NEW YORK - The jammed credit markets barely budged Monday as governments around the world scrambled to prop up their failing banks and investors waited for details on how, exactly, the U.S. Treasury will go about buying US$700 billion of U.S. banks' mortgage assets.
If lending remains tight, it could cause more cash flow problems for the companies and municipalities that rely on the credit markets and banks for short-term loans.
"It's hard to exaggerate how bad things are. Things are still profoundly dislocated," said T.J. Marta, fixed-income analyst at RBC Capital Markets.
Energy retailer Reliant Energy indicated Monday it may be searching for a buyer after getting slammed by stricter credit standards that forced it to raise $1 billion last week. Tobacco company Altria Group Inc. reportedly might delay its acquisition of smokeless tobacco maker UST Inc. at the suggestion of its lenders, while hotel company Wyndham Worldwide Corp. said tighter credit is forcing it to cut jobs and focus on cash flow instead of sales growth.
And Minnesota finance officials are delaying a $42-billion bond sale due to the credit crunch. The sale, scheduled for Tuesday, was to finance expansion of the state's 911 communications system.
As stock markets around the globe swooned Monday, bank-to-bank lending remained pricey, indicating that financial institutions are still loath to lend.
The London Interbank Offered Rate, or LIBOR, for three-month U.S. dollar loans eased only slightly to 4.29 per cent from Friday's nearly nine-month high of 4.33 per cent. The overnight LIBOR for U.S. dollar loans - which dropped Friday to a nearly four-year low just below two per cent, U.S. the Federal Reserve's target overnight rate - edged back up to 2.25 per cent.
To address the rise in LIBOR, to which many adjustable-rate mortgages are tied, the Federal Reserve said Monday it will expand bank lending. It is boosting its one-month loans to $150 billion, three-month loans to $150 billion, and loans available in November to $150 billion. These moves will bring the total amount of credit potentially outstanding through year end to $900 billion, the Fed said, and should eventually help give banks more leeway to lend to others.
But the process could take some time.
"There is some risk that the Fed just continues to pour in dollars, and people continue to hang onto them and don't share them," said Bank of Tokyo-Mitsubishi UFJ financial economist Christopher S. Rupkey. However, he said, "if you keep pouring in liquidity, banks will eventually settle down ... It's only been 21 days since Lehman went under. It's just going to take some time to work through this."
It might also take another interest rate cut, Rupkey said. The Fed's policymakers aren't scheduled to discuss rates until later this month, but could decide to lower rates in the interim. On Tuesday, Fed chairman Ben Bernanke is speaking at the National Association for Business Economics' annual meeting.
Lehman Brothers Holdings Inc.'s bankruptcy, along with the government's takeover of Fannie Mae, Freddie Mac, and American International Group Inc., sent fear rippling through the global financial system last month. When a money market fund took a severe hit due to its investments in Lehman debt, investors began flooding out of corporate debt and into Treasurys.
Treasury bill yields remained extremely low on Monday, suggesting that investors such as money market mutual funds are still sticking to the safety of short-term government debt rather than short-term corporate debt known as commercial paper.
The yield on the three-month T-bill was at 0.49 per cent, down from 0.50 per cent late Friday. The discount rate was also at 0.49 per cent.
On Friday, the House passed a revised $700 billion financial rescue plan, after initially rejecting it. The Senate has also approved the bill. But potential lenders remain wary - some banks are still having a hard time staying afloat, and no one knows yet how much the Treasury will pay for the institutions' risky mortgage-backed assets. It will reportedly take four weeks to set up an auction.
"The bailout was supposed to be a confidence booster. It may have been a confidence booster if it had gone through on time," Rupkey said.
Over the weekend, the mortgage crisis spread across Europe. The German government and financial industry agreed to a $68 billion bailout for commercial-property lender Hypo Real Estate Holding AG, while France's BNP Paribas agreed to acquire a 75 per cent stake in Fortis's Belgium bank after a government rescue failed. Governments in Germany, Ireland and Greece said they would guarantee bank deposits.
Many financial institutions already saddled with bad debt could take another hit if they sold insurance contracts known as credit default swaps against Fannie Mae and Freddie Mac bond defaults. An auction was held Monday to determine how much the sellers of those contracts will have to pay back buyers, now that the mortgage financiers are under the control of the U.S. government.
According to initial results published by Creditex, debt holders will recover a little over 92 cents on the dollar for Fannie Mae senior and subordinated debt, and nearly 94 cents on the dollar for Freddie Mac senior and subordinated debt.
As the Dow Jones industrial average dropped below the 10,000 level, both short-term and long-term Treasury issues saw heavy demand.
The two-year Treasury note rose 9/32 to 101 3/32 and yielded 1.43 per cent, down from 1.58 per cent late Friday. The 10-year note rose 1 8/32 to 104 16/32 and yielded 3.45 per cent, down from 3.60 per cent. The 30-year bond rose 2 1/32 to 109 1/32 and yielded 3.98 per cent, down from 4.09 per cent.
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