We’ve been hearing about increased confidence in small business and, if you’re like me, you want to believe it – but you’re suspicious, too. How do we really know if things are getting better? How do we really know if lending is beginning to open up for small businesses? I don’t think anyone is claiming that small business loans are becoming easy to obtain, but there are good signs that we are headed in the right direction and that the availability of funds are growing for main street.
Before we talk about the “good news” let’s do a quick history lesson about how we got here. Some would say it started with the secondary mortgage market. As mortgages got closed, lenders were able to sell their mortgages on the secondary mortgage market and wall street turned them into mortgage bonds. As real estate prices increased and mortgage rates decreased and profits were flowing through wall street the “appetite” for these mortgage bonds increased. Then you join that with deteriorating underwriting criteria along with a staggering number of sub-prime loans to non-credit-worthy borrowers and we’ve got problems.
But how did this happen? It happened because the ratings agencies (Fitch, Moody’s, and Standard & Poore’s) were giving the same grade to the pools of sub-prime mortgages as they were to the “prime” or “A-Paper” mortgages so these bad mortgages flowed through the system just like any other mortgage. As the defaults hit certain levels, the investors who shorted mortgages by buying insurance against the bad mortgages were able to cash in – this is where you Google search “who is John Paulson” or you could try “what did AIG do wrong?”
History lesson almost over – but what happens next? It’s called TARP or the Troubled Assets Relief Program. TARP is where Uncle Ben (Bernanke) drew on the lessons of The Great Depression of the 1930’s so we didn’t repeat our mistakes. The Fed actually turned a recession into The Great Depression in 1929 by letting the money supply contract very sharply which caused prices to fall and inflation to hit.
Secondly, they let the banks fail and thousands of banks actually failed. TARP was a conscious effort to let the banks recover first because if the banks fail then we all fail and we propel ourselves into a much worse economic climate. TARP was an infusion of capital into the top banks – yes, it’s 100% true that it was “unfair” to the smaller banks – in an effort to get them to continue to lend (or at least to not totally shut down their lending). Interestingly, tax payers made money on TARP but, of course, that hasn’t been talked about in the “occupy” movements.
So here we are a few years after TARP. Fortunately, The Great Recession did not become a depression.
According to CardWeb, $4.5 billion was extended to small business owners in 2009 by Citi. Then they increased that to $6 billion in 2010. Then they pledged to lend $24 billion to small business (defined by them as businesses with less than $20 million in annual revenue) over a three year period from 2011 – 2013. Citi announced last week that they are ahead of pace on their goal of lending $7.0 billion in 2011. They finished the calendar year very strong after a slow summer and ended up lending $7.9 billion in 2011 to small businesses.
I agree that there’s a lot more to be done. However, if we put mistakes of the past aside, this is one lender who is showing us progress and who intends to continue to lend at a much more generous pace than we saw in 2008 and 2009.
Lending Photo via Shutterstock