US small business bailout program may be doomed to flop before it starts, as banks balk at terms

A $350 billion small business bailout, a vital fiscal lifeline for millions of enterprises facing certain doom at the hands of coronavirus-inspired lockdowns, may be dead on arrival due to fears of banks doing the lending.

Thousands of banks expected to participate in the Trump administration’s coronavirus stimulus loan program for small businesses are getting cold feet at the eleventh hour, representatives from those banks told a handful of media outlets on Thursday. If they pull out, the entire future of the program is uncertain – and with it the future of millions of American small businesses that employ half the country’s workforce and are facing utter economic devastation if the lifeline promised by their government doesn’t arrive soon.

With applications for the loans due to open at midnight on Friday, time is running out for the Paycheck Protection Program to pull itself together. The $350 billion segment of the $2 trillion coronavirus fiscal stimulus package signed into law last month was designed to give the small and medium-sized enterprises a nice low-interest (0.5 percent) loan to tide them through the crisis. Applicants can ask for as much as 2.5 times their average monthly payroll and won’t even have to pay back the money if they use it to keep their business running.

As it might be expected with such tempting terms – especially in a panicked climate where 6.6 million Americans have found themselves out of work in the last few weeks – demand is anticipated to far outstrip supply.

Industry experts predict a “feeding frenzy,” CNBC warned on Thursday, painting a nightmarish scenario in which millions of profit-starved businesses overload the application website clamoring for the “first come, first served” loans as soon as its (virtual) doors open – creating an Obamacare-esque debacle that could snarl distribution of the aid for months.

The threat of technical difficulties isn’t what’s causing the banks to balk at the starting line, however. Large and small lenders are reportedly fighting with each other and with the Treasury Department and Small Business Administration, which is administering the loans, over what exactly the final terms will be, each seeking to insulate themselves from risk and maximize profitability.

Small banks want a higher interest rate because they can’t make much off 0.5 percent. Banks large and small want signed guarantees – from both loan applicants and regulators alike – that they won’t be held responsible if applicants lie about their qualifications to secure loans under false pretenses.

Guidelines released by the administration on Tuesday place the responsibility on the banks to verify that applicants meet the program’s requirements. But the banks have argued they’ll be under a massive time crunch – applications are only open until June 30 – and that it simply won’t be feasible to rubber-stamp their approval on companies they’ve never even looked at before.

“Banks are working to get money out the door as quickly as possible,” a spokesman for industry group the Consumer Bankers Association told Politico, explaining they simply don’t want to be subjected to “unlimited potential liability for things that they cannot control.”

Add in the time required to satisfy anti-money-laundering and terrorist-financing laws, and the situation is totally unworkable, another banking industry trade group pleaded with the Treasury and SBA in a letter sent Wednesday.

The letter’s core premise – that’s a nice small business loan program you’ve got there, would be a shame if we couldn’t participate because of some inconvenient provision – may not have been intended as a threat, but given the urgency of distributing the funds to businesses already inches away from death, it could easily be interpreted as one.

Treasury Secretary Steven Mnuchin announced Thursday evening that the interest rate would go up to one percent, and that bankers would "never" have a better chance to make a 50-point profit on government-guaranteed loans. Mnuchin said he was sure that all banks will participate in the program, but implementing it would take some time.

It’s not that the banks don’t have good reason to be cautious. The crash of 2008 was in part caused by armies of so-called robo-signers working for banks who blindly approved mortgage after mortgage for applicants that had no chance of paying them off in order to bundle those mortgages as complex financial instruments whose value was as inflated as they were rotten to the core. This time around, the financial industry is hoping to avoid a repeat of the aftermath of the housing market crash that saw institutions wracked with billions of dollars in fines and lawsuits.

Still, small businesses are unlikely to see the big banks’ foot-dragging as admirable prudence – not when those same banks fell all over themselves to get 2008’s TARP bailout passed as soon as possible after the market collapse without a care for regulations or the program’s workability.

Unlike the Wall Street bailout, the effects of a bailout of the dying US small businesses will be immediately felt by millions of stressed-out Americans and might even reorient the economy toward recovery – that is, if the bankers don’t make a mess of it.

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