WASHINGTON — Stocks fell sharply Thursday, sparked by rising recognition that a freeze is hardening in the vital credit markets that fund daily business operations, trends that add pressure on the House of Representatives to approve the Wall Street rescue package on Friday.
September was the worst month on record for corporate credit, according to data released Thursday by the Federal Reserve. Corporations fund their day-to-day operations by issuing short-term debt called commercial paper, and in September issuance fell by $153.5 billion. During the past week alone, issuance fell by almost $95 billion, according to the Fed.
"The size of the general contraction was pretty scary," said Howard Simons, an investment strategist at Bianco Research in Chicago.
The grim news in the credit markets sent the Dow Jones Industrial Average down 348.22 points to 10,482.85. The S&P 500 sunk 46.78 points to 1114.28, while the Nasdaq skidded 92.68 points to 1976.72.
If corporations can't find buyers for their commercial paper, they must offer unusually high interest rates to investors, which sharply raises their cost of doing business. Often they must cut jobs in response, which underscores how Wall Street's problems spill over onto Main Street.
Even at high rates, there aren't many buyers of commercial paper. Usually money market funds buy this debt, but instead they are flocking these days to short-term Treasury bonds in a so-called flight to safety.
Corporations "can't come to the market because everyone is scared, and this giant market is starved" for capital, Simons said. "It's really not a market anymore."
Alternative options for corporate borrowing are equally poor. Corporations can issue bonds with near-term maturity dates, but the market for them also is in turmoil.
Normally, drawing down lines of credit at a bank would be another option, but banks are barely lending to each other, much less to businesses, as the global credit crunch deepens.
"You may see the Federal Reserve lend in the commercial paper market directly ... rather than jamming money into the banks," Simons said. The Fed "did that in the Great Depression."
The Fed operates as an emergency lender, and it's living up to its billing. The size of its balance sheet grew by $284.3 billion over the past week ending Wednesday. Since the beginning of September, Fed credit increased by more than 63 percent to $1.48 trillion.
"The growth in the Fed's balance sheet over the last three weeks is staggering and emphasizes that the Fed has gone into overdrive as the Lender of Last Resort as the financial crisis has intensified," said John Ryding and Conrad DeQuadros, directors of RDQ Economics, in a research note to investors.
The credit crunch also sent some of the nation's largest employers to Capitol Hill to twist lawmakers' arms. They hope that the House will follow the Senate's lead and pass the controversial Wall Street rescue package on Friday. The House rejected the measure on Monday, 228-205.
"Microsoft strongly urges members of the U.S. House of Representatives to reconsider and to support legislation that will re-instill confidence and stability in the financial markets," said Brad Smith, the Redmond, Wash., software giant's general counsel, in an e-mail to lawmakers. "This legislation is vitally important to the health and preservation of jobs in all sectors of the economy of Washington State and the nation, and we urge Congress to act swiftly."
Forest-products giant Weyerhaeuser Co. told lawmakers in an e-mail that failure to approve the bill would threaten the broader economy.
"The current tight credit market is a significant barrier to functioning capital markets, new home construction and capital intensive businesses," wrote Heidi Biggs Brock, a company vice president. "This further aggravates the impacts of the already depressed housing market which is a significant market for Weyerhaeuser — from timberlands and residential wood products businesses to our homebuilding companies."
Corporate titans weren't the only ones pressing lawmakers. Dyke Messinger, CEO of Power Curbers Inc., told reporters near the Capitol that he'd laid off two thirds of his work force at a machinery manufacturing plant in Salisbury, N.C., because of the credit crisis.
"We don't have the work because our American customers can't get the credit to buy our construction machinery," Messinger said.
(Lisa Zagaroli and Les Blumenthal contributed to this article.)
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