywell at BailoutSleuth reminds us that the vast majority of banks participating in the CPP had assets under $10 billion, raising questions about the need to create an entirely new program.

Furthermore, many of the TARP’s “punitive measures” were actually oversight mechanisms designed to safeguard taxpayer dollars and protect the integrity of the program. For instance, a rule limiting the influence of lobbyists and outside parties is absolutely essential to protecting the interests of taxpayers, who have already been forced to place trillions of dollars at risk through the government’s various bailout programs. POGO hopes Mr. Sperling isn’t suggesting that these taxpayer protections need to be sacrificed in order to encourage greater bank participation.

As POGO pointed out in a recent letter to Congress, even the rules that were put in place under TARP didn’t always go far enough:

For instance, because Treasury initially did not require banks to report on how they actually used the capital acquired through the TARP’s Capital Purchase Program (CPP), the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) had to conduct its own audit, which revealed that banks were using these funds for a wide array of activities, including lending, maintaining capital cushions, purchasing agency-mortgage backed securities, repaying outstanding loans, and even acquiring other banks.

If the SBLF is governed by even weaker oversight rules, it could be exceedingly difficult for taxpayers and other stakeholders to figure out whether the banks are actually making loans to small businesses as intended.

Meanwhile, others are questioning how effective the SBLF will be in practice. A recent report issued by the Congressional Oversight Panel (COP) outlined a number of inherent structural problems, and questioned whether creating a new program will really address the issue of the “TARP stigma,” especially since the SBLF and TARP are so similar. The COP report also points out that the program could create an unintended moral hazard:

A capital infusion program that provides financial institutions with cheap capital and a penalty for banks that do not increase lending runs the risk of creating moral hazard by encouraging banks to make loans to borrowers who are not creditworthy...The stronger the incentive the greater the likelihood that the program will spur some amount of imprudent lending activity.

POGO hopes Congress pays close attention to the concerns raised by the COP and other watchdogs. If Congress does decide to create the SBLF outside of TARP, it is imperative that the bill be aimed at creating a transparent and accountable structure that will benefit not only taxpayers, but also the small businesses that play a vital role in our economic recovery.


Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO's investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.

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