Obama's Plan to Destroy the SBA

Mr. Obama’s latest package of measures aimed at helping small businesses smells like strike three. It’s Fannie Mae and Freddie Mac repackaged under a venerable name, the Small Business Administration (SBA). Ignore the ribbons and bows on the rhetoric spewing from the White House.

The heart of the proposal is centered on the SBA guaranteeing up to 90% of any loan under $150,000 and 75% of the funds for loans above $150,000. This didn’t change much from previous years. The fees for processing the loans will be temporarily eliminated under the new plan. So far, so good.

Traditionally, the primary bank lenders, involved with SBA loans, sold the paper to the secondary market. This freed the primary lenders to write more loans, and make more money.

The current economic crisis has all but dried up the secondary market. So Obama, Frank and Dodd rushed to the rescue!

Now, the SBA will continue to lend money to small businesses through bank lenders, and then immediately buy back the paper from the banks. This will definitely provide small businesses with a credit source.

But hold your horses. This is the identical system that was instituted for sub-prime home mortgages (Freddie and Fannie) that savaged the US economy.

It’s what’s missing from the new lender-borrower equation that is dangerous. Yesterday, the primary lenders (writing loans) knew the projects had to be credit worthy to entice the secondary market buyers. Today, the credit worthiness of the loans will be judged by bureaucrats with no skin in the game.

Now add Barney Frank and Chris Dodd’s penchant for affirmative action based loans. These socialists mandated that 56% of the mortgage loans had to be provided to marginal borrowers. Equal Lending Opportunity was the key that opened the US Treasury to the thieves on Wall Street who ransacked it.

Obama’s new SBA program is the same game, under the same management, with the same predictable outcome. The taxpayers are going to take another shellacking.

There is little hope. Neither Obama nor Geithner understand the decision making guidelines that reputable business people use in formulating borrowing decisions. It’s all about risk and return on investment.

Although the government guarantees the loan, it doesn’t guarantee the borrower’s business will be successful. If the loan is called due to missed payments, the lender has the right to seek any assets in the business or any pledged collateral. That’s why legitimate businesses carefully weigh the risks and rewards of expansion financed through borrowing.

The Obama and Geithner package increases taxes on a business’ future energy, income, profits and medical insurance. When combined with the elimination of deductions, it marginalizes the potential gains of small businesses who risk their existence on expansion.

But unworthy borrowers (Frank and Dodd’s favorite kind) risk nothing because they have no collateral. So take a wild guess who will be applying for these loans. Within a few years the SBA will follow the path of Fannie and Freddie.