The Securities and Exchange Commission also moved to temporarily ban short selling, in which a market player bets that the price of a given stock will decline.
"The emergency order temporarily banning short-selling of financial stocks will restore equilibrium to markets," said SEC Chairman Christopher Cox in a statement.
The actions followed a dramatic Capitol meeting Thursday night in which Treasury, Fed, and SEC chiefs met with top leaders of Congress, winning promises of bipartisan cooperation on the centerpiece of the plan: a major intervention by the government to buy up bad debts that have hung over the economy with the huge fall in the U.S. housing market.
Treasury Secretary Henry Paulson is to hold a press conference at 10 a.m. Friday morning, and lawmakers said Thursday night that they expect to be briefed through the day as the administration finalizes details.
Treasury said it is able to create the new guarantee to back up mutual funds through existing Depression-era authorities without new legislation. But it is fresh ground still and reflects another effort to tamp down panic in the markets.
A Treasury official Friday said the protection would be available to a set of regulated high-quality funds totaling about $2 trillion in assets. A fee will be negotiated with the industry to help cover the costs, and as described, the program is voluntary and expected to run just a year.
“The action should enhance market confidence and alleviate investors concerns about the ability for money market mutual funds to absorb a loss,” the Treasury said.
The Fed’s actions were a two-part effort to add liquidity to the markets.
The first initiative would extend non-recourse loans at the primary credit rate to U.S. depository institutions and bank holding companies to finance “their purchase of high quality asset-backed commercial paper” from mutual funds. The second step would have the Fed be a buyer, purchasing from primary deals federal discount notes, which are short term debt obligations issues by the two mortgage giants, Fannie Mae and Freddie Mac, recently taken over by the government.
Coming just weeks before the November election, the more than hour-long meeting Thursday night was followed by a remarkable joint appearance of top Democrats and Republicans. And for a moment at least, the wrangling of recent days dissolved in the face of the crisis outlined by Paulson and Ben Bernanke, the Fed chairman.
“This is a very serious moment, very serious. It was a very sober gathering.” said Senate Banking Committee Chairman Chris Dodd (D- Conn.). “I’ve been in the Senate for 28 years; Congress 34. There has never been a moment as serious as this one.”
“We have an unprecedented crisis,” said Boehner. And Paulson, who is very aware of how the crisis is viewed in financial markets overseas, said of the meeting: “I think we saw the best of the United States of America….This country is able to come together and do things quickly.”
But given the potential costs, there is sure to be some bargaining still ahead. Frank has already talked of imposing some conditions whereby the government might share in some of the future profits of companies helped by the intervention now. Democrats are pressing for more relief for homeowners facing foreclosures. And the White House may be forced to ease its resistance to new emergency spending sought by Democrats for the auto industry and domestic needs in a year-end appropriations bill.
Following the meeting Thursday night, Frank was cautious about discussing any details of the Treasury plan. But he has been at the forefront inpushing for a “one-time intervention” by the government through a new entity with buying authority.
In an interview Wednesday with Politico, Frank outlined his ideas in more conceptual form and envisioned holding a hearing next week. Wall Street rallied Thursday afternoon after reports that Treasury was showing new interest in the approach, and the Republican presidential nominee, Sen. John McCain, also signaled potential support.
“More and more people are thinking that we’ve come to it and have to do it,” Frank. “Exactly what form it will take, if it takes a form, is still unclear.”
After meeting with Paulson, Frank said: "It will be the power -- it may not be a new entity. It will be the power to buy up illiquid assets. There is this concern that if you had to wait to set up an entity, it could take too long."
The discussions this week have sometimes been confused by comparisons to the Resolution Trust Corp. created to address the savings and loan crisis in the late 80s and early 90s. Sen. Charles Schumer (D-N.Y.) took the Senate floor Thursday to propose an alternative modeled on a Depression-era entity designed not to buy up bad assets but to invest in companies to give them needed capital to work their way out of debt.
Frank said both options should be available to the new entity, but the central principal is that only the government is big enough to step into the markets effectively and also have the staying power to hold the assets until the market stabilizes and they regain value.
“We need someone big enough, strong enough, stable enough to buy them and see some more value in them,” Frank said. And this approach appears to have gained strength not just because of the deteriorating markets but the possibility that the long-term risk to the government may be less at the current prices.
“We hope to structure this so a lot of it would get repaid,” Frank said. “I think you have undervalued assets out there…but the costs of not doing anything are enormous.”
“The deterioration has been rapid ….We know real value hasn’t dropped that much in two days, so there’s clearly been more panic.”
“We’re the only bargain hunter in town,” Frank told Politico before going into the meeting Thursday night.