The Lending Gap Pierces a Hole in Heart of America’s Economy
October 19, 2009
http://patriarchpartners.com/dust2diamonds/2009/10/lending_gap/
The Federal Reserve’s recent upbeat policy statement missed a major threat to the economy that small and middle market businesses across the country understand well: banks are not lending. Despite easy credit and trillions in bailouts, there still remains a vast divide between the “haves” of Wall Street and corporate America who have benefited from the spoils of taxpayer largess and the “have-nots” of small and midsize enterprises (“SMEs”) that have long been the source of a majority of American jobs. As the CEO of a distressed private equity firm, each week I review the requests of dozens of SMEs that are unable to attain loans. Without access to capital, many companies that might otherwise survive have had no choice but to liquidate. As this progression evolves, jobs are lost, technology and tribal knowledge are destroyed and America’s depressed industrial base erodes further.
Last month marked the tenth straight month of declines in commercial lending. Since the crisis commenced, commercial lending has plummeted by 12% -- this equates to an average of 1% each month. Never before during the post-war era have we witnessed a retrenchment in commercial lending so sustained and so severe. By some estimates, lending has contracted at the most rapid rate since the Great Depression. And it’s getting worse. Last month marked the largest one-month drop in lending in half-a-century and September’s outlook is little better. In the first two weeks of September, commercial lending has already declined almost one full percent. The latest Congressional Oversight Panel TARP report, released last month, too, does not portend well for our future. That report illustrates a nose-dive of 43% in new commitments for commercial and industrial lending at large infused institutions during the months between October 2008 and this summer.
Small and middle market companies, especially those that are “the maker of things,” depend on working capital loans from banks to operate their businesses in the ordinary course -- to finance inventory purchases and to fund payroll and other operating expenses. In every business there are timing differences between the spend of capital to manufacture and deliver a product or service and the payment for those goods or services by customers. Battered by a perfect storm of declining revenues and a dearth of credit, companies that in previous recessions would have achieved workout solutions and forbearance from banks, or rescue financing from alternative lenders, are shutting their doors and terminating workers.
Alarmingly, with more than thirty bailout programs offered by Washington since the crisis began, not one addresses directly the dearth of lending to SMEs. Policymakers have found comfort in their delusion that an artificially supported Wall Street will transcend to magical solutions for the rest of the economy. We have spent trillions of taxpayer dollars to execute that chosen strategy, and yet, one year later, the financial crisis continues to gorge a gaping hole in the heart of our economy. Until we face the undeniable truth that the conventional banking system remains too damaged to resume its rightful role as the lubricant of commerce, a real recovery has no chance to take root.
The good news is that this problem is easily addressed. We already have a construct for a public-private program intended to purchase toxic assets from the balance sheets of banks. The model that Treasury established for the Legacy Securities Public-Private Investment Partnership could easily be modified to encourage private investment managers to originate new loans to SMEs. The program would target only those companies that have been unable to access traditional bank lending and would be a temporary measure to plug the lending gap while injured banks recover. The program could be more than fully financed with unused funds already set aside for public-private investment programs. As such, the plan will require no additional appropriations from Congress. In fact, the plan I propose is carefully constructed to deliver investment returns to taxpayers at very low risk.
Unlike the public-private programs for toxic assets, already hampered by unyielding banks with little motivation to sell, there is no shortage of SMEs in desperate need of loans. With access to low-cost government financing, private investment managers, carefully screened through a transparent and thorough process, will be anxious to participate.
America’s small and midsize companies, those still suffering under the burden of Wall Street mistakes, are the very same businesses that have long played by the rules and operated as the engine of job-creation and economic growth in America. A government program to support lending would both foster the rebuilding of this country’s manufacturing base and facilitate the historical role of SMEs to create and sustain jobs and to afford the opportunity to a workforce to earn its living with dignity.
The author is the CEO of Patriarch Partners, a $6 billion private equity firm focused on investments in distressed small and middle market companies. Her plan for saving jobs through a public-private lending program is available at www.SMERescueLoans.com.