Factory owner Craig Barrett says he had been faithfully meeting his payments on the $907,000 line of credit that he has had since 1988, so he was taken aback earlier this year when the Vermont Federal Bank abruptly called in his loan.
Worse yet, Barrett says, the institution also froze his company's money-market account containing $133,000. Forced to order layoffs, Barrett eventually filed for bankruptcy--"to protect my company, machinery and equipment." The case is pending.
"We are one of the victims of the nationwide credit crunch," he says.
Barrett is not alone in his perception that America is in the throes of a serious credit squeeze. All over New England--and in other regions, from the Rust Belt to the Southwest--business people are complaining that banks have begun to tighten the screws.
Indeed, the perception is so widespread that some analysts fear the already weak economy could be pushed into a recession. Commerce Secretary Robert A. Mosbacher warned that the crunch is "serious, and . . . appears to be exacerbating."
Federal regulators deny that there is any sort of across-the-board credit crunch or that legitimate crackdowns on some especially risky types of lending pose a threat of recession. And they cite recent studies that appear to support their claims.
Nonetheless, concern in the business community is widespread.
For his part, Barrett insists that his company will survive--the speeded-up bankruptcy proceedings are to be completed as early as next month, he asserts--but he maintains that Vermont Federal's decision to dun him was unnecessary and possibly even unfair.
As usual in such instances, the bank refuses to comment. "That case is still in litigation," John Cobb, president of Eastern Bancorp, the holding company that owns Vermont Federal, says. But he asserts that Barrett's allegations are "not the facts in the case."
Ostensibly, the credit crackdown is in reaction to the savings and loan scandal. Wary of seeing banks fall into the same bind as S&Ls;, federal banking regulators formally cautioned bankers to avoid making dubious loans and to tighten requirements for collateral.
They also ordered the institutions to rebuild their capital reserves--which had ebbed to an uncomfortably low level over the past few years--as a hedge against soured ventures. New international lending safeguards call for higher capital requirements.
As a result, banks--and most other financial institutions--have virtually stopped making loans in sectors that have proved risky for the S&Ls;, such as commercial real estate, leveraged buyouts and the like.
"There has been a tremendous reduction in the availability of funds to finance mergers and acquisitions," says Lyle Gramley, a former Fed governor and now chief economist of the Mortgage Bankers Assn. Gramley says little of that has affected small business and housing.
But critics of the industry charge that the bankers have overreacted, calling in "good" loans--presumably like Barrett's--along with the bad. And some suspect that the banks are using the federal warning as an excuse to weed out questionable loans that have begun to go bad.
"The banks have certainly scapegoated the Comptroller of the Currency (one of the four major federal bank regulatory agencies) more than is deserved," a senior government official asserts.
The problem is, apart from "anecdotal" complaints, such as Barrett's, neither federal authorities nor private economists can find any hard evidence that there really is a serious credit crunch across the nation--or that it is pushing the economy into a recession.
Nationwide credit figures collected by the Federal Reserve Board and surveys by private industry groups show that, at worst, the "crunch" is limited, confined mainly to New England and a few visible problem sectors.
And a fresh survey by the Federal Reserve Bank of Boston--published last Thursday--showed that, even in New England, virtually all of a reported decline in lending figures for the first quarter reflects writeoffs or sales of old loans, not any cut in overall lending.
"The actual availability of bank credit regionwide did not change significantly over the first quarter," says Richard Kopcke, the bank's vice president and chief economist, who compiled the figures.
The Fed's chairman, Alan Greenspan, sounded a similar note, telling the Senate Banking Committee earlier this month that, while lenders "have tightened their standards in certain sectors and locales, . . . there has not been a broad-based squeeze."
Greenspan also denied that the tightening that has occurred so far has been enough to push the economy into a recession. "Access to credit has not been reduced to an extent that has had a significant damping influence on the American economy," he said.
David D. Hale, economist for Kemper Financial Services in Chicago, agrees. "To the extent that we depend heavily on small business for job creation in the economy, this may retard job growth, but it won't stop it," Hale says. "On the margin, some businesses are suffering."
That hasn't prevented the businesses that are "on the margin" from complaining--or from sounding a call for help from Congress. The Senate Banking Committee hearing was filled with dire warnings from lawmakers admonishing the regulators not to go overboard.
"We've been barraged with letters and calls . . . mainly from real estate developers," Sen. John Heinz (R-Pa.) told the regulators. "The people making these claims are not unreasonable people," Sen. Paul Sarbanes (D-Md.) said.
But some analysts contend that not all the complaints are as serious as lawmakers make them out to be. "You hear some pretty grim stories, but when you follow up you hear they're not as bad as you would think from listening," asserts Gramley of the Mortgage Bankers Assn.
Murray Gerber, a Middletown, Conn., plastics maker, says his 100-worker plant has been enjoying the best five months in its 22 years of operation--after an improvement in 1989. "Knock on plastic; I'm very happy," he says.
Yet, Gerber says he has encountered visible resistance from bank loan officers on his plans to draw anew--as he does each summer--on part of a $200,000 line of credit that he took out at Connecticut National Bank a few years ago.
"They haven't actually refused me, but I get this attitude: 'We'd like you not to take the equipment loan this year,' " Gerber reports. He is working around that, but "it's a bit frustrating," he says. "They're painting us with the same brush."
Joseph Blair, director of the Massachusetts Industrial Finance Agency, a private-sector group, says there are hundreds of other such cases, but business people are reluctant to speak about them publicly because of the stigma involved in being refused a loan.
"That's the part that Mr. Greenspan's numbers are missing," he says.
There's no real question that bank regulators have been pressuring the industry to trim its sails a bit. Many analysts believe that the nation's financial system already is fragile as a result of the S&L; scandal--and unusually vulnerable.
The Comptroller's office formally warned banks early this year to exercise more prudence in lending to "problem" sectors. And reports from areas such as New England and Texas indicate that bank examiners are a lot fussier these days--and more ready to challenge dubious loans.
The question is, have the regulators--and the banks--overdone it? Earlier this year, the Fed sought to quash the issue by inviting key bankers to Washington so the regulators could set the record straight on just how severe any cutbacks should be. Presumably, most got the word.
Greenspan appears satisfied, for the moment, that the scare has been blunted in time--though he and other regulators left no doubt that there still are some areas where a sharper crackdown is justified.
"In our view, banks are to be applauded for tightening lending standards," Federal Deposit Insurance Corp. William L. Seidman told Congress in a statement. "Applying traditional prudent lending standards to this kind of borrower is a sound practice."
But the jury still is out, and--for better or worse--the industry appears likely to be more "prudent" at least for the foreseeable future.
"We're trying to respond to what we read is going on," says Eastern Bancorp's John Cobb.
"We're not aggressively seeking new business. We are working with our existing customers to make sure that all the documentation is proper. And there are types of things we're not looking at--speculative loans, commercial real estate--until we see what the Fed is up to.
But Cobb vehemently denies that his institution is overreacting on any loan. "Banks make money by lending money," he says, "and we wouldn't be arbitrarily cutting back on any good customer. There are two sides to every story."
Still, even Greenspan concedes that the danger is not over and that the banks' new caution could get out of hand, as it did in 1980, when the Carter Administration coaxed the central bank into scaring consumers out of spending. It did, and the country plunged into a slump.
Despite the regulators' attempt to ward off a scare, "significant problems cannot be ruled out in the period ahead, and we will continue to devote close attention to credit conditions," he said.
Translated from the Fed jargon, that means simply: Watch this space. Springfield's Barrett may not have much company now, but when the second-quarter figures come in, they could well show that he is far from alone.