Why Banks Still Won't Lend

Why Banks Still Won't Lend - 1/7/2009 , Class Action News, Class Action, Securities News, shareholder class action, claim, litigation, securities action, common stock'>

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Why Banks Still Won't Lend, Despite More Than $1 Trillion In Federal Largesse, They Still May Not Have The Capital Cushions To Bear The Risks Of Making Fresh Loans
Mara Der Hovanesian and Christopher Palmeri

BusinessWeek. January 7, 2009
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EXCERPT: American Apparel (APP) executives should have been focused on the sales of their leggings and T-shirts this holiday season. Instead, management spent most of the critical shopping period worrying about $125 million of debt due on Dec. 19. After weeks of intense meetings with major banks, the trendy retailer landed a last-minute extension on a loan. The onerous strings: a $2.3 million fee and limits on capital spending. "The credit markets are still frozen," says Chief Financial Officer Adrian Kowalewski. "Even companies that are performing well can't get loans at reasonable terms." The financial challenges facing Kowalewski and other corporate executives pose a major quandary for the incoming Obama Administration and Washington policymakers, who are trying to kick-start the economy. Despite all the government's best efforts in recent months, big banks still aren't lending money freely. One sign of the crunch: New loans to large companies slumped 37% in the three months ending Nov. 30 from the preceding three months. "Banks are being extremely cautious," says Edward Wedbush, chairman of the Los Angeles brokerage Wedbush Morgan Securities. The industry is getting flak for hunkering down. After all, the Treasury has injected $187.5 billion into the nation's largest banks, including Citigroup (C), Bank of America (BAC), and JPMorgan Chase (JPM). The recipients of taxpayer money, say critics, should be required to open up their coffers. "The bad news [is] Treasury has no way to measure whether taxpayer funds are being used to increase lending," Representative Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said in December. "The much worse news [is that Treasury] does not even have the intention of doing so." Banking chiefs defend their position. They argue that the government funds are designed to shore up capital and support lending, but that they have no obligation to make new loans.

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