Credit Squeeze Tightens Grip

Round two of 2007's credit crisis has twice the sting.

The Federal Reserve's reassurance Monday morning that it would shore up liquidity in the financial system as banks face their year-end crunch did little to thwart the brewing seizure in the credit markets.

Instead, the Fed stoked more fear and led traders to compare the current market environment to the anxious days and months in 1999 leading up to the turn of the calendar to the new millennium.

The New York Fed announced Monday morning it will respond to "heightened pressures in money markets for funding through year-end" with a series of repurchase agreements that are more long term than usual.

The first, announced Monday, is an $8 billion, 52-day injection. Details and timing of further operations through the rest of the year are not yet available, according to the Fed's statement. Typically, the Fed puts liquidity into the system in 14-day increments.

In the wake of the Fed's announcement, news spilled into the market about banks' balance sheet woes, including HSBC(HBC - Cramer's Take - Stockpickr) moving two structured investment vehicles onto its balance sheet and about Citigroup's(C - Cramer's Take - Stockpickr) mortgage market exposure. Stock market indices hit lower lows Monday as Treasury bond prices soared.

Traders in junk bonds and leveraged loans report illiquid markets and rising risk premiums well beyond August's worst moments. Investors say that the repeat of the summer's credit crunch is worse this time around, because recession is now widely considered a more tangible possibility, as mortgage-rate resets in 2008 threaten a consumer spending slowdown.