Paulson announces plan for massive federal intervention to calm markets
Investors cheered. The Dow jumped 369 points Friday.
Pablo Martinez Monsivais/AP
Washington – To try to stem a financial crisis that has grown to the point where it threatens the livelihood of millions of Americans, the US government is planning to intervene in the economy to an extent not seen since the days of the New Deal.
Ad hoc rescue plans have not proven enough. What’s needed now is further decisive action to sweep away the bad mortgage-based securities now clogging financial markets, said Treasury Secretary Henry Paulson in a brief press conference Friday.
Thus the administration will work with Congress over the next several days to pass legislation creating a vast government entity to take these battered assets off the balance sheets of financial companies and hold them for eventual resale.
“We’re talking hundreds of billions of dollars,” said Secretary Paulson, when asked how large the entity might be. “This needs to be big enough to make a real difference.”
The move made a big impression on foreign markets as well as Wall Street, where relieved investors sent the Dow Jones Industrial Average up 368.75 points Friday. [Editor's note: This paragraph was added after the markets closed.]
In a Rose Garden statement shortly after Paulson’s appearance, President Bush said that the US economy was now facing unprecedented challenges, requiring an unprecedented federal response.
In this case, “government intervention is not only warranted, it is essential,” said Mr. Bush.
The gears of the financial system are at risk of grinding to a halt, he added. “There will be ample opportunity to debate the origins of this problem. Now is the time to solve it.”
The federal government will be putting much taxpayer money at risk with its current actions. But the risks of inaction are much higher, according to administration officials. And over time, the US may be able to recoup much of its investment through resale of troubled assets.
“This is a pivotal moment for America’s economy,” said Bush.
Paulson’s announcement followed a series of other federal moves taken in concert to address the lack of liquidity in credit markets around the world.
On Friday, President Bush authorized the Treasury to tap up to $50 billion from existing funds to insure holdings of eligible money market mutual funds. These funds are a crucial source of short-term money for credit markets, as well as a haven for investors who thought them safer than the stock market. Yet the money market industry has come under stress in recent days as financial institutions grew wary of lending to all but the most creditworthy borrowers.
The Federal Reserve also announced that it was expanding emergency lending efforts to allow commercial banks to finance purchases of asset-backed paper from money market funds.
The Security and Exchange Commission has announced a temporary ban on short-selling, a trading method that bets that stocks will decline in value.
At his press conference, Paulson announced that Fannie Mae and Freddie Mac, the mortgage giants recently rescued from potential insolvency by Washington, will increase their purchases of higher-quality mortgage-backed securities.
It will be left to the as-yet undesigned new government entity to assume ownership of those mortgage assets too risky for Fannie and Freddie.
All these government actions together add up to a massive government effort to serve as a central clearinghouse of finance. The aim is to get money flowing again through an economy that in recent days has begun to wheeze and sputter as frightened lenders stopped moving their funds.
“The financial security of all Americans ... depends on our ability to restore our financial institutions to sound footing,” said Paulson.
Members of the Democratic-controlled Congress vowed to set partisanship aside and work with the administration to produce bailout legislation within days.
“We hope to move very quickly. Time is of the essence,” said House Speaker Nancy Pelosi after being briefed on the Treasury’s plans on Thursday evening.
[Material from the Associated Press was used in this report.]