MISH

In what should be no surprise, banks are cutting back on small business loans. Please consider Small business loans: $10 billion evaporates.

Eight months after President Obama began prodding the nation’s banks to increase their small business lending, the loan numbers continue to move in the opposite direction.

The 22 banks that got the most help from the Treasury’s bailout programs cut their small business loan balances by a collective $10.5 billion over the past six months, according to a government report released Monday.

Three of the 22 banks make no small business loans at all. Of the remaining 19 banks, 15 have reduced their small business loan balance since April.

Credit crunch: Obama administration officials, including Treasury Secretary Tim Geithner and Small Business Administration head Karen Mills, will host a forum Wednesday in Washington to discuss the lending challenges small businesses face. Bankers, members of Congress, and a selection of small business owners will participate.

While credit conditions have improved in some parts of the financial system, lending remains very tight for businesses that rely on banks for their financing, Federal Reserve Chairman Ben Bernanke acknowledged on Monday.

The article details the plight of Frank and Ingrid Brown who owns retail art and gift shops and wants to expand.

They applied for $35,000 in small business loans and “after filling out mountains of paperwork, the couple got a loan for $14,000 — less than half the $35,000 they applied for. Frank complained “By the time you get through everything, it is not even worth it.”

They also applied for a $50,000 credit line and were only approved for $10,000.

So what is it they need, $35,000, $50,000, or $85,000? If I was a bank I would be extremely nervous about making loans to expand small retail gift shops in this environment especially when they want a large line of credit to go along with it.

Bear in mind we do not have all the facts, nor does the article. But these tales of woe are useless without the facts. I see no reason to believe this couple is a good business risk. Perhaps they are, perhaps they are not but my inclination is to side with the banks.

Pump Runs Dry

Flashback March 16, 2009 Obama: Pumping money into small biz

President Obama vowed Monday to ease the financial plight of the nation’s small businesses, which have been hit hard by the recession.

“Small businesses are the heart of the American economy,” Obama said in a speech at the White House. “They’re responsible for half of all private sector jobs, and they created roughly 70% of all new jobs in the past decade. They’re not only job generators, they’re at the heart of the American Dream.”

Many small businesses, drowning from dried-up coffers and unpaid bills, are having a tough time getting loans from lenders.

“Too many entrepreneurs can’t access the capital to start, operate or grow their business,” Obama said. “Too many dreams are being deferred or denied by a form letter canceling a line of credit.”

The stimulus bill allocated $730 million for direct spending on small-business programs, including expanded financial support for the SBA’s two key lending initiatives, the 7(a) and 504 programs. Under those programs, the SBA guarantees loans made by banks to small-business borrowers. If the business defaults, the SBA picks up the tab for the insured portion of the loan.

Supply Side Economics Lesson

The articles are presenting things from the supply side as if there is a supply problem (banks are refusing to lend and there is not enough money to lend). Yet, Keynesians and Monetarists in general can hardly moan about the supply of money.

The Fed Funds Rates is zero, Bank excess reserves are close to a $trillion, another $trillion is stimulus is floating around.

Combined, all this money could do is raise GDP estimates up to a now downward revised 2.5% (probably low-balled so we can beat the street by a couple tenths yet again).

See 3rd Quarter GDP +2.5% : Is That All? for details.

So Why Aren’t Banks Lending?

1) There are no credit-worthy businesses that want to borrow.

2) Consumers are tapped out and do not want to borrow.

3) Banks are scared to death of pending commercial real estate losses, credit card losses, residential real estate losses, home equity lines of credit losses, and losses in general.

4) Asset prices are simply too high (and banks know it) and the securitization market has dried up

Demand Side Economics

Let’s now take a look at the demand side of things.

It’s easy to find cases like the plight of the Brown family as noted above and trump up “Banks aren’t lending tales”. But what if there are fewer credit-worthy businesses that want to borrow?
More to the point, what if in general, actual demand for small business loans is plunging?

Actually there is no “what if” there is simply “is”.

For proof, inquiring minds are digging for facts in the latest Fed Senior Loan Survey.

Please consider these charts.

Demand for C&I loans from small firms

Lending Standards For Small Firms

There you have it. 85.5% of banks responding to the survey have lending standards that basically remained the same yet 44.6% of banks report moderately weaker demand for loans, with only 8.9% reporting moderately stronger demand for loans.

There is plenty of money available for lending. However, there are fewer businesses wanting loans, and fewer still credit worthy businesses who want loans. That is what the data shows but it is not what is being reported.

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MISH

GE, the financial company masquerading as a manufacturer, has its eyes on the Pot of Government Stimulus Gold.

The financial crisis hasn’t been kind to General Electric Co. Its stock has lost almost half its value, the government has stepped in to prop up its enormous financial arm, and sales have slumped in core industrial businesses.

But Chief Executive Jeffrey Immelt now has his eye on a huge new pool of potential revenue: Uncle Sam’s stimulus dollars. Mr. Immelt, a registered Republican, quips about the shift in thinking in the nation’s corner offices: “We’re all Democrats now.”

GE has high hopes for the strategy. It says that over the next three years or so it could bring in as much as $192 billion from projects funded by governments around the globe, such as electric-grid modernization, renewable-energy generation and health-care technology upgrades.

The company is just starting to see a payoff. Last month, for example, President Barack Obama announced $3.4 billion in government-stimulus grants for power-grid projects. About one-third of the recipients are GE customers. GE expects them to use a good chunk of that money to buy its equipment.

“The government has moved in next door, and it ain’t leaving,” Mr. Immelt said at the International Economic Forum of the Americas in Montreal in June. “You could fight it if you want, but society wants change. And government is not going away.”

The 53-year-old executive supported the presidential campaign of Sen. John McCain, yet scored an invitation onto the President’s Economic Recovery Advisory Board, led by former Federal Reserve Chairman Paul Volcker. Inside GE, he pushed his managers hard to devise plans for capturing government money.

As part of that effort, GE has promoted policy proposals such as a government-backed power-grid modernization, and pressed the government to increase the size of stimulus grants for that purpose. It also has helped customers design projects and apply for government money, with the expectation that those customers will then buy GE equipment.

GE isn’t in agreement with the Obama administration on some proposals. Its GE Capital financial unit, which contributed nearly half of its earnings in recent years, received government backing for its debt when the credit markets seized up last fall. Now GE is lobbying against proposals that would separate GE Capital or its industrial-loan company from the parent company. More regulation on its finance division seems inevitable. The company also is opposed to health-care proposals that would result in $40 billion in fees on health-care device makers such as GE.

Mr. Immelt concluded that the company needed to capitalize on the surge in government spending. According to two people present at the meeting, Mr. Immelt told the group that business people needed to support the Democrats’ stimulus package.

By January, Mr. Immelt had become a leading corporate voice in favor of the $787 billion stimulus bill, supporting it in op-ed pieces and speeches. Reporters who called the Obama administration for information on renewable-energy provisions in the legislation were directed to GE.

As the bill worked its way through Congress, GE lobbyists pressed for grants, tax cuts or rebates aimed at businesses GE is engaged in, including provisions worth more than $80 billion for energy projects, appliances, health-care information systems and wind farms.

When the stimulus package was rolled out, Mr. Immelt instructed executives leading the company’s major business units “to put together swat teams to get stimulus money, and [identify] who to fire if they don’t get the money,” says a person who heard him issue the instructions.

In February, a few days after President Obama signed the stimulus plan, GE lawyers, lobbyists and executives crowded into a conference room at GE’s Washington office to figure out how to parlay billions of dollars in spending provisions into GE contracts.

Separately, Mr. Immelt got an invitation to serve on the President’s Economic Recovery Advisory Board, which would afford him access to the president’s economic inner circle.

GE spent $7.55 million lobbying in the second quarter, a 34% increase from the year-earlier period and more than any other single company, according to federal data compiled by the Center for Responsive Politics.This just goes to show you, if you have enough clout and you are are willing to kiss Obama’s ass, he just may be willing to kiss yours. This is the way the game works, so someone may as well be blunt about it.

Everyone wants a handout for themselves or their company while not wanting anyone else to get one. It does not matter one iota to these corporations how much of the stimulus is wasted. All that matters is how much they get.

In October, amidst all the excitement of companies beating 5 times watered down earnings estimates, GE managed to lay an egg as noted in Earnings Disaster At GE; Profit Drops 45%; Revenues Lag.

In my review I stated “The best way to think of GE is as a finance company masquerading as a manufacturing company. This was essentially the business model of GM as well, except GE is better at it. “

That prompted an immediate Email from Anne Eisele, GE Director, Financial Communications, who said “GE generated $18.4 billion in Infrastructure orders this quarter alone. That’s $500 million more in real, live manufacturing-related orders than we booked last quarter. We have $174 billion in non-financial (read: manufacturing) equipment and services backlog. At the same time, we’re making good on plans to reduce the size of our financial services company so that it contributes only about 30% of company earnings. To say that GE is simply a finance company masquerading as a manufacturing company is not only incorrect, it’s absurd.”

I asked what percentage of earnings financial services provided now and when would it get down to 30%. I did not receive a reply back.

However I would like to point out the catchy phrase at the end of her email “GE imagination at work“.

Indeed, “We’re all Democrats now” is pretty imaginative. Moreover, the campaign was a success. Immelt got an invitation to serve on the President’s Economic Recovery Advisory Board where he can now pitch products and ideas that will be good for GE whether they do a damn thing for the US or not.

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CalculatedRisk

In a report (pdf) titled “Factors Affecting Efforts to Limit Payments to AIG Counterparties”, Neil Barofsky, special inspector for TARP, wrote that the “negotiating strategy to pursue concessions from [AIG] counterparties offered little opportunity for success, even in the light of the willingness of one of the counterparty to agree to concessions”.

He also concluded that the “structure and effect of the FRBNY’s assistance to AIG … effectively transferred tens of billions of dollars of cash from the government to AIG’s counterparties”.

Here is a story from Bloomberg: Fed’s Strategy ‘Severely Limited’ AIG Bailout, Watchdog Says

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