Fed, Treasury move again to help financial markets
Paulson taps point man to oversee high-stakes mortgage rescue effort
10/06 08:57 AM
WASHINGTON (MarketWatch) -- The Bush Administration and the Federal Reserve said Monday they are moving "with substantial force on a number of fronts" to shore up confidence in, and protect, the financial system.
Announcements and statements from regulators came early and often throughout the day.
Most recently, Treasury Secretary Henry Paulson announced Neel Kashkari, a close advisor, has been tapped to lead the $700 billion mortgage rescue effort.
A former banker at Goldman Sachs Group Inc., Kashkari has been assistant secretary for international economics. He came to Treasury along with Paulson in July 2006.
Kashkari's new title is interim assistant secretary for financial stability.
Kashkari, 35, holds two master's degrees. The first is in engineering and the second was an M.B.A. in finance.
The frenzy of activity comes as global stock markets suffered fresh losses amid fear that the turmoil in financial markets and the squeeze on credit will spread to the broader economy.
President Bush joined the effort, saying that it would take time for the Paulson plan to buy toxic assets from banks and help recapitalize the industry.
Bush spoke after the President's Working Group on Financial Markets, which includes the top officials of all regulatory agencies and the Fed, put out a statement saying that it was working with the industry and regulators around the world to address the current challenges.
A prime spot for global coordination could be this week's meeting of finance ministers of the Group of Seven, representing the richest industrial countries, behind closed doors at the Treasury Department.
The U.S. announced that the meeting would take place on Friday afternoon, with a press conference by Treasury Secretary Henry Paulson on Friday evening.
In an early morning statement, the Fed said it would double the size of its emergency loan program to banks to a potential $900 billion by the end of the year.
The announcement came as the central bank announced that it will begin to pay interest on bank reserves. This will give the Fed "greater scope" to address conditions in credit market, the central bank said.
Paying interest on reserves would give the Fed more power to implement monetary policy.
Paying interest would attract excess bank reserves to the Fed, giving the central bank more firepower. Currently, banks deposit only the minimum reserve required.
Maneuvering without cutting rates
Paying interest on bank reserves would allow the Fed to enlarge the asset size of its balance sheet without pushing the funds rate to zero, explained Robert Brusca, chief economist at FAO Economics. The interest rate paid on bank reserves would effectively serve as the floor on the funds rate.
So if the Fed paid 1.75% interest on reserves, the effective federal funds rate couldn't go below 1.75%. Fed researchers believe monetary policy would be much more effective with this approach, because the Fed could more directly control the most liquid asset in the economy and would no longer have to worry that policy could become impotent as the target rate approaches zero.
The Treasury announced steps to clarify to the market how it plans to coordinate the massive borrowing needs that will be required to fund the new emergency mortgage financing plan approved by Congress last week.
Treasury said it will make adjustments to its auction calendar by increasing the size of bill and note auctions and continuing to issue cash management bills, some of longer-duration.
In addition, the department said it was considering bringing back the three-year note in November and taking other steps.
The Fed and Treasury said that they are consulting with market participants on ways to support term unsecured funding markets.
"Together these actions should encourage term lending across a range of financial markets in a manner that eases pressures and promotes the ability of firms and households to obtain credit," the Fed said.
"The Federal Reserve stands ready to take additional measures as necessary to foster liquid money market conditions," the statement said.
The Fed will increase the size of its term auction facility auctions to $150 billion beginning later Monday.
Anthony Ryan, the acting under secretary for domestic finance, went on television to stress that top-level officials are working rapidly to implement the mortgage rescue plan hatched by Treasury Secretary Henry Paulson.
"We're moving as quickly as we can," Ryan said in an interview on CNBC.
But Marc Chandler, currency analyst with Brown Brothers Harriman, said he was worried that the markets were moving much more rapidly than regulators and that Washington's efforts ultimately may be too small to stem the crisis.
Racing to get its plan in place, Treasury put out guidelines to hire the asset managers it will need to purchase and hold mortgages and mortgaged-backed securities.
