Bailout Matters

Congress will begin debating the amended proposed bailout this evening with an expectation to have an approval for the House of Representatives to approve later this week. This legislation has by far been one of the most scrutinized bills the public has had to face and to the average person might not seem fair. Being in the financial industry for nearly a decade I can assure you this is not a request but a demand for our economy and the remainder of the world to continue to operate and here is why.

What most Americans do not understand is this is not about giving the banks a free pass after all the Banks will have to take immediate losses with the bailout on portfolios that are performing well. The problem is not about doing subprime mortgages the problem is about banks lending to each other and providing capital to the financial sector. What happens if a Bank falls? In the past few months we have seen a number of banks fail and for all practical purposes customers’ deposits have been safe. What have not been safe are the customers’ credit lines and this is where the slippery slope begins. If a bank fails the credit line will be closed meaning a business owner will not have access to working capital. Sure in credit training it is very clear you are never to lend to a customer who is having trouble making payroll, rent, or utilities but the working capital lines are used for inventory, expansions, and growth. Although it might seem like a bank issue, here is an example of what can happen.

Bank fails on day 1 and begins to call business lines of credit due immediately. Business X does not have the liquid capital to repay the credit line so they begin shopping for a new business line of credit. The already tight credit market make it difficult to find a new line of credit from a bank with no existing relationship but new bank does fulfill on small credit facility. In order to pay back the entire outstanding debt the business owner decides not to purchase new inventory and sell the remaining inventory to eliminate additional capital costs and avoid legal action from the financial institution. Since the business has lowered the inventory levels sales begin to decrease and the owner is forced to reduce overhead and expenses which usually means job cuts. These cuts take place and a number of people find themselves unemployed looking for new work and trying to pay their bills. These same people are living paycheck to paycheck and this gap in employment causes them to miss a payment forcing the bank to tighten additional credit policies and shrinking the credit market. It is a vicious cycle.

So when you hear people say this is not about the average American I argue this is absolutely about the average American. After all Small Business is the future of America and these are the businesses that are impacted immediately.