Parsing Secretary’s Geithner’s speech to small business

From Reuters Blogs

Small Talk: Parsing Geithner’s speech to small business

It appears the magic number for American small businesses is 10, as in the sudden urgency to help smaller companies after the U.S. unemployment rate jumped over 10 percent last month for the first time in a quarter century. After a year with Wall Street at the top of everyone’s agenda, Main Street is now taking center stage.

Suddenly new lending programs are being announced, town halls are hastily being arranged and political heavyweights from across the financial and ideological spectrums are falling over themselves to propose their plans for how to get small businesses back on track and hiring.

Over the past month, everyone from President Obama, to House Speaker Nancy Pelosi, to Federal Reserve Chairman Ben Bernanke and to billionaire investor Warren Buffett have addressed the issue. Yesterday was Treasury Secretary Tim Geithner’s kick at the can (watch the video of his speech here), when he chaired a forum on small business financing with FDIC head Sheila Bair and SBA chief Karen Mills.

Geithner said the first part of the recovery was to stabilize Wall Street in order to prop up sagging earnings so investment portfolios stop taking such a beating and hard-hit firms stop laying off employees. “That rise in earnings is not simply because banks are particularly smart or clever,” insisted Geithner in front of an audience of small business owners and lenders.

Geithner added that now that the banking sector has been stabilized, the next step is to get banks lending again to small businesses, which he called “the engines of job growth” and which have historically led the country out of recessions. “It’s because the taxpayers of the United States and their elected representatives decided that to save the economy we had to act to stabilize the financial system. All banks – strong and weak – benefited from those actions and banks bear some responsibility for the extent of the damage caused by this crisis and they carry a substantial obligation to help our communities get back on their feet.”

CRISIS MANAGEMENT 101

Geithner went on to give a brief, but informative, lesson on credit crisis management, stating:

“The basic cycle of financial crises is that credit is cheap and easy to get for a time. Banks relax their standards too much leading to excess lending and excess leverage and then when the crisis hits, banks tend to slam on the brakes, shift to reverse, banks pull back – not just from companies that are at more risk of failure, but from all companies – and this hurts the prudent and the conservative; those with impeccable credit histories as well as those who simply borrowed more than they could afford. Now although the demand for credit necessarily falls in recessions – particularly a recession following a long period of excess borrowing – the risk is that banks overcorrect, forcing viable businesses to layoff workers, reduce wages, close factories and defer investments and left to the market this process can feed on itself. A credit crunch can amplify a recession, slow recovery, cause more businesses to fail, unemployment to rise, putting more pressure on banks to cut credit lines for fear of higher defaults. And if this seems unfair and unjust, if it seems counterproductive to economic recovery and job creation, it is. And that’s why it’s so important in financial crises for governments to act aggressively to break financial panics, to make sure banks are able to fund at reasonable rates and that the overall banking system has enough capital to provide credit.”

Don’t you just wish Mr. Geithner had been your economics professor in university?

Geithner added that small businesses are more reliant on banks for credit and that that credit takes longer to start flowing again after a recession. As a stat, Geithner said just 30 percent of large businesses get their credit from banks, whereas that figure is closer to 90 percent for small businesses. Combined with the fact that small businesses generally have fewer capital reserves to ride out a downturn – usually a personal credit card or by leveraging personal assets, like a home or retirement savings – and if they were unlucky enough to have those with a bank that made bad loans, then they could find themselves in a very tough position.

“This is a very hard problem to solve. It’s something you can’t fix easily and it takes a co-ordinated mix of different strategies and policies.”

Geithner then broke down the Obama Administration’s plan to help small businesses in 6 steps, which are as follows:

1. Provide direct support: Recovery Act, which included tax-relief measures and boosted government-backed lending to small businesses through the SBA.
2. Support small business lenders: New legislation that would provide low-cost capital to community banks, or CDFIs, that serve the hardest-hit areas across the country.
3. Repair securiturization markets: TALF (Term Asset-Backed Securities Loan Facility) program which has helped lower the interest costs on asset-backed loans.
4. Provide guidance to lenders: This is the role of the FDIC’s group, led by Bair, of independent bank supervisors and regulators who will take on the added responsibility of making sure bank examiners don’t overcorrect by pulling back too much on lending to small businesses.
5. Support expanded efforts: Refers to additional programs run by lending agencies like the U.S. Export-Import Bank (EXIM)
6. Put pressure on banks to start using federal assistance programs: This mainly refers to the top 19 banks that were given taxpayer funds under TARP (Troubled Asset Relief Program) to start participating more in SBA lending programs, or to simply start loaning more directly to small businesses.

With his plan outlined, Geithner emphasized the most important step is to get bipartisan support for The Administration’s measures.

“It’s very important that members of Congress work with us to create the conditions that make it more likely that small banks are willing to come take advantage of these programs,” said Geithner. “That means they have to have confidence that if they take capital from the government they will not have to face a change in the rules of the game tomorrow. They need to be confident that if they participate in these programs they’re not going to face conditions in the future that will lead them to regret participating.”

Fascinating stuff …