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 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.
“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.
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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 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 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 that could take 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 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 set to discuss rates until later this month, but could decide to lower rates in the interim. Fed Chairman Ben Bernanke is speaking today at the National Association for Business Economics' annual meeting.