Main points of government intervention

Treasury Secretary Henry Paulson made it public this morning (this news had leaked yesterday afternoon causing stocks to rally in late trading) that the government would intervene in the financial markets to shore up confidence in the financial system.

According the Wall Street Journal the government’s intervention could become “the largest intervention in the financial markets since the 1930s.”  This is great news as the health of the financial system was being called into question over the past couple days.

In fact, over the past two days $180 billion has been taken out of traditionally safe money market funds because of fear that the assets backing the fund would fall below the value of the deposits.  This led to investors buying short-term treasury securities with a NEGATIVE RETURN (meaning these investors were willing to accept less money than the money they were investing for the safety of the US government).

Among the measures that the Treasury Secretary announced this morning were-

*Increase the government’s purchases of mortgage backed securities.

*Acquire “bad assets” (risky mortgage-backed bonds) from financial institutions so they can remove them form their balance sheet.

*Ban investors from “short-selling” the stocks of 799 vulnerable financial institutions.

It is unclear what this new intervention will look like in terms of the organizational structure but more details should become available early next week.