US Launches Broad Rescue Of Financial Markets
The U.S. government launched several multibillion-dollar programs to guarantee holdings in money-market mutual funds and curb short-selling while developing a more sweeping plan to mop up toxic mortgage debt, sending global markets sharply higher on Friday.
The price of gold and US Treasury bonds, traditional safe havens in times of turmoil, both slipped back.
The dollar rose against the yen but slipped against the euro, while oil prices surged.
Here's a rundown of what's happening:
—The Treasury said it would use $50 billion to back money market mutual funds whose asset values fall below $1 a share. The intent is to shore up ailing money markets after signs that this long-safe corner of financial markets, home to some $3.5 trillion of deposits, was at risk of falling victim to the year-old credit crunch.
"For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund—both retail and institutional—that pays a fee to participate in the program," the Treasury said in a statement.
The Treasury said concerns about the net asset value of money market funds falling below $1 have exacerbated global financial market turmoil and caused severe liquidity strains in world markets.
—The Federal Reserve said it would lend even more money directly to financial institutions so they could purchase certain assets from money market funds.
—The SEC temporarily banned short-sellingon 799 financial stocks to boost investor confidence on Friday, one day after the UK Financial Services Authority took a similar step.
—Morgan Stanley said the government proposal is a potential "game-changer" in its plans. Morgan has been discussing a potential merger with Wachovia and other firms.
The latest government efforts come after the credit crisis, which had largely been seen as problem for Wall Street risk takers, threatened to spill over into Main Street.
"This is a more substantial and systemic solution than the ad hoc interventions we have seen in recent days," said Dariusz Kowalczyk, chief investment strategist at CFC Seymour in Hong Kong.
President Bush, flanked by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, acknowledged that the program will put a "significant amount of taxpayers' money on the line."
The administration is asking Congress to give it sweeping new powers to execute the plan.
Paulson said it "needs to be big enough to make a real difference and get to the heart of the problem."
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Paulson gave few details but said he would work through the weekend with leaders of Congress from both parties to flesh out the program, the biggest proposed government intervention in financial markets since the Great Depression.
Speaking to reporters at the Treasury Department, Paulson said that the new troubled-asset relief program that he wants Congress to enact must be large enough to have the necessary impact while protecting taxpayers as much as possible.
"I am convinced that this bold approach will cost American families far less than the alternative -- a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," Paulson said in a prepared statement.
"The financial security of all Americans...depends on our ability to restore our financial institutions to a sound footing," Paulson said.
Paulson said mortgage giants Fannie Mae and Freddie Mac will step up their purchases of mortgage-backed securities to help provide support to the crippled housing market.
He also said Friday that the Treasury Department will expand a program, announced earlier this month, to buy mortgage-backed securities, which have been badly hurt by the housing and credit crisis.
"As we all know, lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing. This simply put too many families into mortgages they could not afford," Paulson said.
At a news conference in which he only took three questions, Paulson was asked the approximate dollar size of the government intervention. "We're talking hundreds of billions," he said.
Paulson did not address specifics about the plan to buy back bad debt or whether the government would take a direct stake in troubled banks in exchange for its help.
"These illiquid assets are clogging up our financial system, and undermining the strength of our otherwise sound financial institutions.
As a result, Americans' personal savings are threatened, and the ability of consumers and businesses to borrow and finance spending, investment, and job creation has been disrupted," Paulson said.
He said that the administration would present Congress with a proposed legislative package and then work with lawmakers "to flesh out the details through the weekend. And we're going to be asking them to take action on legislation next week."
—Reuters and AP contributed to this report