Is that all there is? Bailout in hand, markets want more

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With the $700-billion financial-system bailout bill now signed into law, be prepared for a weekend’s worth of comment from Wall Street that will sound a lot like mumbling from an ungrateful child:

--- It’s no magic bullet.

--- The freeze-up of the credit markets still is very serious.

--- Fixing this will take a lot of time, because confidence in the system is shot.

--- We’re probably going to need more help.

More help? You bet. California already is on the U.S. Treasury’s doorstep, warning that the state may need a $7-billion short-term loan unless investors return in droves to the municipal bond market soon.

Unless money market mutual funds start stepping back into the $1.6-trillion market for short-term corporate IOUs (commercial paper) instead of hoarding Treasury bills, major corporations may have to go hat-in-hand to the Federal Reserve for that financing.

As for the reluctance of banks to extend credit to each other -- the root of the money crunch -- the solution seems easy enough, notes Brian Edmonds, head of interest rates at Cantor Fitzgerald in New York.

‘The Fed needs to tell the banks, ‘You need to start lending,’ ‘ he says.

And maybe some will, once the Treasury starts its purchases of garbage mortgage paper in about four weeks.

But with the economy worsening (note the September employment report today, showing a net 159,000 jobs lost), this normally would be a time when banks would be more cautious about lending, anyway. Yet we want them to take on more risk?

There was no sudden loosening of credit conditions today after the House passed the bailout, notes Tony Crescenzi, bond market strategist at Miller Tabak & Co. in New York. Three-month T-bill yields fell again, to 0.48% from 0.60% on Thursday, indicating that the hoarding of super-safe securities continues.

‘The lack of improvement in the credit markets is making it difficult for equity investors to regain confidence,’ Crescenzi said. The Dow Jones industrials ended the day off 157 points, to 10,325 -- a new closing low for this bear market -- after being up 313 points early in the session.

With confidence still in short supply, the next step may be for the Fed to provide a ‘clearinghouse’ function for transactions between wary financial institutions, Bill Gross, the bond guru at Pimco in Newport Beach, said on CNBC today. In that role, the Fed wouldn’t guarantee the assets involved, just that the transactions would clear, he said.

That might be one way to begin to restore faith in the financial system after the collapse of so many major institutions last month (Fannie, Freddie, Lehman, AIG, WaMu, etc.).

Finally, given the economic backdrop and the global scope of the credit crunch, the Fed and other central banks almost certainly are going to provide more help via lower short-term interest rates.

The interest-rate futures market now is pricing in an 84% probability that the Fed will slash its key rate, now 2%, to 1.5% on or before policymakers’ next meeting on Oct. 28.

The Fed did nothing to disabuse the markets of that idea today. In a statement after the House approved the bailout bill, Fed Chairman Ben S. Bernanke promised that the central bank ‘will continue to use all of the powers at our disposal to mitigate credit market disruptions and to foster a strong, vibrant economy.’

And yes, the Fed knows -- it’s neither strong nor vibrant at the moment.