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While the watchdogs slept

There's a bit of a banking scandal going on in Massachusetts right now.

In the wake of 9/11, the government chose to fight against some of the economic devastation with small business loans. More specifically, they set up a special program with the Small Business Administration to encourage banks to loan money to businesses who had suffered from the attacks.

The loan program was very attractive to banks. The additional guarantees made these loans even less risky than average loans, so they signed on cheerfully.

So cheerfully, they started offering them to pretty any business that asked for a loan -- whether or not they had been affected by 9/11. Even a few that didn't even exist in 2001 got the loans.

A lot of people are outraged over this. Even a lot of the businesses are unhappy -- the banks never told them that the loans were tied to 9/11. The SBA is a bit chagrined; they required the banks to document how 9/11 had affected the borrowing business, but didn't bother to enforce that. And the banks say they were under the impression that the loans were to generally boost the economy after 9/11, not just for businesses that could document specific damages from the terrorist attack.

A Massachusetts congressman is calling for an investigation into this. And right now it looks like the heat will fall on the banks, for violating the rules, and the SBA, for not bothering to enforce them. Right now, it looks like the businesses themselves will not be blamed -- there's little evidence they knew they were part of a scam.


Comments (7)

I'd feel bad if I were a bu... (Below threshold)
JohnAnnArbor:

I'd feel bad if I were a business too, if it's true the businesses didn't know of the 9/11 requirement. That kind of negative publicity is not something any business would want.

I think this is more of an ... (Below threshold)
Faith+1:

I think this is more of an argument for keeping the government out of banking loans rather than going after banks for not following a special set of rules.

The fact it would take something like 9/11 to foster small business loans is the problem....not people failing to dot another I or cross another T on yet another government form.

Sure, they failed to follow the rules but why were there rules to begin with?

"The additional guarantees ... (Below threshold)
Phinn:

"The additional guarantees made these loans even less risky than average loans ..."

Another way of saying this is that this is yet another easy-credit government program. (What has that sort of thing done to housing prices? Anyone?)

Still another way of saying this is that the businesses that received the subsidized loans were not good credit risks, according to a people who actually expect to be repaid.

This is an inflationary program. This is simply a way to inject cash into the economy. It is no different than if the government printed up a whole bunch of paper bills and tossed them out in the street.

The businesses that got the subsidized loans would not have qualified for them in a free market. That means they are marginal businesses, and will be the FIRST ones to disappear when the inflationary subsidy-stream stops, or even slows down.

This sort of thing cannot be sustained. You cannot inflate currency indefinitely.

Lemme see here, you say tha... (Below threshold)
Omni:

Lemme see here, you say that the banks had the chance to make a bunch of loans that were unusually favorable to them, and they handled this money tree in the way that'd bring them the best financial returns... what exactly about this is surprising to anyone?

(amazed at how people never see it coming)

Yeah, a local golf course a... (Below threshold)

Yeah, a local golf course around here got a loan to remodel their clubhouse. The justification was that they depend so much on the local Air Base, that the business suffered when so many of the airmen go deployed.

Whatever.

This isn't just a Massachus... (Below threshold)

This isn't just a Massachusetts scnadal -- it's going on all over the country.

Right, I guess I should hav... (Below threshold)

Right, I guess I should have specified that this golf course is in mid-state Georgia...




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