Continued from page 1

Moments before the president’s comments, Treasury Secretary Henry Paulson, Jr., announced his intention to propose a legislative plan this weekend to remove housing-related troubled assets from the financial system in order to restore confidence in the financial markets. He estimated the ultimate cost would be hundreds of billions of dollars.

Mr. Paulson insisted this bold approach will cost American families far less than the alternative.

Mr. Paulson said the illiquid assets had been blocking the system and clogging the financial markets. Many loans resulting from both irresponsible lending and irresponsible borrowing have been parked or frozen on balance sheets, reducing lending. What began as a subprime-mortgage problem has extended to other mortgage sectors, he said.

As a result, 5 million homeowners are now either delinquent or in foreclosure.

Mr. Paulson said Fannie Mae and Freddie Mac, the government-sponsored enterprises that the federal government took over earlier this month, would increase their purchase of mortgage-backed securities. In addition, the Treasury would expand its own program to purchase mortgage-backed securities. Both actions would make mortgages more available and affordable in the short term, he said.

To restore confidence in the system, he said, We must address the underlying problem.

Over the weekend, Mr. Paulson said he would be working with Congress on legislation to remove these troubled assets from the financial system.

Urgently acting on multiple fronts, the U.S. government and the Federal Reserve took other unprecedented steps early Friday morning to calm the financial markets, which have frozen this week in the wake of the Lehman Brothers bankruptcy and the effective government takeover of American Insurance Group.

With fits and starts, the mortgage-related credit and financial crises have been ongoing for more than a year, but they reached their peak this week. Senate Banking Committee Chairman Chris Dodd said Friday morning that the United States could be days away from a complete meltdown of our financial system.

To stem the outflow from money-market mutual funds, Mr. Bush authorized the Treasury Department to use as much as $50 billion from a Depression-era fund to insure the holdings of money-market mutual funds for a year.

At the same time, the Federal Reserve announced an expansion of its emergency-lending program to support the assets of the money-market mutual funds, which hold $3.4 trillion and are a major source of funding for corporations selling short-term debt.

These measure will act as grease for the gears of our financial system, which were at risk of grinding to a halt. They will support the flow of credit to households and businesses, Mr. Bush said.

The market for short-term corporate debt has frozen in recent days. Investors in money-market funds have been rushing to redeem their shares and pour the proceeds into Treasury bills, whose interest rates had plunged to near zero.

On Thursday, the Fed co-ordinated actions with other central banks to inject nearly $200 billion of liquidity into frozen lending markets. Today, European central banks injected an additional $90 billion into money markets in another co-ordinated move.

The Securities and Exchange Commission imposed a ban on short-selling the stocks of financial companies. Short-selling is a tactic in which investors essentially place bets that stocks will decline in value. Short-selling the stocks of investment banks in recent months contributed to the Federal Reserve-subsidized forced sale of Bear Stearns and the Lehman Brothers bankruptcy.

Story Continues →