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U.S. tosses lifesaver to financial markets: Experts hail wide-reaching aid as 'bold, huge and also needed' to stem crisis and assure credit
(Richmond Times-Dispatch (VA) (KRT) Via Acquire Media NewsEdge) Sep. 20--The U.S. government yesterday launched the biggest intervention into U.S. financial markets since the Great Depression.
"This was bold, huge and also needed," said Michael Jones, chairman of Riverfront Investment Group, an advisory firm in Chesterfield County.
The federal government will buy bad bank assets. It banned short sales on certain financial companies until October. And the Treasury Department offered to guarantee money-market funds.
The latest fixes to the financial crisis roiling Wall Street and singeing Main Street are aimed at restoring confidence in the economic system. They are likely to cost hundreds of billions of dollars.
The markets responded to the rescue plan with the Dow Jones industrial average closing up 369 points, or 3 percent, and the Standard & Poor's 500 up 49 points, or 4 percent.
"The financial system was teetering," Jones said. "Banks were not lending to one another. The whole financial mechanism was locking up."
Strong moves were required by policymakers, he said. "And boy, did they give it." A grim-faced President Bush, at a White House press conference yesterday morning, stressed the need to move quickly and put aside partisanship.
"We must act now to protect our nation's economic health from serious risk," Bush said. "There will be ample opportunity to discuss the origins of this problem. Now is the time to solve it."
Treasury Secretary Henry M. Paulson Jr. said federal actions will involve the removal of bad mortgage-related assets that are burdening the finance industry and threatening the economy.
"It caught everyone by surprise that Paulson was able to pull together such a coordinated effort," Jones said.
"To a certain extent, this is not a bailout," he said. "The government will buy assets [bad mortgage loans] that no one wants to buy. If they buy them at a low enough price, it is possible they could make a good bit of money for taxpayers."
It has been a week of financial turmoil. The Federal Reserve lent $85 billion to insurance giant American International Group to prevent its collapse. Two respected investment banks, Lehman Brothers and Merrill Lynch, fell -- one to bankruptcy, the other in a government-brokered takeover.
A week before, the government took over mortgage giants Fannie Mae and Freddie Mac.
J. Alfred Broaddus Jr., past president of the Federal Reserve Bank of Richmond, said the rescue plan will help unclog the credit arteries and get the credit markets moving again so the economy can get back on track.
"Credit is to the economy what the bloodstream is to the human body," Broaddus said.
The efforts will keep the economy from further weakening and prevent a repeat of The Great Depression, when the stock market collapsed and thousands of banks failed, he said.
"It's not over yet," Broaddus said. "Congress has to follow through. But at least it's a move in the right direction."
In addition to a plan focused on housing, the government announced steps to ease investor concerns.
The Treasury Department said it would guarantee money-market mutual funds against losses up to $50 billion. The guarantee comes from a fund created in the Depression.
"To ensure money-market accounts -- that is beyond significant," said Kent Engelke, chief economic strategist at Capitol Securities Management, an asset management firm in Richmond.
"These are extreme efforts in extreme times," Engelke said.
About $3.6 trillion is invested in money-market funds -- assets that are considered super conservative and have never before lost money, he said.
The funds play an important role as an investment vehicle for many Americans and are a fundamental source of funding for capital markets, the Treasury Department 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," the Treasury said in a statement.
Also yesterday the Securities and Exchange Commission issued an emergency order banning short sales on 799 financial institutions, including Bank of Virginia, Genworth Financial and First Capital Bancorp Inc., all based in the Richmond area.
Short sales -- essentially a bet that a company's stock will go lower -- are a common and legal financial transaction.
The ban was imposed "in these unusual and extraordinary circumstances" to restore confidence in financial markets as a whole, the SEC noted.
"The commission is aware of the continued potential of sudden and excessive fluctuations of securities prices and disruption . . . that could threaten fair and orderly markets," according to the order.
"Even though I am not excited about the ban, it is the right thing to do," Engelke said.
"I am not against shorting, but I am against it when it is reckless and there is no merit to shorting a stock," he said. "Reckless shorting causes great losses to many for the benefit of a few."
Of particular concern is the practice of naked short selling, when the short seller does not have the shares to cover the short sale.
"Many companies -- especially those in the financial sector -- have been completely decimated regardless of merit via unscrupulous and questionable activity," Engelke said, referring to naked short sales.
Short sales, if done correctly, provide liquidity in the market and help control the valuation of stock, he said.
In another move, the Federal Reserve boosted its U.S. dollar swap line, or short-term currency exchange, with other major central banks overseas by $180 billion. The infusion is meant to keep credit markets worldwide from freezing up.
"Things were mushrooming out of control," Engelke said. "If things had continued to deteriorate, it's possible that within a week the world's financial system would cease to exist."
Contact Carol Hazard at (804) 775-8023 or chazard@timesdispatch.com.
To see more of the Richmond Times-Dispatch, or to subscribe to the newspaper, go to http://www.timesdispatch.com.
Copyright (c) 2008, Richmond Times-Dispatch, Va.
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