No Bailout for Small Business
Sept 17, 2008
First it was Bear Stearns, then Fannie and Freddie, and now AIG. The government seems to have caught bailout fever these days, but no one is thinking twice about bailing out small business. Given the ongoing economic difficulties the U.S. has faced over the past several months, NSBA has conducted an economic outlook survey of the small-business community. The survey, to be released Monday, Sept. 22, will analyze current small-business economic outlook, as well as provide trending data six months following the nationwide NSBA survey.

Initial results show small business is increasingly impacted by the credit crunch. The annual NSBA survey released in April cited 55 percent of business owners have been impacted by the credit crunch. That number has jumped to 67 percent according to the most recent data. Unfortunately for small-business owners the federal government is not in the business of providing bailouts or increasing access to capital – unless you are a huge conglomerate as indicated by the troubles facing the financial sector.

The recent movements in the banking industry could have adverse effects on small-business owners’ ability to garner financing, which translates into prolonging the recovery of the U.S. economy. Over the past few months we have seen the Fed:
  • Financially back the takeover of Bear Stearns by JPMorgan;

  • Takeover Fannie Mae and Freddie Mac;

  • Allow the collapse of financial giant Lehman Brothers while bailing out AIG


  • So why is the Fed poised to bailout financial giants while leaving America’s true engine of economic growth, small business, to fend for itself? The answer isn’t so simple.

    Bear Stearns was the first in the series of bailouts to arise. The Fed put up nearly $30 billion to support JPMorgan in its bid to takeover the defunct firm. The reasoning behind the bailout – to avert the financial firm from going under and sending ripples through the financial investment community. The question has arisen as to what precedent this action sets for other financial firms that are struggling to keep afloat. Unfortunately for Lehman Brothers the answer to the question came all to soon.

    Last week Lehman Brothers filed for bankruptcy while the Fed sat on the sidelines and watched. Experts say the Fed's lack of action on Lehman was not as much a change in thinking as it was a change in circumstance. Simply put the Lehman Brothers and Bear Stearns are very different - Bear posed a greater risk - and regulators were better prepared this time around to deal with the consequences of a failure.

    However, the Fed was not ready to deal with the set of different circumstances that have been brewing in the government-sponsored enterprises (GSE’s) of Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac form the cornerstones of the U.S. mortgage market and own or guarantee more than $5 trillion worth of American mortgages -- or almost half the home loans in the country's roughly $12 trillion mortgage market. The GSE’s were hard hit by the subprime mortgage fallout that occurred nearly two years ago, and have never fully recovered. Officials with the Treasury Department, the Federal Reserve and the Federal Housing Finance Agency seized control of the embattled mortgage giants in hopes of stabilizing the housing and financial markets.

    Within only a few days of the announcement of its take over of Fannie and Freddie, as well as the decision to let Lehman fail, the Fed reversed policy and precedent by bailing out American International Group, Inc (A.I.G). So why the intervention this time? It was an effort to stave off what would have been the biggest corporate bankruptcy ever. The Fed offered A.I.G, the world’s largest insurance company, $85 billion in exchange for an 80 percent stake in the ailing firm. Analysts have estimated that an A.I.G collapse would cost the financial system about $180 billion dollars, half of the capital they have raised since the beginning of the credit crunch.

    With all the bailouts for the giant conglomerates what can the small-business community expect when they face financial hardships? The answer is nothing. It is no secret that small businesses have a high failure rate, and when things go bad there are few options open to entrepreneurs, especially in today's tight credit market. Given that small businesses have created 93.5 percent of all net new jobs since 1989, it's fair to reason that the small-business community would be getting more attention and assistance as lawmakers look for ways to kick-start the economy.