Quick Take: Have Banks Learned Nothing?

When the subprime crisis first struck, Wall Street wondered whether it would spread to prime lenders such as Washington Mutual (NYSE: WM  ) and Bank of America (NYSE: BAC  ) . Many investors appear to believe that it will. Put me on that list.

Why? Blame the National Federation of Independent Businesses. A 2005 report from that trade group, which represents entrepreneurs, found that 86% of small businesses that sought loans in the last three years successfully obtained them.

Who's writing these loans? Professional traffic dodgers? Alligator wrestlers? Those Alaskan king crab fishermen from Deadliest Catch? Surely they must be thrill-seekers. Quoting from VentureWire's coverage of the report, "Credit availability has moved from a critical issue for many to an afterthought for most."

Hey, here's a thought: Maybe it was supposed to be hard to get these loans. Maybe the bankers who had the wheel before the daredevils took over realized that, according to academic research, a third of small businesses fail within two years and more than half don't survive to see their fifth birthday.

Or, in simpler terms: Maybe they did the math.

To be fair, the SBA provides banks insurance by backing many small business loans. And some banks are taking the further step of increasing loss reserves for the business loans they write. Combined, these steps should offset much of the danger inherent with loose lending standards.

But business lending can't forever remain at historic highs. That's why this cold war against well-financed private equity firms and hedge funds looks to me increasingly like a war of attrition. If I'm right, then the SBA will enforce tighter lending standards on banks at some point. When that day arrives, it will visit still more casualties upon thousands of already-wounded portfolios. Don't let yours be among them.

Do you agree? Disagree? Let me know.

Washington Mutual and Bank of America are Income Investor recommendations.

Fool contributor Tim Beyers probably borrows more than he should. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. The Motley Fool's disclosure policy would like to borrow a cup of sugar for the cake it's baking in honor of your portfolio's returns.


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