A breakthrough agreement to create a giant US government-sponsored vehicle to take on toxic assets in the financial system looked possible on Thursday night as Treasury Secretary Hank Paulson, Fed chairman Ben Bernanke and top lawmakers convened a top level meeting to discuss the financial crisis. The US Treasury said they discussed a “comprehensive approach to address the illiquid assets on bank balance sheets that are at the underlying source” of the current financial turmoil. The Treasury added that Paulson and Bernanke were “exploring all options, legislative and administrative” and expected to work through the weekend with Congressional leaders to finalise a possible solution to the crisis. Hope for a deal to create a vehicle loosely modelled on the Resolution Trust Corporation created to clean up after the S&L crisis of the 1980s fuelled a late equities rally on Thursday, with the US S&P 500 index closing up 4.3%, the biggest gain in nearly six years. This capped a remarkable day that began with a giant effort by the world’s central banks to support market liquidity with infusions of a combined $180bn to banks outside the US. Meanwhile, regulators mounted fresh assaults on short-sellers dragging down bank shares as the Uk took the unprecedented step of banning the short-selling of financial stocks and the SEC discussed similar action.
