TIME: Almanac 1993/TIME Almanac 1993.iso/time/060490/0604209.000

Text File | 1992-08-28 | 7.6 KB | 163 lines

                                                                                BUSINESS, Page 66

Feeling a Crunch


A crackdown on loose lending has made credit tougher to get

By JOHN GREENWALD -- With reporting by Bernard Baumohl and
Stephen Pomper/New York, with other bureaus


     For three years Colin Richardson faithfully made every
payment on the $125,000 mortgage on his small auto-repair shop
in Lexington, Mass. But last February the Bank of Boston
suddenly called in the loan. The bank, which was responding to
pressure from U.S. regulators to tighten credit standards,
relented only after an outraged Richardson went public with his
plight by telling it to reporters in a one-man media blitz.
Says he: "It would have made no sense to close my doors and
sell everything off just to pay back the bank. How absolutely
ridiculous and astounding for a little loan like that."

    Richardson's indignation, if not his blunt tactics, are
widely shared. Beset by tough new regulations and saddled with
hastily made loans that went sour in the go-go '80s, many
lenders are reluctant to grant credit even to borrowers who
present few risks. While the squeeze has so far been greatest
in New England and neighboring states, economists are worried
that it could swiftly spread. In a report issued two weeks ago,
the Federal Reserve Board noted that 80% of the U.S. banks it
surveyed said they had tightened their standards on loans for
office buildings. A majority of the banks also said they had
cut back their lending to small and medium-size companies. For
some firms, the impact has been relatively minor so far. A poll
released last week by the National Federation of Independent
Business, which has 2,300 members, reported only a slight
increase in the difficulty of obtaining loans.

    The new lending caution reflects a backlash against the era
of financial fraud and excess. After the collapse of hundreds
of savings and loans, the Government last year barred S&Ls from
lending amounts representing more than 15% of their capital to
any one customer. The previous limit was 100%, which allowed
some S&Ls to sink themselves by committing a dangerously large
amount to a single venture. Moreover, federal examiners began
using strict new requirements to judge the quality of lending
by commercial banks. "When regulators are being tough, bankers
too have to be very cautious in terms of the credit they
extend," says Kenneth Guenther, executive vice president of the
Independent Bankers Association of America.

    Some banks throttled their lending down so sharply that
Government leaders began to fear a full-fledged credit crunch.
In a candid statement released May 18, the Federal Reserve said
concern about the scarcity of credit had contributed to the
central bank's decision at a policy meeting last March not to
raise interest rates, despite worries about inflation. Federal
Reserve Chairman Alan Greenspan and other top regulators later
urged banks during an extraordinary May 10 session in
Washington to continue making loans to credit-worthy customers.
Said Greenspan at the meeting: "If you have zero loan losses,
then you're not doing your job."

    Officials are concerned worried that a sharp reduction in
lending could jolt the U.S. economy into a slump. Such fears
were underscored last week when the Government reported that
the gross national product grew at an annual rate of just 1.3%
in the first quarter, down from a previously estimated 2.1%.
Coming on top of a dreary 1.1% growth rate in the last quarter
of 1989, the revision indicated that the 7 1/2-year-long U.S.
expansion could be in deepening danger of groaning to a halt.

    Meanwhile, Congress has been swamped with voter complaints
that lenders have been unfairly rejecting loan requests. Says
Senate Banking Committee chairman Donald Riegle Jr. of
Michigan, who plans to hold June hearings on the growing
scarcity of funds: "Some kind of credit contraction is going
on. It is probably most notable in real estate, but there is
more and more evidence that it is spilling over to small
business in general."

    Tight money has hit the construction industry with the force
of a wrecking ball. The Government reported two weeks ago that
housing starts fell 5.8% in April, to an annual rate of 1.25
million units, the lowest level since October 1982, when the
country was in a recession.

    The fallout has spread across the U.S. Michael Foreman,
president of a small Atlanta development firm, has vainly
hunted for a year for financing to build suburban homes. Says
he: "The banks are not only stingy with their loan money; they
are downright unreasonable. I have got no cooperation
whatsoever."

    Other types of contractors have been hammered hard. The
construction firm Arthur Rubloff Real Estate and Capital Inc.
recently abandoned plans to build a $1 billion commercial and
industrial park in suburban Chicago because the company could
not obtain a loan. Even developers in Southern California have
been feeling the pinch. "Unless you have a couple of lead
tenants signed up," says Jack Kyser, chief economist of the Los
Angeles area Chamber of Commerce, "lenders don't want to talk
to you."

    Small companies are particularly vulnerable to a credit
crunch. Unlike major corporations, which can sell bonds or
borrow on Wall Street, smaller firms rely on banks for most of
their loans. Yet such companies may lack the well-established
credit records or other evidence of reliability that
increasingly nervous lenders demand.

    Even medium-size companies can suddenly find themselves cut
off from vital funds. Arthur Pappathanasi ran into a credit
squeeze in January when he decided to expand West Lynn
Creamery, a $200 million-a-year dairy business near Boston that
his family has run for more than a half-century. His local
bank, which had promised to add $3 million to the firm's $15
million line of credit, suddenly backed out and warned him that
he would soon lose access to the original $15 million. That
sent Pappathanasi on a frantic dash for cash that ended when he
found banks in New York City and London that were willing to
lend. Says he: "I didn't sleep for two months chasing these
loans."

    Few industries are as threatened by tight credit as that
quintessentially American small business, the neighborhood car
dealer. Already hurt by weak sales and slender profits, dealers
across the country are watching their lines of credit dry up
for everything from showrooms to repair shops. According to the
National Automobile Dealers Association, 2,000 dealerships, or
8% of those open in the U.S., will close their doors by 1992.

    The recent Government effort to persuade banks to make more
loans is an encouraging sign that the credit crunch will not
be allowed to strangle the U.S. economy. In Washington last
week a conference of New England lawmakers, lenders and
economists cited the May 10 meeting between regulators and
bankers as evidence that the credit crisis in the Northeast may
be easing up. Nonetheless, the experts said the region's
economy has been so weakened by the scarcity of credit and
other problems that it is likely to remain sluggish for the
next 18 months.


____________________________________________________________
FEELING A CRUNCH


    -- 80% of banks in a Rederal Reserve survey had tightened
their standards on loans for commerical office buildings.

    -- 54% had toughened the terms of their lending to small
businesses.

    -- 30% had reduced their lines of credit t medium-size
corporations.