241 Pizza

Today’s temporary deal to insure money market funds — bankrolled by the Treasury's Exchange Stabilisation Fund — will inject confidence back into the stock market.

Money market funds are regarded as relatively safe since they invest in short-term securities that have a high credit rating and are not allowed to invest more than 5 per cent of the fund in any one financial institution.

The funds seek to maintain a stable $1 net asset value, however, this week that value dipped to 96 cents — a price movement known as breaking the buck.

The US federal bailout is designed to stop this week's domino-style collapse of banks and insurers.

It is unclear how the assets would be valued, although there have been suggestions that the securities could be priced at an auction, underwritten by the Government, and eventually sold back to the market.

So far, the US Government has spent more than $600 billion to support its creaking financial system.

Most recently, the Fed agreed a $85 billion loan to AIG, the troubled US insurance giant, before which it pledged to prop up Fannie Mae and Freddie Mac to the tune of $200 billion. Earlier this year, it helped the eleventh-hour rescue of Bear Stearns by JP Morgan Chase.

However, at the weekend, the Government refused to step in and rescue Lehman Brothers, which was forced to file for bankruptcy on Monday. Since then, Barclays, the UK bank, has agreed to acquire Lehman’s US operations for around $2 billion.

Banks have been unwilling to lend to each other over the last year and have been suspicious of each other's exposure to mortgage-backed assets.

It is hoped that if they are able to rid themselves of their mortgage-backed bonds, Wall Street, the world's most important capital market, will begin functioning normally.

Australia has also banned short-selling and it is believed that Europe is examining a crackdown of the practice.

While such trades are legal, they are exacerbating steep falls on the stock market, already nervous about which bank will be next to go bust.

Explore Markets

• United States

• Europe

• Japan

• China

• Russia

• The Gulf

• India

• Africa

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive