A lesson that the Obama administration hasn't learned regarding loans: Supply and Demand both matter

I would also add that I don't think that most lenders want the government to "invest" in them. Others have learned the hard way what government "help" means in terms of bringing politics into business decisions. Now apparently, the problem isn't so much the lack of funds, but the lack of return to borrowing more money. Lower interest rates will generate more borrowing, but loans that shouldn't be made because the benefits from those investments are less than the true costs.

President Barack Obama's $30 billion small community business lending program faces one big challenge: many of the community banks and businesses it's supposed to help don't want it.
The lending program is part of a bill that passed the House of Representatives on Thursday and now awaits the president's signature. The legislation contains a mix of tax cuts and credits aimed at helping small businesses. The centerpiece of the bill is an effort to make billions of dollars available to community banks for loans to small businesses.
It seems like a simple effort to unclog a credit pipeline that has been blocked since the financial meltdown two years ago. But interviews with seven community bankers, as well as small business owners, show a reluctance to participate.
"People in my constituency can't get credit, and this will get money out to small businesses, who are the engine of job creation for this country," said Republican Sen. George LeMieux of Florida, who co-authored the amendment that created the lending program.
Bank executives say their customers don't want loans, even at low interest rates, because the sluggish economy has chilled expansion plans. Some say the federal money isn't worth it because they fear it will come with too much regulatory oversight.
"We have taken a strategic decision not to have our primary regulator, the government, also be a partner in our bank," said William Chase Jr., CEO of Triumph Bank in Memphis.
Chase said the bank already has enough capital to meet the paltry demand for loans. "Our business customers are mired in uncertainty and are reluctant to invest in their businesses," Chase said.
Ninety-one percent of small business owners surveyed in August by the National Federation of Independent Business (NFIB) said all their credit needs were met. Only 4 percent cited a lack of financing as their top business problem. Plans for capital spending were at a 35-year low. . . .

Possibly the TARP program did produce at least on benefit, though those who are already on the hook for TARP seem most interested because the government already can do what it wants with them. From the WSJ a few days ago about how bank executives have already been burned by the government:

However, small bank executives argue that they won't use the program, in part, because of uncertainty about whether government regulators will change the rules after they are already borrowers. Other institutions said they worry about the stigma associated with taking money from the government.

"Many community bankers I spoke with felt that once they agreed to participate the rules would change," said Patricia Satterfield, president of the Virginia Association of Community Banks, in Richmond, who spoke with community bank CEOs in Virginia over the summer about the program.

With good reason--roughly 500 community banks that received capital injections from the Troubled Asset Relief Program later became subject to executive compensation restrictions that were imposed after they had already committed to participate in the program.

The residual stigma from TARP also weighs on the program.

"The administration and supporters of this bill made great strides to differentiate between TARP and the program, but there is always going to be possibility that people will consider that taking funds from this program is the same as taking TARP funds," said Bill Loving, president and CEO of $250 million, 85-year-old Pendleton Community Bank in rural Franklin, W. Va.. . . .

The structure of the program, he added, will encourage these almost-troubled banks to make risky loans so that they can meet their requirement to increase lending within two years of receiving government capital. A failure to expand lending, after they have received government funds, will result in higher dividend payments to the Treasury Department, and more problem costs.

"Looks to me like a lot of bad loans could possibly be made through this program," [Bernard Clineburg, chief executive of the $2 billion, 13-year-old Cardinal Bank, in Fairfax, Va.] said. "It's not so much stigma but stupid." . . . .

One category of community banks that are expected to take advantage of the program are a large chunk of the roughly 500 of so institutions that have already received TARP funds. Those TARP recipients that aren't late on their dividend payments are expected to be permitted to convert their TARP stakes over into the new program.

These institutions are likely to seek to convert their stakes, not only because they would have the opportunity to reduce their dividend payments to the government, but also because the program would eliminate the executive compensation restrictions and costly warrants that came attached to the original TARP program. . . . .

Rusty Cloutier, CEO of $1 billion Midsouth Bancorp Inc. (MSL) in Lafayette, La., said he is eagerly awaiting the opportunity to convert his $20 million TARP stake into the new program, in part, so that the stake's "hundreds of thousands of dollars" in warrant costs are removed. . . . .