Lending remains tight as clock ticks on bailout

There was no discernible change in the markets after the Senate approved the plan Wednesday night and sent it on to the House, which defeated an earlier version of the propsal on Monday. President Bush and congressional leaders on Wednesday expressed optimism that the $700 billion bill to take risky mortgage-backed assets off banks' books would pass, after the addition of a provision that would boost insurance for people's deposits.

But investors were not expected to cheer even if the House does approve the plan--they are unsure how effective the plan will be.

"It can only be effective if it marshals private confidence," said Citigroup economist Steven Wieting. "Private credit markets, as of yesterday, in some ways have ceased to exist. ... This is a confidence crisis."

Investors, particularly money market mutual funds, have been rushing for the safety of Treasurys since the collapse of Lehman Brothers Holdings Inc. and the takeover of the world's largest insurer, American International Group Inc. in September. A money market fund called the Primary Reserve Fund "broke the buck" two weeks ago due to its exposure to Lehman; when a fund breaks the buck, it means it does not have enough assets to cover every dollar invested in it.

Because of the recent drought in credit market activity, more large companies have been having trouble getting loans at rates they can tolerate--and as a result, they're altering their business plans.

Anglo-Swiss mining giant Xstrata PLC dropped its $10 billion bid for British rival Lonmin PLC, the world's No. 3 platinum producer, pointing to uncertainty surrounding "the future availability of credit." And Actuant Corp., an industrial products maker, trimmed its fiscal 2009 sales outlook Wednesday, citing the "unsettled economic and credit environments and headwinds from the stronger U.S. dollar and higher borrowing costs."

To be sure, lending is not at a complete standstill. General Electric Co., which said last month it would scale back its commercial paper holdings, said it is not having problems selling commercial paper when it announced Wednesday that Warren Buffett's Berkshire Hathaway is buying $3 billion worth of GE preferred shares.

Southwest Airlines' chief financial officer said the company has few financing needs and limited immediate exposure to financial markets' troubles. Southwest--the only major U.S. airline to stay profitable this year thanks to its hedges against rising fuel prices--also said it has an unused $600 million line of credit.

But the longer the credit markets stay tight, the longer many companies will have to draw down their reserves and credit lines. Eventually, companies' inability to get credit could deliver a large blow to the already deteriorating economy. The CEO of consumer products maker Procter & Gamble Co. wrote in a newspaper guest column that its customers are feeling pinched, and that small- and mid-sized suppliers aren't finding enough money to run their businesses.