Libor Etc.

Markets BriefStocks Surge, Credit Crumbles, Investors ConfusedSteve Schaefer, 09.30.08, 6:00 PM ET
It may be rare that a triple-digit gain on the Dow is not good news, but Tuesday's surge comes on the heels of a historic decline and at a time that credit markets are freezing up. Key lending rates continued to rise on Tuesday, as the U.S. administration and lawmakers continue working on a bailout for the American financial system after an initial attempt was voted down by the House of Representatives Monday.
Despite the bailout uncertainty and worrisome credit landscape, stocks recouped a portion of their week-opening losses on Tuesday. The Dow gained 485 points, or 4.7%, to 10,851, and nearly halving its loss over the past two days to 2.6%. The S&P 500, which added 58 points, or 5.3%, to 1,165, cut its decline for the week to 4.0%, while the Nasdaq's gain of 99 points, or 5.0%, to 2,082, helped shave its two-day loss to 4.6%.
The London interbank offered rate, a key measure of banks' willingness to lend, has surged in recent days and Tuesday was no different. Overnight Libor spiked to 6.88, from 2.56%, while three-month Libor was up to 4.05%, from 3.89%. The closely-watched Ted spread -- the difference between Libor and the yield on a three-month U.S. Treasury bill -- actually narrowed somewhat Tuesday as the three-month T-bill yield rose to 0.92%, from 0.51%. Short-term Treasury yields had been dropping of late as traders sought a safe place to park their money, regardless of the return, particularly during Monday's plunge. (See "Banks Are Squeezed, Credit Is Crushed.") The wider the Ted spread, the more fear in the credit markets.
In addition to interbank lending, problems are also lurking in other corners of the credit markets like derivatives and commercial paper. Many companies use commercial paper, basically short-term IOUs, to fund daily operations like payroll. On Wednesday, the Federal Reserve shares its latest data on the commercial paper market, with another decline expected after the Sept. 24 report showed the market shrank by $113.0 billion over the previous two weeks. Another decrease would indicate companies have struggled to find buyers and roll over existing commercial paper, and that they may need to turn to tap more expensive bank credit lines or issue bonds to raise cash.
Tuesday's equity gains and credit market turbulence is set against the backdrop of the financial rescue plan, which hit a wall in the House Monday and remains unpopular to the public. Taxpayers had another voice chime in on their side Tuesday as a letter sent by BB&T Chairman John Allison to Congress last week was circulated. The letter expressed his frustration with the bailout, saying it was "inappropriate the debate is being shaped by…financial institutions who made poor decisions." (See "Lawmakers Seek Solution To Bailout Plan Mess.")
Allison goes on to say there is "no panic on Main Street or in sound financial institutions," and offers a 14-point list of key points for a rescue "from a healthy bank's perspective."
The list echoes many of the concerns brought to bear by opponents of the existing bill, most notably the lack of a method to determine the price of the assets the Treasury would acquire from financial institutions. Allison also called for the government to limit its purchases to housing assets, like lots and unsold homes, to resolve a "housing value crisis," not mortgage-backed securities, credit card or auto loans or other liabilities.
The U.S. Securities and Exchange Commission is proposing company estimates be used for fair-value accounting when a market is nonexistent, according to TradeTheNews.com, and is discussing possible amendments with the Financial Accounting Standards Board. Such a change would alter current mark-to-market rules and give financial firms more wiggle room to create a market for difficult to price assets like mortgage-backed securities, which have some value but have been vilified due to certain bad components such as subprime loans.
Despite the ongoing bailout fight and credit market turmoil, Tuesday was undeniably a strong rebound, despite light volume due to the Jewish Rosh Hashana holiday. Regional banks recouped some of Monday's losses, led by Sovereign Bancorp. (nyse: SOV - news - people ). The Philadelphia-based bank announced the departure of its CEO, and shares leaped 71.2% to pace a strong day for the sector.
National City (nyse: NCC - news - people ) was showing a 39.7% gain. A spokeswoman for the Ohio-based bank clarified that a $20.0 billion loan portfolio the bank was said to be interested in shedding contains loans from businesses that National City is no longer operating in and that the bank is merely considering dispositions and has not made any determination on its course of action. She also noted that if a bailout proposal were to be passed by Congress, the Treasury program would provide another option for the company to consider in its disposition of any of the portfolio.
Bigger banks were also on the mend after Monday's meltdown. Dow components Bank of America (nyse: BAC - news - people ), Citigroup (nyse: C - news - people ), and JPMorgan Chase (nyse: JPM - news - people ) were up between 3.5% and 6.0% heading into the close. The firms have also been the beneficiaries of the recent turmoil in the financial system, scooping up brokerage and banking assets at seemingly fire-sale prices. Bank of America made deal with Merrill Lynch right around the time Lehman Brothers Holdings was declaring bankruptcy, while Citigroup and JPMorgan made FDIC-brokered deals to acquire assets from Wachovia and Washington Mutual, respectively, over the past week and a half. (See "Big Banks Hunting, Regional Banks Hurting.")
Outside the financial sector Google (nasdaq: GOOG - news - people ) plunged into the close on an otherwise up day Tuesday, leading Nasdaq Marketwatch to investigate trading in the company's shares. After dropping below the $400.00 level Monday, Google was comfortably above the threshold for most of the day but then dove more than 25.0% just ahead of the bell.
Tuesday's gains came at the close of the third-quarter, and it was not a pretty three months for Wall Street. The Dow lost 6.0% in the month of September to fall 4.4% for the quarter; while the S&P was down 9.0% in Q3 after a 9.2% September drop. The Nasdaq's September loss of 12.1% locked in a 9.2% third-quarter slide.