Feds Try to Revive Spending As Commercial Lending Dries Up

Six weeks into the massive $700 billion bailout, commercial lending remains anemic with banks, auto financiers and credit card companies not extending credit and not being able to sell what loans they do make.

The situation is so dire that the Treasury Department, The Federal Deposit Insurance Corporation and the Federal Reserve have issued a joint missive urging financial companies to start lending. “The agencies expect all banking organizations to fulfill their fundamental role in the economy as intermediaries of credit to businesses, consumers, and other creditworthy borrowers,” the Nov. 12 statement said.

The dearth of commercial financing is a key reason for Treasury Secretary Henry Paulson’s abrupt change in direction with the bailout plan. Instead of buying troubled loans, the strategy now is to make more funds available for credit card, auto and student loans.

The seeming fickleness of Paulson’s policies, coupled with bad economic news, prompted stock markets to decline sharply. The Dow Jones Industrial average was down 4.7 percent to 8286.26 yesterday.

A report by Barclays Capital notes that in October, credit card volumes were down 31 percent, auto loans were off 45 percent and student loans were down 41 percent. The market for selling loans so they can be securitized into bonds had just one deal for $500 million in all of October compared to $50.7 billion in deals for October in 2007, Barclays says.

One reason that loans are not being made is that credit card companies are sending clear signals that they don’t want their customers to borrow. American Express, for example, has been busy slapping even good customers who have made timely payments for years with credit limits and other restrictions.

Commercial paper still remains gummed up and the impacts are already being felt. On Nov. 10, big box electronics goods retailer Circuit City declared bankruptcy. The Richmond, Va.-based firm had been see-sawing from one problem to the other over the past several years, but was done in by a dearth of credit.

Under strong credit pressure, vendors are reluctant to supply goods for Circuit City for holiday sales. They fear that the goods may become trapped in stores that Circuit city might suddenly close. The firm is shutting 155 stores of the 1,520 it operates in the U.S. and Canada and laying off 17 percent of its 46,000 workers.  It owes $118.8 million to computer-maker Hewlett-Packard, $115.9 to television maker Samsung and $60 million to electronics maker Sony, among others.

Circuit City’s better-performing rival, Best Buy, revised its outlook downwards Nov. 11, and said this will be one of the worst sales seasons in years.