U.S. Financial Crisis: Instant ImpactBy Reuters - | Posted 2008-09-19 Email Print
U.S. Treasury Secretary Henry Paulson, leading a push for a taxpayer-funded plan to contain the credit market crisis, said he would ask Congress to take action on this next week and that the Treasury was taking immediate steps in the meantime.
The new initiatives show authorities are trying to get out in front of problems before another institution is pushed to the brink of failure, an analyst said.
"It is probably a testament to how bad things really are when you look beneath the hood," said Weston Boone, vice president of listed trade, Stifel Nicolaus Capital Markets, in Baltimore.
News of the backstop for money market funds had instant impact in financial markets.
U.S. stocks soared on the array of measures authorities are taking to contain the spiraling credit crisis. Major indexes were up more than two percent, adding to gains after their best day in six years on Thursday.
Rates on U.S. Treasury bills shot higher, too. They had fallen to near zero earlier in the week as investors panicked and rushed for the safety of government securities after the oldest U.S. money market fund "broke the buck," or fell below $1 net asset value.
The dollar, meanwhile, rose to a one-week high against the Japanese yen as investors regained an appetite for risk amid all the steps being taken to address the credit crunch.
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.
"Maintaining confidence in the money market fund industry is critical to protecting the integrity and stability of the global financial system," the Treasury Department said in a statement.
The panic in money markets began Tuesday, when the Reserve Primary Fund, a money-market mutual fund whose assets have tumbled 65 percent in recent weeks, fell below $1 a share in net asset value, because of its losses on debt issued by Lehman Brothers Holdings Inc.
In the industry, money funds whose net assets drop below $1 a share are said to have "broken the buck".
(Reporting by Mark Felsenthal and David Lawder; Additional reporting by Alister Bull and Emily Kaiser in Washington; Lucia Mutikani in New York; writing by Dan Burns and Burton Frierson, Editing by Chizu Nomiyama)
© Thomson Reuters 2008 All rights reserved