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

[Type the company name]

The Impact of the U.S. Government Programs Trouble d Asset

Relief Program and Small Business Lending Fund on Small -to-

Medium Enterprises and Their Stakeholders

“[A]ll power is originally vested in, and consequently derived from, the people. That government is instituted and

ought to be exercised for the benefit of the people; which consists in the enjoyment of life and liberty and the right of

acquiring property, and generally of pursuing and obtaining happiness and safety. That the people have an

indubitable, unalienable, and indefeasible right to reform or change their government whenever it be found adverse or

inadequate to the purpose of its institution [Liberty-Tree.ca, 1998-2005].” – James Madison

Macro and Microeconomic

Impact of Government Intervention:

TARP and SBLF

Society

Business Banking

Table of Contents

I. Statement of Proposal .......................................................................................................................................................... 4

Purpose and Mission: .......................................................................................................................................................... 4

II. Historical Perspective ......................................................................................................................................................... 4

III. 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: ................................................................................................................................ 13

IV. Final Assessment and Conclusion: ................................................................................................................................. 14

References ............................................................................................................................................................................. 16

Literary Sources: ............................................................................................................................................................... 16

Web Sources: .................................................................................................................................................................... 16

Appendage ............................................................................................................................................................................ 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 ............................................................................................................................................................................ 21

Exhibit 5 ............................................................................................................................................................................ 21

Exhibit 7: Employees on Nonfarm Private Payrolls (in thousands, seasonally adjusted) ................................................. 22

Exhibit 8: ........................................................................................................................................................................... 22

Exhibit 9: Video Archive .................................................................................................................................................. 22

I. Statement of Proposal

Purpose and Mission:

The purpose of this treatise is to define and describe the interrelationships between two U.S. governmental programs, both prodigies of

the 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 and

impacted 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, with

considerable 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% of

all businesses in the United States in both private and public sectors, generated nearly 70% of all revenue in the economy. Many of

these businesses - according to the U.S. Treasury department, classified as a legal operating entity with a workforce capacity of 500

employees or fewer – depend not only on the sales of their products and services but also on secondary resources such as external

funding through equity and debt financing to maintain the normal flow of daily business operations, pay down existing debt, or to

even explore new business opportunities in the form of capital expenditures for business expansion or capital reinvestment for the

purpose 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 of

their business operations or to use to address other facets of the business that requires additional financial resources. This method of

financing for SMEs has been a viable, strong staple of these businesses’ capital structure diets for over a century. However, as

normally the case with pecuniary matters which affect both business and the communities they serve unanticipated cyclical economic

anomalies such recessions and depressions - two major macroeconomic phenomena - can deeply and adversely disrupt the flow of

business activity on the macroeconomic and microeconomic levels. In recent memory, the clearest example how devastating these

economic distortions can be was evident in perhaps the most severe depression experienced by a country within the last three and a

half centuries: Black Tuesday of October 29, 1929.

Known worldwide as the Great Depression of 1929, this economic disruption caused the worst global financial panic in

history which saw market value drop precipitously nearly over night, ending in a two-day cumulative percentage loss of 68.90% and a

monetary 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 the

local neighborhood “mom and pop” store to corporate behemoths/oligarchies like Ford Motors, Carnegie Steel, Standard Oil, and

Sears Holdings to the numerous banking and financial institutions from community banks to larger corporate powerhouses, notably

the 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 and

private 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), consequently

reducing bank deposits as many struggling Americans rushed to withdraw from their savings to meet daily financial obligations in

addition to basic necessities.

Despite being removed over a decade from the enactment of the Federal Reserve Act of 1913 that was legislated and

approved by Congress as a new regulatory measure that would help mitigate bank exposure to risk, banks, in general, still held very

low capital reserves of less than 10 percent that was insufficient to respond effectively to unanticipated events such as the market

crash of 1929. The Federal Reserve Act of 1933 was created to allow the U.S. central bank, the Federal Reserve Bank to infuse and

provide instant liquidity to the economy through monetary policy that included a near zero federal fund rate to enable easy overnight

and longer term lending from the country’s numerous banking institutions. Though it is not exactly clear to what degree higher

amounts of capital reserves would have aided in the recovery efforts needed following the crash of 1929, however, it has been proven

over the course of several decades that ensued after 1929 that other near-debilitating, near-fatal economic downturns have been

averted by the intervening policy controls implemented by the U.S. federal government and other federal agencies in charge of fiscal

and monetary policy.

Yet, the questions always remain at to what extent and to what degree should government and their concomitant federal

alliances be given the authority – some advocate absolute authority – to design regulatory policy that will ameliorate business

practices, foster a fair and competitive marketplace environment, and help protect the average consumer from such abuses instigated

by corporate malfeasants, government corruption, and other systemic socio-economic improprieties that could create economic

distortions and mayhem within communities and the marketplace. But how much government intervention would necessitate sound

monetary and fiscal policy that would not suffer the fate of overregulation, resulting in a possible market contraction, or insufficient

regulation, in which free market commerce goes unfettered and unchecked, mainly with the belief that the marketplace undergoes

natural periods of self-corrections, a concept many leading economists and proponents of behavioral finance often refer to as the

Efficient Market Hypothesis?

If one fast-forward to the current economic and socio-economic model in American culture following the 2008 global

financial crisis in which some leading scholars proposed had germinated from cultural greed by America’s largest enterprises, with

specific reference to government intervention in ban king and small business environments, first, it is clear that well before this global

distortion in the marketplace occurred government policy reforms created by an evolutionary series of legislative events that trace as

far back as deregulation initiatives by the Carter administration and fortified in later years by the Reagan, Clinton, and both Bush’s

administrations all contributed to the ground swell of economic activity that resulted favorable interest rates and soaring prices, which

normally work inversely to one another when certain trends takes hold. Yet, as demonstrated before the crash of 1929, the economy at

the time saw a buildup in home inventory and an appreciable rise in home prices, mainly due to low fixed interest ARM rates and a

flourishing economy by early 20th

Century standards.

However, unlike some mystifying and unidentifiable triggers that caused the sudden collapse of the market in ’29, the late

21st Century collapses of 2000 and 2008 were anticipated by a few highly distinguished bureaucrats in Washington D.C., who for the

most part were ignored by both executive and congressional branches, primarily because of the fertile economic market position

around both time periods. Whether it was the tech boom of 2000 or the housing boom of 2007, aggressive and proactive changes in

the regulatory policies that helped entice and encourage start-up businesses (mostly SMEs) to elevate higher levels of entrepreneurial

risk-taking in 2000 and through the enactment of the Community Reinvestment Act (CRA) of 1977 and subsequent amendments made

homeownership easily accessible even though many of prospective homebuyers were unable to afford mortgages over the entire

duration of the loan granted by both small community and large banking institutions. The clarion call established by various

presidential administrations - as standard fair during each political cycle to improve the probability for reelection - since the passing of

the 1977 CRA was to give to the average American citizen the opportunity to attain one aspect of the proverbial “American Dream” at

all cost, which was homeownership. Banks were strongly encouraged to loosen lending standards to accommodate this initiative and

those who failed to acquiesce and comply to a newly-established political agenda could incur unexpected federal funding restrictions

and, in some cases, face fines and penalties; thus, the emergence of the housing bubble of 2007 which was preceded by the

introduction 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 phase

out, or total elimination, of such legislation like Glass-Steagall, Act, the father of the Volker Rule that was created by former Federal

Reserve Chairman Paul Volker to restrict commercial banks to use deposits to trade in secondary markets. Therefore, under this

pretext, recapitulating the question that is the topic for discussion and debate in this treatise, what is the intricate nature and

relationship 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 further

explicated, one must understand the type of societal and its appurtenant governing system that inseminate the business culture as it has

evolved over years and as it exist today.

The American system of governance since inception is defined as a Constitutional Republic, which is exclusively built on

fundamental principles involving free market capitalism with minimum government oversight and regulation. Yet, for most

democracies, or post-World War II free-market societies, there are times in which these societal systems are susceptible to various

kinds of rogue behavioral activity that undermine the normalcy and functionality of a free-flowing democratic system that, if persist

for any length of time, may require some form of manual corrected measures (e.g., government stimulus packages for both taxpayers

and 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 that

serves as the common law of the land. Those citizens are obligated and responsible for electing representatives to act on their behalf

to design and developed policy that serve the common interest those who have elected them to serve. This is the essence of a

democratic society and acts as a litmus test to help determine if legislation created by elected officials is in the best interests of the

individuals who have empowered them with their trust to govern appropriately. Yet, it is here where the crux of the issue regarding

the impact government intervention has on banks, businesses, and their communities they serve, and in this analysis report, we will

attempt to explain to what extent government programs such as TARP and SBLF has, first, responded to a global market downturn

demonstrated by the 2008 financial meltdown and, second, to what level of effectiveness it has established to improve the financial

well-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 Business

A. 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 entrepreneurial

growth by providing tax incentives and easing access to capital (Kops, 2010). The exclusion on certain sale tax in the exchange of

qualified small business stock could significantly stimulate business and entrepreneurial development. However, as part of this

agreement between government and small business stock must be held for over a five-year period in order to meet the qualification

parameters for exclusion from a taxable income gain. Eligible small businesses would receive tax credit in investment, working

opportunity, 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 Business

Administration (SBA) – Please refer to Exhibit 1 for SBA Timeline. The $200,000 treasury supported lending program helps start-up

and newly created small businesses growth.

The enacted Act is an important component of small business legislation and many economists believed that a half-million

new jobs would be added to the economy (Dobriansky, 2011). The SBJA is considered a comprehensive statute with government

regulatory and tax provisions for job creation and government contracting. However, as a caveat, many hidden provisions of the Act

are not well known by the small business community. One of the original intent and beneficiary aspect of the Act for small business

community 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, and

through 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 encourage

lending to small businesses by providing capital to community banks with assets less than $10 billion. The U.S. Treasury Department

planned to make SBLF funding available by purchasing Tier 1-qualifying preferred stock or equivalents for institutions that applied

and were approved. In general, the dividend rate that institutions pay on SBLF funding decreases as the institution’s qualified small

business lending, as defined by the Treasury Department, increases. On September 27, 2011, after making its seventh and final

announcement of institutions approved under the program, Treasury indicated total funding for the program was slightly more than $4

billion to 332 community banks (Investopedia, 2012). Community banks were expected to receive big incentives for small business

lending (Abeles and Salmo, 2011). As these banks increased their qualified small business lending, the U.S. Treasury continued to

purchase their preferred stock with a lower dividend rate. The advantages for the banks included the strengthening their corporate

balance sheets with more capital with limited or practically no restrictions on executive compensation. It is believed that many banks

have quickly repaid their TARP (as of the beginning of 2012, some reports indicate that at least 80% of all TARP funds have been

repaid) and now have made a smooth transition into the small business lending fund program. The Treasury department data shows

that 137 out of total 332 banks use totaling $2.2 billion to pay off their TARP obligations. Most banks only lend about 13% of $30

billion of the available funds for small businesses. Unfortunately, regulators for SBLF prohibit banks from using SBLF to pay back

TARP debt. Therefore, as a result, small businesses continue to struggle to get access to bank credit (Mecia, 2011). It has affected

their 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 from

some 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 small

businesses. The program is expected to increase lending to small businesses that are not getting loans they need to create jobs. This

initiative allows states to create successful models for states small business programs, such as Capital Access Programs, venture

capital programs. States can work together to standardize their program rules, such as Capital Access Programs. This effort can

increase 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 support

resulting in $1 of new private financing, $20 MM maximum loan limit on individual guarantees. In this program policy guidelines for

eligible state-own programs shall result in a minimum of $10 of new small business lending for each $1 in Federal funds. This

reasonable expectation is to use federal contributions to generate small business lending at least 10 times the SSBCI contribution

amount. 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 lenders

must get assurance from eligible borrowers demonstrating that loan or investment proceeds are used for start-up costs, working

capital, 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 fund

was to allow the Treasury to buy illiquid mortgage-related assets. The fund was ultimately used to provide direct capital infusions to

distressed financial institutions (Farlex, 2012). According to Wells Fargo company web site, the bank repaid $25 billion of TARP in

full in December 2009. The bank issued $10.4 billion of common stock to raise $1.35 billion to restock and refinance its benefit plans

such as cash incentive compensation for employees. The Board of Governors of the Federal Reserve approved the bank $1.5 billion

asset sales. The key benefits of the repayment plan include eliminating $1.25 billion in annual preferred stock dividends and increased

common equity ratio. U.S. government and regulators agreed Citigroup $20 billion TARP repayment in December 2009. The

agreement included cancelling $1.8 billion securities held by the U.S. government and the bank was no longer as a beneficiary of

TARP exceptional financial assistance starting in 2010. In order to pay back the money, Citigroup had to issue $17 billion of common

stock 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 to

remove 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 revenue

after financial institutions encountered a roller coaster ride in 2009. The combined banking market share of Wells Fargo, Chase, Bank

of America, and Citigroup is about 34% (Jose, 2012). As many as 324 banks closed over the past five years, the competition on these

big banks has been decreased. From late 2009 to early 2011, the efforts of TARP seemed to pay off; however, small business lending

was occurring slower than anticipated. In general, the credit market is caused by economic uncertainty in European sovereign debt

crisis and US Treasuries being downgraded. According to IBISWORLD report, five-year revenue growth from these big banks is

largely come from interest income from the TARP. The banks have less interest on issuing new commercial loans. The largest four

banking institutions have learned an important lesson on subprime credit crisis, exemplified by their recent write downs of $79 billion

on the value of loans, securities, and debt obligations. The phrase “Too big to fail,” a term and concept identified by the general public

describing the government actions that has changed the banking industry landscape by providing a safety net for larger banks and

positioning them to acquire smaller distressed banks. The landscape change affects the big banks increasing their market share. The

prepaid from 2010 to 2012 FDIC Deposit Insurance premium caused smaller banks assets declined, but helped larger banks assets

growth.

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 the

U.S. They are blamed for being the main contributors to the collapse of the financial system. However, in order to put the economy

back to the position before the recession, the government, businesses, and the general public all need banks to fund the economy. The

following analysis will analyze the relationship between banks and two of its most important stakeholders that are the government and

their customers, especially small businesses. After the recession, the lending to small businesses declined due to two sides: banks and

small businesses sectors. This analysis will focus on analyzing the reasons from a banking perspective. In addition, this treatise will

further 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 that

caused 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 very

essential for regulators. The failures of many banks including many giants such as Wachovia and Washington Mutual have reminded

the regulators about the danger of the current financial system. Consequently, new regulations such as requiring banks to increase

capital reserves have been passed (Jose, 2012). In order to comply with the new regulations, banks have reduced the loans to the

markets 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 of

funds to small business sector.

Another cause for this problem is the fact that banks have raised their lending standards since the recession. Several research

reports show that the small businesses have struggled to obtain loans from financial institutions since the beginning of the recession to

now. In the recent Federal Reserve Bank’s survey of senior loan officers, these loan officers have reported that the number of tighter

standards (austerity measures) for loans have increased (Koepke M. & Thomson J. B.). The reason for this is due to the fact that many

businesses and households have faced challenges in repaying their loans to banks. The American Bankruptcy Institute has estimated

that there were 1 million to 1.2 million bankruptcy filings in 2008 that increased 30% since 2007 (Feintzeig, 2008). Therefore, in order

to protect their investments, banks have maintained a higher standard for individuals and businesses to get a loan (Mecia, 2011). It is

understandable that banks did this way because most of banks including the giants such as Bank of America and Citi have suffered

huge losses during the recession (Jose, 2012). For instance, Citi bank has reported their net loss of 18.72 billion USD in 2008 (Citi

Group, 2009) while Bank of America had a quarterly loss of 1.70 billion dollar after 17 years (PBS, 2009). However, in 2009, the

number of officers complaining about tight lending standards dropped precipitously from the peak of almost 80% to below 2%. This

shows that the lending situation have been improved for small businesses. Although the standards for new loans have been reduced

recently, these standards are still higher than those before the recession. According to Biz2Credit reports, although the large banks

have given more loans to small businesses in 2012 than in 2011, the loan approval rate for small business was only 11.7% in January

2012, 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 in

post-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 the

TARP money to over 500 banks in the effort of rescuing the financial system, the government has created and issued a warrant that

allows them to buy common stocks from these banks at a future date (Palleta, 2009). This warrant could guarantee American

taxpayers 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 the

TARP.

Although the difficulties for small businesses are still there, the situation could get better in the near future. The U.S. banking

system, 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 similar

recession (Gandel, 2012) that will inevitably emerge in the near future. A stronger banking system means that they have the ability to

fund 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 billion

from 2012 to 2014 (Hoover, 2011). Together with the government’s programs, increased lending commitments from these banks give

reason to hope that these actions will help provide small business and entrepreneurs’ sufficient capital to help accelerate job growth

across 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 an

efficient system. Before the recession, in the effort of developing its economy, the U.S. government have reduced and simplified many

regulations for banking sector. In contrast, the crisis has reminded regulators the need of placing stricter regulations on banks. In

addition, 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. The

change in government strategic thinking has also greatly affected banks’ stakeholders, such as stockholders and customers. For

example, in order to maintain better benefits for its current shareholders and to develop an exit strategy from TARP, banks have

reduced lending to their customers. Moreover, banks also have their tools that can be used to influence the government. Although

lobbying activities are slowed down in the first quarter after the recession, banks have sped up their lobbying expenses in their

attempts to influence the Capitol Hill (Cumming, 2009). For example, Bank of America increased their spending on lobbying from

660,000 USD in the first quarter of 2009 to 890,000 in the second quarter of 2009. Citi has reported an even larger figure when it

comes to lobbying expenditure, illustrated by an increase from $1.35 million to $2 million for the same period. However, banks have

also been aware of the public sentiment and scrutiny and many of the controversies surrounding these expenses as many financial

institutions 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 financial

institutions. However, some are unaware that the small business sector has been hit the hardest during the recession and post-recession

period. In this paper, the purpose is to study how the difficulty of banks and financial institution affect small businesses and further

more 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, one

of the questionable debates surrounding the TARP program is determine whether those funds were allocated towards its original intent

and function: providing a source of liquidity for the small business sector. A recent study by Federal Reserve Bank of Cleveland

showed that small business loans significantly decreased during the recession and even more so up until the beginning of 2010, which

is a post-recession period. Yet, loans did increase marginally during 2010, but remained relatively weak, compared outcomes prior to

the recession [Exhibit 3]. There are 2 main reasons for this and that is the limited supply of loans from banks and the decreased

demand 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. The

second reason is that small business owners have a lower demand in getting loans because of the recession. According to Federal

Reserve 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. The

study also shows that the demand slightly increased to 5.6%, but still lower than before the recession [Exhibit 2]. According to a

recent 2011 annual survey from U.S Bank with small businesses that have annual revenue below $10 million, small business owners

has 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 2010

Quarterly Indicators about small business and the economy from SBA, the number of small businesses file for bankruptcy has

increased significantly since 2008 to the 2nd quarter of 2010. Because of the lack of fund for small business to survive in the weak

economic condition, there are more of small businesses have gone bankrupt than before. After the recession, in the first 2 quarters of

2010 the number of bankrupt small businesses has decreased compared to the last 2 quarters of 2009, but the number of only the first 2

quarters 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 poor

performance. Because of the lack of financial support, small businesses have decreased in their fixed investment, sales and inventory

since 200 to the end of 2009 ( ahin A., itao S., Cororaton A., and Laiu S.), [Exhibit 5]. The level of fixed investment keeps falling

until the middle of 2010 showing that the small business owners still have not been ready or have not been able to expand their

businesses. With the level of inventory and sales, small businesses have slightly recovered since the beginning of 2010. The reason for

this trend may be related to the tightening or loosening in banks’ lending standards. As discussed, the lending situation has been

improved slightly for small businesses since the end of the recession, so small businesses have had financial support to improve their

performance 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 and

general public. Because of its poor performance, small business has created many job losses. Employees have been lay off from

bankrupt businesses and from businesses that have weak performance and want to cut cost. The job losses from small businesses have

contributed to the increase in national employment level and therefore affected negatively on the society. According to SBA, mall

businesses employ about half of American employees, playing a major role in national employment level. According to the data in

February 2012 ADP national employment data, the small business’s employment level have decreased since January 2007 from more

than 50 million jobs to about 48 million jobs in January 2011 (ADP, 2012) [Exhibit 7]. Therefore, since the recession, there are about

2 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 the

last 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 growth

from 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 trend

may 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 the

unemployment rate will fall to a healthy condition within three years. Bank lending will be expected to rise as consumers are confident

to 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 of

loan standards by lenders and interest rates on small manufacturing firms. Therefore, we conclude that some lenders may have

violated lending discrimination. We have explained in detail in our treatise that sluggish performance and weak sales are the main

obstacles for small businesses to expand. As the demand of products continue to drop, a firm’s demand for credit decreases. Firms

with this disposition will not be inclined to seek investment opportunities and therefore a need for borrowing capital will not be

necessary or prudent.

References

Literary Sources:

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11, 2012, from ABI/INFORM Trade & Industry.

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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.

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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.pdf

ADP National Employment Historical Data (February 2012). Retrieved March 30, 2012, from

http://www.adpemploymentreport.com/data/History_SBR_February_2012.xlsx

ADP National Employment Report (December 2011). Retrieved March 30, 2012, from

http://www.adpemploymentreport.com/pdf/FINAL_Release_December_11.pdf

Alowlyapprentice (2011). The Warning – Brooksley Born Arrives on the Scene (2 of 6). Retrieved March 25, 2012, from

http://youtu.be/WpLXhbueQv0

Biz2Credit 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-december2011

Blinder, 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.htm

Cummings, J. (28th

July, 2009). From under TARP, banks add lobbying. Politico. Retrieved from

http://www.politico.com/news/stories/0709/25497.html

Farlex, Inc. (2012). The Free Dictionary.com: Dictionary/Thesaurus. Retrieved February 28, 2012, from

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http://www.bankruptcy-statistics.com

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March, 2012). Banks pass Fed's stress test. CNN Money. Retrieved from

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February 28, 2012, from http://www.financialreforminsights.com

1932

1942

1953

1954 1972

1967

1964

1958 1980

1996

2007

2012

Appendage

Exhibit 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

creates the

Reconstruction Finance

Corporation (RFC) to lend to businesses of

all sizes hurt by the Depression.

Under the Small

Business Investment

Company program, the

SBA begins regulating and helping to fund

privately owned ventured capital firms.

The SBA’s Small

Business Development

Center program links

states and the federal government to

deliver free campus-based training and

counseling to entrepreneurs.

Congress forms the

Smaller War Plants

Corporation to help

small businesses participate in wartime

production.

The SBA’s Equal

Opportunity Loan

Program begins

providing start-up loans to applicants

below the poverty line. Also, the Score

program is created to offer volunteer

mentoring of entrepreneurs by retired

business executives.

Congressional

Republicans try but fail

to kill the agency.

Congress creates the

Small Business

Administration (SBA)

to take over the small-business-related

functions of the RFC.

President Johnson

orders the SBA to direct

federal contracts to

businesses located in economically

distressed urban areas, creating the 8 (a)

Business Development programs.

Investments in small

businesses by SBA-

backed Small Business

Investment Companies reached a

cumulative total of more than $50 billion.

The SBA makes its

first small-business

loans.

For the first time, the

SBA records a one-year

total of more than $1

billion in small-business loans.

President Obama

proposes combining the

SBA with five other

agencies.

Key Course Terms and References:

Business, Government, Society, General Systems Theory, Interactive Social System, Stakeholder, Stakeholder Analysis, Dynamic

Environment of Business, arl Albrecht’s Eight Strategic Radar Screens of Environmental Intelligence, Corporate Power, The

Modern 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, Expert

Witness 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 Insurance

Corporation, Glass-Steagall Act of 1933, Federal Reserve Acts, Dodd-Frank Wall Street Reform and Consumer Protection Act of

2010, Sarbanes-Oxley Act of 2002, Depository Institution Deregulations and Monetary Control Act of 1980 and the Garn-St. Germain

Depository 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 financial

markets. 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 4

Exhibit 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