What if our banks refused to give loans to fully collateralized businesses? In most cases they don't; an incentive is needed to make the loan happen.
In this post I explored a loan made to Mortex, a textile company located in Wendell. ( Eastern Wake News story. )
- Mortel needed nearly $4 million to continue operating
- Mortel's loan was fully collateralized
- Mortel only got the loan when Capital Bank was assured by the USDA that the bank would be protected from losses on the loan of up to 80%
A few questions have to be asked:
- Just how bad do the banks expect to economy to get that they require an 80% loss back-stop on fully collateralized loans before considering going forward?
- Just how bad does our government think things might get that they agree to this 80% back-stop?
- Is inflation considered in measuring losses on these? A bout of inflation would not only increase the likely hood of default but it would run up the losses that could be counted against the %80 back-stop.
- Is the USDA program needed because there are lower risk investments that are more attractive to the banks? (Ex. the fact that they can borrow money from the Fed. for less than 1% then invest the money in T-Bills at 4% to 5% )