Bush, Bernanke launch subprime assault

By David McMahon and Mike Peacock

NEW YORK/LONDON (Reuters) - The Federal Reserve on Friday reassured investors it would take any steps needed to shelter the U.S. economy from a global credit squeeze, while President George W. Bush promised to help struggling homeowners refinance their mortgages.

Chairman Ben Bernanke also said the central bank would not bail out investors who had made mistakes, but overall his comments reinforced the view that the Fed will cut interest rates by a quarter percentage point at its meeting on September 18.

Bush urged lenders to work with homeowners to renegotiate their mortgages to prevent default and called on Congress to approve legislation that would provide mortgage insurance to borrowers through a network of private-sector lenders.

"It's very light on detail and limited in scope," Jeff Schappe, chief investment officer at BB&T Asset Management in Raleigh, North Carolina, said of Bush's proposal. "The important news today is that Bernanke is saying the Fed is going to do whatever it will take to limit the impact."

Rising default rates on home loans to less credit-worthy

U.S. borrowers, coupled with falling house prices, have

caused losses for banks and funds holding mortgage-linked securities in recent months and fostered the worst global credit and liquidity squeeze in a decade.

The Federal Reserve, the European Central Bank, the Bank of Japan and other central banks have injected extra liquidity in recent weeks to try to stop the credit squeeze impacting global economic growth.

Investors have been pinning their hopes on an interest rate cut by the Fed at its next policy meeting on September 18 to shore up U.S. economic growth and alleviate the credit squeeze.

MARKETS STABILIZE

All three major U.S. stock indexes rose more than 1.0 percent on Friday, supported by the Bush and Bernanke statements, which also helped boost European stocks earlier in the day.

Bernanke said the Fed would "act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets."

But analysts believe the Fed is in no rush to act as it wants to disabuse investors of the idea that it is there to bail out their poor decisions.

The benchmark U.S. 10-year U.S. Treasury note lost 5/32 in price for a yield of 4.53 percent, versus 4.51 percent late on Thursday, as the need for a safe-haven investment dissipated.

International Monetary Fund First Deputy Managing Director John Lipsky said on Friday that market turmoil would dent but not derail world growth, though it was too soon to declare the troubles over.