US plans transfer of bad assets to a new institution

US Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S Bernanke proposed moving troubled assets from the balance sheets of American financial companies into a new institution.

Congressional leaders who met with Paulson and Bernanke late yesterday in Washington said they aim to pass legislation soon. The initiative, which may also insure money-market funds, is aimed at removing the devalued mortgage-linked assets at the root of the worst credit crisis since the Great Depression.

The effort is a recognition that Paulson’s and Bernanke's earlier efforts failed to revive financial and housing markets. The government took over American International Group Inc, Fannie Mae and Freddie Mac in the past 12 days, a period when Lehman Brothers Holdings Inc filed for bankruptcy and Americans pulled a record $89 billion from money-market funds.

“They were just worn out and weary from the one-off situations they had to deal with, and finally came to the realisation that it's a much more pervasive problem,” said Marilyn Cohen, who manages $185 million in bonds as president and chief executive officer of Envision Capital Management in Los Angeles.

“Hopefully, this will give the trading desks the confidence to start making markets again.”

Securities and Exchange Commission Chairman Christopher Cox, who attended the gathering with lawmakers, said the SEC planned to consider more rules to guarantee market liquidity.

Today, the SEC temporarily banned short-selling of financial companies' shares until October 2 after Morgan Stanley fell 39 per cent earlier this week. The UK took a similar step yesterday.