The US government moved to cleanse banks of troubled assets and halt an exodus of investors from money markets in the biggest expansion of federal power over the financial system since the Great Depression. “We're talking hundreds of billions,'' Treasury Secretary Henry Paulson said in a press conference. “This needs to be big enough to make a real difference and get to the heart of the problem.'' The Treasury tapped all $50 billion in the country's Exchange Stabilization Fund to insure money-market mutual fund holdings, and the Federal Reserve expanded lending to commercial banks. The measures were aimed at credit markets teetering on the edge of collapse, as investors pulled a record $89.2 billion from money-market funds Sept. 17. Paulson and Fed Chairman Ben S. Bernanke's plans, which include the removal of illiquid mortgage securities from companies' balance sheets, sent stocks from the UK to China soaring. President George W. Bush, flanked by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, acknowledged that the program will put a “significant amount of taxpayers' money on the line.” The administration is asking Congress to give it sweeping new powers to execute the plan. Paulson said it “needs to be big enough to make a real difference and get to the heart of the problem.” Paulson gave few details but said he would work through the weekend with leaders of Congress from both parties to flesh out the program, the biggest proposed government intervention in financial markets since the Great Depression of the 1930s. Members of the Senate Banking Committee said they had received no details of the proposal. Paulson said that the new troubled-asset relief program that he wants Congress to enact must be large enough to have the necessary impact while protecting taxpayers as much as possible. “I am convinced that this bold approach will cost American families far less than the alternative - a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion,” Paulson said in a prepared statement. “The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing,” Paulson said. Paulson said mortgage giants Fannie Mae and Freddie Mac will step up their purchases of mortgage-backed securities to help provide support to the crippled housing market. The government seized control of the mortgage giants this month. Paulson also said Friday that the Treasury Department will expand a program, announced earlier this month, to buy mortgage-backed securities, which have been badly hurt by the housing and credit crisis. “As we all know, lax lending practices earlier this decade led to irresponsible lending and irresponsible borrowing. This simply put too many families into mortgages they could not afford,” Paulson said. At a news conference in which he only took three questions, Paulson was asked the approximate dollar size of the government intervention. “We're talking hundreds of billions,” he said. Paulson did not address specifics about the plan to buy back bad debt or whether the government would take a direct stake in troubled banks in exchange for its help. “These illiquid assets are clogging up our financial system, and undermining the strength of our otherwise sound financial institutions. As a result, Americans' personal savings are threatened, and the ability of consumers and businesses to borrow and finance spending, investment, and job creation has been disrupted,” Paulson said. He said that the administration would present Congress with a proposed legislative package and then work with lawmakers “to flesh out the details through the weekend. And we're going to be asking them to take action on legislation next week.” “This is what we need to do. Because for some time we've been saying that the root cause of the problems in our economy and our financial system is housing, and until we get stability in the housing market we are not going to get stability in our financial markets,” he said. Earlier, Bush authorized Treasury to tap up to $50 billion from a Depression-era fund to insure the holdings of eligible money market mutual funds. And the Federal Reserve announced it will expand its emergency lending program to help support the $2 trillion in assets of the funds. Both moves are designed to bolster the huge money market mutual fund industry, which has come under stress in recent days. The Fed said it is expanding its emergency lending efforts to allow commercial banks to finance purchases of asset-backed paper from money market funds. The central bank's move should help the funds meet demands for redemptions. The dollar gained, while two-year Treasury notes fell the most in 23 years, sending the yield up from the lowest level since mid-March. “This is taking a giant step toward a cure and a giant step toward creating some clarity in the market,'' said Alan Blinder, a professor at Princeton University and a former Fed vice chairman. “This needs to be drafted very carefully. What's needed is something large and systemic.'' The effort is a recognition that Paulson and Bernanke's earlier efforts failed to revive financial and housing markets. The government took over American International Group Inc., Fannie Mae and Freddie Mac in the past 12 days, a period when Lehman Brothers Holdings Inc. filed for bankruptcy and Americans pulled a record $89 billion from money-market funds. Congressional leaders who met with Paulson and Bernanke late on Thursday in Washington said they aim to pass legislation soon. The initiative is aimed at removing the devalued mortgage-linked assets at the root of the worst credit crisis since the 1930s. Securities and Exchange Commission Chairman Christopher Cox said the SEC planned to consider more rules to guarantee market liquidity.
