NEW YORK (AP) - The jammed credit markets barely budged Monday as European governments scrambled to prop up their failing banks and investors waited for details on how, exactly, the Treasury will go about buying $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.
Energy retailer Reliant Energy, for one, 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. And hotel company Wyndham Worldwide Corp. said tighter credit is forcing it to cut jobs and focus on cash flow instead of sales growth.
Bank-to-bank lending remained pricey Monday, indicating that financial institutions are still loath to lend.
The London Interbank Offered Rate, or LIBOR, for 3-month dollar loans eased only slightly to 4.29 percent from Friday's nearly nine-month high of 4.33 percent. The overnight LIBOR for dollar loans — which dropped Friday to a nearly four-year low just below 2 percent, the Federal Reserve's target overnight rate — edged back up to 2.37 percent.
To address LIBOR, to which many adjustable-rate mortgages are tied, the Federal Reserve said Monday it will boost its three-month loans to banks to $150 billion apiece. The move 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 fell to 0.37 percent from 0.50 percent late Friday. Yields move opposite prices.
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 percent stake in Fortis's Belgium bank after a government rescue failed. Governments in Germany, Ireland and Greece said they would guarantee bank deposits.
As the Dow Jones industrial average dropped below the 10,000 level for the first time in nearly four years, both short-term and long-term Treasury issues saw heavy demand.
The 2-year Treasury note rose 8/32 to 101 1/32 and yielded 1.46 percent, down from 1.58 percent late Friday. The 10-year note rose 1 to 104 10/32 and yielded 3.48 percent, down from 3.60 percent. The 30-year bond rose 2 5/32 to 109 11/32 and yielded 3.96 percent, down from 4.09 percent. |