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Sunday, September 19, 2010

Bank Bailout Not Helping Small Businesses

One would have thought that the massive Troubled Asset Relief Program (TARP) bailout for the nation's financial institutions woud eventually benefit the rest of the private sector.  Instead, many businesses, and small business in particular, have been hit with a liquidity and credit crunch the likes of which have not been experienced in decades.

Read this Crain's article -- on newsstands tomorrow -- quoting Eric Dixon on the problems facing small business.

The last two years have shown that the banks have just used the program to access very low cost financing for themselves while availing themselves of every means possible to ratchet up revenue from borrowers and depositors. The result: Many businesses -- and especially small businesses -- have found credit harder to come by, credit line limits reduced (in some cases, by 100%), increased bank demands for collateral and other proofs to maintain existing credit (never mind getting new credit) and increased charges on almost any transaction imaginable.

After three years of an economic downturn -- which may prove in the end to have been either a double-dip recession or a prolonged stagflation, as these figures are finalized only a few quarters after the fact -- there is no sign of a sustainable economic recovery. 

Most economic news -- that is, reporting using actual facts -- is and remains bad.  That is distinguished from  "commentary" from sell-side "analysts" who are really trying to induce the audience to go long the market.  

You would never know the economy is poor from the banks, however.  We see record profits, high bonuses to corporate executives, substantial bank marketing efforts (wall-to-wall TV and radio ads and sports arena naming rights) and new branches opening up on many available street corners.  

The sum of this behavior indicates that the banks may be "hoarding" capital -- cash -- for an anticipated nuclear winter rainy day.  The expectation that current favorable conditions for banks will not continue would seem to fuel the desire to make the money while one can... because long-term conditions may be significantly worse than they are today.  (There is the looming problem of massive government debt at all levels in this country and most of the world.) 

The combination of these factors suggests that many business owners will need to hoard cash and build up a cash cushion to ensure liquidity for tomorrow's operations as well as the ability to fund tomorrow's basic living expenses.  In such conditions, one can hardly expect hiring to resume or many capital expenditures (from infrastructure to equipment) to be made.  These conditions point to a slow downward spiral that has yet to decelerate.

Eric Dixon is a New York lawyer who represents small businesses, entrepreneurs and freelancers on legal and strategic matters including litigation, negotiations and government investigations.  He can be reached for consultation or comment at 917-696-2442 and


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