By Howard Schneider and Binyamin Appelbaum

Washington Post Staff Writer

Friday, September 19, 2008; 9:42 AM

The U.S. Treasury this morning offered temporary insurance for money market funds, attempting to restore confidence in one of the economy's important safe-haven investments, while the Securities and Exchange Commission slapped a two-week ban on short-selling the stocks of 799 financial companies as federal officials continued ramping up efforts to stabilize the global financial system.

Coming as federal policymakers and politicians work to craft a broad financial rescue plan, this morning's actions are meant as a short-term firewall against a steep market collapse, and demonstrate the government's willingness to change basic market rules, at a moment's notice, in response to the current crisis. The Treasury's move in particular marks an unprecedented step by federal regulators to guarantee the value of investments in a certain type of securities, suspending for money-market investors one of the basic rules of the marketplace -- that value may go down. Previously, that sort of protection was offered solely to bank depositors.

Global stock markets soared towards what may prove historic one day gains. The Dow Jones industrial average added more than 225 points in the opening minutes of trading, or more than 2 percent. The tech-heavy Nasdaq added more than 5 percent initially while the broader S&P 500 jumped nearly 3 percent. Financial stocks, protected from short selling, enjoyed double digit gains, with investment banks Goldman Sachs and Morgan Stanley saw gains in excess of 20 percent.

European markets rose on the order of 7 to 9 percent, while Asian markets overnight added anywhere from 4 to 9 percent.

As with other recent steps taken by the government, Treasury's action to bolster money market funds seems to acknowledge that banks no longer stand alone at the core of the financial system.

Money market funds are meant to serve as a conservative place for investors to keep cash, assured -- at least in theory -- that they will get at least $1 back for every $1 invested. In recent days, however, investors have fled the funds amid concern about their safety. Total assets in money market funds fell by 5 percent over the last week, according to the Investment Company Institute, a trade group -- causing some funds to "break the buck" and fall below $1 per share in value.

With roughly $3.5 trillion resting in such funds -- more than half the value of deposits held at U.S. banks -- a run against them could prove catastrophic. Market funds are major buyers of short-term debt, which is issued by financial companies and other corporations to finance day-to-day activities.

To calm the situation, the Treasury announced it was dipping into a Depression-era account to offer insurance similar to that provided for cash accounts in banks by the Federal Deposit Insurance Corp. The insurance fund is limited to $50 billion and meant to be available only for a year. In addition, funds that participate will have to pay a fee -- potentially undercutting the slim returns that such funds earn.

But the Treasury hopes that the availability of a government guaranty will quell concerns about the possible failure of a large and important piece of the financial system.

Money market funds are "a fundamental source of financing for our capital markets and financial institutions," the Treasury said in a news release. "Maintaining confidence in the money market fund industry is critical to protecting the integrity and stability of the global financial system."

The availability of government insurance should, the Treasury said, "enhance market confidence and alleviate investors' concerns about the ability for money market mutual funds to absorb a loss."

To fund the insurance, the Treasury will tap the Exchange Stabilization Fund, established in 1934 in the wake of the Great Depression to help bolster financial markets as needed.

Buttressing that effort, the Federal Reserve said it would lend money to financial institutions to help them buy assets from money-market mutual funds. The policy aims to avoid losses at money-market funds caused by the need to sell assets quickly to honor customer withdrawal requests.

The overnight move by the SEC against short-selling is meant to temporarily protect financial firms against a practice blamed for undermining the health of banks, brokerages, insurance companies and others.

Along with similar steps taken in London, the SEC action helped ignite stock markets around the world -- with indexes in Asia and Europe soaring and some bank and financial stocks experiencing increases of more than 50 percent.

Hong Kong's Hang Seng index closed nearly 10 percent higher, and other major Asian exchanges rose by anywhere from 4 to 6 percent.

London's FTSE 100 was higher by nearly 9.28 percent at midday, with financial stocks there reacting dramatically to action by the country's Financial Services Authority. Similar to the steps announced by the SEC, British authorities limited short-selling in 29 financial companies, including Lloyds TSB bank and its recent takeover target, mortgage company HBOS. The list also included the Royal Bank of Scotland and several insurance companies whose stocks have been plummeting.

Other European markets were up anywhere from 5 to 8 percent.

Short-selling -- a bet that a company's stock will drop -- involves borrowing shares, selling them at the current price, and hoping that the price drops before they have to be repurchased and returned. It has been partly blamed for creating a crisis atmosphere in the financial sector and allowing speculators to profit as stock prices fell.

The SEC had already announced efforts to limit some of the more extreme forms of the practice. But today's steps go further -- giving 799 firms a respite from any short selling until Oct. 2. The list includes major national banks, as well as regional and local firms, insurance companies, investment banks and others.

The action "calls a time-out to aggressive short-selling in financial institution stocks, because of the essential link between their stock price and confidence in the institution," the SEC said in a news release. The new regulation grants some exceptions. But it also imposes extra reporting requirements on short-selling of any public company undertaken by large institutional investors.

Short-selling is an accepted practice among traders that helps markets set accurate prices and in particular gives investors a way to highlight problem companies. The SEC's willingness to suspend the practice speaks to the depth of the current crisis and the sense that extraordinary measures are needed to right it.

However, in the current environment "it appears that unbridled short-selling is contributing to the recent, sudden price declines in the securities of financial institutions unrelated to true price valuation," the agency said in a news release.

The action "would not be necessary in a well-functioning market," SEC Chairman Christopher Cox said in a news release, noting that it is meant to be "temporary in nature and part of the comprehensive set of steps being taken by the Federal Reserve, the Treasury and the Congress."

The breathing room given to financial firms, which Cox said should "restore equilibrium to markets," comes as U.S. economic policy makers and politicians craft a broader plan to restore confidence in the financial sector.

Markets seemed to respond to both the promise of broader relief, and the immediate disappearance -- for now -- of the effects of short-selling.

In London, shares in Lloyds TSB and Barclays were up 60 percent at one point, while Royal Bank of Scotland soared 50 percent.

The stock exchange in Russia jumped so quickly at its open -- a full 18 percent -- that regulators temporarily suspended trading.

Market regulators in Australia and Switzerland, meanwhile, were also imposing short-selling rules, CNBC reported.

U.S. stock futures pointed to a sharply higher opening on Wall Street, following Thursday's 400-point rally on the Dow Jones industrial average.

Washington Post staff writer Debbi Wilgoren contributed to this report.