Financial crisis could make consumer credit even tighter

McClatchy NewspapersSeptember 15, 2008 

WASHINGTON — One of the worst financial years on record got a little worse on Monday when the falling fortunes of three Wall Street firms sent American investors — and consumers — into high anxiety.

The collapse of Lehman Brothers, the forced sale of Merrill Lynch and the shaky condition of American International Group are the latest dominoes to fall in the ongoing economic downturn that seemingly has no end.

And stocks on Wall Street took their steepest fall since after the Sept. 11, 2001, terrorist attacks.

Former Federal Reserve Chairman Alan Greenspan called the unraveling financial mess a "once-in-a-century" crisis and experts say the most likely result will be further tightening of credit and lending standards for consumers and businesses.

"We're already in a precarious situation with the credit crunch and the economy in bad shape and this is just going to make a bad situation worse," said Kenneth H. Thomas, a Miami-based economist and independent bank consultant.

The decision by the Federal Reserve not to help Lehman Brothers has its pros and cons. But in letting the company fend for itself, the Fed is sending a message that the next faltering financial institution cannot expect a taxpayer bailout.

That alone adds greater risk to credit markets, which could make home, retail and business loans more expensive and harder to secure.

"So all of a sudden the guy that needed a business loan for a new plant may not get his money because a bank decides to put a hold on it and reconsider their position," Thomas said. "The same for somebody buying house. They think they have a good price and are ready to buy, but if they can't get the credit, there's no deal. I think what we're going to see is the credit crunch getting worse."

Others have speculated that more banks could fail in light of the latest problems to hit the financial markets. Of particular concern are several banks owned by Lehman Brothers. Lehman Brothers Bank, based in Wilmington, Del., has deposits of nearly $12 billion, while Lehman Brothers Commercial Bank, in Salt Lake City, has nearly $3 billion in deposits.

A company representative did not return a call regarding the status of both institutions on Monday.

The Federal Deposit Insurance Corporation doesn't comment on open and operating institutions, but FDIC Chairman Sheila C. Bair said, "We are closely monitoring the situation and have taken steps to mitigate any impact on insured institutions that may be directly affected by Lehman Brothers bankruptcy filing."

Some economists have speculated that the troubled financial sector could prompt a run on bank deposits by nervous customers.

But the FDIC insures commercial bank and thrift deposits up to $100,000 and FDIC-insured institutions hold more than 99 percent of the industry's assets.

"In our 75-year history, not a single customer has lost a penny of their insured funds, and they never will," Bair said.

So far this year, despite the financial problems, bank deposits are up 5 percent from a year ago, close to the five-year average growth rate for deposits, said James Chessen, chief economist at the American Bankers Association.

He said many people are finding that a bank deposit is one of the best and safest investments right now. "You can make 3 (percent) or 4 percent on a bank certificate of deposit as opposed to losing 3 (percent) or 4 percent every day in the market," Chessen said . . . "I can understand the nervousness on the part of depositors and investors, but I think the facts speak volumes here."

Monday's slide on Wall Street tested the fortitude of investors nationwide. Most investors, having incurred significant losses already this year, have adjusted their stock portfolios to the bear-market conditions by shedding declining stocks and buying bonds.

Thomas, the Miami consultant, said investors mired in losses should resist the temptation to sell stocks now when prices are low.

"If you've got money in the stock market, it's not the time to be selling when the markets are taking a hit. You don't want to sell in a crisis," Thomas said.

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McClatchy Newspapers 2008

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