Reuters.com reports a senior U.S. lawmaker urged the SEC to reinstate an index arbitrage rule to halt market volatility. "The SEC has the authority and responsibility to ensure that this volatility is not exacerbated dangerously by internal market mechanisms such as program trading which could push this situation into a free fall," said Democratic Rep. Edward Markey, who was chairman of the House subcommittee on telecommunications and finance during the market turmoil of the late 1980s. In a letter addressed to SEC Chairman Christopher Cox, Markey urged the SEC to order the New York Stock Exchange to reinstate rule 80A, which was designed to help calm market volatility.

The equity markets are rebounding this morning (Dow +248, SPX +32, Nasdaq Comp +45), which is a positive sign of stabilization, with hope that Congress will eventually pass some form of a bailout plan following yesterday's rout. However, the bigger story today is taking place in the credit markets, which are not showing the same signs of stabilization. Virtually every measure of liquidity is showing extremely tight credit conditions demonstrating the credit seizure taking place. For example, LIBOR, which is the interest rate at which banks lend to one another, rose sharply with overnight LIBOR rising the most in history -- up to 6.88% from yesterday's high of 3.388%. And although it has since come off those levels, it means banks will lend but they have to pay twice what they did yesterday... The Fed Funds rate, the rate at which U.S. banks lend to other depository institutions through the Fed, rose to 7% this morning, more than 3x the 2% target rate set by the Fed. The fed funds rate has since pulled back from those highs to ~6% after the Fed added $20 bln to the system via a 28-day repurchase operation... Finally the TED spread, which is the difference between 3-month Treasury bills and 3-month Eurodollars (which is essentially the futures market for Libor) is at 3.5347, slightly down from yesterday, but still an extremely historically high elevated level... All this shows that banks are conserving cash now more than ever and are not comfortable lending in this environment.

Bloomberg.com reports Anglo Irish Bank led a surge in Irish financial stocks after the government guaranteed the deposits and borrowings of six lenders to calm investors after banks lost a quarter of their value yesterday. The ISEF Index of financial shares surged as much as 25%, and was up 14% at 10:15 a.m. in Dublin, as Anglo Irish Bank jumped as much as 49%. Ireland's government said it will guarantee all deposits, covered bonds, senior debt and dated subordinated debt of four publicly traded banks and two building societies. The government was guaranteeing liabilities of about 400 bln euros ($575 bln), Finance Minister Brian Lenihan said today at a news conference in Dublin. The Irish economy is worth about 190 bln euros. Allied Irish Banks Plc (AIB) rose 12% to 5.58 euros, paring its decline for the year to about 64%. Bank of Ireland Plc (IRE) gained 10% to 3.60 euros and Irish Life & Permanent Plc gained 26%.

Bloomberg.com reports the U.S. Senate will try to salvage a $700 billion financial-rescue package after the measure was defeated in the House of Representatives. The lawmakers won't have a lot of room to negotiate. "They're not going to totally revamp the bill,'' said Pete Davis, president of Davis Capital Investment Ideas in Washington, who spoke to House and Senate leaders yesterday. "They'll make some minor changes and pass it. This is all about political cover.''... To pick up the 12 votes needed to pass the bill in the House, the bill will need some cosmetic changes, lawmakers and political analysts say. House Republican conservatives are likely to keep pressing for a mandatory insurance program they initially proposed for mortgage-backed securities. They may also try to force the SEC to suspend mark-to-market accounting and require bank regulators to assess the real value of the troubled assets, lawmakers say. House Republicans are also lobbying the White House to get the FDIC to play a greater role in shoring up the financial system, said a House Republican aide. Some Democrats want a provision that would allow bankruptcy judges to alter the terms of a home mortgage for individuals in bankruptcy, even reducing the principal balance.