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The Federal Reserve and Treasury began a series of emergency measures to prop up the mortgage and money markets ahead of congressional action on a broader lifeline for the U.S. financial system.

The Treasury plans to double its purchases of mortgage- backed debt to $10 billion and use a $50 billion fund to insure against losses on money-market funds. The Fed plans to extend emergency loans to banks to purchase asset-backed commercial paper from money funds, and to buy short-term debt from Fannie Mae, Freddie Mac and other agencies.

Today's announcements are aimed at combating a record exodus of investors from money-market funds, long considered to be among the safest investments. The actions come before an expected congressional passage of a new entity that would remove illiquid mortgage securities from companies' balance sheets.

“This is a situation where they could not be reactive because a run on money markets would have material consequences for investor sentiment,'' said Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co. LLC.

The U.S. Treasury said it will use funds from the government's Exchange Stabilization Fund to insure for a year holdings of publicly offered money-market funds that pay a fee to participate in the program. Retail and institutional funds are eligible, the department said today in a statement.

Government Takeover

Treasury Secretary Henry Paulson said Fannie Mae and Freddie Mac, the mortgage-finance firms that government took over last week, will increase their purchases of mortgage-backed securities and the Treasury will “expand'' its own mortgage buying program.

Treasury spokeswoman Brookly McLaughlin said the department will buy $10 billion of mortgage securities, up from an initial $5 billion plan for the first month of the program. Any purchases after that remain to be determined, she said.

Mortgage assets that aren't trading and difficult to value are “choking off'' credit that the economy needs, Paulson said today.

The Fed will extend loans to banks to purchase “high- quality'' asset-backed commercial paper from money market funds, the central bank said. The Fed will also buy short-term discount notes issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks from Wall Street dealers. Neither program has a set limit.

Investor Shift

“The market for agency discount notes has been disrupted particularly by the shift of some investors to Treasury-only money market mutual funds, which do not invest in agency discount notes,'' New York Fed spokesman Andrew Williams said in an e-mail message. “As a result of this shift, other money market mutual funds have apparently attempted to sell large volumes of agency discount notes, further reducing liquidity in this market.''

The Fed purchased $8 billion of short-term federal agency debt under the new program today instant cash advance cash advance usa.

Yields on the debt relative to U.S. Treasury bills tumbled the most in at least 10 years today. The spread for 90-day agency notes dropped 96 basis points to 122.6 basis points at 5:15 p.m. in New York, according to data compiled by Bloomberg. The spread had jumped from 78 basis points at the end of last week.

The actions came a day after Paulson and Fed Chairman Ben S. Bernanke met with congressional leaders to urge moving troubled assets from the balance sheets of U.S. financial companies into a new institution, the most sweeping action aimed at ending the crisis.

Investors pulled a record $89.2 billion from money-market funds on Sept. 17, according to data compiled by the Money Fund Report, a newsletter based in Westborough, Massachusetts.

Federal insurance may distort the market if left in place for a long period, Crescenzi said. “It will be very hard for the Treasury to strip the guarantee if investors get used to it.''

The Fed loans, with terms up to 270 days, will be at the discount rate, the Fed said. The rate is currently 2.25 percent.

`Competitive Auctions'

The New York Fed will conduct the purchases of debt through “competitive auctions'' over the “next several weeks,'' the Fed district bank said in a statement.

Prime money-market funds hold about $230 billion in asset- backed commercial paper that banks can buy with Fed funds and $69 billion of the agency debt, senior Fed staff officials told reporters on a conference call. The staffers spoke on condition of anonymity.

The Fed said it allowed banks to buy commercial paper from affiliated money market funds and exempted banks from capital requirements related to holding the paper.

The loan program will run through Jan. 30, the officials said. There is no end date for the agency debt purchases, they said.

The Fed officials said they believe the central bank and taxpayers are protected because the commercial paper is backed by assets. The loans are non-recourse, meaning the Fed doesn't have additional rights to banks' assets should the collateral's value decline, the officials said.

The Fed invoked emergency lending authority to aid the mutual funds through banks, the officials said.

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