Back in September the "financial system essentially seized up and we had a system-wide crisis," Treasury Secretary Henry M. Paulson told an audience at the Ronald Reagan Presidential Library on Nov. 20. "Credit markets froze and banks substantially reduced interbank lending," he continued. And in testimony before the House Budget Committee on Oct. 20, Federal Reserve Chairman Ben Bernanke warned that "conditions in the interbank lending market have worsened, with term funding essentially unavailable."
Octavio Marenzi, head of Oliver Wyman Group's Celent and author of "Flawed Assumptions about the Credit Crisis," begs to differ. "While there is no denying that we are mired in a very serious financial crisis," Marenzi writes, "this does not yet appear to have been transformed into a general credit crisis. In aggregate, credit and lending markets appear to be functioning well, and in many cases are actually operating at historically high levels."
How can this be? Federal Reserve Bank data shows very healthy credit flows through October: U.S. bank lending reached its highest level ever; U.S. commercial bank lending was at record highs and growing particularly quickly at an annual rate of about 19 percent since May 2007; and interbank lending hit a record high in October and had risen 22 percent since the beginning of the credit crisis, Marenzi observes in the report.
Yes, corporate bond issuance has fallen, but the commercial lending market has filled the gap, Treasury Department data shows. Outstanding volumes in commercial paper are at their highest level since the beginning of 2004, the municipal bond market has continued at levels similar to those before the credit crisis, Marenzi found, and total bank real estate lending set a record high in October.
Evidence of the continuing flow of credit was reflected in Treasury and Fed data. So why was Paulson in particular talking credit freeze? Is it possible that the Treasury and/or the Fed conflated the risk of systemic failure with credit availability? "Possibly," says Marenzi. "However, neither Treasury nor the Fed has explained how they have come to their conclusions. They have not published a report on this, they have not provided a cogent explanation of what they believe is going on, and they change their policies dramatically at the drop of a hat," Marenzi notes.
Marenzi believes that Paulson took the "problems faced by a few very large institutions and incorrectly generalized those to the market as a whole. Some banks were having a hard time obtaining credit, just as some industrials are having difficulty getting loans. However, the problems faced by a few are not indicative of a systemic failure." Meanwhile, Congress is "looking at these issues," says Marenzi. "[It does] not understand why every bank CEO they have testify tells them that their bank has increased lending, and that it must be the other banks that have reduced lending."
The relative robustness of the credit market can be seen in both the business and consumer sectors. There have been a slew of corporate press releases boasting of renewed or renegotiated lines of credit. Department store giant Macy's reduced the interest coverage ratio on its $2-billion bank credit agreement led by Bank of America and JPMorgan Chase, for example. Technology solutions provider Insight Investments increased and extended its credit facility with City National Bank by one-third. Gary Cady, president and CEO of San Diego, CA-based Torrey Pines Bank, says his bank has experienced "significant growth in commercial and real estate loans," even with more conservative lending practices. "The last thing we want to do is be a liberal lender, or make loans that would later get us into trouble," Cady notes.
Lending Services, an originator of mortgage loans, reports that its new mortgage activity doubled in December from a year earlier. Seventy percent of the company's loan applications were for residential properties.
And while refinancing played a big part in the increased volume, "it's important to note that a significant portion of those loans - roughly seven out of 10 - were going to individuals purchasing new homes," says Rodney Anderson, executive director and senior managing partner of the mortgage originator. "Right now, rates are at their lowest point in nearly four decades, and despite what you may hear, lenders are still loaning money in the housing market. There's definitely still purchase and refinance money available for qualified buyers," Anderson notes.
Even the auto finance sector shows signs of life: GMAC Financial, now a commercial bank, sold $5 billion of its "preferred membership interests and warrants" to Treasury as a TARP participant late last year and immediately acted to broaden its auto financing efforts. It widened its credit criteria to include loans to customers with a credit bureau score of 621 or above, a significant expansion of credit compared to the 700 minimum score put in place in November, the company says.
"Credit is still widely available, as along as consumers have good credit, proof of income, and money for a down payment," observes Greg McBride, senior financial analyst at Bankrate.com. "Despite all the talk, the average American pays bills on time. The credit market is open to most consumers as long as they have some skin in the game." McBride acknowledges that there was "a period after the failure of Lehman [Brothers] when the system was at risk." But the "widespread perception that you can't get a loan is flat-out false," he adds. "Getting a loan is not an entitlement, though. Gone are the days when anyone with a pulse could get a loan larger than they could ever repay."