COLUMN RIGHT/ LEWIS C. SOLMON : How to Get the Lending Under Way : We have to be creative in the financing. Pool and sell loans. Set up mutual funds.

Put aside the why or the how--the economy of an important part of Los Angeles has been wrecked. The question on most people’s minds in Los Angeles and Washington is “How can we help them now?” One suggestion for economic development in the ravaged areas is to get money from Washington or Sacramento. But even if we could give more than ever, it would not be enough.

Economic development of a community requires human capital, financial capital and security that life and property will be protected. Even though the quantity and quality of education are inadequate for most of those in the parts of Los Angeles that were destroyed, we saw much leadership, a willingness to work, sound values, caring and ingenuity. So let us assume we have enough human capital to get started.

In the inner city we need access to financial capital. Even builders on the Westside cannot get bank loans. The greater risk in the inner city means that under the present regulatory environment, the probability of access to bank capital there is close to zero.

Consider the following alternative: that the state or federal government--instead of handing out hundreds of millions of dollars--encourage banks to lend to enterprises in inner Los Angeles by not counting such loans in the dreaded ratios monitored by regulators, and by paying banks the difference between a low interest rate charged and the market rate. But if banks systematically overestimate the risk of loans to inner-city enterprises, the government may have to guarantee these loans so that bank losses on the total of inner city loans will be covered, after considering both defaults and interest received from all loans to the inner city, and capital gains on sales of these loans, if any. That is, if the bank earns 10% on a $100,000 loan in Watts, and another $10,000 loan there goes bust, the government would owe the bank nothing.

Then allow banks to sell these loans. Allow mutual fund-like groups to buy them and sell shares in the funds. Perhaps give such funds some tax advantages.

These loans should be contingent upon borrowers providing some minimal amount of money themselves, having mostly local employees, having a viable idea for a business and demonstrating that they have established a way to protect their investment by private means. Preference would be given to applicants who live in the inner city or who are willing to work in the enterprise located there.

Another possibility is an “enterprise-zone bond fund” for a particular area of the city in the amount of, say, $1 billion. It could work something like this: Give investors favorable tax treatment or other advantages. Set up half the debt to have a priority claim on assets so that in the unlikely event of even half of the loans defaulting, holders of the that debt will still get repaid. Sell another $400 million worth of subordinated debt at higher interest rates because the risk would be higher. Finally, take 10% of the fund, or $100 million, and sell it as equity. The equity could be purchased by private investors with some government guarantee to return principal within a certain period, or by the government which may give some shares back to the local business operators at no charge.

Local entrepreneurs could be given stock options that wouldn’t vest until their businesses had been operating for a certain length of time. This would reduce the cost to taxpayers to 1/10 of the total cost of the redevelopment fund, or less if the equity is put up for sale to the public. The equity would not have a guaranteed return, but there would be a guarantee of principal repayment that may never be exercised if the equity appreciates and proves to be valuable.

Since this latter approach involves a government guarantee, some government agency may have to get involved in determining who gets the business loans from the fund. All the problems of bureaucratic decision-making come into play once again.

The choice is whether private parties should make such allocations through a subsidized and guaranteed loan program, or whether a public agency could do better. Perhaps some of the applications for funds would come from entrepreneurs seeking to set up private security companies like those in other parts of the city.

It is vital that we begin to deal with the economic problems of the inner city by financing the human potential that already exists there.