U.S. plan not seen as quick fix for money market

By Richard Leong - Analysis

NEW YORK (Reuters) - The U.S. government's $700 billion bank bailout plan should boost money markets in the coming week, but don't look for dramatic improvement in global liquidity right away given the lack of detail about the proposal so far.

Money markets seized up last week when the Lehman Brothers' bankruptcy led to an upheaval in money market mutual funds. This $3.5 trillion industry is a major buyer of short-term securities issued by banks and corporations.

"I'm confident that the credit market will improve but it will improve slowly. It just seems a lot of details have not been answered yet," Jack Ablin, chief investment officer with Harris Private Bank in Chicago, said on Sunday.

Last Tuesday, the Reserve Primary Fund, one of the oldest U.S. money market funds, reported its shares broke the buck, or fell below $1, due to heavy losses on its holdings of Lehman securities. This triggered a record exodus from this investment once perceived as safe, forcing money fund operators to hoard cash to meet redemptions and to stop buying securities.

The money fund turmoil rippled across other markets and sent short-term borrowing costs and risk premiums soaring.

Some analysts saw this as the watershed event that led the government to implement a sweeping series of measures including a $700 billion fund to buy bad mortgage debt and a $50 billion backstop for money market funds.

"The pressure is off money market funds, and banks are seeing some light at the end of the tunnel to unload their toxic assets," Dan Seiver, a finance professor at San Diego State University in San Diego, California, said on Sunday.

The government's dramatic moves to fight the year-old credit crisis triggered a massive two-day rally on Wall Street. Still, the long-term impact on federal borrowing and its negative implication on the United States' triple-A credit rating have curbed the enthusiasm for the plan.

INTERBANK PREMIUM

One of the first market tests for the government bailout blueprint is whether it has calmed banks and other financial institutions enough so they make funds available again to each other, businesses and consumers.

A greater willingness to lend should lower the premium to borrow three-month dollar funds in the interbank market over the U.S. government's borrowing costs, analysts said.

This closely-watched "TED" spread -- which measures the difference between the interest rates on risk-free U.S. Treasury bills and the rate demanded by banks for loans in the interbank market -- ended at about 2.27 percentage points on Friday after trading at nearly 5.00 points on Thursday, the widest in over a quarter of a century.

Prior to the credit crisis more than a year ago, the three-month TED spread had ranged from 0.10 percentage point to 0.25 percentage point.

"It needs to drop under 2 percent at the very least" as a signal of healthier lending activity in the interbank market, said Seiver.

Available funds for bank-to-bank lending will also get a lift after Monday's $75 billion auction of 28-day loans from the Federal Reserve's Term Auction Facility, analysts said.