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Mr. BOUTIN. There were six. That is Mr. Howard Greenberg, who is the present Deputy Administrator for the Investment Division.
Senator HARRIS. How many do you have now?
Senator HARRIS. What sort of procedures will be used to train both your old and your new examiners for this crash program?
Mr. BOUTIN. Well, the first thing that I have done, Mr. Chairman, is to bring all of our auditing and all of our investigators and all of our examiners within a common head, under the Assistant Administrator for Administration, reporting directly to me. That office is headed by Mr. Art Horner, former
member of the Federal Bureau of Investigation.
We are going to be devoting this year in toto about 1 percent of our budget to training. Obviously, a major portion of that effort on a crash basis must go even to meet this 120-day deadline, to a solid training program to make sure we have competent people.
Senator HARRIS. Will they be given special training as to detection of what we call "bootstrapping and conflict of interest and crossdealing and self-dealing and fraud ?
Mr.BOUTIN. All phases of it, Mr. Chairman; yes.
Senator HARRIS. Now, will some evaluation be made by these examiners of an SBIC portfolio as to its evaluation?
Mr. Boutin. Yes, indeed. Right now, Mr. Chairman, we do a minimum amount of this. Under the new system that I have described to the committee this morning, we have the program evaluation report, as an example, which deals precisely with the condition of the companies and the portfolio of the particular SBIC.
In addition to that, while not in the statement, we are going to require SBIC's, to have their borrowers, for their own good, as well as for ours, to submit annual statements, at the very least, to the SBIC's showing profit and loss and their overall general condition. This should help us immensely, and our people then can quickly pick up this information and have it readily available for us.
Senator HARRIS. Will you establish some criteria as to evaluation of an item in an SBIC portfolio?
Mr. BOUTIN. Yes, indeed.
Senator HARRIS. Then what about some estimate of Government loss in a company which is in trouble? Will that be done?
Mr. BOUTIN. That, of course, will come, Mr. Chairman, from the two report forms that I described, plus our own annual examination. So we should have early warnings of any company that is getting in trouble before they are in so deep that we have potential losses to cope with.
Senator HARRIS. The former head of this program within SBA, Mr. Kelley, made a statement, a public statement, to which I referred in my opening remarks, and 'he estimated that the Government loss would be around $18 million. I notice you used no figure in your statement.
Do you believe that that figure is low?
Mr. BOUTIN. Mr. Chairman, I don't think that that figure is worth any more than a $3 bill. I think it was picked right out of the air. I don't say this disparagingly in any sense of the word, but I think it was Mr. Kelley's best judgment. I frankly can't tell this committee with candor whether the potential loss from these 237 companies is $3 million, $30 million, or $18 million. But we will know once we get these examinations completed at the end of this 120-day period.
Senator HARRIS. There isn't any way a judgment can be made until you have done that?
Mr. BOUTIN. No, until we have an evaluation of the portfolios and evaluation of current condition, and the condition of these firms changes very rapidly. Until we have that, Mr. Chairman, that figure is just a horseback judgment.
Senator HARRIS. As we have just explained privately here, due to my inexperience—and Mr. Adlerman says he will take the responsibility—but due to my inexperience, we failed to administer the oath, which is the regular procedure of this committee for all witnesses whó appear, so at this time, before we proceed further, without any reflection at all on you or any other witness, we will administer the oath.
Will you stand and raise your right hand?
you swear the testimony you are about to give before this subcommittee will be the truth, the whole truth, and nothing but the truth, so help you God?
Mr. BOUTIN. I do.
Senator HARRIS. What about these examinations? Who pays for the examinations during this 120-day crash program?
Mr. BOUTIN. Well, the SBIC's themselves, Mr. Chairman, pay for examinations. Now, we really couldn't legitimately go to those that we have examined in the last 6 months, let us say, and tell them that they are going to have to pay twice this year. That wouldn't be fair. But on all others, they have to pay themselves.
Now, we have established a new fee schedule, as of July 1, which I can very briefly describe for the committee. It provides for $60 per man-day plus 4 cents per $100 of assets up to $325,000, plus 3 cents per $100 of assets for those with over $325,000, up to $1 million, and 12 cent over $1 million.
Typically, a $2 million company would pay $382.50 plus $60 times the number of days that the examiner was there. Translating that into program performance, I can tell the committee that the previous high year of examination fees collected was fiscal 1966 when we collected $84,473. Our estimate for 1967 fiscal year, under this annual examination, is $564,000.
Senator Harris. Very well. What is your own personal opinion about the program of charging the SBIC's themselves for the examination? Do you think that is good practice?
Mr. BOUTIN. I think it is a very good practice, Mr. Chairman. They will know that once a year they are going to be examined. That is presuming, of course, they don't get into some trouble where we have to go in more frequently than that. But I think that is a legitimate expense that they should bear, and if they do a good job in keeping their books, we are not going to have very many man-days involved. If they are not keeping their books well, they are not operating in the interest of the industry, it is going to cost them more money.
Senator Harris. Now, you testified on page 6 about licensing, and the new standards about licensing. I don't suppose there would be any question that we have been rather slipshod in the requirements as to licensing and investigation before these new regulations?
Mr. BOUTIN. I don't think that there is any question about that, Mr. Chairman.
Senator HARRIS. What kind of procedure was followed? Was there any investigation of applicants?
Mr. BOUTIN. It was limited, Mr. Chairman. There was no requirement, as an example, that they provide SBA with a feasible plan of operation, that they have qualified management to run them. It just was too loose.
Senator HARRIS. How much money have we appropriated in the Congress for the SBIC program?
Mr. BOUTIN. I couldn't tell you exactly the amount of money. I can tell you the number of dollars, Mr. Chairman, that have been made available.
Senator HARRIS. I think that is $275 million, is it not?
Mr. BOUTIN. No; the amount of money made available to SBIC's is about $308 million. As of May 31, 1966, the amount outstanding was slightly over $274 million.
Senator HARRIS. Is there some unexpended appropriation ?
Mr. BoUTIN. Yes. Actually, that is not an appropriation, per se; it is an authorization within the revolving fund. The limit authorized by the Congress at the present time is $400 million. Actually, as of June 30, we have about $107 million plus available for fiscal 1967 and carryover into future years.
Senator HARRIS. There were no better provisions as to change of control, and reporting who might buy an SBIC, than there were for original licensing, which we have characterized as "slipshod"?
Mr. BOUTIN. That is exactly so.
Senator HARRIS. And actually, the Government's interest is approximately the same, wouldn't you say, as to persons who later acquired SBIC's just as for the original licensees?
Mr. BOUTIN. I would say just exactly as important.
Senator HARRIS. And lending practices were also very loose about setting forth guidelines previous to this, as to what sort of lending practices would be allowed and would be permissible?
Mr. BOUTIN. Well, Mr. Chairman, outside of the restrictions on real estate, plus the requirement that they only loan to businesses falling within the small business definition, there really was a complete absence of guidelines.
Senator HARRIS. And the same was true pretty much about accounting practices of an SBIC, is that so?
Mr. BOUTIN. Well, our accounting system, Mr. Chairman, was a victim of some circumstances; not meaning to justify what happened, but last fall, with Hurricane Betsy, and the tremendous number of loans that came into the program, our system just plain bogged down. The equipment couldn't handle it and the people couldn't handle it, and the system was inadequate to begin with and just put the frosting on the cake, so to speak.
We have just got to completely redesign our whole system so that we have accurate information. As it is right now, I can ask the Accounting Division for a piece of information, and I can ask the SBIC
people for a piece of information, and get different answers. This we are correcting. We will all be on the same wavelength.
Senator HARRIS. Let me just say again we appreciate your cooperation and your testimony, and the procedures that you are instituting. I find it incredible that in a program involving this much money, the Government has been so in the dark on so many of the necessary facts for the administration and management of this program established by the Congress. That, of course, is of great concern to us as we look at the new administrative procedures, and think of legislation which may be required.
Senator Mundt, do you have any questions?
. May I suggest, for the purpose of making the record complete, that you now answer this question, because while we are not thinking in terms of any problems you are going to encounter as a witness, we are thinking about the hearings as they go on.
Do you now affirm under oath that all of the answers which you gave previous to your taking the oath which you took are also covered by this oath as to their truthfulness and accuracy?
Mr. BOUTIN. Yes, indeed.
Senator Harris. Thank you, Senator Mundt. I should have done that.
Senator MUNDT. I want to ask you a few rather elemental questions first, because, as I said, this particular aspect of the SBA is comparatively new to me. We don't have SBIC's in our State. The SBA is a very popular institution in South Dakota, and as far as I know it has a very excellent record. It is well run and it is very popular, and I believe that the repayment schedule is very good.
Now, there is a difference between the development loans which you make and the SBIC loans which you make. Will you sort of explain each of those areas, and whether they overlap?
Mr. BOUTIN. No; they don't overlap, Senator. The regular loan program is, of course, strictly a loan, and with no provision for equity capital and no opportunity for the funds in any way to be used to invest in stock or convertible debentures or any program like that at all. They are strictly loans as a national bank would make commercial loans to small business.
Senator MUNDT. That is the SBA program?
Senator MUNDT. And between those two is there sort of a community development program?
Mr. BOUTIN. The 502 program, or the 501 and 502. First, the 501 program, Senator, provides money normally on a matching basis to State development organizations.
Senator Mundt. Couldn't they be community as well as State development organizations?
Mr. BOUTIN. One is the State and one is the local community, 501 is statewide and 502 is local communities. The latter where local people put in their own money to at least 20 percent, and then the Government loans up to 80 percent.
Senator MUNDT. They, in turn, can loan, then, to small business? Mr. BOUTIN. Yes, sir.
Senator MUNDT. Now, then, have there been this kind of difficulties in that kind of loan program?
Mr. BOUTIN. No, not at all.
Senator MUNDT. In other words, the community takes the place of the bank, and instead of a bank participation loan, it is a community participation loan.
Mr. BOUTIN. The banks do participate, as a matter of fact.
Senator MUNDT. I read in the paper that people contribute and buy bonds or they do some participating to make this local development work.
Mr. BOUTIN. That is true.
Senator MUNDT. And then this organization makes its loan just as the SBA would make its loan, direct to some local enterprise they are trying to bring into the community.
Mr. BOUTIN. With the exception, Senator, that under the 501 and 502 programs the money can be used, because it is longer term money, to build factory buildings, or provide equipment, or provide nursing homes. It runs the full gamut. Our regular SBA business loan program is different from that. It is purely a business-type loan, and it usually does not include buildings.
Senator CURTIS. May I ask something right there for clarification?
Senator MUNDT. I will be through in a moment. Surely it nust include buildings. You make the loans to people who put up motels. Those are buildings.
Mr. BOUTIN. Yes, but the difference is, Senator, that we do not as a matter of course provide money under the regular business loan program of SBA to construct buildings to the same extent and with the same intent as we do under 501 and 502, since the majority of these are small in size with loan proceeds used for working capital, inventory, equipment and the like.
Senator MUNDT. I am sure that is correct, but I wanted to be sure that the record would show you do provide SBA loans for buildings because I know some of them that have been provided and I don't want them to be considered illegal.
Mr. BOUTIN. A great many.
Senator MUNDT. In your community development programs I understand this has not brought about the kind of problems that we have here.
Mr. BOUTIN. No, it hasn't.
Senator MUNDT. Now, see if I understand the SBIC. You tell me now. Describe how this operates.
Mr. BoUTIN. The SBIC's have a provision where they can provide equity capital. They can go to a small business concern and actually provide that small business concern equity money, either by buying a minority interest of the stock or providing money through a debt security that is convertible to stock at a later time. None of our other programs provide for this at all.
In addition to that, the SBIC's take higher risks than SBA normally would make loans on, or can provide substantially longer terms, longer than our 10-year provision in the small-loan program.