The U.S. government laid out $50 billion to guarantee money-market mutual funds, curbed short-selling and crafted a sweeping plan to mop up toxic mortgage debt, sending global markets higher Friday.
As U.S. government authorities brought out the big guns to tackle the mounting financial crisis, investment bank Morgan Stanley bought itself some time to come up with a plan for its future and continued talking to Wachovia Corp. and other banks about a merger.
But much of the markets' focus Friday was on Washington, as officials from the Bush administration, Congress and the Federal Reserve worked to craft a number of plans to restore confidence in shaken stock markets.
In the most recent example of a government entity stepping in to ease fears, the U.S. Treasury Department said Friday it will use $50 billion to back money-market mutual funds whose asset values fall below $1 in another step to contain raging financial turmoil.
"It's all part of the program to restore confidence in financial markets. They are absolutely petrified of just a run on financial assets and they came very close to that on Thursday," said Boris Schlossberg, director of currency research at GFT Forex in New York. "At this point they have just decided that fiscal responsibility goes out the door and anything and everything that needs to be shored up financially will be done so ... It seems to be working."
After Britain's Financial Services Authority imposed a four-month ban on short selling financial stocks on Thursday, the U.S. Securities and Exchange Commission followed suit on Friday with an immediate 10-day ban. French regulator AMF said it was also talking to other Eurozone regulators about market dealings, leading to expectations that the ban would snowball.
Meanwhile the world's central banks redoubled their efforts to lubricate the seized-up money markets. Japan, Australia, India and Indonesia pumped in $42 billion after the U.S. Fed coordinated a $180 billion package a day earlier.
In Europe, there were signs that the stress was easing. The cost of borrowing dollars overnight fell back toward the Fed's 2 percent target, and three-month borrowing costs slid. The Bank of England offered $40 billion to banks, but only half of it was taken up.
Thursday's proposals by Washington to draw the poison from banks' mortgage assets and the first of the short-selling bans had an immediate and dramatic effect.
U.S. stocks clocked their biggest percentage gain in six years late Thursday, powering a rally in the dollar and pushing oil prices higher, and on Friday Asian and European markets picked up where New York's left off.
The price of gold and government bonds, traditional safe havens in times of turmoil, both slipped.
U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke plan to work through the weekend with Congress on a plan to deal with the toxic bank assets that have been choking the financial system for a year.
"This is a more substantial and systemic solution than the ad hoc interventions we have seen in recent days," said Dariusz Kowalczyk, chief investment strategist at CFC Seymour in Hong Kong.
"At present, confidence is the most important factor, and this will only be maintained if the rescue plans are delivered on both sides of the Atlantic," said Andrew Turnbull, senior sales manager at ODL Securities.
A U.S. fund to deal with bad mortgage-related assets would be similar to the Resolution Trust Corp, which was set up to clean up bad debts from the savings and loan crisis in the late 1980s at a $400 billion cost to taxpayers.
"We talked about a comprehensive approach that will require legislation to deal with illiquid assets on financial institutions' balance sheets," Paulson told reporters.
According to two Congressional aides, he has been shopping around a plan to create the fund.
Rep. Barney Frank, who is chairman of the House Financial Services Committee, said there was concern that establishing a formal entity to buy the assets would take too long.
"I think it will start to provide a floor to asset values and allow institutions to work through this in a systematic manner. They won't have to rush into the arms of suitors to avoid collapsing," said Haag Sherman, co-founder and managing director of Salient Partners in Houston.
In addition, New York's Attorney General Andrew Cuomo began a wide-ranging probe into possible illegal short-selling in the stocks of Wall Street firms such as Morgan Stanley and rival Goldman Sachs.
(Reuters)