Obama Jawbones the Bankers

The day after he called them “a bunch of fat-cat bankers” on 60 Minutes, President Barack Obama met behind closed doors with the chief executives of the nation’s largest financial services firms.

Three of the fattest cats—Goldman Sachs chairman and C.E.O. Lloyd Blankfein, Citigroup chairman Dick Parsons, and Morgan Stanley chairman and C.E.O. John Mack—couldn’t make it to today’s meeting because their flights from New York were delayed by fog. They participated via conference call.

By most accounts, it was an old-fashioned “jawboning” session, where the president uses the power of his position to persuade people to do things he wants. In this case, Obama wants banks to start lending again and stop fighting legislation that would reform how financial firms are regulated.

“My main message in today’s meeting was very simple: That America’s banks received extraordinary assistance from American taxpayers to rebuild their industry—and now that they’re back on their feet, we expect an extraordinary commitment from them to help rebuild our economy,” Obama said after the meeting, his second Wall Street CEO gathering at the White House.

“That starts with finding ways to help creditworthy small and medium-size businesses get the loans that they need to open their doors, grow their operations, and create new jobs,” he said.

Banks have reduced their lending over the past year, which is a good thing unless you’re a small business that all of a sudden has seen your credit line frozen. It was reckless lending that wrecked the economy, so it’s prudent for both banks and regulators to be cautious about new loans.

Bankers, however, complain that regulators have gone overboard, questioning even good loans and forcing banks to write down many loans, particularly if commercial real estate is involved. This makes banks even more hesitant to lend.

The president, meanwhile, may be jawboning the wrong folks. Beating up on big banks may be good politics, but community banks are a more important source of capital for many small businesses. The Treasury Department wants to use Troubled Asset Relief Program funds to provide cheap capital to community banks for small-business loans. Community banks, however, won’t touch TARP money at this point because of the conditions that come with it: executive compensation limits and a government ownership stake in the bank.

The Treasury Department is looking at creating a special-purpose entity, which wouldn’t be subject to TARP restrictions, in order to provide this capital to community banks. That seems a little shady, however—like Enron’s off-balance-sheet entities.

A better solution would be for Congress to exempt community banks from TARP restrictions if they use the money for small-business loans.

Congress also could help small businesses by renewing provisions in the economic stimulus bill that made Small Business Administration loans more attractive. The stimulus bill eliminated or reduced fees on SBA loans and increased the government guarantee on the agency’s flagship 7(a) loans to 90 percent. That made these loans much less risky for lenders.

The SBA ran out of funds for these enhancements last month, and SBA lending has fallen since then. Obama wants Congress to restore the lower fees and higher guarantee, but he didn’t do enough jawboning on this issue when it counted—before the money ran out.