Companies’ Net Worth Falls Again
The Federal Reserve?s latest flow of assets report offers a clue for those trying to know why banks often don?t want to lend to businesses: By some measures, businesses? finances are still deteriorating.
In the fourth quarter of 2009, nonfinancial corporate businesses? net value — what they have minus what they owe — declined 1.9%, notching its ninth straight quarter of ellipsis. The main driver of the drop is companies? real-estate holdings, which tend to include things like land, warehouses and offices that have kept diminishing in value even as residential real estate has rebounded a bit.
One problem with the fall in net value is that it can drive a wedge between the interests of a company?s owners and its creditors. With less to lose, the owners might be willing to take on more risk in the hopes of making huge gains. The creditors, by contrast, are more likely to take a larger loss if the owners? bets go incorrect. Consider, for example, a guy who bets $11 on a horse that pays double if it wins, $1 of his own money and $10 borrowed at 10% interest. In the best case, he makes $10; in the worst, he loses $1, with the creditors taking the rest of the hit.
Those odds can make bankers wary of lending to anyone, a problem prominent long ago by economists Ben Bernanke and Mark Gertler, who developed a concept known as the ?financial accelerator? to describe how such lending problems can aggravate economic downturns. If the latest data on bank lending are any suggestion, the accelerator could still be engaged: As of the end of 2009, total bank lending to businesses — known as money-making and industrial lending — was down 18% from a year earlier.