From Megan McArdle…..

There is a new issue corporate bond today from Caterpillar (CAT) and the pricing of that issue is troublesome – quite troublesome, and reflective of the dire straits of the credit market and the dysfunction which has engulfed the corporate market.

Caterpillar announced a 5 year and a 10 year this morning. The size has yet to be determined, but it is likely to be around $500 million for each tranche

In early August Caterpillar brought a 5 year bond to market, the 4.90 of August 2013. That bond priced 175 basis points cheap to the benchmark 5 year Treasury note. With the turmoil in the credit markets the last several weeks, the issue has widened on spread and this morning it was quoted 225/ 210.

The talk on the new issue is T + 325 basis points. That is fully 100 basis points cheap to the outstanding issue and 150 basis points above where the same maturity was priced six weeks ago

This comment explains the lingo.

Also from Megan McArdle….

American Honda (the finance arm of the car company) just issued 5 and 10 year bonds similar to Catapiller. They are rated AA, and the offering went off at 400 over.

These are top notch industrial companies. I wonder what the less then top notch are being forced to pay right now?

From the Des Moines Register….

Assuming the government’s latest crop forecast is right and this fall’s corn and soybean harvests are sufficient to meet demand, stocks of corn and soybeans are still expected to fall to historically low levels. That’s even as biofuel production and global grain consumption are likely to keep growing.

Corn supplies are projected to fall by one-third to just more that 1 billion bushels, or about one month’s consumption, when harvest starts next fall. Supplies could be even tighter; many analysts think the latest production forecast is overly optimistic.

The scary thing is the first comment on the story. I hope there are not to many farmers who think like him.

To many people are worried about the health of the financial sector and not enough people are worried about the economic health of the nation of a whole.

Look at this chart. It is a graph of debt as a percentage of GDP. Now tell me; how is a 700 billion dollar bail out going to help America’s fundamental problem?

(h/t Rod Dreher)

From the Financial Times….

US regulators have underestimated potential bank losses on preferred stock issued by Fannie Mae and Freddie Mac, the American Bankers Association said on Monday.

Nearly a third of US banks hold preferred stock issued by the two mortgage financiers that were taken into conservatorship this month, according to an industry survey conducted by the ABA. The average bank exposure to such securities relative to core equity capital was 11 per cent.

“The negative impact on banks – particularly Main Street community banks – is far greater than regulators first thought,” wrote Edward Yingling, chief executive of the ABA in a letter to the Treasury, the Federal Reserve and other banking regulators.

The government takeover of Fannie and Freddie all but wiped out the value of $36bn of their preferred shares. This would force exposed banks to take writedowns at the end of the third quarter that could impede future lending, the ABA warned.

“When the actions were contemplated to reduce dividends on Fannie Mae and Freddie Mac preferred stock, the bank regulators estimated that only a dozen banks would be affected by it,” Mr Yingling said.

From Megan McArdle…..

What happened last week is that one money market firm advertised its entire portfolio, including a large chunk of Lehman paper worth slightly less than 2% of the total fund assets. Spooked investors, who did not want to lose out if the fund “broke the buck” started withdrawing as fast as their little fingers could punch the buttons on their phones. Now, this money market fund had tens of billions worth of assets; if it started dumping them on the market, it would drive the price down, leaving them even less money to hand back to their shareholders. But there’s a reason investors herd in a bank run: the first people out get all their money back. The rest get trampled in the stampede. The fund–incidentally, the same company that founded the money market industry–“broke the buck”; that is, its shares became worth less than a dollar. It’s as if the value of your bank account suddenly dropped below the amount you’d put in.

This, by the way, is probably not the only fund this happened to, but it was the only fund that a) advertised its holdings and b) was not attached to an institution large enough to easily make good the loss.

Thus was touched off a general run on money market funds that held money for institutions–the kind that require buy ins of a couple million or more. Institutional managers have a strong incentive to do stupid, destructive things, as long as everyone else is doing them. It’s the same reason that IT managers used to buy IBM–not because it was necessarily the best solution, but because as long as you did it, no one could blame you when things went south. “I bought IBM!” troubled CTOs would say when the server crashed. “The whole market is down!” cry money managers when the financial system crashes.

From Bloomberg.com….

General Motors Corp., burning through cash after three years of losses, will tap the remaining $3.5 billion of a revolving credit line as the crisis on Wall Street threatens to crimp companies’ ability to borrow.

The balance of the $4.5 billion line will go to help cover restructuring costs, GM said in a statement late yesterday. The Detroit-based automaker said it also completed a $322 million debt-to-equity exchange.

Time for another bail out.