1. August 2009
The Credit Crunch is Dead, Long
Live the Credit Crunch
The Credit Crunch is Dead, Long Live the Credit The Dirty Little Secret
Crunch
You see the dirty little secret of the economy is
A Little History that the credit crunch is alive and well and living
in millions of households and small businesses
As you most certainly recall, last fall we had an across the US. The TARP money was largely
almost complete meltdown of the financial used to rebuild the balance sheets of the large
infrastructure in the US as well as globally. Banks financial institutions and almost none of it is
and investment institutions, some founded over flowing through the small businesses and
150 years ago either failed or were on the verge households that drive the economy. It would be
of failure. One hundred year old automotive great if you bought stock in Bank of America back
companies followed suit. Millions of individuals in March at $2.53 per share. It is now at $17.85
watched a decade of stock market gains (+705%). Citigroup was at $.97 in March. It is now
evaporate in the span of less than three months. at $4.81 (+496%). Why do you think these stocks
Then came the wave of residential mortgage and have rebounded so sharply? Do you think it is
credit card defaults as millions of overextended because these institutions are out lending to small
individuals began losing their jobs. Banks reacted businesses and individuals to help drive the
by immediately choking off credit to millions of economy? Or do you think they are using the
individuals and businesses across the country, TARP money to boost their capital ratios by
effectively grinding the economy to a halt. covering write downs of impending commercial
loan and credit card losses? Has your business
Enter the Federal Reserve. The largest of the rebounded like this? Has your family situation?
now crumbling financial and automotive Unfortunately, sector driven stock rebounds will
corporations were immediately deemed "too big do very little to drive an economic recovery which
to fail". Congress rammed through the $780bn has historically been powered by small
Troubled Asset Relief Program (TARP) to businesses and consumers.
immediately begin injecting massive amounts of
capital into the crippled financial institutions so You see the real dirty little secret of the economy
they could begin lending again. Through several is that other than spreading huge amounts of
other monetary tools the Fed further injected liquidity across the financial landscape almost
trillions of dollars into the financial system to jump nothing has been done to address the systemic
start the economy. Since the US is no longer on issues that caused this crisis in the first place.
the gold standard all of this "printed" currency is Lest you think this is a political diatribe these
nothing more than IOU's backed only by the systemic issues have been building and
taxing authority of the Federal government. Don't worsening for over ten years under the regimes of
believe me? Prior to 1963 all US currency was both Alan Greenspan and Ben Bernanke.
printed with the words "This certifies that there
has been deposited in the Treasury of the United View From the Trenches
States $1.00 ($5.00, $10.00) of gold (or silver)". It
further stated that this note is "Payable to the So as a consulting firm that works specifically with
bearer on demand". Go ahead check your wallet small and medium sized privately held business
and see what today's currency says. what am I seeing to back up my claims?
Well thanks for the finance lesson Bill. What does
this have to do with me? Lots.
377 North Avenue Tel: 781.982.1327 Driving the Profitable
Rockland, MA 02370 Fax: 781.982.1327 Growth of Technology and
SM
www.Rockland-Group.com Manufacturing Companies

2. August 2009
The Credit Crunch is Dead, Long
Live the Credit Crunch
Credit Cards - Rightly or wrongly many private score will typically be negatively affected,
business owners utilize credit card lines as an effectively putting you in a death spiral as your
emergency fund for unexpected business issues. existing creditors react to the newly dropped
Unfortunately, over the past several months score.
banks have been reducing credit limits and/or
raising interest rates on millions of credit worthy Existing Loans - Many businesses with existing
customers. I have seen small business owners loans in good standing are being inundated with
with a $25,000 limit, who are carrying a small calls and requests for updated business and
monthly balance to keep the card active, and personal information from the lending institutions.
never missing a payment, suddenly have their Much of this is due to the weakened status of the
limit dropped to $5,000. The explanation by the lender and has nothing to do with the business
bank is that they are reviewing their risk portfolio owner. However, the business owner now has to
on all accounts and have decided to reduce the spend much of his valuable time to generate and
line. End of discussion. This eliminates a valuable report this extra information to try and maintain a
safety net for many business owners who may reasonable working relationship. Of course, the
have used that line to bridge a short term cash same business owner knows that his chances of
flow issue. In addition, this has an immediate securing additional credit from this lender is now
negative impact on their FICO score (see below). zero. This is a scary position to be in.
Much of this is being driven to beat the new
regulations coming out of Congress regarding What I am seeing on this topic could easily fill a
credit card consumer rights. It is choking off the book. In respect of your time let me try an quickly
consumption ability of millions of individuals and summarize.
businesses.
- Many business owners would like to hire or
FICO Scoring - A FICO score is the nationally make small capital investments but feel they are
recognized numeric scoring standard of an under constant financial attack and are therefore
individuals overall creditworthiness. The score reticent to even seek funds. These same
ranges from 300 to 900 and is affected by making business owners also feel the same way on a
late payments, the percentage of total credit personal level and are not making home
being currently utilized, and the number of credit improvements or buying cars because of it. Some
inquiries. A new version of this system called no longer even qualify for college loans for their
FICO 08 has been implemented which offers kids.
some forgiveness for small late payments but is
much more punitive in the other areas. For many - Many business owners are finding their personal
individuals their FICO score has dropped with the and business creditworthiness more intertwined
introduction of the new standard. A privately held and are leery of the personal risk this entails.
business owner's personal financial status is
increasingly being evaluated by banks when - There is growing feeling of helplessness as
determining businesses creditworthiness. Many many do not feel they are in control of their own
banks are now requiring personal guarantees by destiny. This is largely driven by the perceived
business owners rather than accepting the arbitrary and random nature of credit line
backing of assets of the business alone. With the reductions, interest rate increases, and
personal FICO scores of millions of business information requirements. Worse, there is no end
owners dropping due to the above situations in sight.
many are now effectively locked out of acquiring
capital for investment. Oh, and by the way, if you
do apply for a loan and are rejected, your FICO

3. August 2009
The Credit Crunch is Dead, Long
Live the Credit Crunch
The pendulum was clearly too far in the lenient
direction over the last ten plus years. That is what
produced the bubble that made that loud popping
noise last fall. However, the answer is not to
swing the pendulum to the other extreme but to
land somewhere in the middle. It is time for the
financial institutions to really end the credit crunch
and stop covering their ass-ets. That is what are
TARP tax dollars were allocated for. More
importantly, it is time to address the systemic
issues that caused this situation in the first place.
The key to survive and even thrive in the mean
time is to work creatively and innovatively to
navigate through this boulder strewn economic
and financial terrain. The standard methods such
as bank loans and lines of credit aren't working
right now and probably won't for at least another
year. However, there are assets that both you
and your company possess that can still give you
maximum competitive leverage. Couple these
with the right trusted navigator and you can
leverage this situation as an incredible
competitive advantage.
* If you are a private business owner or manager
who is struggling to navigate today's economic
climate contact us for a no obligation, initial
consultation on how we can help.
* If you know of someone who may benefit from
this newsletter please feel free to forward a copy.
If you would like to receive your own copy visit
www.rockland-group.com to sign up.
Bill Gately - Principal
Copyright 2006 - 2009 The Rockland Group, Inc.
All rights reserved. Reproduction without
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