Can someone explain the craziness in the capital markets?

In order for M&A activity to occur, buyers need financing...
Lenders have tightened lending...

Of course, but what has happened in the past few days? Is there a specific spread one should be looking at to assess current rates?

I understand a lack of liquidity has made lending tough, but I guess what I'm asking is if there is something substantive to objectively come up to this conclusion, rather than just making educated guesses due to economic uncertainty.

Valuation in a down market also hurts M&A because shareholders (of public companies) are not as willing to sell because they're not likely going to get the price they feel is just and would rather hold on and wait for the market to turn.

bump....I know someone on here can explain this in further detail.

Credit is expensive and nobody wants to underwrite.

There is a general panic in the air. No one wants to be the last man holding the next Lehman shares. All the lenders are loading up on cash and closing out loans to protect themselves from being the next (take your pick). Yesterday in Asia, someone send a text message saying one of the bank holds lots Lehman shares, all the branch was packed with withdraw. The bank is fine now, but share price took a dive. Still feeling like spending few hundred million in M&A?

When watching CNBC, they'll cut to, say, Rick Santelli, and he'll be freaking out about spreads going through the roof, and then someone that this is so bad and how this will prevent deals to get completed.

1. What are they looking at to determine that spreads are high? 10 year bond, 3 month bond, corporate bonds.....what?

2. How does this fluctuation affect M&A? An example, real or made-up, would be great.

I understand credit is expensive due to lack of liquidity in the markets, but I would like to have a strong grasp on this rather than just being able to spit out that sentence over and over.

1. Robust liquidity led to questionable lending.
2. A game of hot potato ensues (some call this game "securitizations")
3. The music stops and people realize there is some very toxic paper on the books
4. Write-downs ensue, liquidity dries up, and banks are afraid to loan money to each other (due to capital needs, etc.)
5. Without grease, healthy parts of the financial machine are starting to show stress.

If banks are skittish about something as routine as lending money to each other, financing a M&A transaction suddenly becomes a herculean task.