Continuing credit disasters

An update from CFO.com on the federal government’s attempts to spur small business lending indicates that there’s a lot of fumbling and bumbling going on:

One proposal by the Obama administration is to take $30 billion of unused TARP money and create a Small Business Lending Fund for banks with less than $10 billion in assets. The amount of capital a bank could receive would be a percentage of its risk-weighted assets. The government would get at least a 5% dividend from the capital investment, but that rate would fall if the bank demonstrated an increase in small-business lending compared with a 2009 baseline. For every 2.5% increase in incremental business lending over a two-year period, the dividend rate would fall one percentage point. After five years, the dividend rate would increase to encourage timely repayment.

Assuming they’re looking for a five to ten year repayment, the government’s corresponding financing rate is between 2-4% (less than 1% if they borrow short), meaning a spread of 1-3%. Granted, there’s risk being taken “with taxpayers’ money”, but at a time when most economic theories say that the public sector should be dissaving (much less earning a fat spread on its existing funds), this kind of thinking is potentially disastrous (unless, of course, the dividends are going to be distributed to each citizen — read on once you’ve finished laughing).

Combined with the TARP stigma for recipient banks, we agree with critics of the idea who see it as a non-starter. This follows on the heels of what has begun to look like abject failure of the mortgage assistance programs enacted in 2009:

Earlier this year, the Making Home Affordable program was unveiled to help 3.2 million struggling homeowners stay in their homes either through a loan modification or a refinance…

…it’s not working.  This week, government officials reported to the House Financial Services Committee that 70 percent of borrowers who have signed up are not getting help…

Unfortunately, time is ticking and [better] ideas cannot be implemented quickly enough to keep up with the looming deadlines for these trial modifications, the increasing unemployment rate and rise in foreclosures.

As Rep. Barney Frank admitted in December, “no one can think we have done a satisfactory job.”

What can the feds do? Briefly, the best thing they could do is to minimize uncertainty for lenders and the entire private sector, and to ensure that fiscal policy is supportive – be it spending, tax cuts, or both (and ensuring that the TARP dividends distributed to its citizen-owners are tax free, ha ha ha…).

URLs:

http://www.cfo.com/article.cfm/14480869

http://www.credit.com/news/housing-market/2010-03-07/hamp-has-not-prevented-foreclosures-realtors-say.html

http://www.zillow.com/blog/mortgage/2009/12/09/hamp-harp-tarp-dud/

http://www.washingtonpost.com/wp-dyn/content/article/2009/12/08/AR2009120804194.html