While many investors were celebrating the stock market rally yesterday, the debt markets were busy shouting out that the threat to the world economy hadn't gone away.
In fact, lenders are saying it has gotten worse - so much worse that big banks have been behaving in ways not seen in nearly 70 years.
"Many global participants, for lack of a better term, are hoarding cash," said Joe Davis, chief economist at the Vanguard Group Inc., of Malvern.
And while creditors started putting on the squeeze last summer, it has intensified in the last two weeks, culminating in the record set yesterday by a little-known but vastly influential interest rate known as LIBOR, for London Interbank Offered Rate.
LIBOR, the rate that big banks charge one another for overnight loans, climbed 4.31 percentage points to an all-time high of 6.88 percent. Other lenders use LIBOR to determine what to charge for a wide range of loans, including home mortgages and business loans.
The spike in LIBOR followed several weeks in which rates on short-term Treasury securities, a haven for lenders seeking safety, have fallen to levels as low as they were in 1940, when the Great Depression and World War II shook the markets, Davis said. Translation: Credit markets are so concerned about safety that they'll accept almost no interest on their money for the ability to sleep at night.
So if you're looking for a number to watch to determine whether the economy is in dire straits, go ahead and watch the Dow Jones industrial average.
But check out LIBOR and rates on T-bills, too, because what they are saying right now is that unless the United States stabilizes its banks, through a bailout or some other means, businesses and consumers are going to find loans hard to come by.
Short-term credit is a lifeline for many businesses, especially retailers who use it to finance inventories for the all-important holiday season. If credit continues to tighten, businesses may not be able to make payrolls, leading to layoffs. Consumers used to tapping credit cards and home-equity lines of credit in emergencies may find their credit limits lowered.
On the bright side, the country has not reached that stage yet. But credit-market experts fear it is not far off.
"You don't need to produce a dead body to know that somebody's getting sick," said Tom Marshella, who supervises a team of analysts that monitors the creditworthiness of corporations across the Americas for Moody's Investors Service in New York.
Patrick Dorsey, director of stock analysis for Morningstar Inc., the Chicago investment-research firm, said that even a temporary halt in lending would create long-term problems.
"The common analogy is that credit is the oil in the economy. With your car, you know that if you have oil, it makes your car go. You don't even think about it, but it's really important," he said. "If you don't have oil, your engine seizes, and you don't just put more oil in, and it starts back up. You have to take the engine apart."
He thinks that people who oppose the bailout fail to understand it properly. If the bailout works, it would strengthen banks, allowing them to lend more freely again and grease the economy.
"People are not getting the connection between this bailout package between Wall Street and Main Street," he said. "They think this bails out fat cats on Wall Street, but most of those cats are not so fat anymore, and we're close to a total seizure of the credit markets here. These are the kinds of loans that keep business going on a day-to-day basis."
Wonks look to LIBOR to see if credit is tighening, but anecdotal evidence is accumulating, too.
AT&T Inc. chairman and chief executive officer Randall Stephenson said yesterday that his company was unable to sell any commercial paper last week for terms longer than overnight. Commercial paper, which helps lubricate the flow of business operations, is a short-term IOU available to corporations that banks usually know are good for the money. He said the difficulty in finding lenders would make the company "cautious in terms of where we invest, very guarded and cautious in terms of hiring and capital spending."
In the Plymouth Meeting office of CBIZ MHM L.L.C., a consulting and accounting firm, director Nicholas Crocetti said that some clients had laid off workers and that all were experiencing more intense scrutiny from their banks.
"The questions are getting harder. Banks are asking for more documentation," Crocetti said. "They're asking for more financial statements than they have in the past."
One reason that commercial paper and revolving bank credit lines have become expensive or scarce, Moody's corporate retail analyst Margaret Taylor explained, is that the investors who used to make these loans possible are among the troubled financial institutions that have made headlines in recent weeks. They are pulling back on making such loans and instead are hoarding cash to stabilize their bottom lines.
"A lot of investors in commercial paper or holders of the bank facilities are entities that need to be bailed out," Taylor said. "Lehman buys commercial paper and funds revolving credit facilities. Same with Wachovia."
Lehman Bros. Holdings Inc. filed for bankruptcy Sept. 15 after being hit by the credit crunch and a failed rescue deal. Wachovia Corp. was sold to Citigroup on Monday, with assistance from federal banking regulators.