(Reuters) – Some public agencies that rely on the municipal bond market for financing fear that a landmark financial reform rule will cripple their ability to sell bonds and make it more expensive to raise money for crucial services.

The Volcker Rule was designed to curb the risks that banks take with depositor dollars, a practice known as proprietary trading. But the rule risks ensnaring public agencies ranging from housing agencies to hospital authorities because the way muni bonds are sold and traded results in banks risking their own capital — the very practice banned under the Volcker Rule.

And although the rule, a key component of the Dodd-Frank reform law passed in the wake of the 2008 financial crisis, did include an exemption to ensure that state and local governments would still be able to raise money in the municipal bond market, it left a gaping hole.

As a result, state and local authorities are worried that the rule will inhibit banks from underwriting bonds and trading, inadvertently driving up water and sewer bills, delaying public transportation projects and making affordable housing scarcer unless changes are made.

The rule exempts about 60 percent of municipal bonds from the restrictions on banks’ proprietary trading.

Bonds issued by states and their political sub-divisions – such as counties and cities – will be excluded from the ban, but debt issued by public agencies or authorities would be subject to the restriction.

“It could have a very detrimental effect on trying to make the investments in public infrastructure that many of us have felt could be and should be the core of economic recovery,” said Washington State Treasurer James McIntire, who otherwise supports the Volcker Rule.

While proprietary trading in many markets is associated with dealers taking positions to try to profit from movements in a security, in the highly illiquid $3.7 trillion municipal market dealers are usually risking their own capital just to facilitate trades, said the Municipal Securities Rulemaking Board, in a letter to federal regulators last month.

That would hurt issuers’ abilities to even sell debt in the first place, as three-quarters of the new bond issues in 2011 were underwritten by banks that would have to follow the rule.

That in turn will force issuers to delay projects or pass on hefty bills to taxpayers because of a distinction brokers, dealers, underwriters and issuers describe as arbitrary, unclear and unintentional. Most blame the narrow definition on oversights in drafting the proposal.

The MSRB, the market’s self-regulatory organization, openly criticized the definition last month, and many believe that because it took the rare steps of objecting to a federal proposal, the final plan will be less stringent. The chairman of the Securities and Exchange Commission, Mary Schapiro, signaled recently the commission is considering widening the exemption.

“I think their intention was to try to restrict esoteric, non-traditional stuff. I do think it will create a bifurcated market if it were to occur,” said Tom Metzold, co-director of the municipal bond department at Eaton Vance in Boston. “I really do believe they will correct their mistake.”

TALE OF TWO WATER AUTHORITIES

Many states require what is known as “competitive underwritings” in the muni market, where underwriters bid on a bond issue with the expectation that investors will later buy the debt. That assumption means banks run the risk of holding a lot of unsold debt – and risking their own capital, which would be banned under the Volcker rule.

George Friedlander, a Citigroup municipal bond strategist, said this would diminish price discovery, increase volatility, push up yields, and threaten liquidity because most banks would be banned from market-making activities.

Agencies that are not exempt will also have to spend more on underwriting and legal counsel in properly structuring their bond issues, or simply in going through regulatory fine print to confirm the law applies to them.

The rules could lead to inconsistencies. For example, the District of Columbia Water and Sewer Authority and the Washington Suburban Sanitary Commission in neighboring Maryland are more than similar.

They are linked through a joint $2 billion project to clean up nitrogen at the Blue Plains wastewater treatment plant that serves Washington, Virginia and Maryland. The Washington suburban commission is a customer of the D.C. water authority as well, said Timothy Firestine, chief administrator for Maryland’s Montgomery County and vice chairman of the D.C. authority.

But the city authority could end up paying more when it borrows for projects – including the nitrogen clean-up – than its suburban sister. Because the agencies have slightly different relationships with their local governments, they could end up on opposite sides of the Volcker Rule, Firestine said.

“Homeowners in the District, and even the federal government, would pay higher rates on their water and sewer rates,” Firestine said. There is confusion about “who’s in and who’s out,” he added.

Washington State’s McIntire pointed to two public corporations created by local governments in his state as examples: authorities for the famous Pike Place Market and for the Seattle Art Museum. Their bonds would be hit by those restrictions, even if guaranteed by the city. But bonds sold by the city for the same purpose would be exempt.

For those not exempt, it would be “more difficult for many of these entities to get to market. There wouldn’t be as many banks that would be able to work with them,” he said.

Investors, knowing they were buying bonds that would have limited liquidity, would likely want higher yields. Individual buyers might begin to spurn municipal securities if some are deemed too risky for banks to buy, said the treasurer for Iowa, Michael Fitzgerald.

“When there’s confusion, grandma or anyone else buying bonds stay away,” he said. “This is more work for the underwriters to do and the costs go up.”

After the federal agencies sift through comments, they will release a final plan for enforcement beginning in July.

One of few voices calling to maintain the narrow definition is Occupy the SEC, an Occupy Wall Street offshoot that submitted a 325-page comment on the proposal. It cited Alabama’s Jefferson County sewer authority, which pushed an entire county into bankruptcy through complicated financing, and to scandals where banks overcharged municipalities for investments.

“Stated plainly, an additional exemption for municipal agency bonds would be harmful to the banking system, as it would encourage banks to continue…their attention on remote, highly unregulated markets in quasi-governmental securities that are already rife with abuse,” the group said.

HIGHER BILLS FOR AFFORDABLE HOUSING AGENCIES

In the call for a wider exemption from the Volcker Rule, housing authorities are among those making the strongest pleas.

All 50 states have agencies to finance affordable housing, which like some other agencies were created so that investors would know governments were not being profligate with general debt issuance.

The National Council of State Housing Agencies in a letter to federal agencies seeking an exemption cited the debt’s “proven track record of safe and sound performance.” Without an exemption, it said, agencies could struggle paying for rental and down-payment aid, loan servicing, and homeless programs.

Fitzgerald of Iowa noted that his state created its housing authority in the 1970s to handle borrowing instead of issuing direct state bonds in order “to pacify the public and say ‘we’re conservative Iowans – we’re not plunging the state into debt.’”

Iowa state still relies heavily on agencies to borrow for its various needs and could “suffer a little more proportionately” if the proposed definition becomes final, he said.

“Does the public understand the difference? I don’t think so,” Fitzgerald said about the distinction between agency and general obligation debt. “Look at what these agencies are doing. They’re financing essential public purposes…that doesn’t seem to be the source of wild speculation in the markets that caused the problems.”

(Additional Reporting by Karen Pierog in Chicago and Joan Gralla in New York; Editing by Leslie Adler)

Terms of the deal, which is expected to close in the second
quarter of 2012, were not disclosed.

Dwight, which had $42 billion in assets as of Dec. 31, is an
institutional fixed income asset manager that specializes in
stable-value funds for retirement plans.

For Goldman Sachs, the acquisition represents an attempt to
become a bigger player in the defined contribution space,
according to a release issued by the firm.

“Many of our clients are focused on stable value as an
important asset class for DC plans and Dwight has been an
innovator in this space,” Eric S. Lane and Timothy J. O’Neill,
co-heads of the investment management division at Goldman Sachs,
said in a statement.

Reuters first reported in August that Old Mutual Asset
Management, a subsidiary of London-based investment company Old
Mutual PLC, was looking to sell Dwight Asset Management
Company LLC as part of its ongoing effort to free up capital in
preparation for a partial IPO of its asset management unit
.

In August, Old Mutual sold its $2.3 billion U.S. mutual fund
business to Touchstone Investments. Old Mutual
Asset Management’s 17 affiliated asset managers had $224 billion
as of Sept. 30.

(Reuters) – Wall Street traders and fund managers have opinions on almost everything – from politics to religion to the price of a spectacular bottle of wine. But ask about this Sunday’s Super Bowl matchup between the New York Giants and the Boston-backed New England Patriots, and they’re suddenly far from loquacious.

Even if they’re Dan Fuss, one of the most respected fund managers in the country. Fuss isn’t exactly in danger of losing his position, but wasn’t keen to get chatty about American football’s big championship game, which is annually the most-watched televised event in the United States.

“People really take this stuff seriously,” said Fuss, vice chairman at Boston-based Loomis Sayles, which oversees more than $150 billion in assets. “The Patriots are playing a New York team and I don’t want to comment because we have a lot of New York business,” he joked.

The game adds to the long-simmering rivalry between the cities of New York and Boston, particularly because this game is a rematch from four years ago, when the Giants won 17-14.

The attitude was a little more relaxed on the floor of the New York Stock Exchange on Wednesday as an Anheuser-Busch/InBev sponsored event outside the exchange encouraged floor brokers to loosen up. Traders put on jerseys of their favorite players, with most donning the blue-and-red colors associated with the Giants.

Most of them, that is. Kenneth Polcari, managing director of Icap Equities, was one of the few brave Patriot fans to pull a Patriots jersey – bearing the number 83 of star wide receiver Wes Welker – over his shirt and tie, and the reaction was not exactly enthusiastic.

“You would have thought the building was going to collapse,” he said of the rowdy reception he got as soon as he put the jersey on and began walking around the floor.

Polcari hails from Boston, so he’s in a small minority on the trading floor, and the rest let him know it.

“I am the only one that dares to wear a Pats jersey and walk around. There might be closet Pats fans but they are not coming out,” he said.

Wall Street has long been known as a place for trying to get one-up on your colleague or rival regardless of how mundane the event, so it’s natural that the Super Bowl – the biggest U.S. sporting event of the year – becomes a big event for casual betting.

Most large banks, brokers and money managers tend to clam up when asked about betting pools – which are known to exist in many companies – either because such pools are illegal to begin with, or because they are wary that publicity could add to an already volatile atmosphere.

One executive prominent in Boston financial circles described bets he has made on the game on condition of anonymity because of concerns about legality.

He has bet a total of about $1500 on the Patriots. Clients and business partners from around New York and New Jersey have been calling steadily to make bets since the matchup was set two weekends ago, he said. “People are calling me every day. They’re all crazy down there,” he said.

“The New Yorkers all want to win because it’s Boston. I’m getting a lot of calls on it. People are all over me,” he said.

Still, the rocky markets of the last few years have a way of making Wall Street denizens more circumspect about their activities.

“Whenever markets are going up you can do whatever you want – you want to have a Super Bowl pool with an oak-tag poster in the middle of the room, you can do it,” said Josh Brown, vice president of investments at Fusion Analytics, and a die-hard Giants fan. “These days people are more aware of extra-curricular activities that can get you fired.”

That’s not to say people aren’t doing their fair share of trash-talking, especially at companies with offices in both places.

“I don’t think there is another team that is represented on a fan basis at Knight other than these two teams, so that is really an intense conversation,” said Peter Kenny, managing director at wholesale market makers Knight Capital Group in Jersey City, New Jersey, just across the Hudson River from Wall Street.

The needling has its way of spilling over into public events, such as the results conference call held by private equity firm Blackstone Group on Thursday.

Stephen Schwarzman, Blackstone chairman and CEO, at one point announced he was turning the call over to Laurence Tosi, referring to him as “LT,” the same initials as famed former Giants defensive player Lawrence Taylor. He carried that abbreviated moniker when he starred in the 1980s and played on two championship Giants squads.

“That’s an appropriate name given that the Giants are going to the Super Bowl,” Schwarzman said.

Tosi, chief financial officer at Blackstone, retorted: “Thank you, Steve. Although I am a Patriots fan, I appreciate the thought.”

Knight’s Kenny, as a Giants fan, is naturally convinced of his team’s chances, adding fuel to the fire by saying his Patriots-supporting colleagues are still having nightmares “waking up in the middle of the night about the Tyree catch.”

“Ten times I have heard that from different people,” he said, referring to the miraculous “Helmet Catch” by little-used Giants receiver David Tyree that continued the team’s winning drive in its 17-14 victory over the Patriots in the 2008 Super Bowl.

That loss in the closing minute of the game – which also stopped the Patriots from recording an undefeated season – still stings badly in Boston. “From a fan’s perspective you want to avenge that loss,” said Lewis Piantedosi, portfolio manager at asset manager Eaton Vance Corp. in downtown Boston.

Piantedosi said he doesn’t have any bets on the game. He said he’d bet on the Patriots, but won’t find anyone in his office willing to take the other side.

When pushed hard, even Fuss responds to the goading from New York. “This is the Patriots,” he said. “They’re definitely going to win.”

Back down on the New York Stock Exchange floor Wednesday, Jason Weisberg, managing director at Seaport Securities Corp, said Polcari didn’t keep the Patriots colors on for long.

“There is one – and they took the jersey off – they were getting abused,” he said.

(With reporting By Jennifer Ablan and Chuck Mikolajczak, Lauren Young and Jed Horowitz in New York and Ross Kerber in Boston)

(Reuters) – Global bond market funds were the biggest winner in 2011, as investors seeking safety poured more than $110 billion into fixed-income funds, according to data from fund tracker EPFR Global released on Friday.

U.S. bond funds had the single largest amount of inflows as tracked by EPFR, at $62.3 billion, a good thing for investors who responded to the year’s volatility by staying away from stocks and commodities.

The U.S. benchmark 10-year Treasury returned about 17 percent for the year, outperforming most other debt markets, including German bunds, corporates, and high-yield bonds.

Most classes of bond funds saw inflows, save for European bond funds, as investors fled from the increased sovereign risk in those markets. European bond funds posted outflows of $29.8 billion in 2011.

The U.S. stock market went nowhere fast in 2011, but for fund investors that was enough late in the year; investors put money in U.S. equity funds for the eighth week of the last 10. EPFR showed equity funds overall took in $412 million for the week ended December 28.

“Institutional investors actually committed over $50 billion to the U.S. funds we track,” said Brad Durham, managing director of Cambridge, Massachusetts-based EPFR Global. “While retail investors were in full retreat from U.S. equities in 2011, institutional investors were a pillar of support that helped the S&P 500 index get back to the general vicinity of its starting point for the year.”

For the year, however, investors mostly pulled money from stocks. Developed markets saw an outflow of $123.84 billion, and emerging markets funds outflows were $47.7 billion.

A number of sectors and regions saw record outflows, according to EPFR, including the United States, India, Brazil and Europe, along with financial and energy sector-focused funds.

MONEY FUNDS LOSE AGAIN

Money market funds posted greater outflows in 2011 than any other class, according to EPFR. Outflows of $108.4 billion in 2011 followed an exodus of nearly $500 billion in the previous year.

Another decliner in terms of funds – and one of the few bond fund classes to say so – was the municipal market. These funds lost $19.5 billion in 2011, spurred by a December 2010 warning by analyst Meredith Whitney that there would be billions of dollars in municipal defaults .

Her call has been roundly pilloried in the muni market, and after 22 straight weeks of outflows, investors have piled back into that market. In the fourth quarter, inflows totaled $2.4 billion.

Emerging market stocks funds lost favor with investors. Redemptions from Latin American equity funds rose to $10.8 billion, easily surpassing the record of $4 billion-plus in 2008. Brazil funds had a record outflow of $2.3 billion.

China-oriented funds posted outflows of $3.7 billion, and funds from Russia, Africa and the Middle East also posted outflows.

OTHER WINNERS

Gold-oriented funds were again a source of new money, with more than $8.1 billion in inflows. But with a slump in the price of spot gold in recent weeks, gold and precious metals funds have seen outflows of $1.6 billion in the fourth quarter, and there are suggestions of more declines ahead. The overall inflow for gold and precious metals funds for the year is just a bit more than half of 2010′s $15.95 billion in new funds in the sector.

Other areas associated with safety did well. Utilities and real estate funds had a strong year, and Germany-focused funds saw an inflow of $18.8 billion, compared with a $15.9-billion outflow for all Western Europe funds.

(Reporting By David Gaffen; Editing by Leslie Adler)

(Reuters) – Should the euro zone debt crisis drag the continent into a recession, states and regions in the United States would not be immune to the fallout across the Atlantic, a report said on Wednesday.

Europe is a significant trading partner with the United States, particularly states such as New York, California and Texas, the three most populous – and among the largest issuers of municipal debt – in the country.

According to a white paper from eBooleant Consulting, those states contributed a large percentage of the $1.3 trillion in exports to Europe in 2010.

“What’s going on in Europe is not going to stay in Europe – it looks progressively worse,” said Philip Fischer, managing principal at eBooleant Consulting, an economics consultancy in New York.

Although the largest percentage of the New York metropolitan area’s exports is to Asia rather than the European Union, slowed growth in the EU would have an impact on both the city and New York State, Fischer said. The effect would be “material but manageable.”

The biggest state exporter to Europe is California, and the largest cities that export to Europe are New York, Houston and Los Angeles. Fischer, formerly the head of Municipal Bond Research, said some credit spread widening in municipal names could be seen as a result.

“The weaker credits in muni markets in those zones are going to see some effect,” he said.

The euro zone’s economy has struggled as several nations, including Italy and Greece, deal with rising borrowing costs and as the region attempts to confront heavy debt loads through severe austerity packages. Italy, the third-largest euro zone economy, shrank in the third quarter, setting it on course for what is expected to be a prolonged recession.

MORE ISSUANCE EXPECTED IN 2011

Long-term U.S. taxable and tax-exempt municipal bond issuance is forecast to total $347.0 billion in 2012, up from an estimated $288.0 billion this year, according to a survey released on Wednesday.

Total muni issuance, which also includes short-term debt, is predicted to hit $402 billion next year from an expected $342.0 billion in 2011, the survey by the Securities Industry and Financial Markets Association showed.

“Despite fiscal difficulties at the state and local levels, the strong issuance forecast underscores the market’s appetite for municipal bonds,” Leslie Norwood, SIFMA managing director, said in a statement.

SIFMA’s “2012 Municipal Bond Issuance Survey” also found that respondents projected long-term tax-exempt municipal issuance would hit $303.0 billion in 2012, a 20.2 percent increase from the $252.0 billion estimated for 2011.

Survey participants also forecast that long-term taxable municipal issuance would total $35.0 billion in 2012, a 25.0 percent increase from the $28.0 billion estimate in 2011.

Survey respondents said they expect the two-year U.S. Treasury note to yield 0.5 percent in December 2012, up from 0.25 percent in December 2011; the 10-year Treasury note is forecast to rise to 2.5 percent in December of next year from 2.0 percent this month, SIFMA said.

In secondary trading on Wednesday, municipal bond prices were down slightly, according to a final market read by MMD, a unit of Thomson Reuters.

Yields on top-rated 10-year muni bonds rose 1 basis point to 1.93 percent, just off the record low level hit on Monday on MMD’s benchmark triple-A scale. Since December 1, yields on 10-year munis are down by 29 basis points.

Yields on triple-A rated 30-year munis rose 2 basis points to 3.64 percent, according to MMD.

The record low yield for the 30-year maturity is 3.44 percent, hit on September 22.

(Reporting By David Gaffen,; additional reporting by Chip Barnett; Editing by Dan Grebler)

The daily headlines out of Europe are enough to make a long-term investor’s head spin and more importantly, to keep them out of the market altogether.

Markets have see-sawed all week on frequent and sometimes contradictory reports on the success or lack thereof of European leaders to deal with their region’s debt crisis.

Stocks have risen on the mere suggestion of a hint of progress, with investors afraid of missing the rally that will follow if politicians finally come up with a solution.

Volume has been muted, generally spiking on sudden rallies and sell-offs. It’s a sign investors are avoiding real investment decisions and chasing rallies in what has been a tough year so far.

“People have been burned by reacting to individual news stories only to have them refuted, withdrawn or contradicted,” said Stephen Massocca, managing director at Wedbush Morgan in San Francisco. “It’s really kind of wait and watch, which is why the volume is so low.”

Trading activity has largely been the province of professional traders pinging stocks and other asset classes back and forth using futures, ETFs and blue-chip issues.

Those in the market are trading the euro, oil and stocks tightly together, as correlations between these assets have rarely been higher.

The volatile trading environment reflects the enormity of the euro zone debt crisis and fears that a Greek debt default could engulf the entire region with potentially devastating consequences for the global financial system.

That’s worrisome for this reason: Even though European leaders are doubling up on summits this coming week, the vast scope of the problems means solutions are elusive. That’s going to keep uncertainty and volatility high — so look forward to more trading like this.

“The question of the euro zone’s very existence in its current form continues to plague the financial markets. Global equities oscillate from euphoria to despair, depending on the headline,” said analysts at Goldman Sachs Investment Strategy Group in a note this week.

The gyrations aren’t necessarily indicative of fear and despair playing one another — the range remains too tight, even considering the rally Friday.

It’s more a sign that short-term players are using the headlines to shift large bets on trends in several markets at once. Often they appear to be shifting back the other way on the next headline.

Some have surmised that complicated algorithmic programs with strong name-recognition software are dominating this market, making automatic shifts as soon as headlines containing words such as ‘EFSF’ and ‘Merkel’ hit.

But market participants say those programs are the province of the sharpest hedge funds and not much more, with the bulk of the moves coming from firms reacting to shifts in momentum and riding those moves as long as possible.

Momentum traders using computer models often follow the shifts, especially if levels that have served as resistance or support are surpassed. From there, performance chasing follows.

“If you go and look at the trades that react to that data down to the millisecond level you’ll see an immediate spike in the futures … and then you’ll see buying across the equities in less than a second, across the S&P 500, major liquid equities,” said Chris Bartlett, director at Nobilis Capital, a high frequency trading firm in New York that uses momentum strategies.

“The other part of the equation is the algorithmic and automated and high frequency trading that takes place, (those) who have momentum algos running that see a sudden spike in the buying after the news comes out.”

Bartlett said this type of market was perfect for what he termed short-term alpha trades but was frustrating longer-term money managers seeking entry and exit points.

The short-term bets are macro in nature and involve bets on several markets. The 22-day correlation coefficient of the S&P 500 and the euro was at 0.94 on Friday, just shy of 1, a perfect lock-step relationship.

Many investors bet using plain-vanilla or leveraged ETFs. ETFs now account for about 20 percent of daily share volume, according to Credit Suisse, up from about 15 percent at the beginning of 2011.

Some have also fingered ETFs for the increased market volatility, but traders attribute it more to the similar bets being made among sectors, stocks, and the overall market.

Don Bright, director and trader at Bright Trading in Chicago, said he is keeping his time horizon short. He is currently playing in the ProShares UltraShort MSCI Europe, the double-short Europe ETF, but he doesn’t plan on holding it long.

“We put that trade on yesterday (Wednesday) because there’s still a lot of uncertainty related to the euro zone,” Bright said. “I’m short term on that trade and will probably scale out of two-thirds of it by Friday’s close, depending on any kind of news events that come out by then. I don’t want to be short going into the weekend.”

The tight relationship is exploited as investors use futures and broad ETFs to bet on markets. This can be seen in the daily volume of certain issues — the Direxion Financial Bull 3X ETF now routinely ranks in the top 10 of issues traded in the U.S. equity market.

(Reporting by David Gaffen, Ed Krudy, Gertrude Chavez, Chuck Mikolajczak and Ryan Vlastelica; Editing by James Dalgleish)

Harrisburg is one of a handful of municipalities that has flirted with bankruptcy in the wake of the Great Recession that devastated budgets in state and local communities. Some say it could become a touchstone for whether other cities will follow this path to extract concessions from creditors and others.

In an interview with Reuters Insider on Thursday, Mark Schwartz, an attorney for the city council, said the Chapter 9 filing was “absolutely” legal, rejecting charges from the mayor and the surrounding county that the council did not have the authority to take such a step.

The Pennsylvania capital’s crisis has been a year in the making. The city of about 50,000 is hampered by $300 million in debt incurred from an expensive revamp of its incinerator and is struggling to fund key city services.

On Thursday, Charles Zwally, special council for Dauphin County, where Harrisburg is located, said the county is weighing its options.

“We’re reviewing it now and we’re advising the county…We don’t believe that they are authorized to file,” he said.

The barriers for municipalities to file bankruptcy are high. Less than half of U.S. states authorize a city or county to undertake such a move, and such cases have been dismissed in the past.

In 1991, Bridgeport, Connecticut filed but the case was dismissed as the city could not prove it was unable to pay its debts.

In a press conference Wednesday, Mayor Linda Thompson said she was “ashamed of the behavior” of the council, and said the 4-3 vote to authorize bankruptcy was not legal.

Bond insurer Assured Guaranty also questioned the legality of the filing, which the Harrisburg City Council approved in a 4-3 vote late on Tuesday.

Schwartz rejected that assessment.

“I’ve had 40 years of involvement with respect to representing and dealing with elected bodies,” Schwartz said.

“The council basically utilized that remedy, which was bankruptcy, and filed for it.”

Thompson said Wednesday that the mayor and the city solicitor must sign off on all hiring of outside counsel and the city solicitor must approve all ordinances and resolutions considered by the council, which was not done in this case, she said.

The county is one of the most high-profile cities to use Chapter 9 of the U.S. bankruptcy code, most notably invoked nearly 20 years ago by Orange County, California.

There have been only 629 municipal bankruptcies under Chapter 9 of the U.S. Bankruptcy Code since 1937, according to James Spiotto, a municipal bankruptcy expert at the law firm Chapman and Cutler.

The move likely sets up a protracted legal battle between several entities, including the county, state, city and bondholders.

Pennsylvania Governor Tom Corbett has said the city would be better off if it agreed to a rescue plan under the state’s Act 47 program for distressed cities — which has seen Philadelphia and other cities through crises. His office opposes the bankruptcy.

“The governor and the bond insurer and the creditors are all jostling for, they’re still pushing their lawsuits which basically should be stayed by this proceeding,” said Schwartz.

“What they’re pushing for is, it’s all about who’s first in line. The creditors want to get paid before police and fire. And that’s just wrong.”

At the root of Harrisburg’s troubles is a financing scheme used to fund a state-of-the-art revamp of its trash-burning plant that left the city deeply in debt.

The incinerator is owned by the Harrisburg Authority, a separate municipal entity, but the city and the surrounding Dauphin County guarantee much of that debt.

Last December, with Harrisburg facing the prospect of bond defaults, deep service cuts, or worse, Pennsylvania officials put the city under its so-called Act 47 law, which obliges faltering cities to implement plans to ward off Chapter 9 municipal bankruptcy filings.

In July, the Harrisburg City Council rejected a state-approved rescue plan, which called on the city to renegotiate labor deals, cut jobs, and sell or lease the city’s major assets — its parking garages and the incinerator. A month later, the council rejected a similar plan.

(Reporting by Edith Honan; Editing by Andrea Ricci)

U.S. stocks jumped at the open, led by Exxon Mobil Corp, which rose 2 percent. Investors, however, offset buys of risky assets by continuing to buy gold. Persistent worries that the sovereign debt crisis in euro zone peripheral countries may spread to bigger economies in the region encouraged flows into gold, pushing it to another record high.

The cost for euro zone banks to borrow money from one another rose again on Monday, heading back toward their highest levels since late 2008, as U.S. banks remained wary of lending to European counterparts in the face of the intractable debt crisis.

Brent crude oil fell 1.6 percent. The potential for a restart of Libyan oil flows into the market if the Gaddafi regime collapses weighed on the benchmark oil price. If Libyan production comes back it would ease gasoline prices, a potential boost to economies worldwide.

Libyan government tanks and snipers put up scattered resistance in Tripoli after rebels swept into the heart of the capital, cheered on by crowds hailing the end of Muammar Gaddafi’s 42 years in power.

The Dow Jones industrial average was up 171.80 points, or 1.59 percent, at 10,989.45. The Standard & Poor’s 500 Index rose 19.24 points, or 1.71 percent, at 1,142.77. The Nasdaq Composite Index gained 53.62 points, or 2.29 percent, at 2,395.46.

European stocks rose 1.8 percent.

The benchmark MSCI world equity index gained 1 percent on Monday but has fallen for five weeks in a row and looks to be heading for its worst monthly performance since October 2008, when markets were reeling after the collapse of Lehman Brothers.

Gold hit a third consecutive all-time high near $1,900 an ounce after staging its biggest weekly gain in 2-1/2 years last week.

The euro rose 0.3 percent. The dollar held above a record low around 75.94 yen hit on Friday, thanks to concerns about intervention by Japanese authorities. It was at 76.74.

The U.S. currency fell 0.2 percent against a basket of major currencies.

Investors are waiting to see whether the Federal Reserve flags further stimulus when bankers gather in Jackson Hole, Wyoming later this week, a year after Chairman Ben Bernanke launched a second round of quantitative easing to revive the economy.

Additional bond purchases by the Fed could help reflate asset prices, but many view the chances of a third round of quantitative easing as limited and expect the Fed to take gradual measures to boost the economy.

(Editing by Padraic Cassidy)

Markets’ sentiment has swung dramatically in the last few days as investors price in another recession and an unsuccessful battle by euro zone politicians to halt an expanding sovereign debt crisis.

With the Standard & Poor’s 500 index down 11 percent in ten days, some investors might think it’s time to jump back in with two feet. Not this time. Not yet.

“The last time people were terrified was two-and-a-half years ago — that was a great time to be greedy,” said Rob Arnott, chairman of Research Affiliates of Newport Beach, California, who oversees $80 billion.

But markets are not terrified yet.

“A day like today is going to lead people to be awfully rattled — but terrified? No,” he added.

The last time the S&P fell so far, so fast occurred in March 2009, the end of a run of panicked selling before the market went on a tear that saw the S&P double by April 2011.

The growing worry of economic weakness and the intractable nature of the European debt crisis may diminish the impact of Friday’s data on the employment situation. Expectations are for payroll growth of 85,000 jobs, a figure that would confirm the status quo — that job growth is too slow to keep up with the labor force.

“You would need something in the payrolls to point to outright recession to probably have a large effect on (Treasury security) yields,” said Adam Brown, co-head of Treasury trading at Barclays Capital in New York. “Any one number, unless it’s an extreme outlier, will probably have less of an effect than normal.”

Analysts at CRT said the results of their August non-farm payrolls survey ahead of the July data were skewed to a “do-nothing approach” as two-year yields hit record lows and long-dated yields fell sharply as well.

The heavy volume in stocks – it was the busiest day since June 2010 — and the sharp divide between gainers and losers on the New York Stock Exchange suggests the kind of end-game selling that results in short-term buying opportunities.

Since 1983, the day after the stock market falls more than 3 percent has been a buying opportunity nearly two-thirds of the time, with an average gain of 0.49 percent, according to Bespoke Investment Group of Harrison, N.Y.

“You know these things usually end with a selling climax. Today and perhaps tomorrow we’ll have climatic proportions,” Byron Wien, vice chair of Blackstone Advisory Partners, told Reuters Insider.

“I’m lining up opportunities on the equity side. I think the market will bottom before the fundamentals improve. So I’m letting the market tell me when it’s over.”

The depth of the financial crisis schooled investors in a few hard lessons unless they were adept enough to sell after big one-day rallies.

Some of the best rebounds for the market were between September and December 2008 — but they were sucker’s rallies. On October 10, 2008, stocks rose 11.6 percent. The average kept falling. A 7 percent one-day rally a month later didn’t hold. Nor another 4 percent gain in early December.

Investors in uncertain markets such as this often look for a trigger that the selling has exhausted itself. But Europe’s sovereign debt crisis continues to bleed through the bandages put on it. Job growth is slack, and the conclusion of the wrangling in Washington over the U.S. debt ceiling left investors not relieved but sour — and expecting more such fights.

With that in mind, tomorrow may be a better day. But it is unlikely to be the first of many better days.

“We’re waiting for something to get cheap so we can pounce,” Arnott said. “But this is the first serious jolt we’ve had in a long time, and basically the market is saying we don’t believe the policy elite in the U.S. or Europe or Japan have a clue how to wind down the addiction to debt.”

(Additional reporting by Emily Flitter, Richard Leong, Burton Frierson and Rhonda Schaffler; Editing by Kenneth Barry)

The Swiss franc, the favored safety currency during this crisis, pulled back from record highs against the dollar, and gold slipped off all-time peaks.

With two days remaining until the United States exhausts its ability to borrow money, legislators said a deal was becoming more likely, but they had some way to go before reaching agreement.

Markets were moving in anticipation of good news. The S&P 500 futures bounced 19.8 points, or 1.5 percent, to 1,307.40. Gold, which has reached new heights during the stalemate, lost $16.59 to $1,610 an ounce.

Senate Democratic Leader Harry Reid said he hopes to hold a Senate vote on Sunday night on an emerging deal to raise the U.S. debt ceiling.

The S&P 500 fell every day last week, losing 3.9 percent. The CBOE Market Volatility Index , a gauge of investor fear, jumped as much as 9 percent on Friday to its highest level since mid-March before paring its rise.

“At this point, the markets are perceiving that a deal and a vote will be announced,” said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

Even if U.S. lawmakers agree on a last-minute debt limit deal, many investors believe that would not prevent credit ratings agencies from downgrading the United States’ triple-A ratings.

“Even if the debt ceiling is raised, all of the heavy lifting will be in front of us,” said Peter Kenny, managing director in institutional sales at Knight Capital Group in Jersey City, New Jersey.

“I think it’s an almost foregone conclusion that there is going to be a downgrade at some point.”

The dollar rebounded against the Swiss franc, rising to 0.7930. On Friday, the U.S. currency hit an all-time low at 0.7853.

(Additional reporting by Jonathan Stempel and Ellen Freilich; Editing by Dale Hudson)