April 2, 2001

Credit Crunch Still Looms Bust

We warned months ago about the problems that banks would face because of defaults on high-yield junk bonds. American Express' earnings warning today confirmed that the credit crisis is becoming a worse threat to the health of the economy.

During the bull market, banks made risky loans to brand new corporations with untested business plans and individuals who had only stock as collateral. Since then, those business plans have been proven unprofitable and ill-conceived, and the stock isn't worth the paper it's printed on. As a result, loan defaults have skyrocketed, and banks are forced to take the hit.

But the banks aren't the only losers. Already, banks have tightened up on lending practices and made it much harder for solid businesses and individuals to get a loan. The Fed even lowered rates three times in an effort to entice banks to extend more loans. Each time, the banks responded: "No way!"

The credit crisis will continue as long as the economy is in dire straits and the stock market keeps plunging. But the economy and the stock market won't turn around until companies can get the capital they need to restart their growth. That's usually where the banks come in -- but not this time.

Related commentary:

Top 10 List of Worst Lenders January 15, 2001
Bad Loans Are Bad News for Banks in Slowing Economy January 10, 2001
2001: A Funding Odyssey December 29, 2001
Credit Lines in Critical Condition December 21, 2000
Credit Bubble Explodes December 12, 2000

Related Issue:

January 2001 SMR Newsletter (for subscribers only)

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