Every recent president — Bill Clinton, George W. Bush, and now Barack Obama — talk about how neat small businesses are, and create tax incentives and lending programs to stimulate small-business growth. But a Government Accountability Office report released today tells a different story: the Small Business Administration’s biggest lending program to small businesses is, in fact, a boon for big banks — the same banks that now seek a government bailout.

This $20 billion-a-year Small Business Administration program — called "credit elsewhere" — sounds like a good idea. As Jonathan Weisman of the Wall Street Journal explains, a bank — often a big one like Bank of America or JP Morgan Chase — gets the government to guarantee 50-85 percent of a loan to a small business borrower who can’t get credit elsewhere. The Obama administration, viewing credit elsewhere as especially appealing in a historic credit crunch, says SBA will now ensure 90 percent of the loan.

But, according to GAO, there are two main problems. First, 1/3 of lenders aren’t documenting that the borrower really couldn’t get credit elsewhere. Second, the mega-banks might do what they do worst — greedily package the loans:

Government watchdogs fear the potential for another debacle, similar to what happened in the mortgage crisis, in which poorly documented loans were granted by mortgage brokers, then shuffled off to banks and hedge funds as securities.

By eliminating the upfront fees for banks and lenders while increasing guarantee levels, watchdogs say, the administration could be creating incentives for banks to rush credit out the door. The bank’s only risk would be the 10% of the loan left on its books, and that could be eliminated by selling the loan on the secondary market, where it could fetch a premium because of government backing.

The GAO report is another example that what matters most in managing the economic crisis is not the most brilliant idea but the responsible execution of invariably imperfect and complex programs. Democrats and Republicans, in theory, support the credit elsewhere program. But the idea and intentions of the policy don’t matter if the SBA, the Treasury Dept. and Securities and Exchange Commission aren’t constantly monitoring a banking system that has lost the public trust.-MB

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