Far to go
Wells Fargo boss Charlie Scharf received a nugget of good news on Wednesday. The U.S. Federal Reserve is temporarily relaxing the cap it imposed two years ago on the scandal-hit lender’s growth so it can funnel rescue loans to more of America’s 30 million small businesses. But it’s just one piece of a big bailout jigsaw that’s still a mess.
Companies with fewer than 500 employees are in dire Covid-19 straits: Around half only have cash to last 15 days, according to the JPMorgan Chase Institute. The roughly $350 billion Congress set aside for small businesses in last month’s pandemic-response stimulus should be a lifeline.
The trouble is, the scheme is packed with problems. Sure, in theory the loans, 100% guaranteed by Uncle Sam, carry just a 1% interest rate and will be forgiven if used to cover employees’ wages and some other expenses. But businesses need the cash right now, and that’s where the difficulties start.
For one thing, the program is first come, first served until the money runs out, which not only invites a stampede but also may favor larger firms with more resources. Lawmakers may add another $250 billion to the kitty this week, but it’s still a scramble.
Second, banks are supposed to arrange the loans, then apply to the Small Business Administration for federal guarantees. But the SBA typically only handles around $20 billion in loans a year, involving a relatively small number of banks. It’s now charged with administering nearly 20 times that amount in far less time, and to work with some 3,000 lenders, taxing its people and an all-important system called E-Tran, which doles out guarantee numbers and was down for much of Monday.
To reduce red tape, some banks are limiting loans to existing customers. That limits businesses’ options. Moreover, even the biggest lenders don’t yet have a handle on the details. They worry about being left holding problem loans; in his letter to shareholders this week, JPMorgan boss Jamie Dimon also warned of the risk of future litigation associated with working on government programs.
It’s arguably a chance for Scharf to step up and rehabilitate his bank, and Wells Fargo is now increasing its $10 billon commitment to the bailout program. The feds need to get busy on other fixes, too.