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September 28th, 2010
Could This Be the Banking Bubble??

President Barack Obama has passed a bill allocating as much as $30 billion in credit for small businesses...too bad small businesses and community banks don’t want it.

The U.S. Senate hopes the $30 billion of capital funneled into community banks could make $300 billion in loans that would create jobs for small firms, according to a Senate summary.
If it works, they hope in Hopenchangeland, it could more than double the commercial and industrial loans at eligible banks as of the first quarter, according to data compiled by KBW Inc.

It seems however, the Senate has misdiagnosed the problem...bankers say the problem isn’t scarce credit, it’s lack of demand from creditworthy firms in a weak economy.

The result may be more loans given to distressed firms and higher losses (think the housing collapse and what happened there).

“The highest demand for loans is from the companies least qualified, the companies that have really struggled because of the economic downturn,” said Stark, a former Comerica Inc. executive whose Chicago-based investment bank helps community lenders raise capital.

Lawmakers like to see, “everyone as a good borrower, and that’s just not the case.”

Small borrowers are higher risks because their size leaves less room for error, bankers say.

Half fail within their first five years, according to the SBA, and the recession eroded the value of hard assets such as property and equipment to pledge as collateral, said Alfred Osborne, senior associate dean of the UCLA Anderson School of Management in Los Angeles.

“We can create lots of jobs making bad loans,” NFIB chief economist William Dunkelberg said. “We did that during the housing bubble.”  




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