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February 23rd, 2010
06:00 AM ET

Broken Government: Are small banks the solution?

Editor's Note: All this week in our special series "Broken Government," CNN is taking a hard look at our nation's government; the frustrating problems and the potential solutions. Today, our Carol Costello reports on why banks still aren't loaning and what the answer is for small businesses. Tomorrow on American Morning, we focus on states that are trying to gamble their way out of the recession.

By Ronni Berke and Carol Costello

You're the owner of a small business that's more than breaking even during this recession. You have good credit and want to hire more people. Therefore, you qualify for a small business loan – right? Wrong.

Jimmie Hughes, who runs office supply business “Grand America” outside of Dallas, says although that description fits him perfectly, he's been turned down for a loan by six community banks.

"I could double the size of my company now if I wanted to, but what I need in order to do that is to have operating capital that I can use to stabilize the situation with my company so I can put some good people to work."

Hughes may be caught in the loan log jam now affecting many small businesses. According to the Treasury Department, the nation's 11 biggest banks cut their small business loan balance by more than $2.3 billion in December. In 2009, the Small Business Administration approved only $9.2 billion in 7(a) commercial bank loans, down from $12.7 billion in 2008.

To loosen up credit, President Obama has proposed moving $30 billion of funds repaid under the Troubled Asset Relief Program (TARP) to community banks to lend to small business owners. But community bankers like Edward Merritt of Boston's Mt. Washington Bank, say cash is not what they need.

"I'm not really looking for more money to lend," he says. "I'm looking for more qualified borrowers to lend to, and that is as big a problem as I see it today as it is the bank's willingness to lend money."

Merritt's bank doles out $7 to $10 million a month in commercial loans, mostly to mom and pop businesses in Boston. He'd like to lend more, but good credit isn't enough these days. If a small business owner asked him for a loan to meet payroll, because his own customers weren't paying on time, Merritt says he would hesitate.

"I would have to ask [him] ... 'why can't you meet your payroll?'"

Banking experts say community bankers have always been more conservative with their loans and that is actually a good thing.

"Community bankers loan money to people they think that can pay it back," says Bart Narter, senior vice president of the banking group at Celent, a Boston-based consulting firm.

"I don't think the goal should be to get money to small businesses. The goal should be to encourage small businesses to hire more people," he adds. "Perhaps it would be a good idea to create a program that reduces taxes on new hires, for example."

Another option could be to devise programs to "temporarily waive the social security tax on new hires, or the Medicare and Medicaid fees," which Narter says could stimulate job growth.

"Community banks are probably better lenders to small business than the giant banks," who just run data though an automated approval process. "Smaller banks will tend to put a little more time and energy into it and really look at the small business more closely," he says.

Filed under: Broken Government • Economy
soundoff (35 Responses)
  1. varun mahajan

    Broken Government .

    Our politicans are going to increase the gas prices. As people dont believe the government they are not going to want the dollar . This will make the Dollar weak against the Euro and that means higher gas prices . Thanks to all the Satins associates called public officials . The Satins have given america a reputation of USA( united satins association)

    February 24, 2010 at 2:20 pm |
  2. varun mahajan

    Broken Government .

    We need to have a revolution . We need all our seniors to do a Business process re engineering on all our government.

    The USA ( UNITED STATES OF AMERICA ) has Become USA( UNITED SATINS ASSOCIATIONS) where the satins are the senators , congressmen , governors and president.

    February 24, 2010 at 2:16 pm |
  3. varun mahajan

    Broken Government

    The reason why a country fails is when the Judicial system and enforcement of the laws is not performed

    1 Judicial System : The Banks got away with criminal activities by putting pressure on the loan officers to write bad loans . As a result our financial markets got tainted with bad fish . But the Ceo's got away with criminal activity . Now If the government would have enforced only one law called Sarbanes Oxley 302 and 404 , we would have cleaned up our system . But Instead obama gave a message to the Public Ceos , you can get away with criminal activity .

    2 Justice : There is a saying that you cannot lie to a judge . One cannot lie in court . But that is not the case in cobb county Ga . In the court of judge Staley you can lie , commit fraud and win if you are rich . For reference see case number 07103365-28.

    3 Pay for Performance : Just like the health care system reform we need to put a system for the politicians called pay for performance .

    4 Competition : we need to increase the competition among firms , for example if we abolish the USMLE we can have more doctors and competition will drive the cost of healthcare down

    February 24, 2010 at 2:11 pm |
  4. Harry in Texas

    I guess that years of shipping jobs overseas is finally coming home to roost. Qualified borrowers will be increasingly hard to find as the good paying jobs are performed by the slaves in low-wage countries.

    Until we erect barriers to the flight of capital, we will contine to see our standard of living shrink.

    February 23, 2010 at 11:20 am |
  5. Lanny Sanford

    our small business should Hatti and Mali People we should kidnap UScitizen and ask for$50,000.00 USdollars then we would all be doing Great

    February 23, 2010 at 10:51 am |
  6. Al

    Small Business problems stem from a multi dimensional issues and will not be easily fixed by throwing money. Some of the items are:
    1. Banks are greedy and tightened the credit for our operating expenses and small loans.
    2. Big Business stopped using the small business as suppliers due to belt tightening and diverting the supplies from elsewhere around the world.
    3. We are importing everything from China with their currency altering policy and dirt cheap employee payrolls, what else is left for us other than service and restaurant business making small profit.
    4. All of the government work goes to big companies and we are left out.

    February 23, 2010 at 10:50 am |
  7. Lillian

    Think about it, small business loans to cover operating cost, gee can I have a loan to cover my household operating costs? Obama is not the president of the peopl. He wants to fix Washington, what a joke! Executive orders that keep Americans first, fixes Washington! He and his experts with their Doctorate degree do not have any common sense! The people are going to be showing him the door in 2012. Did you know the Unearned Tax Credit is up to $8,000 refunds for individuals that do not work and do not pay a dime of income tax. Middle class is easly defined, it is those of us that pay taxes and pay out the nose on high interest loans, because we work or do not hold a government position in the main branches.

    Fix credit reporting for individuals and you fix the credit crunch and the economy. Seems to me, banks and big business in the pockets of our law makers had that overlooked. Try correcting your credit report, business wins! Even if you offer proof, the business wins and individual will loose! Even though we were scammed on mortgages we are still taking the hit; even though we worked steady for 20 years, we still taking the hit. Put through legistlation in the Financial Reform Bill that will show compassion and a second chance for million of Americans so we can get back on our feet. They did it for Banking, Airlines, Automakers, but not the American people! This legislation would not cost the government a dime!

    February 23, 2010 at 10:09 am |
  8. Lanny Sanford

    I have worked for a small business we need some one like JFK or President Obama we all know that our goverment can not help everyone in small business we need people in our goverment who understand small business and keeps our citizen working all the time President Obama is trying to help but it is to late for a lot of small business And Carol it is like being a new reporter you have to find a story the goverment loans and the private loansjust like finding the news in the world some time we don't understand your goverment but we have a good president I have got to look for away to bring Anne Home to Montana I have called a lot of our goverment to help and we do have good people in our Department of State we as UScitizen got to understand our Citizen should come first before Hatti People

    February 23, 2010 at 10:06 am |
  9. Mark McInnis

    We are rewarding internet business by the sales tax exemption. In the process states' revenues are declining. Local business must compete
    with business that doesn't charge sales tax. State economies and local
    businesses must be able to regain their health before the Federal Health
    will improve.

    Many states are actually looking to increase sales taxes at this time, which will send more sales away from local business. What if the exemption was removed?

    February 23, 2010 at 9:11 am |
  10. NC Properties & Financial Svs Inc

    We are a company of funding facilitators founded on the ability to provide funding assistance thru our private investors. We review all commercial project request for funding. Our interest is providing funding to qualified clients reguardless of certain credit issues. Please call us at 281-627-8701. Our website: . Office hours are 9am – 5pm, mon-fri. There is a possibility we may be able to help.
    N Caffee, President

    February 23, 2010 at 9:06 am |
  11. Blake Johnston

    CHINA: China imports are the problem with America. I do manual work and ALL TOOLS are made in CHina, Most car parts are made in CHINA. Go into a WalMart or Kmart and see how many items you can find that are made in the USA. They are taking our JOBS. and taking our money. China does not know how to make steel our how to temper it to make it hard. Let's get the jobs back in the USA.

    February 23, 2010 at 8:57 am |
  12. Steve

    It's obviously broken if we even HAVE to question it. I'm a young man and even I have already become very uncomfortable about the amount everyone talks about our government failing and our countries money problem, my feeling is that if it is that important to the survival of our NATION, we shouldn't even be struggling with it. So somethings obviously wrong. I can't believe this is our problem.

    February 23, 2010 at 8:54 am |
  13. Noel

    people don't have enough colateral to borrow money from community bank, but the problem is not the goverment problem anymore; what's the job of the goverment is, though, to supply enough liquidations in order for the bank to make loans, with people with good eligible business owner
    i think there is nothing to politicize about, shouldn't you have to qualify before any body gets a bank loan? i don't know but this is common sense...

    February 23, 2010 at 8:53 am |
  14. John

    As a consultant to the community bank sector, I have found them eager to help small business. But, they too have been hurt by the local and regional economies they serve. Couple this with regulatory requirements for higher capital ratios, regulatory enforcement actions that result in better financial performance requirements from potential borrowers– and you have the ideal recipe for lending curtailment from the banker.

    Another concern from a bankers perspective might be what rules will be created subsequent to the $30 billion being given them. Remember TARP

    The main issue is JOB creation. Banks don't neccesarily need more funds to lend they need the economy to improve.

    February 23, 2010 at 8:52 am |
  15. Paul Deppenbrook

    The only way to fix this situation is to repeat some of what FDR had done. The general Welfare provision of the Constitution must be used. The creation of CCC projects and WPA projects have to be enacted by Government. Waiting for businesses to borrow to put people back to work has no legs because buisness and peoples credit ratings have been destroyed by the very system that is wrongly attempting to be aved. The banks MUST be put through Bankruptcy reorganization and Glass- Steegal restored. If this is not done soon it's over for all of us. Thanks you for the opportunity to speak--.Paul

    February 23, 2010 at 8:51 am |
  16. Loren

    I have a 7 digit net worth and have not been able to get a loan in a bank. Everything I own, several properties, all my vehicles, are paid for. The requirements for getting a loan are formalized to showing tax returns which show an income. I reinvest my income into my businesses and don't show an excess at the end of the year because I live frugally. One of the problems in the current crises is the overpriced valuation of homes. There is nothing which backs up the value when looking at materials cost and labor cost and land cost. Now that prices have corrected. I still can build a longer lasting home than I can buy, for less money. Another problem with this country is the short sightedness which focuses on a home which seldom lasts more that the length of the mortgage. I build homes which should last for a thousand years, and are self sufficient. and still cost less than conventional homes. Yet banks won't loan on these homes because there are no comparables. A dilemma

    February 23, 2010 at 8:50 am |
  17. francnnam

    For Jeffrey Clarke:

    CNN's first series on "Broken Government" was aired on October 19, 2006. Jack Cafferty was our host. Transcripts from the programs may be found at this link:

    Scroll down to the date October 19, 2006, and you will see all programming around this topic.

    February 23, 2010 at 8:49 am |
  18. Joanne Hamilton

    I wouldn't loan Jimmie Hughes money either. He wants the money for operating costs and to stabilize his company. If the money was to update euipment or retool to be more efficient and able to hire more people, okay, but his two statements tell me he isn't generating enough business to cover costs. What kind of salary is he paying himself? In most cases, employers think they are worth more than the business can sustain. Until he can cover his operating costs, he is running the risk of closing down and any loan he generates will just disappear down the rabbit hole, leaving the bank with another loss. Jimmie needs to understand profit and loss, and get his house in order. If he does go under, he'll probably whine that the banks wouldn't help him.

    February 23, 2010 at 8:48 am |
  19. Jeremiah Merrell

    Great! Help out small business owners, but there are many other problems in our economy; I am positively sure you know this! But did you know that in Indiana alone 1500 teachers will be laid-off, without any severance package, this year! Not only will these teachers be laid-off, but they will not be given any un-employment money because they are considered part-time seasonal help! My wife is a teacher and she may work only 9 months out of the year, but she puts in approximately 60-70 hours a week with lesson plans and grading papers! This is outrageous!! One of the teachers at my wife's school is married to a teacher at another school, and they have two children if they both lose their jobs. Where is their help!

    February 23, 2010 at 8:48 am |
  20. Karen Moots

    My husband and I have been in business for 30 years in the same location. We have a building that cost us $400,000 in 1998. We only owe $135,000. We both have over an 800 FICO rating, never missed a payment, and never declared bankruptcy. We have asked every bank in our community to refinance our building so that we could buy inventory, but they have come up with a multitude of reasons why they can't loan us money like our business sales are down. We are about to close our business because of this. No one is helping these kinds of businesses.

    February 23, 2010 at 8:47 am |
  21. Manny Pesco`

    I watched your report on TV where the Banker said a firm would need collateral to qualify for a loan. My experience is that it won't matter.We have $400,000.00 to $500,000.00 in equity and still can't get a loan.

    When we had damage from two hurricanes we got an SBA loan to fix up and stay in business. Now that we have had a financial disaster you cannot get a loan to get you through. What the difference in a natural disaster and one man made? SBA loans made directly to small business would go a long way to helpings.

    February 23, 2010 at 8:46 am |
  22. Small Business

    Simplify the tax system, currently it inhibits employment and confuses millions. Combine a national sales tax and a very simple tax on business/company profits. Organise and reduce goverment spending and then set the tax rates to create a surplus so the national debt can be paid down.

    February 23, 2010 at 8:43 am |
  23. P Farley - Oshkosh WI

    If the banks are unwilling or afraid to loan directly to small business, perhaps the government branch through the SBA should loan directly to companies hiring less than 50 people cutting out the banking industry all together. Also as I've proposed to my legislators, cut at a 50% level all imports for at least 5 years and give the president the "fast track" authority. This would force American companies to produce the products we need once again. (to heck with NAFTA and other sweet heart trade deals during our time of crisis). WE MUST get small business back on their feet in this country regardless of their current credit score if the companies have shown a 3 to 5 year positive cash flow prior to this economic downturn.

    February 23, 2010 at 8:43 am |
  24. Vivian Torres

    I also have a small business and understand the pressures of cash flow. I would like to see some of the bailout money that the banks have to pay back to the government be allocated for small business and have the banks act as intermediaries to manage the logistics.

    February 23, 2010 at 8:43 am |
  25. Rhonda

    I doubt you'll read this on air, but I just had to say this anyhow. There is NO middle class. So, I put it to the American public – What would happen if we ALL withdrew everything but $1.00 from our bank accounts on the same day, say 7/1/2010! Would they – the banks and Washington – finally help? Hah, that's a joke! Once elected to Washington, they keep their salaries for life so why would they care or change anything?
    Keep up the excellent reporting. CNN is #1!

    February 23, 2010 at 8:43 am |
  26. William Sutton, Jr

    Community banks are not being true to the original roots. Mt Washington Bank is relying too much on computer models that rely on credit scores, instead of looking at the business model, the individual(s) who will guarnantee the loan as well as the repayment source. You can take a business owner who has always paid his/her bills on time, but now have suffered low cash flows and that has hindered their ability to repay their own debts, thus reducing their credit scores. I have always believed that I lend money to people, not a computer model. Although they can be pretty accurate, it is all based upon what the bank wants built into these models. They are raising the minimum credit scores, which ultimately exclude many people now.

    February 23, 2010 at 8:42 am |
  27. Lawrence Darmstedter

    Tax cuts? Please! Republicans, some Democrats and the Tea Party do not have a clue here. If I were a business owner, it would not matter how big of a tax cut you would give me, I would not create a job if there were no increase in demand for my products or services. If there were an increase in demand for my product or service, I would skip meals to find the funds to expand my business. Demand, not tax cuts stimulate job growth.

    The answer is jobs. Not only jobs, but also laws and policies that allow Americans to be competitive with workers in other countries. Do we want to reduce our American workers to the levels of sweat shops in third world countries where they have no benefits, occupational or environmental protections, and where they barely make enough money to feed thier families? No, I am sure that we do not. What is needed is policies, laws, and tariffs that level the playing field for our workers. Closing this competitive advantage will create the jobs.

    Please, I have yet to see a news network educate the public as to the how Milton Friedman's Free Market Economics has affected the working class in every country where it has been implmented. It has been a disaster for the working class. Higher deficits, more poverty. The rich get richer and the poor get poorer. Please, also educate the public as to the Keynsian Economic System that was in place after WWII.

    February 23, 2010 at 8:41 am |
  28. Jeff

    As long as we have teams in our government (R vs D), we will never move forward as a country. Human beings will defend their "team" to the death just as they stick with their favorite football or baseball team even when their team may be losing horribly due to poor decisions and poor execution. The best laid plans have always been developed by individual people giving their individual opinions and ideas. Good ideas are easily recognized when you don't have to defend the team your on, and The President of The United States should never, ever be on a team that only represents 50% of the population.

    February 23, 2010 at 8:40 am |
  29. Carl

    The invisible hand that guides the free market is really the millions of individual decisions made every day by consumers. It is impossible for government to control this, as history and today's economy have shown. Let the market work. It won't always be speedy and it certainly can be harsh to the loosers, but in the end it has allowed our country to flourish.

    February 23, 2010 at 8:37 am |
  30. Janet Greco

    Success is driven by consumer spending. What good is making borrowing money to pay your employees or put stock on your selves if the consumer doesn't have money to spend? More money in the customer pocket equals money to pay employees, buy stock, pay bills, make a living.....

    February 23, 2010 at 8:36 am |
  31. jason

    Seems to me that if you want to encourage growth in small business then we need to stop sinking money into banks that arent going to lend to or invest in small busines. To get real growth in small business and major job creation go right to the small business owners of America. Not just proposed tax breaks, but real incentives to hire more workers. Figure out what is costing small business owners so much they cant hire new workers and federally buffer that cost or offset it by making big business that outsource to other countries pay up. Stimulate america not the banks and fat cats that line their pockets with your money.

    February 23, 2010 at 8:26 am |
  32. Greig Nakamoto

    I've got no faith in the ability of our Federal govt. to do anything that is constructive when it comes to business. Everything they touch has unintended consequences, which usually make matters worse. I cringe each time I hear that our Federal govt. is about to pass more laws to 'fix' another problem! This whole thing started with Fannie and Freddie, and the Fed govt,. trying to 'help' more people attain the American dream........... homeownership.............behold-–unintended consequences!!!

    February 23, 2010 at 7:42 am |
  33. Jeffrey Clarke

    I do not recall CNN using the title "Broken Government" when Bush was in power. Your titles and comments help to drive the national discourse. The problems with banks lending money how is that broken government? Health care how is that broken government? On the banks would the title be "Broken on greed on wall street" or "Broken Banks". On health care would it be "Greed in the Health Care System? Explain to me how the Obama's administration helped to create today's current problems? Now explain to me how the Bush policies helped to create this current crisis? Why not do a piece on that.

    Your organization is lazy on the facts.

    February 23, 2010 at 7:41 am |
  34. Bob

    Go to your local Churches people and beg God to remove the corrupt and strengthen the weak honest men and women of our government. Political agendas have intruded on our homes and have taken from our children, caused disease and sickness all in the name of greed.
    Pray that Americans return to God and look to him for healing before this nation is complete FAIL.

    February 23, 2010 at 7:39 am |
  35. El Laurence

    The 'government' isn't broken but the elected politicians are only interested in their own advancement and future elections rather than what is really good for the country. They are not listening to their constituents.
    Instead of spending money and bailing out only certain businesses and banks, why don't they simply get more money back into the hands of legal citizens and small businesses and support companies that do business in the United States providing paying jobs instead of importing from other countries – expecially China.

    February 23, 2010 at 7:38 am |