Last March 16, President Obama and Treasury Secretary Tim Geithner announced a new $15 billion program to help encourage loans to small businesses — the Unlocking Credit for Small Businesses, or UCSB program.
Subsequently, wrote Neil Barofsky, Special Inspector General of the Troubled Asset Relief Program, in his latest report, "two additional initiatives were announced to support small-business lending, and Treasury announced an increase of the TARP funding dedicated to support these efforts to $30 billion."
But oddly, Barofsky noted, as of December 31, 2009, "the details of the initiative under this program had not been announced and no funds had been disbursed."
A $15-30 billion program for small businesses and no details have been released?
And no money disbursed??
"Look, the programs that the president supported in the Recovery Act were very, very effective," he said after I asked him about the UCSB program. "You saw small — lending by the Small Business Administration increase by more than 70 percent — 75 percent from the lows. And we have been very effective at trying to make sure we're opening up the broader credit markets to companies around the world."
The Treasury Secretary didn't directly answer my question, but another administration source shed some light.
The source told me that the reason the program has not been officially utilized was twofold.
One, almost every potential participant declined to cooperate because they didn't want the stigma of using TARP funds given the tremendous public anger towards Wall Street and resentment about the $700 billion bailout.
Two, the specific purpose of the plan – to get the secondary market moving again for these SBA loans – was largely accomplished.
Once the program was announced, the source said, the market started to recover dramatically, and the activity on these particular markets increased four times compared to January 2009. Many market experts credited the mere announcement of the administration's willingness to be a buyer of last resort as helping to unfreeze that market.
The Small Business Administration reported that the number of SBA 7(a) loans sold on the secondary market was just $86 million in January 2009.
Between June and December 2009 the number of those loans sold on the secondary market averaged $357 million a month, higher than even pre-crisis levels.
Additionally, the weekly volume for SBA’s main loan programs increased 86% compared to the weeks before the stimulus bill passed in February 2009.
In April 2009, the Coleman CPR Report, an industry newsletter, quoted Scott Evans, of Government Loan Solutions Partners, saying, "We do not have a healthy market or a liquid situation yet, but there is a more optimistic feeling among SBA broker-dealers and lenders today." The Coleman CPR Report wrote that "a handful of loans are being sold to the market at 104 – 106%. These select increases in activity and premium rates seem to be directly tied to the March 17th announcement by the Obama Administration of $15 billion in TARP funding to raise liquidity in the secondary market.”
And GovGex wrote that in the week since the UCSB program was unveiled, "GovGex had an 11-fold increase in the daily number of loans offered for sale relative to the prior 90 days. Premiums have shown a significant upward trend. According to Brian O'Boyle of GovGex.com, loans with the most desired structure are receiving premiums exceeding 105%, compared with 101-102% premiums during the preceding 90 day period.”
But even with this positive response, sources say the Obama administration went through detailed term sheets with potential but ultimately almost every participant did not want to take on the "TARP stigma" and so unless the economic situation deteriorated sharply again, they opted not to participate.
Thus the announcement of this program was both a positive and cautionary tale, the source said.
The positive — that simply announcing a government backstop can have the intended effect without the program being utilized.
The cautionary tale — by Spring, the TARP stigma had grown so strong that potential participants were only willing to take part in a TARP program unless matters were to become truly dire.