March 16 (Bloomberg) -- President Barack Obama and Treasury Secretary Timothy Geithner said the U.S. will free up credit for small businesses by raising loan guarantees and spending $15 billion to bolster the secondary market.

“Small businesses are the heart of the American economy,” Obama told a gathering of business owners, community banking executives and lawmakers at the White House. He said the measures announced today are “a first step” of a continuing effort to help small business.

Geithner urged banks “to go the extra mile” to offer loans and said they bear a “special responsibility” to assist in the recovery because of their role in the financial crisis.

The administration is seeking to restore confidence in the economy and build public support for Obama’s strategy in battling a recession that has pushed the unemployment rate to 8.1 percent last month. The president also is trying to head off a backlash over government efforts to rescue banks and Wall Street firms.

Before talking about the loan program, Obama addressed bonus payments by American International Group Inc., calling them an “outrage” and saying he wants Geithner to “pursue every single legal avenue” to block the payments.

‘Recklessness, Greed’

“This is a corporation that finds itself in financial distress due to recklessness and greed,” Obama said. “This isn’t just a matter of dollars and cents. It’s about our fundamental values.”

Insurer AIG, which was saved from collapse by a $170 billion taxpayer bailout, has come under criticism for awarding $165 million in retention pay to employees in the unit that sold credit-default swaps to the bank counterparties, transactions that helped trigger the global credit crisis.

“It’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay,” Obama said.

To help entrepreneurs and business owners, the administration announced the Small Business Administration will step up lending guarantees. The SBA currently guarantees payment on 85 percent of a loan up to $150,000 and as much as 75 percent on loans of more than $150,000. The administration is raising the guarantee to 90 percent, reducing lender risk as an incentive to make loans.

Fees Waived

In addition, fees of as much as 3.75 percent of the loan’s face value are being waived effective today, and people who obtained loans and paid fees since Feb. 17 qualify for a refund of those fees. Canceling fees will lower the cost of money, administration officials said in a conference call with reporters.

Obama ordered the Treasury Department, effective March 31, to begin using as much as $15 billion from the $700 billion bank rescue fund to purchase SBA loans on the secondary market, freeing up bank liquidity to make more loans.

Many companies are struggling as credit has tightened. SBA loans in the fourth quarter fell 57 percent from the year-ago period, the SBA said. While the SBA typically guarantees $20 billion a year in loans, new lending is on track to fall below $10 billion this year, according to administration and banking officials.

“Over the last year the secondary market has frozen up,” Camden Fine, president of the Independent Community Bankers of America, said after leaving the White House meeting. Obama’s plan to buy up secondary market securities will be “a jolt in the arm for community banks.”

Tom Donohue, president of the U.S. Chamber of Commerce, said the moves to help small businesses are “very significant and very valuable.”

The administration also announced new reporting requirements on lending. The 21 largest banks getting government bailout money must provide monthly reports on how much they are lending to small businesses, and all other banks must make quarterly reports on such lending, under the plan.

To contact the reporter on this story: Roger Runningen in Washington at rrunningen@bloomberg.net; Kim Chipman in Washington at kchipman@bloomberg.net

Last Updated: March 16, 2009 14:46 EDT