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Treasury Department Asks Congress to Let It Backstop Money Markets--2nd Update

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03/18/2020 | 01:10pm EDT

By Kate Davidson

WASHINGTON -- The Treasury Department is seeking authority from Congress to temporarily backstop money markets amid intense strains in the financial sector -- as part of a broader fiscal package to bolster the economy due to the coronavirus pandemic.

In a memo outlining the administration's proposal, The Treasury Department said it is asking lawmakers to temporarily suspend restrictions on its Exchange Stabilization Fund so it can develop guarantee programs for the money-market mutual fund industry.

Money-market funds are investments designed to be a safe place to park cash temporarily with little risk of taking a loss.

In 2008, the Treasury intervened to guarantee money-market funds after the collapse of Lehman Brothers spooked investors, who pulled out more than $200 billion from the funds over two days. The U.S. backstop calmed investors, but an uproar over Wall Street bailouts led Congress in 2010 to prohibit Treasury from issuing such guarantees in the future.

Treasury Secretary Steven Mnuchin has said Treasury officials have been coordinating its fiscal response to the crisis with the Federal Reserve. The proposal shows how fiscal and monetary authorities intend to work together to mitigate the economic effects of the coronavirus.

If approved, the money-market request would help support dramatic actions the Fed has taken in recent weeks to calm turbulent financial markets. The central bank announced Tuesday it was creating a new program to lend directly to U.S. corporations, its first effort in the current crisis that required consultation with the Treasury Department. The department will provide $10 billion from its Exchange Stabilization Fund, which has around $94 billion, to cover any Fed credit losses.

Mr. Mnuchin said the Tuesday intervention in the market for very short-term corporate loans was "very significant" in an interview with CNBC Wednesday.

"We saw issues in those markets," he said. "The Fed reacted quickly, we reacted quickly, and we're going to continue to make sure we act quickly."

The proposed money-market program would last until the White House terminates the national state of emergency President Trump declared on March 13, 2020, according to the memo viewed by The Wall Street Journal.

The Treasury Department is also seeking a $200 billion injection into the fund for loans to industries affected by coronavirus disruptions, including $50 billion in secured loans for the airline industry, the terms of which would include limits on executive compensation, according to the memo.

Write to Kate Davidson at kate.davidson@wsj.com

 

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