FDIC’s proposed guarantee freezes banks out of the markets

From the collapse of Lehman Brothers in September right up until the second half of November, US banks were entirely absent from the debt capital markets. It is a sudden turning off of the tap from a key source of funds. In the first quarter of 2008, US banks and financial issuers had sold $97.5 billion of debt in the US corporate bond market; in the second quarter, they sold $133 billion, issuing at roughly the same rapid pace as in the second quarter of 2007, before the financial crisis had even begun. Then...nothing. Spreads on bank paper gapped out to extraordinary highs, implying expectation of imminent and widespread defaults, during the fears of systemic meltdown in September, but as the US government and the Federal Reserve hurried to take over troubled institutions, invest in bank capital, inject liquidity and guarantee funding, they soon narrowed again. When, the US Treasury...