Banks' Next Profit Center: Small-Biz Lending

While banks are asking those questions, others are already stepping up to the job.

Lynn Tilton, founder and CEO of the private-equity firm Patriarch Partners, has been voicing her concern about a dearth of small-business credit since the beginning of the crisis. She has placed advertisements in the New York Times and Washington Post issuing a "clarion call to rebuild America" through the creation of a federal bank that issues loans directly to capital-starved companies. She has also proposed a public-private partnership that would leverage funds from other rescue programs to do the same.

In the meantime, she's invested billions of dollars in dozens of small businesses.

"When these companies are gone, they're gone forever," says Tilton. "We can't get their business model back; they can't get their workers back; they can't get their production lines back."

Though banks aren't interested in lending to these companies, says Tilton: "We turn dust to diamonds every day."

-- Written by Lauren Tara LaCapra in New York.

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