Whitney Says U.S. Rebound Hampered by Small-Business Loan Curbs

By Michael Heath

Oct. 2 (Bloomberg) -- The U.S. recovery will falter as banks continue to curb lending to small companies, said Meredith Whitney, whose 2007 prediction that Citigroup Inc. would cut its dividend triggered a plunge in the bank’s stock.

“Access to credit is being denied at an accelerating pace,” Whitney said in a commentary in the Wall Street Journal. While large companies have no problem obtaining loans, small businesses “have never had a harder time,” she said in the article, dated yesterday.

Small companies employ 50 percent of the U.S. workforce and contribute 38 percent of gross domestic product, said Whitney, founder of Meredith Whitney Advisory Group LLC. They are often also innovators, with Apple Inc., Dell Inc., McDonald’s Corp. and Starbucks Corp. starting as small businesses, she said.

Reports yesterday showed U.S. jobless claims grew more than forecast and a gauge of manufacturing unexpectedly fell. The International Monetary Fund said this week rising unemployment and the waning effects of President Barack Obama’s $787 billion stimulus program will restrain the economy’s recovery next year.

Since the onset of the credit crisis more than two years ago, “available credit to small businesses and consumers has contracted by trillions of dollars, and that phenomenon is reflected in dismal consumer spending trends,” Whitney said.

The world’s largest economy is forecast to expand 1.5 percent next year, after contracting 2.7 percent in 2009, the IMF said yesterday. In July, the Washington-based lender projected 0.8 percent growth for 2010.

Job Cuts

U.S. Labor Department data to be released today is forecast to show employers cut jobs in September for the 21st straight month, driving the unemployment rate to 9.8 percent, the highest since 1983. Goldman Sachs Group Inc. yesterday increased its forecast for September job losses to 250,000, compared with an earlier estimate of 200,000. The average estimate of economists surveyed by Bloomberg is a decrease of 175,000.

Whitney predicted in October 2007 Citigroup would have to cut its dividend amid writedowns and credit losses, triggering the steepest tumble in the company’s shares since September 2002. The New York-based bank slashed the dividend by 41 percent three months later.

Whitney said in the Journal commentary she believes the U.S. is in the early stages of the second half of this credit cycle.

“I expect another $1.5 trillion of credit-card lines to be removed from the system by the end of 2010,” she said. “This includes not only the large lenders reducing exposure but also the shuttering of several major subprime credit-card lenders.”

She called for incentives to be provided to smaller banks to step up small-business loans on a bigger scale.

“Smaller banks could not only bridge gaps created by the shut down in the securitization market but also gaps being created by a massive contraction in credit-card lines,” she said. “Arguably credit would perform better with these types of loans as they would reintroduce and reinforce the most important rule in banking: ‘Know Your Customer.’”

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net.