Bid to ease pressure on balance sheets of banks and other financial institutions
The plan is designed as a comprehensive approach after a series of individual rescues failed to stem the crisis. -- REUTERS
New York - In an effort to bring stability to world financial markets, the United States government and Congress worked through the weekend on a sweeping plan that would mop up hundreds of billions of dollars' worth of troubled mortgage assets.
The Treasury is likely to run the programme, which would involve auctions where the government buys devalued assets, said House Financial Services Committee chairman Barney Frank.
The plan, which will apply to US-based financial institutions seeking to sell mortgage assets, is designed as a comprehensive approach after a series of individual rescues failed to stem the crisis.
Details are still being hammered out but Treasury Secretary Henry Paulson gave an indication of its scale at a press conference last Friday.
'We're talking hundreds of billions. This needs to be big enough to make a real difference and get to the heart of the problem,' he said.
Options being considered include an US$800 billion (S$1.15 trillion) fund to buy so-called failed assets and a separate US$400 billion pool at Federal Deposit Insurance to insure investors in money-market funds, said sources briefed by congressional staff.
President George W. Bush said the plan will ease pressure on the balance sheets of banks and other financial institutions.
'There will be ample opportunity to debate the origins of this problem; now is the time to solve it,' he said in a statement at the White House last Friday.
Calling the current crisis a 'pivotal moment' for the nation's economy, he later lobbied House Speaker Nancy Pelosi and Senate Democratic Leader Harry Reid, as well as top Republicans, for quick legislative action to stabilise financial markets.
Mr Frank said Congress will act quickly.
Meanwhile, the Treasury tapped all US$50 billion in the country's Exchange Stabilisation Fund to insure money-market mutual fund holdings, and the Federal Reserve expanded lending to commercial banks.
The measures were aimed at credit markets teetering on the edge of collapse as investors pulled a record US$89.2 billion from money-market funds last Wednesday.
The moves capped a week in which financial markets faced their most serious confluence of crises since the Great Depression in the 1930s, with national economies and the global banking system in jeopardy.
The latest rescue efforts sent stocks surging in the biggest two- day global rally in 38 years after a three-day slide last week wiped about US$1.9 trillion in market value from the MSCI World Index.
The Dow Jones Industrial Average soared another 3.4 per cent last Friday, capping its biggest two-day jump in six years. Conversely, US Treasuries - seen as 'safe haven' investments - plunged, sending two-year note yields up the most in 23 years.
But troubling issues remain.
While many on Wall Street cheered a ban on short-selling, options traders, who sell stock short to balance their trading positions, were caught off guard and warned that the measure could paralyse derivatives markets.
Some analysts have also voiced concerns about the US government's own balance sheet as it takes on yet more devalued assets after the seizures of Fannie Mae, Freddie Mac and American Insurance Group.
