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September 19th, 2008

Government Issues Unprecedented Steps to Heal Markets

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On the heels of yesterday’s announcement by Treasury Secretary Henry Paulson that a government facility may be formed to buy off bad assets in order to clear company balance sheets, came a new sweeping sets of reforms announced this morning, that have some calling it the largest financial intervention since the Great Depression.

The newest reforms call for the development of a program that is intended to shore up money market mutual funds. President Bush has already approved the Treasury to tap up to $50 billion from a depression-era fund in order to insure the holdings of these “historically safe assets”:

The move is designed to stem an outflow of funds as consumers start to worry about even the safest of investments, a sign of how the crisis is spreading to Main Street. There is $3.4 trillion in money-market funds outstanding.

The Fed is also planning to expand its liquidity programs, including purchasing short-term debt from Fannie Mae, Freddie Mac and the Federal Home Loan Banks. In order to allow banks to purchase high-quality paper from money market mutual funds, the Fed will extend those US banks non-recourse loans at the primary-credit rate:

“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,” Treasury said in a statement.

In addition, the Securities and Exchange Commission (SEC) will place a temporary ban on the short selling of nearly 800 financial stocks. The ban which is effective immediately will last for 10 days, yet could be extended to 30 days. Short selling, which is considered very risky, allows investors to take advantage and profit off of falling stocks:

In the announcement, the commission said it was acting in concert with the U.K. Financial Services Authority in taking emergency action to “prohibit short selling in financial companies” to protect the integrity of the securities market and boost investor confidence.

“The commission is committed to using every weapon in its arsenal to combat market manipulation that threatens investors and capital markets,” (SEC Chairman Chris) Cox said in a statement. “The emergency order temporarily banning short-selling of financial stocks will restore equilibrium to markets.”

Treasury Secretary Paulson made prepared statements this morning on the government’s latest initiatives to shore up the financial markets, that are likely to set the government back hundreds of billions of dollars.

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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