Small Business Lending Fund Act Of 2010 -- Resumed

Floor Speech

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Mr. MERKLEY. Madam President, I wish to start simply by recognizing the tremendous work the chair of the Small Business Committee is doing in championing commonsense strategies to assist our small businesses in being the job factories that they can be if they have access to credit. That is where the genesis of this bill comes from. The question we have heard in each of our States is: How can I, as a small business, gain access to credit when the credit markets are frozen?

We have done precious little to assist them. So often, we need to indulge in far less partisanship and a lot more problem solving. If one investigates what is going on in the credit markets for small business, one finds that the businesses have gone to their banks, and the banks have said, we are cutting your credit line in half or we are eliminating it.

The small business said, well, we have always made every payment. Yes, but we are in a land of frozen credit and we cannot extend the same amount of credit. When we give you that line of credit, it counts against our leverage, and we have to increase our capital holdings to meet the leverage requirements. So we are taking away or cutting in half or cutting by 90 percent your line of credit.

At that point, the small businesses go to other banks and find out the other banks are in the same position. These are community banks where often the principals know each other, they have worked together, the banks want to lend, the small business wants to borrow, they can see it is a profitable arrangement, but the banks are constrained by their leverage limit.

If there were not a credit crunch in this Nation, the bank would be able to recapitalize and then make additional loans. That is where we had a period of irrational exuberance, now we are in a period of irrational fear, and people do not want to recapitalize community banks, even when they are healthy.

Through much discussion with many thoughtful people from various parts of the country, various parts of the credit system, it became clear that the chokepoint was the capitalization of healthy community banks. This is why what this provision does is it provides for the recapitalization of community banks. Community banks will have to pay that money back.

A lot of questions were raised about this point, and I want to clarify some of them. The first question was: What happens if a bank that is going under is seeking a bunch of money to recapitalize? Will this program help them? Answer: No, it will not. Because only banks that have CAMEL ratings--those are ratings of how healthy they are--of one, two or three qualify. The banks have to be healthy, because this is ultimately not about saving banks, this is about getting capital into the hands of small business.

The second question that many have raised is: Well, will banks not just sit on the funds, and not make loans? Will they not hoard funds in case they have better opportunities as the economy recovers? And the answer is probably not. Because the program was designed so that when a bank recapitalizes in this fashion, they pay dividends. If they do not lend out the money, then they pay a high dividend of 7 percent. They are not going to make money sitting on funds in their bank and paying 7 percent. But if they make loans, then they pay a 1-percent dividend, so that puts them in a situation where they will make money if they make loans. So they will not even ask for the money if they do not intend to lend it. That was a thoughtful question for some of my colleagues to ask, would banks sit on these funds. It is important that we design this program so that they do not. And we did.

A third question came: Well, does this not put taxpayer funds at risk? The answer is, actually it does not, because we are not lending to unhealthy banks, we are capitalizing healthy banks. The Congressional Budget Office estimates that this will make $1 billion, over $1 billion for the U.S. Treasury. That estimate does not include the taxes that individuals will pay on the wages they earn because small businesses are able to hire. That estimate does not include the taxes that small businesses will pay on their profits which will be higher when they are able to expand. So that is a bottom-line positive return that could be far larger when you take into account the impact on employment and the success of small businesses.

Other folks have asked another question: Why get lending into the hands of our small businesses through the hands of community banks? Why not create some government organization to do it? Well, very simply, banks are on Main Street. It is their business to know what works and what does not work. They know the principals involved. They know the local market dynamics. You do not want to set up a government agency to distribute loans when you can have the power, the knowledge, the wisdom, of community banks making smart decisions.

Then finally an additional question was asked: Well, will banks not make loans that maybe are not a good bet if they have this additional capitalization? Well, actually, no, they will not, because, first, they are not required to be recapitalized in this fashion. And if they do make loans through this system, they are not guaranteed loans.

When you have a guaranteed loan, you are saying to someone: You bear no risk. But these loans are not guaranteed. This is a bank doing its standard lending. In that standard lending, they make money if they make good loans, and they lose money if they make bad loans. So they have absolutely no incentive to lend, because if a loan goes under, the bank is hurt. It is all the power of a smart path to getting capital into the hands of our small businesses.

I guess my request to all of my colleagues is to ask yourselves if we are going to ever get out of this recession if we do not unleash the power of small business in America to create jobs. Please ask yourself, is it possible to unleash the power of small businesses if the small businesses do not have access to credit, and, therefore, if you believe in small business, if you believe in job creation, if you believe in strengthening communities through successful businesses and employed families, then this plan makes a lot of sense.

I will close with this thought: Let's bring commonsense problem solving to the challenge of putting America back on track. Let's set partisanship aside, let's set thoughts about the November elections aside, and let's engage in commonsense bipartisan problem solving, and this program makes all the sense in the world.

I yield the floor.

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Mr. MERKLEY. Mr. President, I came to the floor earlier to talk about a number of concerns that had been raised and how those did not actually fit the bill. One of those concerns was that banks would simply sit on the funds, which is not the case because there is incentive to lend. Another concern is there would be capitalization of failing banks, which is not the case because ratings are being applied so that capitalization only goes to healthy banks.

The point is not to save banks. The point is to get lending, to get capital into the hands of small businesses. I went through a number of those concerns.

Since I left the floor, there were three more issues that were raised by those who have concerns about the program. I wished to come back and address those issues.

One issue that was raised by a colleague is he said this program will have the government saying where to send money, what businesses will get money. In fact, no, not at all because similar to any capitalization of a small bank, the bank decides where to send money. That is the beauty of this public-private partnership; we are channeling, we are connecting to the power and wisdom of the small banks that understand the economy on their Main Street, that understand the reputation and capabilities of the folks who are asking for the loans, that understand the local economic dynamics. That is the duty. It is small banks that do what they do very well, which is decide where it is smart to invest and not invest.

A second concern that was raised since I last left the floor was that this would create a rush to lend. I think maybe the speaker had some picture in his mind that the moment a small bank got capitalized, they would immediately be judged on how much they had loaned out and that their rate of dividends would be set on that and, therefore, they would just throw the money out the door.

I wanted to make sure folks understood the basic mechanism in this bill. It works like this: For every 2.5 percent incremental increase in loans made by small and medium banks, the dividend would be reduced by 1 percent. This is the key phrase: The enumerated loans would be monitored for a 2-year period, starting on the date of the investment. Based on the lending rate at the end of that 2-year period, the dividend rate would be locked in and the bank would benefit from this attractive rate for the next 3 years.

If a bank seeks some funds to be recapitalized, it has a full 2 years to get loans out the door and needs to do so only at a rate of 2.5 to 1; whereas, we know a lot of banks will leverage that at 10 to 1. This is a modest standard and certainly nothing that would impel a rush.

The third critique that was raised said this report--I hold up the cover, the ``May Oversight Report, Small Business Credit Crunch and the Impact of TARP,'' said there was a moral hazard in the structure of a small business lending fund. Let's find the language in the report and analyze what was actually being said. We will find it on page 77. Feel free to look it up.

In this report, it is going through a series of issues and saying: OK, this is something worth considering. That is why we value these kinds of reports because they point out the challenges we might be facing and allows us to design legislation to work better.

This report notes:

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.

Then it goes on to answer that critique:

Although, in the legislation, the carrot ..... is arguably stronger than the stick. .....

It is an incentive system rather than a penalty system.

Then it goes on to note further, and it received feedback from Treasury:

..... the SBLF was designed to minimize the chances that banks will use the capital to make risky bets.

Why is that?

The program does not shift risk away from the banks that receive the capital: any institution that receives funds under the SBLF is obligated to repay that money to Treasury and therefore will lose money if it makes a bad loan.

I made this point earlier that unlike a guaranteed loan program where it does not matter if you make a bad judgment, in this case, it is the banks themselves putting at risk their own profits, utilizing their best judgments.

I think it is appropriate that folks come to the floor and say: I want to oppose this bill because it has this problem and this problem. That is the value of debate. Others can come to the floor and say: Actually, it is not designed like that; actually, it has been addressed because it has gone through months of people wrestling with the best design to harness the power of small banks, to address the challenges of small businesses in getting loans.

We will not get out of this recession if we do not empower our small businesses. There is only one other approach that has been brought to this floor as an alternative, and that alternative is to tell the small business to run up its credit card. I don't know about in my colleagues' States, but in my State, running up your credit card is not a viable option for small businesses to succeed.

We have the power, the wisdom of Main Street banks helping Main Street small businesses. Let's put that power to work.

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