The US Treasury Department says it will tap into a Great Depression-era fund to provide guarantees for US money market mutual funds while the US Federal Reserve says it will expand its emergency lending program to help support the US$2 trillion in assets of the funds.
Seeking to deal with a severe financial crisis, the Treasury and the Fed announced separate actions yesterday designed to bolster the huge money market mutual fund industry, which has come under stress in recent days.
The Fed said it would expand its emergency lending efforts to allow commercial banks to finance purchases of asset-backed paper from money market funds. The central bank move should help the funds to meet demands for redemptions.
The announcement came just hours after the US Congress promised quick action on a plan to buy up toxic assets, such as bad mortgages, held by troubled banks and other institutions.
US Treasury Secretary Henry Paulson and US Federal Reserve Chairman Ben Bernanke were crafting a plan after concluding they needed broader powers to combat fallout from a housing and credit market meltdown that has sent shock waves through Wall Street and around the globe.
Paulson, Bernanke and Securities and Exchange Commission (SEC) Chairman Christopher Cox met for nearly 90 minutes on Thursday night with more than a dozen Democratic and Republican lawmakers, including House Speaker Nancy Pelosi, in her office.
Paulson said later that he and the lawmakers were working on a plan to “address systemic risks” in the markets and deal with problem assets, but offered few details.
“We talked about a comprehensive approach that will require legislation to deal with illiquid assets on financial institutions’ balance sheets,” he said.
Representative Barney Frank, a Democrat, said afterward that the Bush administration wanted the power “to buy up the illiquid assets” poisoning the markets.
Frank, who chairs the House of Representatives’ Financial Services Committee, said there was “virtually unanimous agreement” in the meeting that there would be legislation involved.
However, he discounted the idea of setting up a new agency — similar to the Resolution Trust Corp — established in 1989 to help resolve a savings and loan crisis at a cost to taxpayers of US$125 billion.
“It will be the power — it may not be a new entity. It will be the power to buy up illiquid assets,” Frank said. “There is this concern that if you had to wait to set up an entity, it could take too long.”
US congressional leaders said they expected to get the plan late yesterday and act on it before Congress recesses for the election.
“The root cause of the stress in the capital markets is the real estate correction,” Paulson said, adding that he hoped to have a solution “aimed right at the heart of this problem.”
Washington has already pledged more than US$600 billion in the past year to bail out, or help bail out, some of the biggest names in US finance.
There was no immediate word on how much the new rescue plan might cost.
Paulson, Bernanke and other US officials planned to work through the weekend on a solution.
Pelosi sent a letter on Thursday to US President George W. Bush saying the worsening economy demands another bipartisan economic recovery effort, and that Congress was ready to deal with legislation beyond its scheduled adjournment next Friday, if needed.
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