June 5 (Bloomberg) -- Joe Bristol, owner of a Roto-Rooter Inc. franchise in Concord, California, became a victim of the credit crisis last month when Pee Wee Muldoons Bar & Grill in a strip mall 20 miles away filed for bankruptcy protection.

``I was going to replace 10 service vehicles this year,'' said Bristol, 67, whose claim for $5,297.75 makes him one of 57 creditors listed in Pee Wee's court filings. ``Now, with the economy the way it is, I'm going to hold back. But it seems like everybody on that list is a victim to some degree.''

The pain at places like Pee Wee's, in Brentwood, California, 50 miles east of San Francisco, is still ricocheting through the economy. What began with the repackaging of subprime loans into AAA rated securities is unraveling on Main Street, wreaking havoc with businesses and lives far from New York, as house prices continue to fall and foreclosures rise. That, in turn, means more bad news for banks.

``We're in the eye of the hurricane right now,'' said Paul Kasriel, chief economist at Northern Trust Corp. in Chicago. ``We've been through the first wave, and another one's coming. We're going to see more problems in the financial sector and sluggish growth at best in a number of quarters going forward.''

Meatloaf and Vodka

Pee Wee's difficulties started in the fall of 2006, when California's housing market cooled. Monthly revenue at the restaurant, which serves a community with a large retirement population, fell from $260,000 to $180,000, and then to $100,000, said co-owner Milan Petrovich, 61. He blamed the drop on a surge in foreclosures and rising gasoline prices that discouraged patrons from driving for a night out.

``This place would be packed on weekends two or three years ago,'' said Brian Nolte, 43, a regular customer who stopped in for a meatloaf lunch and a double vodka. ``Now you'd be lucky to have eight or 10 people on a Friday night.''

Pee Wee's had $2 million in liabilities when it filed for bankruptcy protection May 12, ranging from the $130 it owed Bimbo Bakeries in Los Angeles for bread and rolls to a $250,000 line of credit at Citibank.

That's a tiny sum compared with the $386 billion in writedowns and credit losses taken by banks since the beginning of the subprime meltdown last year. Yet Pee Wee's failure set in motion its own credit crisis, a chain reaction that stretches from Roto-Rooter to General Motors Corp., the largest U.S. automaker. In one bar's demise, a larger story can be told.

`Maxed Out'

That story will only be compounded if U.S. residential real estate prices continue to decline, leaving more homeowners with mortgages greater than the value of their houses. That could lead to a surge in defaults, even by borrowers with good credit, forcing banks to cut lending.

The credit crunch is already squeezing business and family budgets, said Laura Tyson, an economics professor at the Haas School of Business at the University of California at Berkeley. Normally, she said, households would turn to home equity loans or new credit-card accounts for temporary relief. Now, that's more difficult.

``Banks have cut back on their willingness to lend, and people are maxed out on their credit cards,'' Tyson said. ``Add the unexpected oil shock on top of credit contraction, and those are two very big hits.''

Tightening Credit

The frozen securitization market, which helped banks and mortgage lenders expand the supply of credit, will curb amounts available to U.S. borrowers, said Meredith Whitney, a banking analyst at Oppenheimer & Co.

``Bank balance sheets simply do not have the capacity to provide the liquidity lost,'' she wrote in a May 19 report.

Tightening credit is affecting companies of all sizes. Fairfield, Connecticut-based General Electric Co. said it missed first-quarter profit estimates because of the seizure in credit markets. And in Peabody, Massachusetts, Wet Willy's car wash is closing.

``People aren't buying cars, and they're not washing the cars they have,'' said Jordan Shapiro, a lawyer in Malden, Massachusetts, representing Wet Willy's.

The car wash was one of 2,745 U.S. companies to seek bankruptcy protection this year through June 3, an increase of 33 percent over the same period last year.

`Massive Overbuild'

In Brentwood, 15,841 homes were in foreclosure as of June 2, according to RealtyTrac, an Irvine, California, company that monitors mortgage defaults.

California, Nevada and Arizona lead the U.S. in foreclosure rates, according to RealtyTrac. Through April, one in every 146 Nevada homes was in foreclosure, as was one in every 204 in California and one in every 224 in Arizona. Across the country, the April foreclosure rate was 65 percent higher than a year earlier, RealtyTrac found.

``We've really been on the front lines of the whole housing bubble,'' said Dean Martin, Arizona's state treasurer. ``We're like someone who partied hard on Friday night and woke up with the worst headache on Saturday morning. We're really feeling the effects of the hangover.''

Newly constructed five-bedroom homes in Brentwood that would have once sold for $800,000 are now priced at $450,000, said Nolte, the Pee Wee's patron, a contractor who owns a demolition and asbestos-removal business.

``You had a massive overbuild,'' he said. ``People were sucked up quick by subprime loans.''

50% Interest

In September, as Pee Wee's revenue fell, Petrovich and his partner, Steve Kraut, borrowed $100,000 through Community Bank of the Bay in Oakland, Petrovich said. The bank got the money from Advance Restaurant Finance, a San Mateo, California, company that specializes in loans to restaurants. Under the loan's terms, Pee Wee's had to repay $150,000 in a year, making the interest rate 50 percent. The restaurant still owes $106,000 on the loan, according to the court filing.

Such loans aren't unusual, said Brian Garrett, president and chief executive officer of Community Bank, which he said has worked with Advance for four years.

``The interest rate is a reflection of risk, and this is an industry that needs quick access to capital,'' he said. ``When a freezer breaks down, they need to get it fixed right away.'' As for the rate, he said, ``I don't hold a gun to their head.''

The loan helped, Petrovich said, though not enough. The restaurant remains open with 51 fewer items on the menu and four fewer servers than during the housing boom, said Kathy Kraut, who owns half the company with her husband, Steve.

``The ball goes down as fast as it goes up,'' Steve Kraut said.

Roto-Rooter Regrets

Bristol, the Roto-Rooter franchise owner, predicts he'll never see any of the money Pee Wee's owes him.

And he's not sure when he'll be able to buy those 10 new Chevrolet vans he needs. Larry Fitch, the franchise's general manager, said the vehicles represent $250,000 to $300,000 that Roto-Rooter, a unit of Cincinnati-based Chemed Corp., won't spend with Detroit-based General Motors and one of its dealers.

Just another ricochet: Chevy sales over the first five months of this year were down 15.8 percent from 2007, said John McDonald, a company spokesman. The reasons, he said, were fuel costs, home foreclosures and tight credit.

To contact the reporters on this story: Michael Janofsky in Los Angeles at mjanofsky@bloomberg.net; Dan Levy in San Francisco at dlevy13@bloomberg.net.

Last Updated: June 5, 2008 00:13 EDT