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Final Course Term Paper: The Effects of TARP and SBLF on Various Stakeholders

Final Course Term Paper: The Effects of TARP and SBLF on Various Stakeholders

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    Team Term Paper Template Update By Ann Duy Lam Scott Mar26 Team Term Paper Template Update By Ann Duy Lam Scott Mar26 Document Transcript

    • The Impact of the U.S. Government Programs Trouble d AssetRelief Program and Small Business Lending Fund on Small -to- [Type the company name] Medium Enterprises and Their Stakeholders“[A]ll power is originally vested in, and consequently derived from, the people. That government is instituted andought to be exercised for the benefit of the people; which consists in the enjoyment of life and liberty and the right ofacquiring property, and generally of pursuing and obtaining happiness and safety. That the people have anindubitable, unalienable, and indefeasible right to reform or change their government whenever it be found adverse orinadequate to the purpose of its institution [Liberty-Tree.ca, 1998-2005].” – James Madison Society Macro and Microeconomic Impact of Government Intervention: TARP and SBLF Banking Business A Term Paper Presented to Meet Partial Requirements for Contextual Environment of Business, Mgt. 345 Course Professor: Ms. Wendy Giblin Duy Ahn Bui, Ahn Thi Van Tran, Lam Lei & Scott Green Saturday, April 28, 2012
    • Table of ContentsI. Statement of Proposal .......................................................................................................................................................... 4 Purpose and Mission: .......................................................................................................................................................... 4II. Historical Perspective ......................................................................................................................................................... 4III. Pre- and Post-2008 Financial Crisis Comparative Analysis: Government, Banking and Financial Institution, and Business ............................................................................................................................................................................. 7 A. Government: ............................................................................................................................................................... 7 1. Government Actions to Help Small Businesses: .................................................................................................... 7 1.1 Small Business Jobs Act (SBJA): ........................................................................................................................ 7 1.2 Small Business Lending Fund (SBLF): ............................................................................................................... 8 1.3 State Small Business Credit Initiative (SSBCI): ................................................................................................. 9 2. Government Approved Big Banks Equity Offering:............................................................................................... 9 B. Banks: ....................................................................................................................................................................... 10 1. Banks in the Relationship with Their Stakeholders: Customers and Government: .............................................. 10 2. Small Businesses Lending from Banks’ Perspective: ........................................................................................... 10 3. How Banking Industry Influence the Regulators: ................................................................................................. 12 C. Small Businesses:...................................................................................................................................................... 12 1. Small Businesses Sector and its Stakeholders: Creditors, General Publics and Employees:................................ 13 2. Small Business Lending Issue from Small Business’s Perspective: ..................................................................... 13 3. Small Business Performance:................................................................................................................................ 13IV. Final Assessment and Conclusion: ................................................................................................................................. 14References ............................................................................................................................................................................. 16 Literary Sources: ............................................................................................................................................................... 16 Web Sources: .................................................................................................................................................................... 16Appendage ............................................................................................................................................................................ 19 Exhibit 1: ........................................................................................................................................................................... 19 Small Business Administration (SBA) Origination and Timeline Graph ......................................................................... 19 Key Course Terms and References: .................................................................................................................................. 19 Special Terms and Description: ........................................................................................................................................ 20 Economic Emergency Stabilization Act (EESA): .......................................................................................................... 20 Exhibit 2: ........................................................................................................................................................................... 20 Exhibit 3: Appendix 1: ...................................................................................................................................................... 20
    • Exhibit 4 ............................................................................................................................................................................ 21Exhibit 5 ............................................................................................................................................................................ 21Exhibit 7: Employees on Nonfarm Private Payrolls (in thousands, seasonally adjusted) ................................................. 22Exhibit 8: ........................................................................................................................................................................... 22Exhibit 9: Video Archive .................................................................................................................................................. 22
    • I. Statement of ProposalPurpose and Mission:The purpose of this treatise is to define and describe the interrelationships between two U.S. governmental programs, both prodigies ofthe Small Business Administration (SBA) program - Troubled Assets Relief Program (TARP) and Small Business Lending Fund(SBLF) - and the various small-to-mid-size banking institutions that participated and determine how those relationships affected andimpacted small-to-medium enterprises (SMEs) and their stakeholders. This report analysis will be conducted during a five-year pre-and post-financial crisis period (financial crisis of 2008) spanning from the beginning of Year 2006 to the end of Year 2011, withconsiderable emphasis given to the time immediately following the financial crisis. II. Historical Perspective At the end of 2011, latest reports indicate that small to medium-size businesses (SMEs), which makes up more than 99% ofall businesses in the United States in both private and public sectors, generated nearly 70% of all revenue in the economy. Many ofthese businesses - according to the U.S. Treasury department, classified as a legal operating entity with a workforce capacity of 500employees or fewer – depend not only on the sales of their products and services but also on secondary resources such as externalfunding through equity and debt financing to maintain the normal flow of daily business operations, pay down existing debt, or toeven explore new business opportunities in the form of capital expenditures for business expansion or capital reinvestment for thepurpose of improving net income. Yet, largely due to the size of these companies, many of them rely almost exclusively on debt financing to service the bulk oftheir business operations or to use to address other facets of the business that requires additional financial resources. This method offinancing for SMEs has been a viable, strong staple of these businesses’ capital structure diets for over a century. However, asnormally the case with pecuniary matters which affect both business and the communities they serve unanticipated cyclical economicanomalies such recessions and depressions - two major macroeconomic phenomena - can deeply and adversely disrupt the flow ofbusiness activity on the macroeconomic and microeconomic levels. In recent memory, the clearest example how devastating theseeconomic distortions can be was evident in perhaps the most severe depression experienced by a country within the last three and ahalf centuries: Black Tuesday of October 29, 1929. Known worldwide as the Great Depression of 1929, this economic disruption caused the worst global financial panic inhistory which saw market value drop precipitously nearly over night, ending in a two-day cumulative percentage loss of 68.90% and amonetary loss of more than $30 million, total losses only eclipse by the Crash of 1987. Unemployment accumulated year end to an
    • incredible 607% over a period stretching from 1929 to 1932. The ripple effect move throughout various industrial sectors from thelocal neighborhood “mom and pop” store to corporate behemoths/oligarchies like Ford Motors, Carnegie Steel, Standard Oil, andSears Holdings to the numerous banking and financial institutions from community banks to larger corporate powerhouses, notablythe JP Morgan Bank, Chase Bank, National Bank of New York, Brown Brothers, Kidder, Peabody, & Co., Liberty National Bank,Farmer’s Loan and Trust Co., and a few others, which provided a litany of credit and credit-related services for both commercial andprivate lending purposes. As investors began losing confidence in the market, thus initiating one of history’s most massive selloffs,corporate equity dried up, triggering huge layoffs in the meantime (unemployment reaching as high as 25% in 1929), consequentlyreducing bank deposits as many struggling Americans rushed to withdraw from their savings to meet daily financial obligations inaddition to basic necessities. Despite being removed over a decade from the enactment of the Federal Reserve Act of 1913 that was legislated andapproved by Congress as a new regulatory measure that would help mitigate bank exposure to risk, banks, in general, still held verylow capital reserves of less than 10 percent that was insufficient to respond effectively to unanticipated events such as the marketcrash of 1929. The Federal Reserve Act of 1933 was created to allow the U.S. central bank, the Federal Reserve Bank to infuse andprovide instant liquidity to the economy through monetary policy that included a near zero federal fund rate to enable easy overnightand longer term lending from the country’s numerous banking institutions. Though it is not exactly clear to what degree higheramounts of capital reserves would have aided in the recovery efforts needed following the crash of 1929, however, it has been provenover the course of several decades that ensued after 1929 that other near-debilitating, near-fatal economic downturns have beenaverted by the intervening policy controls implemented by the U.S. federal government and other federal agencies in charge of fiscaland monetary policy. Yet, the questions always remain at to what extent and to what degree should government and their concomitant federalalliances be given the authority – some advocate absolute authority – to design regulatory policy that will ameliorate businesspractices, foster a fair and competitive marketplace environment, and help protect the average consumer from such abuses instigatedby corporate malfeasants, government corruption, and other systemic socio-economic improprieties that could create economicdistortions and mayhem within communities and the marketplace. But how much government intervention would necessitate soundmonetary and fiscal policy that would not suffer the fate of overregulation, resulting in a possible market contraction, or insufficientregulation, in which free market commerce goes unfettered and unchecked, mainly with the belief that the marketplace undergoesnatural periods of self-corrections, a concept many leading economists and proponents of behavioral finance often refer to as theEfficient Market Hypothesis?
    • If one fast-forward to the current economic and socio-economic model in American culture following the 2008 globalfinancial crisis in which some leading scholars proposed had germinated from cultural greed by America’s largest enterprises, withspecific reference to government intervention in ban king and small business environments, first, it is clear that well before this globaldistortion in the marketplace occurred government policy reforms created by an evolutionary series of legislative events that trace asfar back as deregulation initiatives by the Carter administration and fortified in later years by the Reagan, Clinton, and both Bush’sadministrations all contributed to the ground swell of economic activity that resulted favorable interest rates and soaring prices, whichnormally work inversely to one another when certain trends takes hold. Yet, as demonstrated before the crash of 1929, the economy atthe time saw a buildup in home inventory and an appreciable rise in home prices, mainly due to low fixed interest ARM rates and aflourishing economy by early 20th Century standards. However, unlike some mystifying and unidentifiable triggers that caused the sudden collapse of the market in ’29, the late21st Century collapses of 2000 and 2008 were anticipated by a few highly distinguished bureaucrats in Washington D.C., who for themost part were ignored by both executive and congressional branches, primarily because of the fertile economic market positionaround both time periods. Whether it was the tech boom of 2000 or the housing boom of 2007, aggressive and proactive changes inthe regulatory policies that helped entice and encourage start-up businesses (mostly SMEs) to elevate higher levels of entrepreneurialrisk-taking in 2000 and through the enactment of the Community Reinvestment Act (CRA) of 1977 and subsequent amendments madehomeownership easily accessible even though many of prospective homebuyers were unable to afford mortgages over the entireduration of the loan granted by both small community and large banking institutions. The clarion call established by variouspresidential administrations - as standard fair during each political cycle to improve the probability for reelection - since the passing ofthe 1977 CRA was to give to the average American citizen the opportunity to attain one aspect of the proverbial “American Dream” atall cost, which was homeownership. Banks were strongly encouraged to loosen lending standards to accommodate this initiative andthose who failed to acquiesce and comply to a newly-established political agenda could incur unexpected federal funding restrictionsand, in some cases, face fines and penalties; thus, the emergence of the housing bubble of 2007 which was preceded by theintroduction of mortgage-backed securities (MBSs) – Please click on the link in Exhibit 9 for a related video expository[Alowlyapprentice, 2011] - which materialized for the majority around the late ‘90s up to the new millennium, due to the slow phaseout, or total elimination, of such legislation like Glass-Steagall, Act, the father of the Volker Rule that was created by former FederalReserve Chairman Paul Volker to restrict commercial banks to use deposits to trade in secondary markets. Therefore, under thispretext, recapitulating the question that is the topic for discussion and debate in this treatise, what is the intricate nature andrelationship of this triumvirate of interlinking constituents within a business arena and how does it negatively and positively repercuss
    • or effectuate throughout global communities on both micro and macroeconomic levels? But before these questions are furtherexplicated, one must understand the type of societal and its appurtenant governing system that inseminate the business culture as it hasevolved over years and as it exist today. The American system of governance since inception is defined as a Constitutional Republic, which is exclusively built onfundamental principles involving free market capitalism with minimum government oversight and regulation. Yet, for mostdemocracies, or post-World War II free-market societies, there are times in which these societal systems are susceptible to variouskinds of rogue behavioral activity that undermine the normalcy and functionality of a free-flowing democratic system that, if persistfor any length of time, may require some form of manual corrected measures (e.g., government stimulus packages for both taxpayersand businesses, et al.) to reconciled damages caused by unforeseen, unpredictable market abuse. In its purest form, a democracy is composed of the citizens who by majority vote have agreed on the type of governance thatserves as the common law of the land. Those citizens are obligated and responsible for electing representatives to act on their behalfto design and developed policy that serve the common interest those who have elected them to serve. This is the essence of ademocratic society and acts as a litmus test to help determine if legislation created by elected officials is in the best interests of theindividuals who have empowered them with their trust to govern appropriately. Yet, it is here where the crux of the issue regardingthe impact government intervention has on banks, businesses, and their communities they serve, and in this analysis report, we willattempt to explain to what extent government programs such as TARP and SBLF has, first, responded to a global market downturndemonstrated by the 2008 financial meltdown and, second, to what level of effectiveness it has established to improve the financialwell-being for all stakeholders directly and indirectly impacted by the crisis.III. Pre- and Post-2008 Financial Crisis Comparative Analysis: Government, Banking and Financial Institution, and BusinessA. Government: 1. Government Actions to Help Small Businesses: 1.1 Small Business Jobs Act (SBJA): President Obama signed the Small Business Jobs Act of 2010. The sole purpose of the act was to stimulate entrepreneurialgrowth by providing tax incentives and easing access to capital (Kops, 2010). The exclusion on certain sale tax in the exchange ofqualified small business stock could significantly stimulate business and entrepreneurial development. However, as part of thisagreement between government and small business stock must be held for over a five-year period in order to meet the qualificationparameters for exclusion from a taxable income gain. Eligible small businesses would receive tax credit in investment, workingopportunity, research, and renewable electricity. As a result, start-up businesses could potentially double their expense deductions for
    • amounts reaching as high as $10,000. The Act increased the maximum loan from $2 million to $5 million under the Small BusinessAdministration (SBA) – Please refer to Exhibit 1 for SBA Timeline. The $200,000 treasury supported lending program helps start-upand newly created small businesses growth. The enacted Act is an important component of small business legislation and many economists believed that a half-millionnew jobs would be added to the economy (Dobriansky, 2011). The SBJA is considered a comprehensive statute with governmentregulatory and tax provisions for job creation and government contracting. However, as a caveat, many hidden provisions of the Actare not well known by the small business community. One of the original intent and beneficiary aspect of the Act for small businesscommunity was to obtain strong support from legislators, chambers of commerce, veteran groups, and other advocacy groups(Dobriansky, 2011). The SBJA is a working program and it has a real impact in creating jobs, sustaining economic virility, andthrough those conditions helping to retain highly skilled professionals in the process. 1.2 Small Business Lending Fund (SBLF): As part of the Small Business Jobs Act of 2010, the Small Business Lending Fund (SBLF) was designed to encouragelending to small businesses by providing capital to community banks with assets less than $10 billion. The U.S. Treasury Departmentplanned to make SBLF funding available by purchasing Tier 1-qualifying preferred stock or equivalents for institutions that appliedand were approved. In general, the dividend rate that institutions pay on SBLF funding decreases as the institution’s qualified smallbusiness lending, as defined by the Treasury Department, increases. On September 27, 2011, after making its seventh and finalannouncement of institutions approved under the program, Treasury indicated total funding for the program was slightly more than $4billion to 332 community banks (Investopedia, 2012). Community banks were expected to receive big incentives for small businesslending (Abeles and Salmo, 2011). As these banks increased their qualified small business lending, the U.S. Treasury continued topurchase their preferred stock with a lower dividend rate. The advantages for the banks included the strengthening their corporatebalance sheets with more capital with limited or practically no restrictions on executive compensation. It is believed that many bankshave quickly repaid their TARP (as of the beginning of 2012, some reports indicate that at least 80% of all TARP funds have beenrepaid) and now have made a smooth transition into the small business lending fund program. The Treasury department data showsthat 137 out of total 332 banks use totaling $2.2 billion to pay off their TARP obligations. Most banks only lend about 13% of $30billion of the available funds for small businesses. Unfortunately, regulators for SBLF prohibit banks from using SBLF to pay backTARP debt. Therefore, as a result, small businesses continue to struggle to get access to bank credit (Mecia, 2011). It has affectedtheir abilities to expand and hire additional employees. According to the Federal Reserve quarterly report, in recent years, a majority
    • of U.S. banks still tightens the costs of credit lines to smaller firms, consequently ending in higher premiums for riskier loans fromsome banks. 1.3 State Small Business Credit Initiative (SSBCI): The U.S. Treasury manages this program. The intention is to strengthen state programs to support private financing for smallbusinesses. The program is expected to increase lending to small businesses that are not getting loans they need to create jobs. Thisinitiative allows states to create successful models for states small business programs, such as Capital Access Programs, venturecapital programs. States can work together to standardize their program rules, such as Capital Access Programs. This effort canincrease the program’s efficiency and usability. Many states could use similar enrollment forms for financial institutions to participate,set the same rules for borrowers and the use of loan proceeds. The credit support program must demonstrate $1 of public supportresulting in $1 of new private financing, $20 MM maximum loan limit on individual guarantees. In this program policy guidelines foreligible state-own programs shall result in a minimum of $10 of new small business lending for each $1 in Federal funds. Thisreasonable expectation is to use federal contributions to generate small business lending at least 10 times the SSBCI contributionamount. It is a good idea, but a challenge task for states on how their Other Credit Support Programs will recycle SSBCI funds.According to the government web site, treasury will approve all applications, but criterion must be met. Financial institution lendersmust get assurance from eligible borrowers demonstrating that loan or investment proceeds are used for start-up costs, workingcapital, business procurement, franchise fees, equipment, and so on. 2. Government Approved Big Banks Equity Offering: A $700 billion TARP fund was created in response to the credit crunch that hit the US in 2008. The original intent of the fundwas to allow the Treasury to buy illiquid mortgage-related assets. The fund was ultimately used to provide direct capital infusions todistressed financial institutions (Farlex, 2012). According to Wells Fargo company web site, the bank repaid $25 billion of TARP infull in December 2009. The bank issued $10.4 billion of common stock to raise $1.35 billion to restock and refinance its benefit planssuch as cash incentive compensation for employees. The Board of Governors of the Federal Reserve approved the bank $1.5 billionasset sales. The key benefits of the repayment plan include eliminating $1.25 billion in annual preferred stock dividends and increasedcommon equity ratio. U.S. government and regulators agreed Citigroup $20 billion TARP repayment in December 2009. Theagreement included cancelling $1.8 billion securities held by the U.S. government and the bank was no longer as a beneficiary ofTARP exceptional financial assistance starting in 2010. In order to pay back the money, Citigroup had to issue $17 billion of commonstock and $3.5 billion of tangible equity. According to the company website, Citi’s capital and liquidity ratios would be some of the
    • strongest in the banking industry after the completion of transactions. The impact of exiting TARP agreement caused Citigroup toremove over $3 billion from its balance sheet and $1.3 billion after-tax loss. Wells Fargo and Citigroup have banked on the bailout money. Government aid has revived the banking industry revenueafter financial institutions encountered a roller coaster ride in 2009. The combined banking market share of Wells Fargo, Chase, Bankof America, and Citigroup is about 34% (Jose, 2012). As many as 324 banks closed over the past five years, the competition on thesebig banks has been decreased. From late 2009 to early 2011, the efforts of TARP seemed to pay off; however, small business lendingwas occurring slower than anticipated. In general, the credit market is caused by economic uncertainty in European sovereign debtcrisis and US Treasuries being downgraded. According to IBISWORLD report, five-year revenue growth from these big banks islargely come from interest income from the TARP. The banks have less interest on issuing new commercial loans. The largest fourbanking institutions have learned an important lesson on subprime credit crisis, exemplified by their recent write downs of $79 billionon the value of loans, securities, and debt obligations. The phrase “Too big to fail,” a term and concept identified by the general publicdescribing the government actions that has changed the banking industry landscape by providing a safety net for larger banks andpositioning them to acquire smaller distressed banks. The landscape change affects the big banks increasing their market share. Theprepaid from 2010 to 2012 FDIC Deposit Insurance premium caused smaller banks assets declined, but helped larger banks assetsgrowth.B. Banks: 1. Banks in the Relationship with Their Stakeholders: Customers and Government: Financial institutions especially commercial banks were accuse of being at the center of the sub-prime mortgage crisis in theU.S. They are blamed for being the main contributors to the collapse of the financial system. However, in order to put the economyback to the position before the recession, the government, businesses, and the general public all need banks to fund the economy. Thefollowing analysis will analyze the relationship between banks and two of its most important stakeholders that are the government andtheir customers, especially small businesses. After the recession, the lending to small businesses declined due to two sides: banks andsmall businesses sectors. This analysis will focus on analyzing the reasons from a banking perspective. In addition, this treatise willfurther explore and study the way banks create influences on the government. 2. Small Businesses Lending from Banks’ Perspective: TARP and SBLF are two of many programs created by the government to stimulate the whole economic system.Nevertheless, small businesses have still faced many challenges when taking loans from banking sector. There are 3 main factors thatcaused the limited supply of funds from banks to small businesses. The first reason is the policies that require banks to increase their
    • capital reserve. Healing the economy is the most important priority for the government, but avoiding a similar recession is also veryessential for regulators. The failures of many banks including many giants such as Wachovia and Washington Mutual have remindedthe regulators about the danger of the current financial system. Consequently, new regulations such as requiring banks to increasecapital reserves have been passed (Jose, 2012). In order to comply with the new regulations, banks have reduced the loans to themarkets to maintain required capital reserve. Consequently, small businesses have also been affected by these regulations. Although,regulatory reform efforts of the government after decades of deregulation are necessary, these policies somehow affect the outflow offunds to small business sector. Another cause for this problem is the fact that banks have raised their lending standards since the recession. Several researchreports show that the small businesses have struggled to obtain loans from financial institutions since the beginning of the recession tonow. In the recent Federal Reserve Bank’s survey of senior loan officers, these loan officers have reported that the number of tighterstandards (austerity measures) for loans have increased (Koepke M. & Thomson J. B.). The reason for this is due to the fact that manybusinesses and households have faced challenges in repaying their loans to banks. The American Bankruptcy Institute has estimatedthat there were 1 million to 1.2 million bankruptcy filings in 2008 that increased 30% since 2007 (Feintzeig, 2008). Therefore, in orderto protect their investments, banks have maintained a higher standard for individuals and businesses to get a loan (Mecia, 2011). It isunderstandable that banks did this way because most of banks including the giants such as Bank of America and Citi have sufferedhuge losses during the recession (Jose, 2012). For instance, Citi bank has reported their net loss of 18.72 billion USD in 2008 (CitiGroup, 2009) while Bank of America had a quarterly loss of 1.70 billion dollar after 17 years (PBS, 2009). However, in 2009, thenumber of officers complaining about tight lending standards dropped precipitously from the peak of almost 80% to below 2%. Thisshows that the lending situation have been improved for small businesses. Although the standards for new loans have been reducedrecently, these standards are still higher than those before the recession. According to Biz2Credit reports, although the large bankshave given more loans to small businesses in 2012 than in 2011, the loan approval rate for small business was only 11.7% in January2012, compared to 40-44% of pre-recession. In contrast, the picture of small business lending from smaller banks with assets under$10 billion is better with loan approval rate of 47.5% for loans between $250,000 and $3million. The overall picture shows that inpost-recession period banks have improved their small business lending but at a very slow rate. The third reason that caused the slow increase of lending to small business is the cost of TARP to banks. When injecting theTARP money to over 500 banks in the effort of rescuing the financial system, the government has created and issued a warrant thatallows them to buy common stocks from these banks at a future date (Palleta, 2009). This warrant could guarantee Americantaxpayers higher returns on their investments from these banks. In contrast, banks’ shareholders will be affected when the shares’
    • value of these banks increase as the economy recovers. Therefore, the sooner banks get out of the TARP, the better they are. However,instead of using more money from the SBLF to fund small businesses, banks have taken more than two billions dollars to repay theTARP. Although the difficulties for small businesses are still there, the situation could get better in the near future. The U.S. bankingsystem, in large part, has gradually recovered from the recession and most of the banks are healthier than they were 3 years ago.According to a recent report of FED, 15 of 19 largest banks of the US have enough capital to cover losses from another similarrecession (Gandel, 2012) that will inevitably emerge in the near future. A stronger banking system means that they have the ability tofund more businesses and individuals. Despite all the facts that could limit lending to small businesses, a group of thirteen banks,including Bank of America, Chase, Wells Fargo and Citi, have agreed to increase their lending to the business sector by 20 billionfrom 2012 to 2014 (Hoover, 2011). Together with the government’s programs, increased lending commitments from these banks givereason to hope that these actions will help provide small business and entrepreneurs’ sufficient capital to help accelerate job growthacross the country. 3. How Banking Industry Influence the Regulators: Any organization,, especially one like a bank, is being regulated by the government and its agencies in order to maintain anefficient system. Before the recession, in the effort of developing its economy, the U.S. government have reduced and simplified manyregulations for banking sector. In contrast, the crisis has reminded regulators the need of placing stricter regulations on banks. Inaddition, we also see that during the crisis, many policies and bills have been passed by the U.S. Congress to stimulate the economy.Consequently, banks have to change their strategies to adapt to the changes, sometimes rapid changes, in government regulations. Thechange in government strategic thinking has also greatly affected banks’ stakeholders, such as stockholders and customers. Forexample, in order to maintain better benefits for its current shareholders and to develop an exit strategy from TARP, banks havereduced lending to their customers. Moreover, banks also have their tools that can be used to influence the government. Althoughlobbying activities are slowed down in the first quarter after the recession, banks have sped up their lobbying expenses in theirattempts to influence the Capitol Hill (Cumming, 2009). For example, Bank of America increased their spending on lobbying from660,000 USD in the first quarter of 2009 to 890,000 in the second quarter of 2009. Citi has reported an even larger figure when itcomes to lobbying expenditure, illustrated by an increase from $1.35 million to $2 million for the same period. However, banks havealso been aware of the public sentiment and scrutiny and many of the controversies surrounding these expenses as many financialinstitutions continue to use TARP funding or taxpayers’ money (Cumming, 2009).C. Small Businesses:
    • 1. Small Businesses Sector and its Stakeholders: Creditors, General Publics and Employees: Most people know that the recession has had a bad impact on the economy, big corporations, and banks and financialinstitutions. However, some are unaware that the small business sector has been hit the hardest during the recession and post-recessionperiod. In this paper, the purpose is to study how the difficulty of banks and financial institution affect small businesses and furthermore small businesses’ employees and the publics. 2. Small Business Lending Issue from Small Business’s Perspective: One of the primary purposes of TARP is to help small business promote economic growth and development. However, oneof the questionable debates surrounding the TARP program is determine whether those funds were allocated towards its original intentand function: providing a source of liquidity for the small business sector. A recent study by Federal Reserve Bank of Clevelandshowed that small business loans significantly decreased during the recession and even more so up until the beginning of 2010, whichis a post-recession period. Yet, loans did increase marginally during 2010, but remained relatively weak, compared outcomes prior tothe recession [Exhibit 3]. There are 2 main reasons for this and that is the limited supply of loans from banks and the decreaseddemand in funding for small businesses. The first reason is that banks have limited their supply of loan for small business, as discussed above in section A.1. Thesecond reason is that small business owners have a lower demand in getting loans because of the recession. According to FederalReserve Board’s senior loan officer survey, the demand for C&I loan of small business had dropped significantly during the recession(Koepke M. & Thomson J. B.). In 2010 the demand for C&I loan from small business started to increase the first time since 2006. Thestudy also shows that the demand slightly increased to 5.6%, but still lower than before the recession [Exhibit 2]. According to arecent 2011 annual survey from U.S Bank with small businesses that have annual revenue below $10 million, small business ownershas been more positive in the economy, but 78% of them still think that U.S is still in the recession. [Exhibit 4] 3. Small Business Performance: Small businesses are those who were affected most during the recession and even after the recession. According to the 2010Quarterly Indicators about small business and the economy from SBA, the number of small businesses file for bankruptcy hasincreased significantly since 2008 to the 2nd quarter of 2010. Because of the lack of fund for small business to survive in the weakeconomic condition, there are more of small businesses have gone bankrupt than before. After the recession, in the first 2 quarters of2010 the number of bankrupt small businesses has decreased compared to the last 2 quarters of 2009, but the number of only the first 2quarters of 2010 is bigger than the number of the whole 2007 year [Exhibit 6].
    • Besides the small businesses that have gone bankrupt, most of the rest of them have suffered from the recession with poorperformance. Because of the lack of financial support, small businesses have decreased in their fixed investment, sales and inventorysince 200 to the end of 2009 ( ahin A., itao S., Cororaton A., and Laiu S.), [Exhibit 5]. The level of fixed investment keeps fallinguntil the middle of 2010 showing that the small business owners still have not been ready or have not been able to expand theirbusinesses. With the level of inventory and sales, small businesses have slightly recovered since the beginning of 2010. The reason forthis trend may be related to the tightening or loosening in banks’ lending standards. As discussed, the lending situation has beenimproved slightly for small businesses since the end of the recession, so small businesses have had financial support to improve theirperformance but not enough for them to invest more in their businesses.Impact on National Employment Level and Job Creation: During the recession and post-recession period, mall business has major impact on two of its stakeholders, employees andgeneral public. Because of its poor performance, small business has created many job losses. Employees have been lay off frombankrupt businesses and from businesses that have weak performance and want to cut cost. The job losses from small businesses havecontributed to the increase in national employment level and therefore affected negatively on the society. According to SBA, mallbusinesses employ about half of American employees, playing a major role in national employment level. According to the data inFebruary 2012 ADP national employment data, the small business’s employment level have decreased since January 2007 from morethan 50 million jobs to about 48 million jobs in January 2011 (ADP, 2012) [Exhibit 7]. Therefore, since the recession, there are about2 million jobs have been lost in small business section. Small businesses have been known as the biggest job creator in the U.S; they have created about 65% of net new jobs for thelast 17 years (SBA). However, the poor performance during the recession has had bad impact on small business’s job creation ability.According to the December 2011 ADP national employment report, during January 2008 to January 2010, there was no job growthfrom small business section (ADP, 2011). After the recession, since January 2010, small businesses have started to create jobs again(ADP, 2011). By June 2011, the monthly job growth was recorded a high number of 148,000 jobs (ADP, 2011) [Exhibit 8]. This trendmay be resulted from the improved performance of small businesses from January 2010 as mentioned above. IV. Final Assessment and Conclusion: We believe that the demand for various loans will rise as well as prime rate when the economy improves. We project theunemployment rate will fall to a healthy condition within three years. Bank lending will be expected to rise as consumers are confidentto deposit their money into banks. Furthermore, increased consumer demand will also give rise to strong sales for small businesses.Yet, the credit market condition will need to improve, along with increases in the supply of bank credit. Bank loans will need to
    • continue rising for financing small businesses. Economic condition shall be certain for business owners to take on new investments.Our final analysis vividly showed a decline in credit supply to small firms in recent recession. Evidence indicates the tightening ofloan standards by lenders and interest rates on small manufacturing firms. Therefore, we conclude that some lenders may haveviolated lending discrimination. We have explained in detail in our treatise that sluggish performance and weak sales are the mainobstacles for small businesses to expand. As the demand of products continue to drop, a firm’s demand for credit decreases. Firmswith this disposition will not be inclined to seek investment opportunities and therefore a need for borrowing capital will not benecessary or prudent.
    • ReferencesLiterary Sources:Abeles, Z., & Salmo, B.. (2011, February). Big Incentives for Small Business Lending. Bank News, 111(2), 26-27. Retrieved March 11, 2012, from ABI/INFORM Trade & Industry.Anonymous, . 191 Community Banks Have Received More Than $2.4 Billion From Treasury Departments Small Business Lending Fund. (2011, November). The Secured Lender, 67(7), 14-15. Retrieved March 11, 2012, from ABI/INFORM Global.De Rugy, V. and Kasoff, B. (2012, March 19). The Journal Report: Big Issues: Should the Small Business Administration Be Abolished. The Wall Street Journal, pg. R2.Dobriansky, J.. (2011, March). The SMALL BUSINESS JOBS ACT OF 2010. Contract Management, 52(3), 72-75,77,79,81. Retrieved March 11, 2012, from ABI/INFORM Global.Jose, E. (February, 2012). IBISWorld Industry Report 52211Commercial: Banking in the US. IBISWorld.Kops, M., Davis, S., & Kambas, W., (2010). Small Business Jobs Act of 2010. Mondaq business briefing.Sahin, A., Kitao, S., Cororaton, A., & Laiu, S.. (2011). Why Small Businesses Were Hit Harder by the Recent Recession. Current Issues in Economics and Finance, 17(4), 1-7. Retrieved March 10, 2012, from ABI/INFORM Global.Stuart, A. (2012, March 15). Capital vs. Confidence. CFO, 28, No. 2, 49-53.Web Sources:2011 U.S Bank Small Business Annual Survey (22nd June, 2011). Retrieved March 30, 2012, from http://www.fsround.org/hyperlink/2011SmallBusinessAnnualSurvey.pdfADP National Employment Historical Data (February 2012). Retrieved March 30, 2012, from http://www.adpemploymentreport.com/data/History_SBR_February_2012.xlsxADP National Employment Report (December 2011). Retrieved March 30, 2012, from http://www.adpemploymentreport.com/pdf/FINAL_Release_December_11.pdfAlowlyapprentice (2011). The Warning – Brooksley Born Arrives on the Scene (2 of 6). Retrieved March 25, 2012, from http://youtu.be/WpLXhbueQv0Biz2Credit Small Business Lending Index for December 2011 Finds Loan Approval Rates Rose at Small Banks and Alternative Lenders, Dipped at Big Banks (2012). Retrieved March 30, 2012, from http://www.biz2credit.com/january2012/biz2Credit- small-business-lending-index-for-december2011Blinder, A. (2010). How the Great Recession Was Brought to an End. Retrieved March 2, 2012, from http://www.princeton.edu/
    • BPS NewsHour. (16th January, 2009). Bank of America Posts Big Losses, Citigroup Splits in Two. PBS NewsHour. Retrieved from http://www.pbs.org/newshour/updates/business/jan-june09/bank_01-16.html.Citi Group. (16th January, 2009). Citi Reports Fourth Quarter Net Loss of $8.29 Billion, Loss Per Share of $1.7. Citi Group. Retrieved from http://www.citigroup.com/citi/press/2009/090116a.htmCummings, J. (28th July, 2009). From under TARP, banks add lobbying. Politico. Retrieved from http://www.politico.com/news/stories/0709/25497.htmlFarlex, Inc. (2012). The Free Dictionary.com: Dictionary/Thesaurus. Retrieved February 28, 2012, from http://www.thefreedictionary.com/Small+Business+AdministrationFarlex, Inc. (2012). The Free Dictionary.com: Financial Dictionary. Retrieved February 28, 2012, from http://financial- dictionary.thefreedictionary.com/Troubled+Asset+Relief+ProgramFeintzeig, R. (2008). More Companies Shutting Down As U.S. Financial Crisis Deepens. Bankruptcy Statistics. Retrieved from http://www.bankruptcy-statistics.comFrequently Asked Questions. Retrieved from the U.S. Small Business Administration (SBA) Office of Advocacy website: http://www.sba.gov/sites/default/files/sbfaq.pdfGandel, S. (13th March, 2012). Banks pass Feds stress test. CNN Money. Retrieved from http://finance.fortune.cnn.com/2012/03/13/banks-pass-feds-stress-test/.Hoover, K. (20th September, 2011). Banks offer $20B in help to small business. Washington Business Journal. Retrieved from http://www.bizjournals.com/washington/news/2011/09/20/banks-offer-20b-in-help-to-small.htmlInvestopedia, ULC. (2012). Investopedia.com: Dictionary. Retrieved February 28, 2012, from http://www.investopedia.comLiberty-Tree.ca.com (1998-2005). James Madison Quotes. Retrieved March 27, 2012, from http://quotes.liberty-tree.ca/quotesMeica, T. (21st November, 2011). Small businesses struggle to find credit in post-recession world. CreditCards.com. Retrieved from http://www.creditcards.com/credit-card-news/small-business-credit-lending-post-recession-1269.php#ixzz1oZecfKRS.Micro Businesses Report Growth in Customers and Revenue for 2011 (27th February, 2012). Retrieved March 30, 2012, from http://www.marketwatch.com/story/micro-businesses-report-growth-in-customers-and-revenue-for-2011-2012-02-27Palleta, D. (22nd April, 2009). Financial Firms Lobby to Cut Cost of TARP Exit. The Walls Street Journal. Retrieved from http://online.wsj.com/article/SB124035639380840961.htmlThird quarter 2010: The economy and Small business (10th November, 2010). Retrieved March 30, 2012, from http://archive.sba.gov/advo/research/sbqei1003.pdf
    • Williams V., (7th June, 2011). Small Business Lending: First Quarter 2011. Retrieved from the U.S. Small Business Administration (SBA) Office of Advocacy website: http://www.sba.gov/sites/default/files/files/SBL_2011Q1.pdfWilson, L. (2011). Financial Reform Insights.com: Featured: Small Business Lending Fund Annual Auditor Certification. Retrieved February 28, 2012, from http://www.financialreforminsights.com
    • AppendageExhibit 1: Small Business Administration (SBA) Origination and Timeline Graph (The Wall Street Journal, 2012) From Depression and War… | Milestones in the SBA’s Development President Hoover Under the Small The SBA’s Small 1932 creates the Reconstruction Finance 1958 Business Investment Company program, the 1980 Business Development Center program linksCorporation (RFC) to lend to businesses of SBA begins regulating and helping to fund states and the federal government toall sizes hurt by the Depression. privately owned ventured capital firms. deliver free campus-based training and counseling to entrepreneurs. Congress forms the The SBA’s Equal Congressional1942 Smaller War Plants Corporation to help 1964 Opportunity Loan Program begins 1996 Republicans try but fail to kill the agency.small businesses participate in wartime providing start-up loans to applicantsproduction. below the poverty line. Also, the Score program is created to offer volunteer mentoring of entrepreneurs by retired business executives. Congress creates the President Johnson Investments in small1953 Small Business Administration (SBA) 1967 orders the SBA to direct federal contracts to 2007 businesses by SBA- backed Small Businessto take over the small-business-related businesses located in economically Investment Companies reached afunctions of the RFC. distressed urban areas, creating the 8 (a) cumulative total of more than $50 billion. Business Development programs. The SBA makes its For the first time, the President Obama1954 first small-business loans. 1972 SBA records a one-year total of more than $1 2012 proposes combining the SBA with five other billion in small-business loans. agencies.Key Course Terms and References:Business, Government, Society, General Systems Theory, Interactive Social System, Stakeholder, Stakeholder Analysis, DynamicEnvironment of Business, arl Albrecht’s Eight Strategic Radar Screens of Environmental Intelligence, Corporate Power, TheModern Theory of Stakeholder Management, Legal Obligations, Ethical Relativism and Business Ethics, Corporate Ethical Climate,Accounting, Financial, Marketing, and Information Technology Ethics, Free Enterprise vs. Central State Controlled Systems,Transparency, Fiscal, Monetary, and Industrial Policy, Economic Regulation, Deregulation, and Reregulation, Spill-Over Effects(Negative Externalities), Market Failure, Political Environment, Corporate Political Strategy, Lobbying, Business Roundtable, ExpertWitness Testimony, Economic Leverage, Rights of the Consumer, Consumer Protection Laws, Social Contract – Government,Society, and Business, Whistle-Blowing, Community, Community Relations, and Civic Engagement, Community Reinvestment Act,
    • Corporate Crisis and Media Training, White Collar Crime, Securities and Exchange Commission, Federal Deposit and InsuranceCorporation, Glass-Steagall Act of 1933, Federal Reserve Acts, Dodd-Frank Wall Street Reform and Consumer Protection Act of2010, Sarbanes-Oxley Act of 2002, Depository Institution Deregulations and Monetary Control Act of 1980 and the Garn-St. GermainDepository Institutions Act of 1982, American Bankruptcy Institute.Special Terms and Description:Economic Emergency Stabilization Act (EESA):This program is one of the bailout measures taken by Congress in 2008 to help repair the damage from the subprime mortgage crisis.The act gives the Treasury Secretary the authority to buy up to $700 billion of troubled assets and restore liquidity in financialmarkets. The Emergency Economic Stabilization Act (EESA) was originally created and proposed by Henry Paulson (Investopedia,2012).Exhibit 2:Exhibit 3: Appendix 1:Source: 2011 U.S Bank’s Small Business Annual Survey
    • Exhibit 4Exhibit 5
    • Exhibit 7: Employees on Nonfarm Private Payrolls (in thousands, seasonally adjusted) Source: Based on information in the February 2012 ADP National Employment Report®Exhibit 8:Exhibit 9: Video Archive “The Warning – Brooksley Born Arrives on the Scene (2 of 6)”: http://youtu.be/WpLXhbueQv0