WALL STREET STILL FOCUSES RAPTLY ON BELTWAY
Sometimes all it takes to change up the dynamic is something as minor as turning the page on the calendar. That’s especially so if the page in question takes the corporate and investing world from the end of one quarter to the beginning of another one. And especially if, in the collective wisdom of Wall Street, we can’t put the retreating quarter, with all its miseries, in the rear-view mirror far enough fast enough. So we bid adieu to a third quarter that ended with a ”painting the tape” rally in equities and a clamped-fist constriction in the credit markets, and welcome the burgeoning fourth quarter. One that will be characterized - at least at the start - by a sudden willingness on the part of one bank to lend to another, as well as by a rather downbeat start to the equities trading session.

No surprise that, with the third quarter coming to a close, banks showed their determination to keep all funds available right there on their balance sheets. Now, with the start of the new quarter, they don’t have to account quite so scrupulously for the cash on hand. Overnight LIBOR rates have fallen more than 300 basis points, taking the rate to about 3.8%. Longer-term rates remained almost as backed up as they were earlier this week, however. Abetting the new-found willingness of banks to lend to other banks, of course, has been the concerted effort on the part of the central banking infrastructure around the globe to effectively flood the financial capitals with dollars. According to some reports, the Federal Reserve’s expansion of liquidity in the last several days alone has been greater in size than the central bank’s own balance sheet just two weeks ago. The Bank of England proved itself just as compliant about unleashing the greenbacks to its constituency. While these initiatives don’t necessarilly spell any kind of long-term solution for the mortally dysfunctional credit markets, they do, at least, serve to keep the wound hydrated on a short-term basis.

Meanwhile, U.S. equities rose sharply in Tuesday’s trading, erasing nearly two-thirds of the losses recorded in Monday’s market disturbance. The Dow industrial average on Tuesday recovered 485 points of the 778 points relinquished Monday. The New York Times reported that part of the action came from a particularly conspicuous display of what traders call ”painting the tape,” in which equity holders furiously bid up the prices of stocks already in their portfolio heading into the closing bell, in order to pretty-up their books - or, under the circumstances, minimize the ugliness - that record their quarterly performance. Tuesday’s session also included an upbeat response to indications that the SEC has shown some willingness to ease the rigidity of accounting rules that require financial firms to record fire-sale valuations for some of their distressed assets. Securities regulators talked with the Financial Accounting Standards Board about loosening the ”mark to market” rules governing the way those assets are recorded on balance sheets. The SEC apparently stopped short of scuttling the rules altogether, but suggested it would allow financial firms to give a more indulgent treatment to the valuation of some assets, allowing asset holders to - for example - judge assets on their intrinsic value, rather than on market valuations.

Both the credit and the equities markets are expected to spend the session eyeing the prospects of some passage of a legislative bailout for Wall Street firms. Although the use of the term ”bailout” as a description for the relief has been criminalized, and replaced instead with the phrase ”recovery plan.” In order to make it an easier sell on Main Street. The Senate has elbowed its way to the front of the bicameral proceedings, scheduling a vote later Wednesday on its version of the legislation - a version that would include more populist gee-gaws, such as an increase in deposit insurance, as well as tax breaks for business and the middle class. (This, coming on a day when the national deficit is expected to eclipse the $10 trillion mark.) Other trinkets, such as an extension of jobless benefits and a homeownership tax break, might also get stapled on before a vote is taken. The expectation is that the added features would afford the legislation some momentum that would allow it to hit the Senate chamber running. (Though if significant additions of heft actually make something faster, your average business journalist ought to be able to out-run that Usain Bolt fellow.) The next logical leap is that the presumptive Senate passage is going to put enough pressure on the House to prompt the 12 members needed to change their votes to pass bailout … er, rather, recovery … legislation. That’s presuming the substantial expansion of the government’s obligations included in the new package doesn’t convince some of the so-called Blue Dog Democrats, who fancy a certain blend of fiscal conservatism, to change their own votes to ”against” from ”for.” That’s the province of the Inside-The-Beltway crowd. This is just the view from Wall Street.
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