Treasury Secretary Henry M. Paulson and Federal Reserve Chairman Ben S. Bernanke met with congressional leaders Thursday night in an unprecedented effort to craft a bipartisan solution to resolve mounting bad loans that have dragged down a beleaguered Wall Street.
"We are here to work together for solutions... in a way that insulates taxpayers, consumers, Main Street from the crisis on Wall Street," House Speaker Nancy Pelosi said, surrounded by lawmakers from both parties who assembled for the extraordinary on Capitol Hill.
Reports that the government might abandon its piecemeal approach to bailing out institutions and adopt a comprehensive plan sparked a dramatic recovery in stock markets at mid-afternoon yesterday, with the Dow Jones Industrial Average rebounding from a 200-point fall and surging to a 410-point gain at the close of trading.
Away from Congress, the markets got a major boost from a joint action by the Federal Reserve and foreign central banks in Asia and Europe to pump a record $247 billion in cash into the stressed credit markets to try to get banks to start lending to each other again.
In a whirlwind day, federal regulators offered new rules to restricting investment that bet on the decline of financial stock prices while President Bush candidly told the American people that "serious challenges" remain from the fallout of the financial crisis.
The American people can be sure we will continue to act to strengthen and stabilize our financial markets and improve investor confidence, the president said.
At the top of the emergency meeting on Capitol Hill, leaders in both parties said they were prepared to put their election-year squabbles behind them to pass a legislative solution soon. The Bush administration was preparing a plan to present within the next day to create a mechanism to resolve bad debt problems.
Mr. Paulson said the solution would aim to aim ease the "ill-liquid debt" that is plaguing many financial institutions hit by declining property values. "What we are dealing with now is an approach to deal with systemic risk in our financial markets," he said.
Treasury said it was open to various options Congress wants to pursue, as long as it is "a comprehensive approach to address the illiquid assets on bank balance sheets that are at the underlying source of the current stresses in our financial institutions and financial markets." The administration would prefer congressional action over its disjointed actions in recent days giving American International Group a loan but allowing Lehman Brothers to fail. But the possibility such contentious legislation could fall victim to election-year politics led officials to consider other possibilities as well, including putting in place a temporary executive plan.
"A big part of the problem right now in markets is confidence, and it would be a further blow to confidence" if election-year politics defeated efforts to resolve the crisis, said one source with knowledge of the matter.
The move toward a breakthrough in dealing with the longrunning financial crisis came after a day of concerted moves by the United States and foreign governments to bolster confidence and pump cash into financial markets which provided a breathing spell for battered markets.
Securities and Exchange Commission chairman Christopher Cox announced stiff rules against short-selling of financial stocks and requiring disclosure of short sales by hedge funds that are believed to have been behind the spectacular decline of Lehman Brothers stock before its bankruptcy on Monday as well as troubles being experienced by Morgan Stanley, Goldman Sachs and others.
The new rules and cash infusion sent financial stocks soaring, with beleaguered shares of Washington Mutual, Wachovia and other banks rising by record amounts.
"The last 24 hours have been the most challenging for financial markets since World War II," said Tobias Davis, an analyst at Custom House, a Canadian investment firm. The efforts by central banks helped to ease somewhat the virtual stall in lending that occurred earlier this week, he said.
The central bank infusion was designed to end the freeze in bank-to-bank lending in recent days that had sent lending rates soaring and caused a rush into safe-haven gold and Treasury bills, sending their yields to the lowest levels since World War II.
But the moves came too late to prevent the sudden shutdown Thursday of a $15 billion money market fund by Putnam investments, which said it was forced to close the fund after receiving massive redemption requests from investors worried about spreading defaults.
Money market mutual funds saw huge redemptions totalling $89 billion in the last week, according to the Money Fund Report. Much of that was involved the Reserve Primary Fund, which became the first to "break the buck" this week, prompting investors to pull $40 billion out of the $65 billion fund.
President Bush urged confidence early in the day after cancelling a trip to Alabama so he could meet with Treasury Secretary Henry Paulson and other financial advisers and monitor the situation on Wall Street.