The credit crunch hit 2640 Merchant Drive in Baltimore in September when Drew Greenblatt asked his bank for a $175,000 increase in the line of credit for his thriving company, Marlin Steel Wire Products. The bank said it wouldn't give him the money unless he put an equal sum into a certificate of deposit. In other words, the bank wasn't willing to let one more dime out of its sight. "It's laughable," says Greenblatt, not quite laughing. "We're a profitable company. When banks can't service guys like me, how are they doing it for the other guys?"
The 14-month-old credit crunch has entered a frightening new stage—one in which even healthy sectors are vulnerable and contagion is spreading to Europe and Asia. An explicit guarantee from the U.S. government has succeeded in keeping money flowing to prime home buyers through the Sept. 7 takeover of mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE), which were able to sell $12.8 billion in debt in September. But that's not helping other parts of the U.S. economy, where manufacturers, car buyers, and local governments are struggling. One sign of the squeeze: Total nonfinancial investment-grade corporate debt issuance was only $10.5 billion in September, down from $41 billion a year earlier, according to Thomson Reuters (TRI).
Innocent Victims
The longer credit remains unavailable, the greater the damage to the economy. That's why the Senate raced on the evening of Oct. 1 to vote for a bailout that would let the government buy $700 billion worth of unwanted mortgage-backed securities and other assets. The House's rejection of an earlier version of the legislation on Sept. 29 triggered a "lucky sevens" 777.7-point decline in the Dow Jones industrial average.
What makes a credit crunch scary is that it claims the innocent as well as the guilty. European authorities were forced to close five major financial institutions in a span of three days, and signs of stress broke out in Hong Kong, India, and South Korea. On Oct. 1 in the U.S., the Institute of Supply Management announced a plunge in its key manufacturing index for August to its lowest level since the month after September 11. That same day even vaunted General Electric (GE) got caught in the crunch. With lenders demanding unprecedented risk premiums for short-term financing, GE said it would sell $12 billion in common shares to the public and $3 billion in preferred to investor Warren Buffett on favorable terms.
Unless things stabilize soon, it could get a lot worse. Laurence Fink, CEO of investment manager BlackRock (BLK), points to the buyers' strike in the commercial paper market, which banks and large corporations rely on for short-term funding needs. Says Fink: "Cost of capital for corporations is increasing dramatically, and if we don't stabilize that market, it will be a catastrophe." The same goes for cities and states. Lasana Mack, the treasurer of the District of Columbia, says higher rates are costing the district hundreds of thousands of dollars, and he has no clear idea how he'll sell debt issues slated for November and December. In the last week of September, just three significant municipal bond issues came to market, vs. the usual 100 or so. "Nothing," says Mack, "is really functioning normally."