Paulson Urges Congress Action on Mortgage Debt Plan
WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson, leading a push for a taxpayer-funded plan to contain the credit market crisis, said on Friday he would ask Congress to take action on this next week and that the Treasury was taking immediate steps in the meantime.
"We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses," Paulson told a news conference.
His remarks followed U.S. officials' rush 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 and bring the crisis to Main Street.
The Treasury said it would use $50 billion to back money market mutual funds whose asset values fall below $1 a share. Separately, the U.S. Federal Reserve said it would lend even more money directly to financial institutions so they could purchase certain assets from money market funds.
On Thursday, Paulson told lawmakers in Congress that the Treasury was crafting a plan to mop up assets made illiquid by the mortgage debt crisis.
Saying Treasury will work with lawmakers through the weekend on a plan, Paulson said it needed to be in the hundreds of billions of dollars.
The latest government efforts come after the credit crisis, which had largely been seen as a problem for Wall Street risk takers, threatened to spill over into Main Street after some super-safe money market funds buckled.
"They are absolutely petrified of just a run on financial assets and they came very close to that on Thursday," said Boris Schlossberg, director of currency research at GFT Forex in New York.
"At this point they have just decided that fiscal responsibility goes out the door and anything and everything that needs to be shored up financially will be done so in order to alleviate the panic."
The surprise move comes as the Treasury and the Federal Reserve consider broad government intervention to prevent the collapse of the financial system, shaken in recent days by a crisis at insurer American International Group that required a $85 billion government rescue and the bankruptcy of investment bank Lehman Brothers Holdings Inc.
President George W. Bush said on Friday it was essential for officials to take action to prevent more damage to the economy, which he described as being at a "pivotal moment".
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)
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