TARP Verdict: Bailouts Failed to Help Small Business

Photograph by Scott Eells/Bloomberg

A new report commissioned by the Small Business Administration confirms what a lot of business owners felt in the four years since the financial crisis: The government bailouts for banks did little to relieve the credit crunch for Main Street companies.

In fact, banks that took taxpayer money during the financial crisis of 2008-09 cut their lending to small businesses more than other banks did, according to the paper by Rebel Cole, a DePaul University economist.

Small business loans outstanding dropped 18 percent, from a peak of $659 billion in 2008 to $543 billion in 2011, according to Cole’s analysis. TARP banks cut their lending to small businesses by 21 percent in that period, compared to a 14 percent drop at other banks, according to the paper.

The U.S. Treasury invested more than $200 billion in 700 banks through the bailout program, including $25 billion each to the nation’s largest lenders, including Wells Fargo, JPMorgan Chase, Citi, and Bank of America. Citi and BofA received other aid as well. Treasury has noted that its TARP repayments have turned a profit for taxpayers. A Treasury spokeswoman did not respond to an e-mail seeking comment.

Cole called the bailout “a bait and switch” in an interview on Nov. 9 from Ramallah, in the West Bank, where he is working with the International Monetary Fund. The U.S. government, he says, asked banks “to lend that money to small businesses and they didn’t do it. They shored up their capital position.”

The findings match recent data released about the Small Business Lending Fund, a vehicle that invested taxpayer money in financial institutions. While lenders in that program did increase loans to small businesses, those banks that didn’t use the money to refinance their TARP bailouts increased lending substantially more than the TARP banks did.

In Cole’s study, the drop in lending that followed the financial crisis was more severe for small businesses than for large businesses, and it hit commercial and industrial loans harder than commercial real estate loans. “Once you’ve made a loan to make an office building, you’re stuck,” Cole says. “They cut back their lending where it was easier to cut back.”

While the financial crisis caused banks to retrench, slack demand from small businesses that are healthy enough to borrow may be keeping lenders from expanding credit now. “The banks did cut back in a major way back in 2008. A lot of those small businesses failed. They’re gone,” he says. “The only customers out there are not creditworthy customers right now.”

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