WASHINGTON - Urgently moving on multiple fronts to stem the worst financial crisis in decades, the government on Friday said it would safeguard assets in money market mutual funds and temporarily banned short-selling of financial company stocks. The Treasury Department has asked Congress to give it sweeping power to buy up toxic debt that has unhinged Wall Street.
The Fed said it expanding its emergency lending efforts to allow commercial banks to finance purchases of asset-backed paper from money market funds. The central bank should help the funds to meet demands for redemptions.
The Securities and Exchange Commission early Friday imposed a temporary emergency ban on short-selling of financial company stocks, a trading method that bets the stocks will go down.Wall Street headed for a huge rally Friday. The government's moves could help alleviate the uncertainty that has been sending the markets into tumult over the past week. Lending has grinded to a virtual standstill in the wake of the bankruptcy of Lehman Brothers Holdings Inc.
And Swiss National Bank and Bank of England offered up more cash Friday. The three banks put a combined $90 billion into money markets in a lockstep move.,
The chairman of the Senate Banking Committee, Chris Dodd, D-Conn., warned the United States could be "days away from a complete meltdown of our financial system" and said Congress is working quickly to prevent that.
Stocks on Wall Street shot up more than 400 points late Thursday on word that a plan was in the works. Fallout from the housing and credit debacles have badly bruised the economy and pushed unemployment to a five-year high.
"This staves off Judgment Day," said Anthony Sabino, professor of law and business at St. John's University. "This is a detox for banks, and will help cleanse themselves of the bad mortgage securities, loans and everything else that has hurt them."
The roots of the current crisis can be traced to lax lending for home mortgages — especially subprime loans given to borrowers with tarnished credit — during the housing boom. Lenders and borrowers were counting on home prices to keep zooming upward. But when the housing market went bust, home prices plummeted. Foreclosures spiked as people were left owing more on their mortgage than their home was worth. Rising mortgage rates also clobbered some homeowners.
As financial companies racked up multibillion-dollar losses on soured mortgage investments, and credit problems spread globally, firms hoarded cash and clamped down on lending. That crimped consumer and business spending, dragging down the national economy — a vicious cycle policymakers have been trying to break.
"The root cause of the stress in the capital markets is the real estate correction," Paulson said, adding he hopes to have a solution "aimed right at the heart of this problem."
Bernanke said a resolution would help "get our economy moving again."
House Financial Services Committee, discounted the idea of setting up a new agency — similar to the Resolution Trust Corp. — established in 1989 to help resolve a at a cost to taxpayers of $125 billion., D-Mass., chairman of the
"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."
The federal government already has pledged more than $600 billion in the past year to bail out, or help bail out, some of the biggest names in American finance. There was no immediate word on how much the new rescue plan might cost.
The SEC on Friday said it was acting in concert with thein taking emergency action to prohibit short selling in financial companies to protect the integrity of the securities market and boost investor confidence.
Associated Press writers Martin Crutsinger, Andrew Taylor and Marcy Gordon in Washington and Joe Bel Bruno in New York contributed to this report.