The stock market had its best day in six years on Thursday and has followed through with another huge rally on Friday. Market participants are relieved that the US government is now attempting to enact an overall solution to the credit problems, instead of just putting out fires (Fannie, Freddie, AIG, etc.).
The main ingredient to the US government solution will be a “bad bank” which will take much of the toxic bad debts off the books of the major US financial institutions. Final details have yet to be worked out for this “bad bank”. However, it is thought that it will be similar to the RTC (Resolution Trust Corp.), which is what the government used during the savings & loan crisis of the early 90s, or the RFC (Reconstruction Finance Corp), which was used during the Great Depression to aid the financial institutions at that time.
The government has also instituted a “temporary” 1-year insurance fund, similar to the FDIC, which will insure money market fund deposits. In the past week, there were a few money market funds which “broke the buck” (i.e., instead being valued at the normal $1 per share, values had dropped below $1). This began to accelerate panic in the financial markets. Nearly $100 billion was withdrawn from money market funds in one day and placed into 3-month treasury bills which lowered the yields to nearly zero!
The government also instituted additional measures including: additional injections of billions of dollars into the interbank money markets, stepping up their direct purchases of mortgage securities, and instituting a temporary ban on short-selling.
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