U.S. toxic-debt plan, short-selling curbs lift markets

By Patrick M. Fitzgibbons

NEW YORK (Reuters) - The U.S. government curbed short-selling and guaranteed money-market mutual funds on Friday as it worked on a sweeping bailout to mop up hundreds of billions of dollars in toxic mortgage debt, sending global stock markets soaring.

The moves capped a week in which financial markets faced their most serious confluence of crises since the Great Depression in the 1930s and threatened national economies and the worldwide banking system.

"It's like having a heart attack, and you go and get your chest cracked open and get it fixed, but the next morning you're still hurting," said Warren Simpson, managing director at Stephens Capital Management in Little Rock, Arkansas. "This has been a beast of biblical proportions. Nobody has seen anything like it."

As the U.S. government brought out the big guns to tackle the mounting financial crisis, investment bank Morgan Stanley bought itself some time to come up with a plan for its future and continued talking to Wachovia Corp and other banks about a merger.

But much of the markets' focus on Friday was on Washington, as officials from President George W Bush's administration, Congress and the Federal Reserve worked to craft a number of plans to restore confidence in shaken stock markets.

The U.S. government has pledged more than $1 trillion to prop up the financial system and housing market.

In the most recent example of a government entity stepping in to ease fears, the U.S. Treasury said on Friday it will use $50 billion to back money-market mutual funds whose asset values fall below $1 in another step to contain raging financial turmoil.

"The problems were critical, both in the credit markets and with banks," said Blake Howells, director of equity research at Becker Capital Management in Portland, Oregon. "The government is trying to stop a domino effect of more institutions failing, and taking others down."

U.S. stocks soared as the Dow Jones industrial average closed up 368.75 points, or 3.4 percent, at 11,388.44, and the Nasdaq rose 74.80, or 3.4 percent, to 2,273.90. Other global markets also reacted sharply.

WORKING FOR THE WEEKEND

Government officials said they had more work to do. The toxic-debt plan, still being crafted, is expected to cost hundreds of billions of dollars.

"We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses," Treasury Secretary Henry Paulson said at a press conference. "The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy."

Banks worldwide have suffered more than $500 billion of write-downs and loan losses since the global credit crisis began more than a year ago.

The crisis grew more acute this month with government takeovers of mortgage companies Fannie Mae and Freddie Mac; the bankruptcy of Lehman Brothers Holdings Inc; Merrill Lynch & Co's shotgun agreement to be bought by Bank of America Corp; and a bailout of insurer AIG. This came just six months after a government-backed rescue of Bear Stearns Cos.

Government officials have indicated their willingness to do what they can to prevent a major financial institution from going under and roiling the overall markets. A government plan was expected to be sent to Congress this weekend.