Credit squeeze adds urgency to today's vote on rescue plan

WASHINGTON — Sparked by rising recognition that a freeze is hardening in the vital credit markets that fund daily business operations, pressure built on the House to approve the Wall Street rescue package today.

September was the worst month on record for corporate credit, according to data released Thursday by the Federal Reserve. Corporations pay for 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.

Wall Street reacted by sending the Dow Jones industrial average down 348.22 points, or 3.2 percent.

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 said this week their ability to borrow has been threatened. And Thursday, auto-parts maker Dana Holding said it drew $200 million from its $650 million credit facility due to "uncertainty in the financial markets."

If the rescue package is passed by the House 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.

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 highlights 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 buyers are flocking these days to short-term Treasury bonds, which are believed to be safe.

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 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 in the week ending Wednesday. Since the beginning of September, Fed credit increased by more than 63 percent to $1.48 trillion.

The credit crunch sent some of the nation's largest employers to Capitol Hill to twist lawmakers' arms Thursday. They hope the House will follow the Senate's lead and pass the Wall Street rescue package today. The House rejected the measure Monday, 228-205, before it was revised.

"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 software maker'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."

Corporate titans weren't the only ones pressing lawmakers. Dyke Messinger, chief executive officer of Power Curbers, said 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.

Information from The Associated Press is included in this report.