A rough quarter for the credit markets ended with even more turmoil than at the start.
As the third quarter began, Fannie Mae and Freddie Mac, the two flailing government-sponsored entities that own or guarantee about half of U.S. mortgage debt outstanding, were deteriorating; monthly unemployment numbers were rising; and the housing market continued to suffer.
Then came Black September, which began with the government’s takeover of the two mortgage titans, and things got worse. Confidence unraveled, the stock market tanked, and shaky financial institutions, from insurer American International Group Inc. to brokerage Lehman Brothers Holdings Inc., faced either a quick demise, government takeover or complete overhaul.
Credit markets came nearly to a standstill. Investors fled anything that seemed the slightest bit risky and rushed into supersafe Treasurys. Borrowing costs for companies soared, if they could borrow at all. Overnight and other short-term credit markets seized up as banks stopped lending, even to one another.
Bond spreads, or the added yield that bonds offer over Treasurys of comparable maturities, grew dramatically during the quarter, even on highly rated corporate bonds that are typically considered very safe. Insurance against defaults on assets linked to corporate debt and mortgage securities became much more expensive.
As government officials worked on ways to help the financial sector, the U.S. economy seemed to hang in the balance. Not only companies, but consumers, found it harder to obtain credit. Then, on Monday, the House rejected a plan to stabilize the financial markets, sending stocks plummeting and more investors fleeing to the safety of Treasury securities.