[Congressional Record Volume 156, Number 133 (Wednesday, September 29, 2010)]
[Extensions of Remarks]
[Pages E1775-E1776]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                    SMALL BUSINESS JOBS ACT OF 2010

                                 ______
                                 

                               speech of

                           HON. BARNEY FRANK

                            of massachusetts

                    in the house of representatives

                      Thursday, September 23, 2010

  Mr. FRANK of Massachusetts. Madam Speaker, attached is a Wall Street 
Journal article noting that the lack of credit was hurting many small 
businesses in our country.

                     [From the Wall Street Journal]

              Loan Squeeze Thwarts Small-Business Revival

                          (By Mark Whitehouse)

       Ypsilanti, MI.--Thomas Harrison, chief executive of 
     Michigan Ladder Co., has a plan that would contribute to the 
     U.S. economic recovery: Expand the 108-year-old company, 
     adding at least 20 jobs in the process. His chances of 
     getting the loan of $300,000 or more he needs to do so, 
     though, depend in part on what happens to folks like home 
     builder James Haeussler.
       Both are customers of the same community bank, the Bank of 
     Ann Arbor. Mr. Haeussler is struggling to repay $8.3 million 
     he and a partner borrowed to build a residential community in 
     nearby Saline, Mich. In this economic environment, the bank 
     doesn't want to take a chance on what it sees as a risky new 
     loan to Mr. Harrison.
       ``In a world where Jim Haeussler makes it, Tom Harrison 
     will make it,'' says Timothy Marshall, the bank's president. 
     ``But it's not prudent to do both loans at this point in 
     time. We're in a more risk-averse mode.''
       Mr. Marshall's reluctance sheds light on a problem looming 
     over the economy. A year and a half after the financial 
     crisis hit, the U.S. credit machine is still malfunctioning. 
     During the boom, credit was too abundant. Now the pendulum 
     has swung. With an eye toward limiting such swings, Sen. 
     Christopher Dodd is expected to unveil a bill Monday that 
     would be especially tough on big banks while preserving the 
     Fed's regulatory role, but the bill's prospects remain 
     uncertain.

[[Page E1776]]

       For a recovery to take hold, hundreds of thousands of small 
     businesses must find the confidence to expand and create 
     jobs. But when they get to that point, the local banks they 
     depend on--worried about borrowers' financial strength, 
     scrutinized by regulators and slammed by souring real-estate 
     loans--might not be willing or able to provide the credit 
     they need.
       While big companies have been able to borrow in bond 
     markets, smaller companies rely mainly on bank credit, which 
     has been shrinking. In 2009, total lending by U.S. banks fell 
     7.4%, the steepest drop since 1942. In all, the credit pulled 
     out of the economy by banks since the downfall of Lehman 
     Brothers in September 2008 amounts to about $700 billion, 
     more than double the amount so far distributed under 
     President Barack Obama's $787 billion stimulus program.
       ``It's a dismal situation,'' says Diane Swonk, chief 
     economist at Chicago-based financial-services firm Mesirow 
     Financial. ``Banks won't lend to businesses because they're 
     afraid they'll go bad, but that can become a self-fulfilling 
     prophecy.''
       The dearth of credit for small businesses could have a big 
     effect on prospects for restoring the 8.4 million jobs lost 
     since the recession began. From 1992 through the beginning of 
     the latest recession, companies with fewer than 100 employees 
     accounted for about 45% of net job growth, according to Labor 
     Department data.
       Policy makers have been looking for ways to reopen the 
     spigot. President Obama has proposed creating a $30 billion 
     fund to support small-business lending. Last month, in an 
     unusual show of solidarity, the Federal Reserve, the Federal 
     Deposit Insurance Corp. and other state and federal 
     regulators issued a joint statement urging banks to continue 
     lending to credit-worthy small enterprises.
       Making sure small firms get access to credit ``is crucial 
     to avoiding a Japan-type scenario of persistent stagnation,'' 
     says Mark Gertler, a New York University economist who has 
     done seminal research with Fed Chairman Ben Bernanke, then a 
     Princeton University professor, on how troubles with bank 
     lending can aggravate economic downturns.
       Getting banks to lend more won't be easy, given the rising 
     tide of defaults on loans made to finance housing 
     developments, office buildings, shopping malls and other 
     commercial real estate. Deutsche Bank expects banks to suffer 
     at least $250 billion in losses on such loans, with about 
     half coming in the next few years. Together with an estimated 
     $250 billion in further charge-offs on home mortgages, that's 
     more than double banks' current reserves against losses on 
     all types of loans.
       The stakes are particularly high for community banks, which 
     tend to be much more active in commercial real estate than 
     their larger counterparts. As of December 2009, such loans 
     comprised about 42% of all loans held by the 7,344 banks with 
     less than $1 billion in assets, compared to about 17% for the 
     hundred or so banks with more than $10 billion in assets.
       Some bankers say policy makers' desire to encourage lending 
     isn't always reflected on the ground, where they say bank 
     inspectors are getting tougher about lending standards. ``For 
     the first time in my 37 years in banking, we're having to say 
     to our clients that we're not sure this will pass muster with 
     the regulators,'' says Larry Barbour, president and chief 
     executive of North State Bank in Raleigh, N.C. ``That's not 
     healthy.''
       Washtenaw County, Mich., which includes Ann Arbor, 
     Ypsilanti and Saline, offers a glimpse of how the cycle of 
     economic malaise and shrinking credit is playing out across 
     the country. The county includes the Willow Run plant, where 
     Ford Motor Co. once produced the B-24 Liberator bombers that 
     helped win World War II, the University of Michigan football 
     stadium, and hospital complexes and high-tech start-ups in 
     Ann Arbor. As of December, Washtenaw's unemployment rate 
     stood at 9%, close to the national average.
       Michigan Ladder's Mr. Harrison, 44 years old, remembers 
     vividly the day in September 2008 when the recession hit 
     home. The company, which manufactures wooden ladders and 
     distributes imported aluminum and fiberglass models, had been 
     doing well despite the financial crisis. Sales were up 6% 
     over the previous year, and Mr. Harrison had expanded the 
     company's staff to about 28, from 20 at the beginning of the 
     year.
       But during the week of Sept. 15, the company's largest 
     supplier of aluminum and fiberglass ladders suddenly refused 
     to deliver ladders unless it was paid in advance. Within 
     days, says Mr. Harrison, Michigan Ladder lost as much as $1 
     million of the supplier credit on which it relied to pay for 
     raw materials and maintain its inventory of ladders. At the 
     same time, its customers started failing to pay for ladders 
     it had already delivered.
       ``Literally overnight, the whole world changed for us,'' 
     says Mr. Harrison. ``It was simply too much of a shock--too 
     much of a change, too quickly.'' He laid off eight workers in 
     December 2008 and another eight in 2009 as sales fell 40%.
       Mr. Harrison has since lined up new credit from suppliers, 
     and he says sales are on track to rise 15% this year. He 
     thinks the time has come to implement the expansion project 
     he shelved when the crisis hit. The plan: Produce in Michigan 
     the aluminum and fiberglass ladders he currently imports from 
     places such as Mexico and China. He already has the 
     customers, and he calculates that manufacturing in Michigan 
     will actually boost his profit margins, in part because the 
     savings on shipping will offset the higher cost of U.S. 
     labor.
       ``We can do this,'' he says. ``We can be a low-cost 
     producer, and we will have a made-in-USA product, which we 
     think will have some appeal to people.''
       The Bank of Ann Arbor is Mr. Harrison's best bet to finance 
     his project. Larger banks typically don't deal with companies 
     the size of Michigan Ladder. Also, Bank of Ann Arbor, which 
     has $543 million in assets, has weathered the crisis much 
     better than most of its peers. It turned profits every year, 
     expanded overall lending and declined the support of the 
     government Troubled Asset Relief Program.
       The bank has made loans to finance expansions for some of 
     its stronger customers, such as Solohill Engineering, which 
     makes products used in the manufacture of vaccines and more 
     than doubled sales in 2009. Nonetheless, says its president, 
     Mr. Marshall, fears about a weak recovery are prompting even 
     healthy banks to be careful, a trend he recognizes could help 
     make those fears a reality.
       ``It's kind of a vicious cycle,'' he says. ``Anytime you're 
     in an economic environment like we are, bankers are going to 
     be more conservative.''
       One of bankers' main concerns is the damage the recession 
     has done to many companies' finances. Values of real estate 
     and other things small business owners can put up as 
     collateral for loans have fallen so far, so fast, that many 
     businesses have little to offer. Also, a year or more of 
     losses have eroded the value of owners' stakes in companies, 
     leaving less of a cushion against bankruptcy.
       Mr. Marshall says such financial concerns are a big reason 
     he's not ready to lend to Mr. Harrison, who says his company 
     took heavy losses in 2008 before returning to profitability 
     in 2009. Mr. Harrison says he's exploring ways to raise new 
     money from investors, but so far to no avail. ``It's not 
     reasonable to expect that [the Bank of Ann Arbor] can make up 
     for all the credit companies like ours have lost,'' he says.
       Mr. Harrison's credit difficulties also are linked to the 
     travails of other borrowers such as Mr. Haeussler, the 51-
     year-old president of Peters Building. In 2005, he and a 
     partner began developing a 625-acre piece of land known as 
     Saline Valley Farms, the site of a cooperative farm in the 
     mid-1900s.
       The downturn hit Mr. Haeussler hard in 2007, when home 
     builder Toll Brothers called with bad news: It wouldn't 
     exercise its option to purchase 93 luxury-home lots, the 
     entire first phase of the Saline Valley Farms project. When 
     the $8.3 million loan he and a partner had taken out to grade 
     the lots and build infrastructure came due in late 2008, they 
     still owed $6.7 million and had 76 empty lots, the estimated 
     value of which had fallen to about $1.4 million.
       ``It was perfectly wrong timing,'' says Mr. Haeussler.
       Losses on loans to developers such as Mr. Haeussler have 
     taken a toll on community banks, eroding their capital and 
     limiting their capacity to make new loans. Bank of Ann Arbor 
     has moved more quickly than other banks to recognize losses, 
     charging off nearly one-quarter of its construction and 
     development loans in 2009. That compares to about 5% for all 
     banks. In its remaining portfolio of such loans, about 6% are 
     delinquent, compared to about 16% for all banks.
       Many community banks are renegotiating troubled real-estate 
     loans. In Mr. Haeussler's case, the Bank of Ann Arbor cut a 
     deal: In return for a four-year extension, Mr. Haeussler and 
     his partner more than quadrupled the amount of collateral 
     backing the loan, putting up the entire Saline Valley Farms 
     project and more. Even with the added collateral, the bank 
     charged off $2.1 million of the loan, effectively recognizing 
     that it may never get the money back.
       The bank figures that giving Mr. Haeussler more time 
     increases the odds he will pay off his loan. But such deals 
     tie up cash on what essentially are bets that existing 
     borrowers will make it through. That leaves banks, including 
     Bank of Ann Arbor, with less appetite to make new loans to 
     customers like Mr. Harrison, who doesn't have the resources 
     Mr. Haeussler and his partner used to secure their loan.
       Mr. Haeussler, for his part, says he's trying not to think 
     too much about all that's hanging in the balance, which could 
     include his entire business. ``It's a little unnerving at 
     times,'' he says. ``But you just have to put your head down 
     and work through it.''

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