Taken from The Star ( 30th Sept 2008)
NEW YORK: The House's rejection of the financial bailout plan flung the credit markets into further disarray Monday, sending investors swarming again for the safety of Treasury bills.
If the credit markets stay tight, it could spell trouble for companies trying to raise cash by selling short-term debt in the coming weeks.
If those companies' efforts are thwarted, the economy could grow even weaker.
After the Dow Jones industrial average plunged nearly 780 points on Monday - the biggest daily point drop ever - the yield on the 3-month Treasury bill sank to 0.14 percent from 0.87 percent late Friday.
Low T-bill yields show that investors are prepared to get virtually no return on an investment as long as it is secure.
The moves in both bonds and stocks Monday were "violent,'' said John Spinello, bond strategist at Jefferies & Co.
"We're dealing with moment-to-moment, dynamic action that's so hard to describe.''
Earlier Monday, LIBOR, or London Interbank Offered Rate, for 3-month dollar loans had risen to 3.88 percent from 3.76 percent on Friday, suggesting that banks have grown increasingly unwilling to lend to each other.
LIBOR for 3-month euro loans, meanwhile, soared to 5.22 percent, the highest rate ever.
Other lending rates increased, too, from already lofty levels - including those on short-term company debt known as commercial paper, and those on overnight loans in the repo markets, where banks and other institutions do temporary borrowing.
"Once the credit market freezes up like that, this crisis that's enveloping the financial sector has the potential to leach out into other areas of the market - into companies that themselves are solvent, but need cash to fund their daily operations,'' said Jack A. Ablin, chief investment officer at Harris Private Bank.
Demand for commercial paper has tumbled, analysts say. And according to the Federal Reserve, about a quarter of the $1.7 trillion in total commercial paper outstanding matures this week.
Another 30 percent matures in the following three weeks.
"There are hundreds of billions dollars maturing over next 60 days that need to be somehow refinanced,'' Ablin said.
"Without a working credit market, this isn't just a slowdown of the economy - it's essentially a shutdown of the economy.''
To be sure, some of the problems in the credit markets, where corporate borrowers go to find loans, have been feeding on themselves.
Much of the recent tightness in the markets has been caused by investors waiting for the outcome of the rescue package, which proposed to allow the Treasury to spend up to $700 billion buying banks' souring mortgage-backed debt.
"I think everybody focusing on Washington froze the credit markets,'' said Howard Simons, strategist with Bianco Research in Chicago.
Potential buyers figured the government under the plan would buy mortgage-backed securities, he said, but they did not know how it would go about it, or how much it would pay - and that kept them in wait-and-see mode.
But while it is possible that the fears are overblown, even the most daring investors appear hesitant to make contrarian bets - particularly given how many times academics, government officials and bank executives called a bottom to the global financial systems' woes, only to have their predictions blow up in their faces.
The global financial landscape continues to change, keeping large and small investors alike on edge.
Citigroup Inc. acquired Wachovia Corp. Monday in a deal brokered by the government.
That development follows Washington Mutual Inc. becoming the largest bank to fail in U.S. history; Lehman Brothers Holdings Inc. becoming the largest company to file for bankruptcy; the government takeover of insurer American International Group Inc. and mortgage financiers Fannie Mae and Freddie Mac; and Bank of America Corp.'s shotgun buyout of Merrill Lynch & Co.
The mortgage crisis is also ripping through Europe, where there are many large banks whose failures could rock the global financial system.
The British government is nationalizing the troubled mortgage lender Bradford & Bingley, while Belgium, the Netherlands and Luxembourg agreed to buy a 49 percent stake in Fortis NV for $16.4 billion.
"Right now, banks don't trust one another,'' said Axel Merk, portfolio manager at Merk Funds, adding that European countries' short-term government debt was in extremely high demand Monday.
In an effort to keep the global financial system functional, the Federal Reserve said it was doubling the total amount of cash loans to banks to $300 billion, and making $620 billion available to other central banks through currency swap arrangements, up from $290 billion.
Longer-term Treasury prices soared as stocks tumbled.
By late trading, the 2-year note rose 26/32 to 100 20/32, and its yield dropped to 1.67 percent from 2.13 percent.
The 10-year note rose 2 7/32 to 103 15/32 and yielded 3.58 percent, down from 3.86 percent.
The 30-year note jumped 4 12/32 to 106 16/32, and its yield fell to 4.12 percent from 4.38 percent.
The U.S. economy is still weakening.
The Commerce Department said consumer spending was flat in August - the worst reading since February, when spending was also unchanged from the previous month. - AP
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