Treasury Secretary Henry Paulson outlined today a comprehensive approach aimed at relieving stresses on financial institutions and markets, as lack of confidence continues to undermine liquidity and affect economic growth.
In his statement, Mr. Paulson stressed the fact that despite steps taken on a case-by-case basis in recent weeks, more decisive and fundamental actions are needed. What should be exigently addressed, he noted, are the illiquidity issues facing mortgage assets that keep losing value as the housing correction proceeds. These illiquid assets, which are the root cause of the financial system’s stresses and its anomalies, are subsequently choking off the flow of credit that is so vitally important to the financial system and the country’s economic growth.
In order to restore confidence, the Treasury said that the federal government must implement a ‘troubled asset relief program’ which would remove illiquid assets that are clogging up the financial system and threatening the progress of the economy. According to the Treasury, this asset relief program must be structured to function effectively, and at the same time be sufficiently large to have ‘maximum impact’ while including features that protect the taxpayer to the maximum extent possible.
In the meantime, as the Treasury continues to work with the federal government to pass this legislation over the next week, Secretary Paulson proposed the implementation of a couple of measures that will provide immediate relieve. These measures will allow additional funding to Fannie Mae (FNM) & Freddie Mac (FRE), and increase their purchases of mortgage-backed securities (MBS). Also, the Treasury will increase the availability of capital for new home loans and expand the MBS purchase program. This will complement the capital provided by the GSEs and will help facilitate mortgage availability.
Also today, the Treasury Dept., in light of concerns about the net asset value of money market funds breaking the buck, announced the establishment of a temporary guaranty program for the U.S. money market mutual fund industry. Treasury said that it would siphon up to $50 billion from the country’s Exchange Stabilization Fund for a temporary guaranty program, aimed at shoring up confidence in the U.S. money market mutual fund industry. There is $3.35 trillion in money-market funds outstanding. The move is designed to decelerate the outflow of funds as consumers are starting to worry about even the safest of investments. Investors pulled a record $89.2 billion from money-market funds on Sept. 17, according to data compiled by the Money Fund Report.
Separately, the Securities and Exchange Commission (SEC) proposed a temporary ban on short-selling on 799 financial stocks through Oct 2. The SEC claims that the rampant short selling has triggered a sharp decline in financial stocks. The ban is effective immediately, and is set to last for 10 days, but may get extended for up to 30 days.
These are the latest dramatic measures that the government is trying to implement in order to prevent credit markets from freezing up over huge losses on subprime mortgages.
Mr. Paulson reiterated the fact that the Treasury’s focus remains in restoring the strength of the financial system and its institutions.