NEW YORK — The Senate’s endorsement of the $700 billion financial-bailout plan failed to relax the credit markets Thursday, with investors worried that the passage of the bill may not prevent the economy from sinking into a prolonged recession.
The market for loans has seized up in recent weeks, sidelining companies and municipalities in need of short-term cash.
Catalyst Energy, a natural-gas marketer, filed for Chapter 11 bankruptcy Wednesday after Constellation Energy, the nation’s largest independent energy marketer, pulled its credit line.
Financial officials in states such as California and Florida have said this week their ability to borrow has been threatened. And Thursday, auto-parts maker Dana Holding Corp. said it drew $200 million from its $650 million credit facility because of “uncertainty in the financial markets.”
If the rescue package is passed by the House when it meets again today, banks will be able to sell their risky mortgage-backed assets to the government. This is intended to stem bank losses, create a market again for risky debt and get financial institutions lending again at reasonable rates.
One source of concern is that no one knows how the government will price the assets. Pricing them too high will lead to more losses for the government; pricing the assets too low will lead to hefty losses for the institutions that the bill aims to prop up.
Meanwhile, criticisms abound about the plan’s fairness, size and effectiveness.
“We’re not going to get a perfect plan, particularly in this political world,” said Len Blum, managing director of Westwood Capital. “But it’s better than not doing anything.”
The yield on the 3-month Treasury bill was at 0.70 percent, down from 0.79 percent late Wednesday. That shows that demand for T-bills — considered the safest assets around because they are issued by the U.S. government — remains very high despite their meager returns. The discount rate on the 3-month T-bill was at 0.78 percent.
The London Interbank Offered Rate for 3-month dollar loans rose to 4.21 percent Thursday from 4.15 percent Wednesday.
The rise in that rate suggests banks are getting even more tightfisted with their cash.
And rates on the short-term corporate debt known as commercial paper rose again Thursday after pulling back a bit Wednesday.
Over the past week, outstanding commercial paper dropped by $97.1 billion to $1.54 trillion, the Federal Reserve said Thursday.
On a seasonally adjusted basis, total commercial paper outstanding fell to $1.61 trillion from $1.70 trillion. Most of the drop was in commercial paper issued by financial companies.
The Fed also said banks and investment firms ramped up borrowing last week to record levels from its emergency lending facility.
