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 November 20, justifying the passage of the Troubled Asset Relief Program (TARP).
But 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.”
Marenzi says that various government data show 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 his report.
Yes, corporate bond issuance has fallen, but the commercial lending market has filled the gap, government 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,” and bank real estate lending set a record high in October.
All of this healthiness is reflected in government data, the same data available to Treasury and the Fed. So why has Paulson in particular been 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 in an interview. “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.” Treasury had not responded to U.S. Banker inquiries as of posting, and the Fed would not comment on the Celent report. Meanwhile, Congress is “looking at these issues as we speak,” 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.”
