No More Bailouts?

President Obama signs the Dodd-Frank Wall Street Reform and Consumer Protection Act—considered the most sweeping law of its kind since the Great Depression—in Washington on July 21, 2010.

Image: Jim Young/Reuters

The specter of taxpayer-funded bailouts hung over Washington today as President Barack Obama signed financial regulatory reform into law and the Senate prepared to vote on legislation that would provide community banks with up to $30 billion in capital for use in making small-business loans.

“Because of this law, the American people will never again be asked to foot the bill for Wall Street’s mistakes,” Obama said at the signing ceremony for financial regulatory reform. “There will be no more taxpayer-funded bailouts. Period.”

Instead of keeping large financial institutions alive when they get into trouble, the legislation provides the federal government with an orderly means of winding them down, the president said.

“There will be new rules to make clear that no firm is somehow protected because it is ‘too big to fail,’ so that we don’t have another AIG,” he said.

Many Republicans, however, dispute the notion that financial reform ends government bailouts of big banks.

House Minority John Boehner, Republican of Ohio, contended the bill “provides permanent bailouts for his Wall Street allies at the expense of community banks and small businesses around the country.”

That’s not the way the Independent Community Bankers of America sees it, however. ICBA president Camden Fine attended the signing ceremony and praised the bill for increasing oversight over large financial firms, including nonbanks, and giving some breaks to community banks. His organization has issues with several provisions in the bill, notably limits on interchange fees that banks can charge merchants for debit-card transactions. On the whole, however, he praised the bill as “the most pivotal piece of financial legislation to be signed into law since the Great Depression.”

Community banks are hoping for another victory later this week in the Senate. The Senate plans a stand-alone vote on a proposal for the federal government to provide $30 billion in cheap capital to community banks for use in making small-business loans. This Small Business Lending Fund proposal originally was part of a broader bill that also includes tax breaks for small businesses and enhancement and expansion of Small Business Administration loan programs. Senate Democratic leaders, however, decided they wanted a separate vote on the lending fund to put Republicans on the spot.

“It’s very puzzling why there has not been more enthusiastic support” for this proposal, said Senator Mary Landrieu, Democrat of Louisiana, who chairs the Senate Small Business and Entrepreneurship Committee.

Many small businesses are struggling to get loans, and community banks are viewed as their best bet if these institutions had more capital to lend. An ICBA survey found that at least 1,000 community banks would use the program.

To many Republicans, however, the program smells too much like the Troubled Asset Relief Program, the $700 billion fund that poured taxpayer dollars into everything from big banks to automakers. House Republicans dubbed the program “TARP Jr.” when the bill moved through the House.

Supporters, however, said this new fund is anything but a bailout. Unlike TARP, this program includes incentives for banks to use the money for making small-business loans. The more loans they make to small firms, the lower the dividend rate they would pay the government for this capital. Banks also would have to submit a plan on how they would use the capital to increase small-business lending. Only banks with less than $10 billion in assets would be eligible for this capital.

“The big banks are just not lending to small businesses,” said Senator Barbara Boxer, Democrat of California.

Todd McCracken, president and CEO of the National Small Business Association, said small businesses have led the way out of every recession for the past 30 years—except this one. Credit “is the critical thing that we’re missing right now,” he said.

NSBA is “extremely supportive of this bill,” McCracken said.

Republicans face a choice: Do they play the anti-TARP card and stand by their ideological aversion to government involvement in the private sector? Or do they agree that credit is too tight for small businesses right now and try to do something about it?