United States. Congress. House. Committee on Small.

The effects of bank consolidation on small business lending : joint hearing before the Subcommittee on Taxation and Finance and the Subcommittee on Government Programs of the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, second session, Boston, MA, March 4, 1996 online

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Online LibraryUnited States. Congress. House. Committee on SmallThe effects of bank consolidation on small business lending : joint hearing before the Subcommittee on Taxation and Finance and the Subcommittee on Government Programs of the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, second session, Boston, MA, March 4, 1996 → online text (page 6 of 21)
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allow for the creation of a new fund that would fund early stage
technology companies, all technologies, not just software compa-
nies.

What happened was we were looking for investors for that fund,
and we approached the major banks in this town. The result is sort
of ironic. We were successful in getting a million dollar commit-
ment from both Fleet and Bank of Boston, but neither bank con-
tributed those monies out of their lending portfolios. They were all
doing it because we asked them in their role as community citizens
that if they were going to be participating in the growth of the soft-
ware industry — and one of the engines of growth of the Massachu-
setts economy — the only way they could figure out how to do it,
given their internal guidelines and other kinds of regulatory guide-
lines, was to do it out of their community-based dollars.

So, they are going to get their dollars back because this is an in-
vestment in a fund, and we hope that they will at least get the re-
turn that the other MTDC investors have gotten, which is I think
somewhere around a 15 percent return.

So, I think we need to be very innovative and creative in trying
to find some solutions to help the software industry in particular.
Thank you again for the opportunity to speak today.

[Mr. Blohm's statement may be found in the appendix.]

Chairwoman Smith. Thank you, panel. We'll start with our ques-
tions from Representative Torkildsen.

Chairman Torkildsen. Thank you, Madam Chair. I also thank
all the witnesses for their testimony. Just to start off, in my open-
ing remarks, I had asked about the difference between the Federal
Reserve Bank of Boston study and the Federal Bank of New York
study and asked for any thoughts on that.

John Gould mentioned perhaps one possibility in that he saw the
New England economy not rebounding as quickly as other parts of
the country as a possible explanation for how these two different
reports that came to two different conclusions can both be accurate.
I would just ask John to comment on that and also for any other
comment.

Mr. Romero again cited that study and that New England did
not have that same access as other parts of the country. From your
perspectives, do people agree with the assessment about the lag in
the economy, or were there other factors involved? I just would ap-
preciate everyone's comments on that notion, that study and what
the underlying cause was.

Mr. Gould. Mr. Torkildsen, there is no question that there has
been an almost traditional lag between the performance of the na-



39

tional economy and the Massachusetts economy, particularly, al-
though you could generalize and say New England. The point of
the matter is, it goes back to a time when Massachusetts — let me
try to explain this very simply.

From the fourth quarter of 1985 till the third quarter of 1989,
there was a massive amount of investment in upgrading productiv-
ity across the country. Massachusetts came out of that period at
the last quarter of 1989 ranking 48 out of 50 States that were
judged in terms of its capital investment.

If one were to trace that back — and some of us at that point
did — one found that this had been a creeping kind of a malaise that
had been going on really since 1960. We have for the first time in
12 years at the close of 1995 found a net increase in manufacturing
jobs in Massachusetts. What's fascinating is that almost all of it
came in the fourth quarter of 1995.

The point I'm trying to make on that part of your question is
that we may be for the first time coming out of something we had
come to accept, which was somehow, the Nation is doing better
than Massachusetts, and that's really what we deserve and expect.
Obviously, it's not true, but it was the reality.

As it relates to the findings of one Federal Reserve Bank versus
another, I can be an economist, because I can say on the other
hand, I have both. I have found myself very often agreeing with
conclusions that are arrived at for reasons I don't agree with as
they come out of Federal Reserve reports.

I am not trying to be wise about this, but the publication system
within the Federal Reserve system is interesting in that it pro-
motes individualism. When you're dealing with something called an
economy, you're taking a great chance when you're trying to say to
people, "Go out and be a star." To quote my high school Latin,
"Cum grano salis," the difference between the reports.

Chairman Torkildsen. Thank you.

Would anyone else like to comment on that?

Mr. Romano. I guess the comment on the report — I did not read
the New York report, but I understand the New York report was
a national report, not a regional report; am I correct on that? But
I understand the total numbers, though, was the summation of all
the regions.

It seems to me — again, I've only read Peggy Gilligan's report 10
or 12 times — but her numbers are just very strong. I don't know.
I think that's a good question maybe you could ask of two Federal
Reserve Banks, "Why is there a difference?"

I think we would all like to get to the bottom line, why does
there seem to be such a difference that in her report here in Bos-
ton, she's saying banks over $5 billion — now, these are the banks
that have been consolidating — their loans are off 5.3 percent. Now,
that's a big number. I mean, then to say consolidation has had no
impact on small business lending?

Then you go back to Michael Saltz's report in the Journal, and
he gave a list of major banks. It's — certainly Saltz's report from the
Wall Street Journal comes more to Peggy Gilligan's report, those
two agreeing.

Then there was a third report I don't know if everyone has had
a chance to look at, but the Fed here in Boston did another report



40

that seems to lead to that by Joe Pique and Eric Rosengrad. Did
anyone see that one on August 1995? And that report again seems
to be toward what Peggy Gilligan is saying. That also seems to tie
into the SBANE survey in the spring of last year that Julie Scofield
commented on.

So, I think it's important to understand where the reports and
where the numbers really are, because it makes a big difference on
the score card.

Mr. Gould. Frank, I don't disagree with you at all. I have one
problem as it relates to the number of financial intermediaries who
are active in the business right now. They did not exist — I'm, as
you know a retired banker — they did not exist in any kind of com-
petitive fashion as they do now, at least through 1988.

When you start finding Federal programs and State programs
where you're making $58 million and then $70 million and then
$62 million in nonbank loans, you are going to dent a market this
size. I don't see how you cannot do it.

Chairman Torkildsen. Any other comments from any of the wit-
nesses? Ms. Scofield?

Ms. Scofield. Well, I would just be curious to know to what ex-
tent the Connecticut experience is operating as a regional drag on
those numbers, as well.

Jim Howell of the Howell Group and formerly the chief economist
for the Bank of Boston, whom I know would love dearly the fact
that I'm mentioning his name but probably not the fact that I'm
about to probably misquote him, did talk about the recovery of the
region from the credit crunch and the percent that various States
were back to being as a percentage of where they were before the
credit crunch.

The percentage for Connecticut was just terrifying. I mean, they
had come back to something like 17 percent ot where they were
prior to. They are hard hit, and that's a drag on bank lending be-
cause you have a beleaguered bank community that is in general
terms less bankable. That may be factored somehow.

You don't see Connecticut rebounding with private enterprise
and small banks coming in, which you do see in Maine. You do see
private banks coming in and being responsive at that level. So,
there may be some of that that's acting as a break. That's just a
speculation.

Chairman Torkildsen. If there's no further comment on that, I'll
just say that it's my intent — and I think the other members of the
Subcommittee would agree — that we'll be asking the Fed of New
York and Boston to comment on each other's numbers to factor in
that there was a Connecticut experience that was just so different
than the rest of New England that it had an overall effect, which
certainly seems quite possible, and then also to ask that they deter-
mine what nonbank factors were involved in the study, as well, so
we know if we're talking about commercial institutions or these
nonbank entities which also play a role in it.

If I may very quickly, Ms. Plotkin had mentioned about the Mass
Technology Development Corporation. Any comments from anyone
else on the panel about a Senate entity of that type? From my
knowledge of the Mass Technology Development Corporation, it has
been very positive. However, it has a very focused role. Perhaps it's



41

better to keep it at a State level as opposed to the Federal level.
Is there any comment from the witnesses on that?

Mr. Gould. I agree with Joyce entirely. I would also mention
that the Mass Business Development Corporation has been going
very well and is very active. Julie and I are both involved with
that.

Chairman Torkildsen. Thank you.

Chairwoman Smith. Before we go on, we will make a formal re-
quest of this Subcommittee to ask for comments on those two stud-
ies. I think that's a very good idea, Mr. Torkildsen.

With that, we'll go to Mr. Meehan.

Mr. Meehan. Ms. Scofield, I think the study that you referred to
that SBANE had conducted, I think it has been about year now
since that survey. There has obviously been sort of a bank consoli-
dation since then. Would SBANE be willing to take a look again
and maybe do another survey and see whether or not any of the
more recent bank consolidations have affected your survey at all,
if you could do an update? Would you be willing to do an update?

Ms. Scofield. Absolutely. We would be just as interested as you
to see what the trend is within our organization and the extent to
which it remains the same, it has gone up, it has gone down, we
would be delighted to do that.

Mr. Meehan. That would be great, particularly in light of Chair-
woman Smith getting this information, trying to get the Fed to re-
solve

Ms. Scofield. And I would like to extend that if there are any
other questions that you would like to see bundled into that out-
reach, it would be good time now to forward them. We would be
happy to consider that whole universe for further Q and A.

Mr. Meehan. The other point that's interesting to me, when I
heard Fleet, I keep hearing SBA guaranteed loan from Mr. Ro-
mano, SBA guaranteed loans, and I can't help but think that
there's nothing more critical than making sure we keep the SBA
moving and going and make sure that we don't abolish the SBA.
Because, another interesting thing, I guess we're all a product of
the stories that we — our experiences and the stories that we tell as
a result of those experiences.

When I first got elected to Congress — and one of the reasons I'm
so interested in this issue is because I meet with small businesses,
as my colleagues do, on a regular basis. Wayne Company was in
Chapter 11, and they were trying to sell off their various plants
around my district and facilities around the district. There was a
facility that they were going to close, and 50 employees were left
there after the downsizing. They were attempting to survive. There
was a vice president who had kind of ran that facility who decided
that he wanted to take the facility and make a small business out
of it, but he couldn't get a loan. He came to my office and asked
for help. We got the Small Business Administration involved. I
went up and personally got involved with them and tried to get
some interested lenders after we got the SBA guarantee.

That business, not only did it save 50 jobs, but it's now 250 jobs.
This particular businessperson who lives in Lowell and has a busi-
ness in Methuan, is my nominee to be the small businessperson of



42

the year in Massachusetts. I hear stories like that all the time. Mr.
Romano mentioned Apple computers and others.

I'm wondering if you could comment, because there have been
proposals in Washington to abolish the SBA or to — certainly, sig-
nificant downsizing. There was a reference to going from 9 percent
guaranteed to 75 percent guaranteed. I wonder if you could com-
ment on SBA as it affects small business employment.

Mr. Romano. At least from my point of view, I think SBANE has
always supported the SBA and has been a strong proponent. Let
me say that both parties, Democrat and Republican, at times have
tried to get rid of the SBA. It has been a bipartisan effort, unfortu-
nately.

Chairman Torkildsen. But as Marty said, it was always the
other one.

Mr. Romano. Certainly, listening this morning to Mr. Zafris and
his 7(a) software loan, we heard that he did make an SBA loan for
software, which is quite interesting. To me, if the numbers come
back from both Feds and they can find out what the real numbers
really are — and let's assume, if I may, for answering the question,
that there is a drop-off in lending small businesses and that small
banks — and I think that we would all agree that both reports — at
least don't disagree — that banks are the $300 million make most
of the loans to small business.

I think there's an agreement on that. So, at least that's the un-
disputed point. Now the question is, then, how do we motivate
more banks than the $300 million to make loans. It clearly is
through the SBA.

This latest reduction is concerning because as inflation grows
and we look at the 750 now to 500,000, I think the 750 — are we
going to be back to 750 on the guarantee? Is that the new hope,
that we'll be back to 750? It seems to me that we ought to be look-
ing to expand that to go to a million, five. That is one of the rec-
ommendations I made. Because that certainly will allow the small-
er banks that are also competing in deposits.

This is a recent article in the Globe. It says, "Smaller Banks
Squaring Off Against Giants." Well, one of the keys, if the smaller
banks don't have the deposits because of the guarantee, they can
still continue to lend. If their deposit base shrinks some, they can
sell off that guarantee. So, I personally would be a strong pro-
ponent for keeping the SBA and expanding the SBA's lending capa-
bilities.

Again, if we find out that the Boston report is correct, then I
would say even triple that, the importance of the SBA to step in
to fill that void.

Ms. Allan. One of the interesting things, I think, about the SBA
is that much of the growth in small business over the past few
years has been in women-owned businesses. I think the SBA has
taken a major leap in terms of making loans for women more ac-
cessible. When we look at the opportunities even in banks having
a history with the company and making those loans for women who
are going into small businesses, they don't have that history.

In fact, most of the startup women-owned companies indicate
that those women are even with more preponderance using credit
cards, using equity loans, and the like to get those businesses



43

started. In fact, they tend to be very successful, and perhaps it's
because of the use of that instrument in starting out.

But I think that some of the other programs with the SBA have
been really critical in helping our small businesses. I think that
keeping it moving along is really important. Ms. Scofield. Well,
just for the record yet one more time, our organization and the
SBA have a very warm and friendly relationship. We predate that
organization, having started in 1938 and the SBA came into exist-
ence in the 1950's. But our support of that Agency is deep and
wide.

We believe very strongly that it is one of the most effective tools
that we as a Nation have to stimulate growth in the sector of the
economy that affects everyone, it is critical to all of us, and that
even at its current survival rate, it's underfunded in what it could
do if it were appropriately funded.

We work with our sister, if you will, organization, National Small
Business United, which includes maintaining and expanding the
SBA as one of its key agenda items. It was one of the top items
coming out of the White House Conference on Small Business. It's
very important to us as an organization.

Chairman Torkildsen. Madam Chair, just to follow up on that,
overseeing the Government Program Subcommittee, obviously, this
issue has come up substantially in the past year.

I think there's a general consensus in the House now, bipartisan
in nature, that the SBA is a very positive entity. What happened
in the past year is that the subsidy rate was reduced from about
2.74 percent to just a little over 1 percent. Again, a bipartisan ini-
tiative which I think we all applaud, because we don't want tax-
payers to pay more than they need to keep this valuable entity
going.

The other point that Mr. Romano mentioned about increasing
loans, I have not heard the figure a $lV2million, but I do know that
President Clinton had argued for increasing it to a million, with
the guaranteed portion of that rate between $750,000 and a $1 mil-
lion being guaranteed at 50 percent, instead of the higher percent-
age that the rest of the loan was guaranteed at.

That was an idea that I endorsed at the time. I still think it
would be a good idea. But does anyone on the panel want to com-
ment on that? Do you think the larger guarantee would still be a
positive addition to the SBA's Programs, even though banks may
have some hesitation about it? Perhaps we should have asked this
question to the last panel, as well. A 50 percent guarantee, would
anyone like to comment on that proposal?

Mr. Romano. I certainly feel that any guarantee of the Govern-
ment would help to grow businesses. I think initially when they
start off, you would have the larger guarantee, which is the highest
risk area, I think as Mr. Zafris testified this morning, when they're
just starting with the idea. Like that software company that he
made the initial loan to, I think this year will do $18 million in
sales and employ some 250 people.

As that company grows, his bank isn't going to be able to make
a loan. He's going to get to the point that he brought that company
to where it is today, and he can't because of his capital structure.
So, any increase in the guarantee is going to help him, because



44

that 50 percent guarantee that he makes will not be counted
against his capital. So, I would certainly concur that anything we
can do in that area would be great.

The $1.5 million was my suggestion, because I think that if the
Gilligan report stands up, then there is truly a reduction in lending
by big money center banks to small business. Then I think SBA is
going to have to get more actively involved to fill that void if,
again, we want to keep this economic engine running.

Mr. Gould. Mr. Torkildsen, I agree with Frank to the extent
that the SBA is a truly crucial piece of the financing of small busi-
ness today. There's no question. It would be my hope that some-
how, Congress in its wisdom could create a vehicle that would rate
the need and relate that to the percentage as you go forward.

I did mention the 90 to 75 percent guarantee this morning. I've
ot three companies who will not make it because the banks won't
end at that level. They're very serious problems. It seems to me
also, though, as Frank has just pointed out — and I totally agree —
if you have a larger organization with a whatever you want to call
it, a product that you know will sell that has been marketed and
tested and so forth, then the need for the bank to extract that
guarantee becomes less.

It seems to me there has got to be an intelligent way to create
a formula that takes these things into account as opposed to just
the plain old cutoff, as important as that cutoff is.

Chairman Torkildsen. Thank you, Madam Chair.

Chairwoman Smith. Thank you, and I'm going to ask one more
question. Then I think Mr. Meehan had a second question.

I was thinking about your comments about available capital
where there's high risk. I'm sure looking at some of the investors
or some of the companies that you have, they're looking at a very
high risk, things are changing too fast in that market. I was think-
ing, if I were in that market and I was starting another business,
probably I would be looking to support and push expensing as rap-
idly as possible, rather than putting some of this on 7 or 15 years
or whatever, when it could be outdated so rapidly.

Are you dealing with the issue of expensing and pushing that in
Congress? Are you also looking at that and the flat tax issue, obvi-
ously, 100 percent expensing as a part of your group's platform?
Under the flat tax, you take everything off the year you paid for
it.

Ms. Plotkin. That's not a particular plank in our platform at
this point in time. We have limited ability to deal with some of the
national issues because we have such a small staff locally and don't
have a lot of ability to do that at a national level. So, we try to
confine ourselves primarily to State issues.

I think, though, that the bottom line would be that we would be
interested in looking at all types of things that would help. That's
certainly a piece that might help. The broader issue, at least at the
startup stage, is the question of the angel and making — lowering
the risk for them and trying to help them with some rate of return
for taking that risk. So

Chairwoman Smith. Regarding the issue of risk, if I were invest-
ing in one of these companies and I saw that it could write off its
investments and its tax rate would not — let's say gave them a 20



45

percent return the first year, it would probably actually wipe out
all tax possibilities its first couple of years — therefore making its
cash flow more able to pay you back, more secure. The Government
would not be taking a piece until the company got its costs down.
That would minimize my risk and increase your chance for a profit.

I think it's something that when you get into — whether it be the
flat tax debate, because that allows complete expensing costs from
the beginning — or whether it be just the issue in the Contract with
America of increasing the expensing — it sounds to me like in
high-risk areas like that, that it's a tool to your advantage.

Ms. Plotkin. That sounds good.

Chairwoman Smith. Anyone else want to talk about expensing or
the issue of expensing everything up front?

Ms. Scofield. Well, you may be familiar that the White House
Conference on Small Business included that among the top rec-
ommendations.

Chairwoman SMITH. I guess cash flow the first few years is your
real bugaboo.

Ms. Scofield. Sometimes, longer.

Chairwoman Smith. Yes, your first few years. Your ability to ex-
pand is often just blocked by cash flow. The issue of having to fork
over money to the Government at whatever rate you're filing in can
be quite irritating at the same time as you have capitalized. You've
spent a whole lot on startup and are stringing it out over 7 to 15
years.

Mr. Romano. If I might comment on your earlier comment, I
think it comes down to the character loan. This gets back to a fi-
nancial statement and how you run your statement, if you're trying
to expense things quicker, what does it look like to your banker.
I think one of the issues we're seeing today, too, is a small
businessperson wants to grow, not just startup a new entity, new
software development. They have been profitable, but now they
want to move into a new venture.

When they put their own money up, that's going to hurt their fi-
nancial state, because they're expensing some of those expenses up
initially. Their financial statement isn't going to look as good to
that matrix kind of loan review that the large banks put them
through versus the smaller banker who makes the character loan
because they know the company, they have been out to see the
company, and they know that they're making an investment in new
technology that will hopefully generate jobs.

So, I think that character loan that you brought up earlier is a
really important issue. I'm not quite sure that the larger banks un-
derstood some of the — what we're forced to do if we want to get a
loan from a larger bank. You literally have to look at your growth
and say, "Maybe this year I'm not going to spend that money in


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Online LibraryUnited States. Congress. House. Committee on SmallThe effects of bank consolidation on small business lending : joint hearing before the Subcommittee on Taxation and Finance and the Subcommittee on Government Programs of the Committee on Small Business, House of Representatives, One Hundred Fourth Congress, second session, Boston, MA, March 4, 1996 → online text (page 6 of 21)