WORLD> America
|
WORLD> America
|
|
Fed announces new plan to help money market funds
(Agencies)
Updated: 2008-10-22 11:45 WASHINGTON -- First, it was the banks. Now the Federal Reserve has come to the aid of money market funds as the government seeks to break the credit logjam that threatens the global economy.
A week after the government announced it would spend $250 billion to buy stakes in US banks, the Fed stepped up Tuesday to help money market funds that have been squeezed by worried investors demanding to cash out their holdings. Meanwhile, the Treasury named two accounting firms to help manage the $700 billion bailout package. Treasury Secretary Henry Paulson said Tuesday night that the government would do whatever it takes to deal with the credit crisis but he cautioned that economic troubles caused by the crisis are likely to persist "for a number of months." "Through a multitude of powerful actions we have and will demonstrate our commitment to unlocking our credit markets and minimizing the impact of the current instability on the rest of the US economy," Paulson told a New York audience. The government is trying to combat the worst credit crisis in seven decades, an upheaval that has destabilized Wall Street and raised fears that the country could tumble into a deep recession. The Fed said it would provide up to $540 billion in financing to money market mutual funds in a new program called the Money Market Investor Funding Facility. "The government is doing everything it can to break the logjam," said Mark Zandi, chief economist at Moody's Economy.com. "If these money markets are not working properly, then the economy is significantly threatened because this is where businesses get their short-term financing for their day-to-day operations." JPMorgan Chase & Co. was chosen to run five special funds that will buy from money market mutual funds certificates of deposit, bank notes and commercial paper, which is short-term debt companies issue to raise money for payroll or supplies. Money market funds hold about one-third of commercial paper. Fed officials said that about $500 billion has flowed out of prime money market funds since August as investors worried about their ability to redeem shares. On Sept. 18, the Treasury Department announced it was tapping a $50 billion Treasury fund to provide guarantees for the assets in the money market accounts. The Fed has already announced that starting next Monday it will begin making direct purchases of commercial paper in a further effort to bolster this market. Also Tuesday, the Treasury Department announced that it had selected two major accounting firms to help manage the government's $700 billion rescue program for the financial system. The department announced that Ernst & Young would receive an initial contract for $492,000 to provide accounting services, and Pricewaterhouse Coopers would get nearly $191,500 to set up internal controls for the part of $700 billion program that will focus on buying distressed real estate assets from banks as a way to encourage new lending. The government could select later this week the five to 10 asset-management firms that will supervise the government's purchases of distressed home mortgages and securities backed by those loans. The program is initially expected to spend $100 billion of the $700 billion bailout package on those purchases. Another $250 billion will be used by the government to buy stock in hundreds of banks to bolster their reserves, another effort to unfreeze the credit markets. The initiatives seem to be having a positive effect. Yields on Treasury bills and the interest rates banks charge to other banks have both fallen back to late-September levels. But Wall Street pulled back Tuesday as investors decided to cash in some of the big gains of the previous session. The Dow Jones industrial average fell 231.77 points, a retreat following a gain of 413 points on Monday. |
