Paulson & Bernanke Swoop to Rescue Financial Markets

By: • Fri, Sep 19 2008, 9:12 AM

In an unprecedented series of actions from the U.S. Treasury Department, the U.S. Federal Reserve and the U.S. Securities and Exchange Commission over the last 24 hours, the administration has announced plans to purchase illiquid assets from financial institutions. It also promised to buy up Fannie Mae and Freddie Mac Debt, it will launch an initiative to lend to banks for the purchase of commercial paper, created a fund geared at insuring money market mutual funds and banned short selling on 799 financial stocks.

After a meeting with Congressional leaders, and Fed Chairman Ben Bernanke on Thursday night, Treasury Secretary Henry Paulson said he is working on legislation that would allow the removal of illiquid assets from the balance sheets of financial institutions. The Treasury Secretary pledged to continue working closely with Congress on a proposal, but warned that that systemic risks in markets need to be dealt with.

The U.S. Securities and Exchange Commission enforced a temporary ban Friday on the short selling of 799 financial stocks in an effort to calm investor fear and markets in general. The ban is in place until 11:59 p.m. EDT on Oct. 2, and can be extended 10 days or beyond if deemed necessary. The move follows similar actions in the UK late Thursday evening. Meanwhile, Australia said it plans to institute a similar rule on Monday.

Hours later, in an effort to continue bolstering investor confidence, the U.S. Treasury announced on Friday that it is launching an Exchange Stabilization Fund worth up to $50 billion geared at insuring money market mutual fund holding assets. The insurance program triggers when the net asset value for a money market mutual fund falls under $1.

Following the announcement a Treasury official told reporters that the action is geared to providing the same confidence that the FDIC does in ensuring bank deposits.

The money market is a critical part of the financial system, said the spokesperson.

In an announcement made on Friday, the U.S. Federal Reserve announced its intentions to purchase federal agency discount notes from primary dealers and launch an initiative allowing banks to borrow money for the purchase of asset-backed commercial paper. The bank loan includes a non-recourse lending at the primary credit rate for the purchase of "high-quality" ABCP. Under the provision, the Fed will be able to purchase debt from Fannie Mae and Freddie Mac.

In an interview with Bloomberg Television on Friday, U.S. House Financial Services Chairman Barney Frank said that government buying up illiquid assets would help boost market psychology. Although the lawmaker stressed the need for better rules on leverage and disclosure practices, Frank said the costs of not acting would be must worse than the double digit billions it would cost government to aid the markets.