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Administration Considers Bailout Funds for Small Businesses

From The Washington Post
By David Cho

The new effort — which would represent a striking shift from the rescue program’s original mandate — would direct billions of bailout dollars toward a program that aims more at saving jobs than righting the financial system.

A proposal being floated by senior Treasury Department officials calls for using the bailout funds to expand an existing government program that helps small companies borrow money from banks a low rates to keep their businesses going, the source said. These “working capital” loans would come with few restrictions and could be used for buying inventory, holding onto employees and paying off short-term debt.

The initiative would expand a Small Business Administration lending program called 7(a), the agency’s most popular lending program. Lines of credit for small companies could greatly increase in size. If the firm failed despite receiving this help, the government would cover most of the losses on the federal loan, perhaps as much as 90 percent. Lines of credit act like the credit cards for companies — short-term revolving debt used to pay a variety of immediate expenses.

Discussions about the plan have reached the highest levels of the administration. In a meeting at the White House last week, Treasury Secretary Timothy F. Geithner expressed support of his staff’s proposal, while National Economic Council director Lawrence Summers was more skeptical. Neither has made up his mind, officials said.

“Larry has supported every small business idea we have implemented so far,” said Gene Sperling, a counselor to Geithner, who has been working on small business issues. “When we have a brainstorming session on new ideas, Larry as always asks the toughest questions in the room.”

The debate over the proposal has centered on whether taxpayers would be protected and whether banks that make these loans would lower their standards if the government promises to cover most of any loan losses, according to participants present or briefed on the discussions. The spoke on condition of anonymity because the conversations were considered private.

On one hand, administration officials want to prevent healthy small businesses from closing their doors and adding their workers to the growing ranks of the unemployed. But small companies have poorer record of repaying loans compared to large corporations and would be the riskiest investment made under the bailout program to date.

The officials said the discussions are in the early stages and that no plan is expected before the fall. Ideas currently on the table may evolve or be scrapped altogether, they said.

Some administration officials had hoped to present several proposals to President Obama last week. But the meeting has been indefinitely put on hold while the Treasury conducts deeper analysis of the problems afflicting small businesses.

The scope of the Troubled Assets Relief Program, or TARP, has been expanded several times already, first for auto manufacturers and then to life insurers. In both cases, government officials argued that aiding these firms was critical to preventing economic upheaval. But aiding small businesses would be the program’s most dramatic expansion.

Some officials argue that the program is worth the risk. They say small businesses are key to reversing the soaring unemployment rate, which has hit 9.5 percent, the highest since the early 1980s. Some economists estimate small businesses employ 60 percent to 80 percent of all workers, though others doubt such figures.

The administration has carried out several programs to help small businesses through the $787 billion economic stimulus package passed by Congress in February. That measure doubled the budget of the SBA to help it spark new lending. Since the bill passed, $6 billion worth of small business loans have gone out the door, said Karen Mills, the administrator of the SBA.

“If we are going to solve our issues in the recession and come forth in a recovery, it’s going to be small businesses that leads us,” said Mills. She added that she is the first head of the SBA to be appointed to the NEC, the council led by Summers, in a sign of the administration’s focus on the issue.

The Treasury is working on a separate $15 billion effort, announced in March, to provide more credit for small businesses by aiding the financial firms that package SBA loans together and turn them into securities.

The administration is considering purchasing these securitized loans outright, to free up the books of these lenders. But conditions in the TARP program, which require recipients of aid to surrender stakes and submit to executive pay restrictions, have discouraged firms from participating.

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