David Kirkpatrick

October 23, 2008

Credit remains tight

I hate to be so doom-and-gloom on the economic picture today, but the news is bad, very bad and worse. The little exercise in corporate socialism known as the “bailout.” Let’s call that one a failure so far since the entire purpose was to open inter-bank credit to help prop up ailing financial institutions.

How did that turn out?

The title from the link:

U.S. Banks Still Aren’t Lending

Despite the federal government’s best efforts, banks are hoarding cash. It may be 2010 before the credit climate improves

And from further into the article:

The defensive crouch that Dorner and other bank executives have adopted is creating a quandary for Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, and other Washington policymakers who are trying to get credit flowing freely across the economy. The government is reaching deep into its pockets to stimulate the credit markets, most recently with a plan to inject $250 billion into big banks. But while there are small signs of improvement—notably a modest drop in the rate banks charge one another to borrow money—the initiatives are being blunted by banks’ reluctance to loosen their purse strings. Right now the modest uptick in lending is coming mostly from panicked companies drawing down existing lines of credit rather than new loans.

Simply put, banks are hoarding cash, and the influx of government money won’t necessarily change their plans. That’s the case with Citigroup (C), which has shrunk the size of its balance sheet by 13% over the past year and plans to cut even further. “We’re not going to treat [the money from the government] like a windfall and back off of the measures that we have under way to get the company fit,” Citigroup Chief Financial Officer Gary Crittenden told analysts recently.

The industry may be hunkering down for a while. In a recent survey by data firm Reuters LPC, 40% of lenders and loan investors said they didn’t expect the credit climate to improve significantly until 2010, after the worst of the recession has passed. “Lending won’t start until everyone agrees the bottom has been reached,” Richard M. Kovacevich, chairman of San Francisco-based Wells Fargo (WFC) told BusinessWeek in an interview with Maria Bartiromo.

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