Government Program to Provide Small Banks with Funds for Small Business Loans Proves Small Banks Can Operate Just as Callously as Big Banks

Subverting a Program to Help Small Businesses Purely for Profit

As part of its plans to stimulate the economy, the Federal Government put in place a program to provide low cost loans to small community banks in order to enable them to fund lending programs for small business. What could go wrong with that?  Well plenty if the banks used the funds for something else.

The something else that the banks used the funds for was to repay high cost TARP money.  That’s right, these banks took funds meant for small business loans to  used them to reduce their own interest costs without making many small business loans.

Of 332 banks that received cash through the lending fund, 137 used at least a portion—totaling $2.2 billion—to pay off their TARP obligations, Treasury Department data reviewed by The Wall Street Journal show.

How was it even possible that the law allowed banks to do this?  Lobbying, of course.

The Independent Community Bankers of America successfully pushed for a provision allowing TARP recipients to transfer from one Treasury program to the other. In congressional testimony in May 2010, the lobbying group requested that transferring banks "be subject to the new program rules and released from their existing TARP restrictions."

Even the banking community could not defend the practices

"It's a bit of a shell game," acknowledged John Schmidt, chief operating officer of Heartland Financial USA Inc., a Dubuque, Iowa, lender. Heartland received $81.7 million from the fund, and it used the full amount to retire TARP obligations.

Now it turned out this was not a particular big program, and its overall impact would not have been very great but it does point a very important point.  Banks regard the Federal government as someone to bail them out, someone to subsidize their operations, someone to backstop all of their bad decisions.  In return, these banks feel that they have no obligation whatsoever to the public that provides them with these benefits. 

Anyone wonder where small banks got that impression?  Anyone?  You in the back of the class, Mr. Citibank, you think you know the answer?