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Monday, July 28, 2008

Worried Banks Sharply Reduce Business Loans

Published: July 28, 2008
Steve Ruark for The New York Times

Drew Greenblatt of Marlin Steel Wire Products is having trouble getting a $300,000 loan to buy a robot for his Baltimore factory. “This is what a bank is supposed to do,” he said.

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Credit Difficulties




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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.

“Before, they wouldn’t verify income and they were loose on the valuations of collateral,” said John W. Kiefer, chief executive of First Capital, a private commercial lender. “Now they’re tightening down on the ability to repay. They go off the reservation, and now they come back to basics. It’s preservation for many of them at this point. It’s survival.”

But if the newfound caution of American banks is prudent in the long run, the immediate impact is amplifying the troubles with the economy. The Federal Reserve has been lowering interest rates aggressively to make money flow more loosely and to spur economic activity.

The financial system is not going along: As banks hold on to their dollars, mortgage rates are climbing. So are borrowing costs for corporations.

Some suggest that the banks, spooked by enormous losses, have replaced a disastrously indiscriminate willingness to hand out money with an equally arbitrary aversion to lend — even on industries that continue to grow.

“There’s been a lot of disruption in the credit market, and a lot of traditional lenders have really tightened up,” said Gregory Goldstein, president of Macquarie Equipment Finance, which leases computer gear and other technology to companies. “Before, some of the standards they lent on were weak, but we think they have overshot and gone too far on the other end.”

Such was Mr. Greenblatt’s reaction, as he learned that an infusion of credit for his Baltimore factory would not come easily. His company has been enjoying double-digit sales growth. This month, it received the two largest orders in its history, he said.

“It was jubilation,” he said. “I was doing the Funky Chicken.”

The initial call to Wachovia left him dismayed.