BoatBanter.com - It Takes A Worried Bank

July 28, 2008
Worried Banks Sharply Reduce Business Loans
By PETER S. GOODMAN
NY Times

Banks struggling to recover from multibillion-dollar losses on real
estate are curtailing loans to American businesses, depriving even
healthy companies of money for expansion and hiring.

Two vital forms of credit used by companies — commercial and industrial
loans from banks, and short-term “commercial paper” not backed by
collateral — collectively dropped almost 3 percent over the last year,
to $3.27 trillion from $3.36 trillion, according to Federal Reserve
data. That is the largest annual decline since the credit tightening
that began with the last recession, in 2001.

The scarcity of credit has intensified the strains on the economy by
withholding capital from many companies, just as joblessness grows and
consumers pull back from spending in the face of high gas prices,
plummeting home values and mounting debt.

“The second half of the year is shot,” said Michael T. Darda, chief
economist at the trading firm MKM Partners in Greenwich, Conn., who was
until recently optimistic that the economy would continue expanding.
“Access to capital and credit is essential to growth. If that access is
restrained or blocked, the economic system takes a hit.”

Companies that rely on credit are now delaying and canceling expansion
plans as they struggle to secure finance.

Drew Greenblatt, president of Marlin Steel Wire Products, figured it
would be easy to get a $300,000 bank loan to finance a new robot for his
factory in Baltimore. His company, which makes parts for makers of home
appliances, is growing and profitable, he said. His expansion would add
three new jobs to an economy hungry for work.

But when Mr. Greenblatt called the local branch of Wachovia — the same
bank that had been aggressively marketing loans to him for years — he
was distressed by the response.

“The exact words were, ‘We’re saying no to almost everybody,’ ” Mr.
Greenblatt recalled. “This is why God made banks, for this kind of
transaction. This is going to slow down the American economy.”

Earlier this year, credit extended by banks to companies and consumers
was still growing at double-digit rates compared with three months
earlier, according to an analysis of Federal Reserve data by Goldman
Sachs. By mid-June, bank credit was declining at an annualized pace of
more than 6 percent.

That is a drop of nearly $150 billion, an amount much larger than the
value of the tax rebates the government has sent to households this year
in an effort to spur economic activity.

Financial industry executives say tighter credit from major banks
represents a swing back to a realistic assessment of risk, after years
of handing out money with abandon. Those practices produced a mortgage
crisis whose losses could reach $1 trillion, by many estimates.