This article misstated the first name of James B. Lockhart III, the head of the Federal Housing Finance Agency.
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Historic Market Bailout Set in Motion
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The problems accelerated as the massive withdrawals forced funds to sell assets at fire-sale prices. The Federal Reserve, trying to stanch the bleeding, said it would offer funding for banks to buy assets from the funds at normal prices.
The Treasury Department also announced that it would offer an insurance program for the funds that is similar to the long-standing government guarantee of bank deposits. Funds would pay a fee in exchange; if they collapse, the government repays investors.
But the Treasury intervention threatens to drain deposits from alreadytroubled banks because money-market funds offer higher interest rates and now will feature the same federal protection. People familiar with the matter said banking regulators were not consulted on the plan and were considering how best to limit the impact on banks.
The American Bankers Association released a letter to Bernanke and Paulson that said the government had acted in "great haste" and should reconsider.
"The program announced this morning runs the risk in the long run of profoundly changing the nature of our financial system and, specifically, undermining the nation's banking system," wrote ABA President Edward Yingling.
The Treasury further announced that Fannie Mae and Freddie Mac will increase their purchases of mortgage-backed securities. By buying more of these securities, the two firms will provide more money to fund mortgages and should decrease the interest rate on those mortgages.
The Federal Housing Finance Agency, the regulator overseeing Fannie Mae and Freddie Mac, said it had directed the companies to begin buying more mortgages but declined to say how much more they would buy. Although this could expose the companies to greater risks, FHFA Director Joseph B. Lockhart III said government "examiners will continue to oversee that such activities are done in a safe and sound manner."
Paulson also said the Treasury would expand its plan to buy mortgage-backed securities to supply additional money to Fannie Mae, Freddie Mac and the overall mortgage market. The government plans to buy $10 billion in mortgage securities in the next month, up from $5 billion earlier this year.
Staff writers Dan Eggen, Zachary A. Goldfarb, Neil Irwin, Paul Kane, Renae Merle, Lori Montgomery and Steven Mufson contributed to this report.
