Feeling A Crunch

By John Greenwald

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.

CHART: NOT AVAILABLE

With reporting by Bernard Baumohl and Stephen Pomper/New York, with other bureaus