Markets applaud as financial rescue plan takes shape

WASHINGTON -- Stocks rallied strongly Friday after Treasury Secretary Henry Paulson and top elected officials pledged to expedite a rescue plan for the nation's troubled financial sector.

The Dow Jones industrial average gained 368.75 points or 3.35%, erasing the week's losses. Other major indexes also gained 3% to 4%.

House Speaker Nancy Pelosi said the House will stay in session past its scheduled adjournment next week if needed to deal with the crisis.

"We are committed to quick, bipartisan action," she said.

That assurance, and new measures announced earlier Friday to grease the nation's financial wheels helped propel the rally in stocks.

The rescue could involve government guarantees worth hundreds of billions of dollars, Paulson said. "This needs to be big enough to make a real difference," he told reporters Friday morning, arguing that doing nothing would cause great harm.

"I am convinced that this bold approach will cost American families far less than the alternative — a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," he said.

In a brief appearance later Friday morning, President Bush reiterated that the action is necessary.

"These measures will require us to put a significant amount of taxpayer dollars on the line," he said. "This action does entail risk, but we expect that this money will eventually be paid back."

Paulson said he, along with Federal Reserve Chairman Ben Bernanke, will work with members of Congress throughout the weekend to craft a proposal, which he referred to as a "troubled asset relief program."

Treasury and the Fed had been dealing with the financial crisis on a case-by-case basis. A coordinated effort is expected to calm individual investors and financial markerts and increase confidence, helping to bring financial markets and the economy back to a new normal.

"The Treasury and the Fed have finally realized the depth and systemic nature of the crisis," John Ryding and Conrad DeQuadros of RDQ Economics said in a statement to clients. "We believe that these actions will constitute the wider firebreak that will contain the crisis. ... However, we still think the economy is in recession— although these measures reduce the chance that the recession could become a depression."

In mid-morning trading, the Dow Jones industrial average was up as much as 400 points at times on the news.

Among the actions taken Friday to unfreeze financial markets:

• The Treasury Department said it will temporarily insure money market mutual funds up to $50 billion for firms that pay a fee to participate in the government program.

"Concerns about the net asset value of money market funds falling below $1 have exacerbated global financial market turmoil and caused severe liquidity strains in world markets," Treasury said.

The program is being created under the Exchange Stabilization Fund, which was created in 1934 to stabilize the dollar.

• The Federal Reserve said it would lend money to banks to buy high-grade, asset-backed commercial paper from money market mutual funds. That will give them cash to handle redemptions by clients.

The Fed will assume the risk for the loans, meaning if they are not paid back, the central bank will lose. That said, senior Fed staffers Friday said they do not expect that to happen, given that the asset-backed commercial paper is of good quality that will be worth its value when the financial crisis eases.

Money market mutual funds hold approximately $234 billion of asset-backed commercial paper. In recent days, some investors have pulled their money out of money market mutual funds, which are not insured, forcing firms to sell securities to raise cash. But the crisis in financial markets has made it harder for firms to sell their holdings, even high quality securities.

• The Federal Reserve also said it would buy notes from Fannie Mae, Freddie Mac and the Federal Home Loan Banks from primary dealers, the firms that regularly deal with the Fed in its open market operations, which are conducted to maintain its target for short-term interest rates.

• The Securities and Exchange Commission temporarily halted short selling in the stocks of 799 financial companies to "protect the integrity and quality of the securities market and strengthen investor confidence," the agency said. Short selling is making a bet that the stocks will fall. The practice has been blamed for accelerating declines in financial stocks, or worse, forcing companies into bankruptcy or mergers.

• The Treasury Department said Fannie Mae and Freddie Mac will increase their purchases of mortgage-backed securities, providing fresh money to mortgage lenders, while Treasury said it would expand its purchases of the securities. Those moves are expected to help increase mortgage availability and affordability, Paulson said.