Obama seeks to reassure Main Street

The White House release:

WASHINGTON, DC – Today, as part of an effort Treasury Secretary Geithner first outlined in introducing the Financial Stability Plan (FSP) in February, President Obama and Secretary Geithner will announce plans to take immediate action to help ensure that credit gets flowing again to entrepreneurs and business owners. As another part of the Consumer and Business Lending Initiative, by the end of the month the Treasury Department will begin making direct purchases of securities backed by SBA loans to get the credit market moving again, and it will stand ready to purchase new securities to ensure that community banks and credit unions feel confident in extending new loans to local businesses. These purchases, combined with higher loan guarantees and reduced fees, will help provide lenders with the confidence that they need to extend credit, knowing they both have a backstop against their risk and a source of liquidity. These measures will complement other steps the administration is taking to help small businesses recover and grow, including several tax cuts under the Recovery Act.

The Obama Administration firmly believes that economic recovery will be driven in large part by America’s small businesses, which have generated about 70 percent of net new jobs annually over the past decade. But as the flow of credit has dried up during this recession, small business owners who were prudent and responsible have been set back by the behavior of others in our financial system who were not. Businesses with strong credit histories have seen loan applications denied due to conditions that have nothing to do with their own actions and are now struggling to expand their businesses, make their payments or even keep workers on their payrolls. As a result, while the U.S. Small Business Administration (SBA) typically guarantees about $20 billion in loans annually, new lending is trending below $10 billion this year.

The Obama Administration has already taken several positive steps to ensure that small businesses have access to the credit they need to support an economic recovery. The American Recovery and Reinvestment Act signed by the President provides for increased guarantees and reduced fees for certain Small Business Administration loans. In February, the Treasury Department made a special effort under the Consumer and Business Lending Initiative to improve terms for securities backed by SBA loans in the TALF.

1. Jumpstart Credit Markets For Small Businesses By Purchasing Up to $15 Billion in Securities
 Begin Direct Purchases of Securities Backed by Loans from SBA’s 7(a) Program: Traditionally, SBA lending has been supported by an active secondary market, as community banks and other lenders sell the government-guaranteed portion of their loans, providing them with new capital to make additional loans. But since last fall, this secondary market – which has historically supported over 40 percent of SBA’s 7(a) lending program – has frozen up. As a result, both lenders, including community banks and credit unions, and the “pool assemblers” that securitize their loans have been left with government-guaranteed SBA loans and securities on their books. This has prevented them from making or buying new loans. Today, the Treasury Department announces that – in order to get credit moving immediately to small businesses – it will:

o Stand Ready to Purchase Securities Backed by 7(a) Loans Packaged Since Last July: Treasury has hired an investment manager who will be authorized to purchase – starting by the end of this month – securities backed by guaranteed portions of 7(a) loans packaged on or after July 1, 2008. This will help clear the backlog of securities that has built up since the beginning of the credit crisis last year, providing pool assemblers and banks with a source of liquidity so that new lending can occur.

o Stand Ready to Purchase New 7(a) Securities Packaged Between Now and the End of the Year: Between now and the expiration of Emergency Economic Stabilization Act (EESA) authority on December 31, 2009, Treasury stands ready to purchase new securities backed by the guaranteed portions of 7(a) loans. By making this pledge, Treasury provides assurances to community banks and other lenders that they can sell the new 7(a) loans they make, providing them with cash they can use to extend even more credit.

 Make Direct Purchases to Unlock Credit Markets for SBA’s 504 Community Development Loan Program: The SBA’s 504 program combines government-backed loans with mortgage loans from private lenders to provide long-term financing of up to $10 million that directly supports economic development within a community. First-lien mortgage loans made by private-sector lenders – which account for 50 percent of the financing for 504 projects, and are not SBA guaranteed – were often traded in the past on an active secondary market that has frozen in the last year, leaving billions in unsold assets on the books of banks. To get the 504 lending market moving again, Treasury will:

o Stand Ready to Purchase Securities Packaged From 504 First-Lien Mortgages: Treasury will stand ready to buy first-lien mortgage securities connected to SBA’s 504 loan program. No later than May, Treasury will begin purchasing securities packaged on or after July 1, 2008 that meet eligibility criteria designed to protect taxpayers.

o Prepare to Buy 504 First-Lien Mortgage Securities That Receive New SBA Guarantees: As part of the Recovery Act, SBA is working to develop a secondary market guarantee program for securities issued from pooled 504 first mortgage loans. Once this program is fully implemented by SBA, Treasury will stand ready to purchase these government-guaranteed securities.

 Provide Liquidity While Keeping The Secondary Market in Place: These direct purchases of 7(a) and 504 securities will provide liquidity to lenders, including community banks and credit unions, enabling them to restart the process of recycling capital and extending loans. At the same time, the TALF component of the Consumer and Business Lending Initiative will provide investors with an attractive source of financing, allowing them to continue participating in the market. This is intended to keep the existing secondary market in place so that private investors can replace the government as the purchaser of these securities when market conditions return to normal.
2. Temporarily Raise Guarantees to Up to 90 Percent in SBA’s 7(a) Loan Program: The purpose of the 7(a) loan program is to provide a government guarantee that reduces the risk lenders face when they make loans to borrowers who cannot find credit elsewhere. But during the current recession, the guarantees – up to 85 percent for loans at or below $150,000 and up to 75 percent for larger loans – have not been large enough to give banks the confidence they need to lend. As part of its implementation of the Recovery Act, the SBA today announces:
 An Increase in Maximum Loan Guarantees to 90 Percent: Beginning today, any lender who participates in the 7(a) program can request a guarantee from the SBA of up to 90 percent for each eligible loan. This temporarily available increase in guarantees will help provide banks with the greater confidence they need to extend credit during the current recession.
 A Confidence Boost Lenders Need to Extend Credit: Combined with Treasury’s efforts to unlock secondary markets, higher loan guarantees will ensure that lenders have both greater safeguards against possible credit losses and assurances that there will be an active secondary market to purchase their loans and provide the liquidity they need to keep lending.
3. Temporarily Eliminate SBA Loan Fees to Reduce the Cost of Capital
 Elimination of Borrower and Lender Fees for 504 Loans: On any new eligible 504 applications submitted beginning today, SBA will temporarily eliminate the Certified Development Company (CDC) processing fees charged to borrowers and the third-party participation fees charged to lenders. As a temporary provision authorized by the Recovery Act, these measures will reduce costs to both borrowers and lenders participating in the 504 program, which has a demonstrated record of supporting community development and creating jobs.
 Elimination of Up-Front Fees for 7(a) Loans: For any new eligible 7(a) loan, the SBA will temporarily eliminate the up-front fees that lenders pass along to borrowers. These fees – which go up to 3.75 percent for larger loans – increase the cost of borrowing for small businesses and make it more difficult for them to access the credit they need to expand or make new investments.
 Rebates for Fees Paid Since February 17th: For borrowers or lenders charged any of these fees on loans approved on or after February 17th, the SBA will provide a refund, to ensure that Recovery Act provisions create the maximum possible economic stimulus.
 A Pledge to Quickly Turn Around Loans: To maintain a high level of service to potential borrowers and lenders alike, the SBA also pledges that complete loan applications will be turned around quickly by the SBA – usually in as little as two to three days.

4. Call by Secretary Geithner for New Reporting Requirements on Bank Lending to Small Businesses and Greater Efforts to Extend Small Business Loans

 Require the 21 Largest Banks Receiving Financial Stability Plan Assistance to Report Their Small Business Lending Every Month: As part of the President’s commitment to increasing transparency and accountability, Treasury will – for the first time – require the 21 largest banks receiving capital from the government to report how much small business lending they do every month.

 Call for Quarterly Reports of Small Business Lending By All Banks: Today, Secretary Geithner called for every bank nationwide to report their total lending to small businesses in their regular quarterly reports, rather than just once a year. Secretary Geithner will ask bank regulators to take steps to amend the quarterly Report of Condition to achieve this important objective. This will offer more current information about trends in small business lending, while at the same time providing important information about how well government programs are working to stimulate these loans.
 Issue Call for All Banks to Make Efforts to Increase Small Business Lending: Today, Secretary Geithner called on all banks – whether or not they receive FSP assistance – to make an extra effort to extend small business loans to creditworthy borrowers. In light of the extraordinary assistance provided to the banking system, Secretary Geithner emphasized that lenders should take a special responsibility for providing the credit that small businesses need to operate, expand and add jobs.

5. Issue Guidance for An Expanded Carryback Provision as Part of the Recovery Act’s Comprehensive Tax Cut Package for Small Businesses:
 Establish Five-Year Carryback Provision to Increase Tax Refunds for Small Businesses: Today, the IRS will issue guidance for a provision in the Recovery Act that allows businesses with gross receipts of up to $15 million to “carry back” their losses for up to five years, effectively allowing them a rebate on taxes paid in previous years. The Joint Committee on Taxation estimates that this measure will increase liquidity for small businesses by $4.7 billion by September 30, 2009.
 Continue Implementation of Recovery Act’s Comprehensive Tax Cut Package for Small Businesses: The carryback provision is only one of several measures in the Recovery Act that will improve liquidity for small businesses by lowering their taxes, including:
 Incentives to Invest in Plant and Equipment by Allowing Small Businesses to Write Off Up to $250,000 of Investment: The Recovery Act allows small businesses to immediately write off up to $250,000 of qualified investment in 2009, providing an immediate tax incentive to invest and create jobs.
 Additional Liquidity Support By Reducing Estimated Tax Payments: Normally, small businesses have to pay 110 percent of their previous year’s taxes in estimated taxes. But with incomes down for many small businesses this requirement is too burdensome – and causing a cash crunch. The Recovery Act allows small businesses to reduce their estimated payments to 90 percent of the previous year’s taxes, helping to boost their liquidity and better align their estimated taxes with their actual taxes in a year of severe economic contraction.
 Extension of Bonus Depreciation Deductions Through 2009: The Recovery Act also extends through 2009 bonus depreciation, allowing businesses to take a larger tax deduction within the first year of a property’s purchase.
 Incentives for Investors to Put Money in Small Businesses: Finally, the Recovery Act includes a measure that will exclude from taxation 75 percent of the capital gains for investors in small businesses who hold their investments for five years. In his budget, the President proposes to go further, eliminating all capital gains taxes on small businesses and making this measure permanent.

The president's remarks:

Well, we're here today to talk about how my administration can help the millions of small businesses bearing the brunt of this credit crisis. And Secretary Geithner and I just met with not only Marco and Cynthia, but a number of other small business owners and community lenders who shared with us experiences that are familiar to so many.

Small businesses are the heart of the American economy. They're responsible for half of all private sector jobs –- and they create roughly 70 percent of all new jobs in the past decade. So small businesses are not only job generators, they're also at the heart of the American Dream. After all, these are businesses born in family meetings around kitchen tables. They're born when a worker takes a chance on her desire to be her own boss. They're born when a part-time inventor becomes a full-time entrepreneur, or when somebody sees a product that could be better or a service that could be smarter, and they think, "Well, why not me? Let me try it. Let me take my shot." That's Marco's story, which he just shared with us.

That's Brian Conrad's story. When Brian's company eliminated his department -- Brian is sitting right there, so I don't want to embarrass him here, but it's a great story -- he lost his job, but he found his calling and started, you know, doing all kinds of work on a restaurant called the Blue Monkey, which now employs some 40 people in Pennsylvania's Lehigh Valley.

That's Carmen Jones's story. Carmen is over there. Carmen was disabled in an accident a few years ago. And in facing personal trials, she discovered a reservoir of strength and an untapped market. So today she helps companies advertise and sell their services to people living with disabilities.

This is America's story –- a place where we believe all things are possible; where we are limited only by our willingness to take a chance and work hard to achieve our dreams. But today, too many entrepreneurs can't access the capital to start, operate, or grow their business. Too many dreams are being deferred or denied by a form letter cancelling a line of credit.

And this is a consequence of the credit crisis, which began when some banks bundled and sold mortgages in complex ways to hide risk and avoid responsibility. The collapse of these mortgage-backed securities and other complex financial instruments froze the credit markets, including the markets that help small businesses access loans to cover payroll, to purchase supplies, or to expand in ways that create new jobs.

And I think it's important just to take a moment to understand -- here's how these markets work. A community bank, like the one run by Cynthia, offers an entrepreneur, like Marco, a loan to open up a restaurant. Before this crisis, Cynthia had two options. Her bank could hold the loan and receive regular payments from Marco as he pays back the amount that he borrowed plus interest. But another option was the bank could also sell part of the loan as an asset to a larger bank or to an investor. And that means that her bank could then use these new funds for more business loans and auto loans and home loans and student loans.

That's why this secondary market -- Cynthia's ability to resell loans -- is so important: It means banks can offer small businesses and families more credit because the bank has more money on hand. If Cynthia could get that $11 million of SBA loans that she currently holds in her portfolio, if she can get that into the secondary market, that's now $11 million that she can make work back in her community.

Today, unfortunately, there aren't nearly as many secondary buyers for these kinds of loans -- even when they're guaranteed by the Small Business Administration. So community banks cannot bring in the funds necessary to provide as many loans. And as a result, we've seen a precipitous drop in lending to small business.

The SBA typically guarantees $20 billion in loans annually. But this year, lending may fall below $10 billion. Even businesses with impeccable credit can't access loans.

So entrepreneurs and their employees pay an enormous price. But the whole country pays a price, as well, because less lending leads to fewer jobs and lower spending, which leads to less lending -- a vicious cycle that delays our recovery. And small businesses don't just provide jobs -- they provide the innovations that help us lead in the global economy.

Smaller companies produce 13 times more patents per employee than large companies. Now, think about it. Hewlett-Packard began in a garage. It was a small business. Google began as a research project -- small business. The first Apple computers were built by hand one at a time -- small business. McDonald's started with one restaurant. Marco, I know you've got ideas. (Laughter.) Small business.

Our recovery in the present and our prosperity in the future depend upon the success of America's small businesses and entrepreneurs. And that's why my administration has already taken aggressive action on their behalf.

My recovery plan, as already been noted, raises the guarantees on SBA loans to 90 percent and eliminates costly fees for borrowers and lenders that can be too costly in a recession. And these changes are being implemented now, fulfilling a campaign promise that I made. The recovery plan also includes a series of tax cuts for small businesses and tax incentives to encourage investments in small businesses. And the Treasury Department has launched the Consumer and Business Lending Initiative to help unfreeze the credit markets.

I've also proposed, as part of my budget, that we reduce to zero the capital gains tax for investments in small or startup businesses -- expanding and making permanent one of the tax cuts in the recovery plan. And my budget, as part of our health care reform efforts, calls for tax credits and other assistance to help small businesses offer coverage to their workers.

So we've already done a lot. But we've got to do more. And none of these steps will be effective unless we unlock the credit markets that are denying small businesses the loans they need to grow.

Therefore, as part of my Financial Stability Plan, the Treasury Department will begin purchasing up to $15 billion of SBA loans through the Troubled Asset Relief Program, or TARP. We will immediately unfreeze the secondary market for SBA loans and increase the liquidity of community banks. Cynthia's bank is going to be able to sell those $11 million loans so that she's got more money to lend. (Applause.)

So with this action, any lender that provides SBA small business loans will have a buyer for those loans. And in turn, community banks will no longer have to choose between providing loans to creditworthy small businesses and maintaining the required capital and liquidity.

Now, this plan is the latest step –- but by no means the last step –- in our ongoing efforts to stabilize the financial markets on behalf of businesses and consumers. We'll be outlining further steps on behalf of small businesses in the weeks and months ahead. And we will continue to do whatever is necessary to lead this economy out of recession and lay the foundation for long-term prosperity.

That's what the small business owners in this room expect us to do. They're folks like John Wilson, the president and part owner of a small business in Raleigh, North Carolina. He wrote to me a few weeks ago and participated in the meeting we just held.

And John's business, NC Design Group, sells cabinets and interior design services. And not surprisingly, it's been a tough year. Sales have fallen by half. And keep in mind, John had previously doubled what had started off as a very small business, to the point where he's providing a living for -- it was up to 40 -- 48 people. And John did all that he could to save loans. The owners, including John, have taken no compensation. But they had to reduce the size of their company from 48 employees to 34. And John just told the group of us that he personally took the time to speak to each and every person that he had to lay off. And I don't think he minds me sharing that he cried each time he did it, because it's a hard thing when somebody is working hard and committed to helping you build your business, you having to lay them off.

And now, even though they've never been late on a payment to the bank, they're having trouble keeping a credit line. It's putting his small business –- and the 34 jobs left –- in jeopardy.

Now, John is not looking for a handout. He's looking for the opportunity to succeed. And he said it best himself in his letter, and I'm quoting from the letter here: "Small business people are incredibly resilient and resourceful given half a chance," he said. "But we need the chance."

Well, I want to say to John and to every American running a small business or hoping to run a small business one day: You deserve a chance. America needs you to have that chance. And as President, I will continue to do everything in my power to ensure that you have the opportunity to contribute to your community, to our economy, and to the future of the United States of America.

Thank you, everybody. Thank you.