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CAN BAILOUT STEADY TEETERING TITANS?

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By EDMUND L. ANDREWS

The New York Times

Published: September 19, 2008

WASHINGTON - In another breathtaking display of government intervention, top officials at the Treasury Department and Federal Reserve began discussing with congressional leaders a plan to buy up vast numbers of distressed mortgages held by ailing financial institutions.

Although the details of the plan remain to be hammered out, the discussions could result in the biggest bailout in U.S. history, and the most direct commitment of taxpayer funds so far in the worst financial crisis that Fed and Treasury officials say they have ever seen.

"What we are working on now is an approach to deal with systemic risks and stresses in our capital markets," said Treasury Secretary Henry Paulson. It would be "a comprehensive approach that would require legislation to deal with the illiquid assets on financial institutions' balance sheets," he added.

The essence of the new plan is expected to be loosely modeled on the Resolution Trust Corp., the entity that bought up and eventually sold hundreds of billions of dollars worth of real estate in the 1990s from failed savings-and-loan companies. In this case, however, the government is expected to take over only distressed assets, not entire institutions.

It came on a day when the Federal Reserve poured almost $300 billion into global credit markets and barely dented the panic.

Hoping to shore up confidence with a show of financial shock and awe, the Federal Reserve stunned investors before dawn on Thursday by announcing a plan to provide $180 billion to financial markets through lending programs operated by the European Central Bank and the central banks of Canada, Japan, England and Switzerland.

Rumors about the Bush administration's new stance swept through the stock markets on Thursday afternoon. Still, the move took most of Washington by surprise, especially since Congress had been trying to finish up its business and head home to campaign for re-election.

After an initial sense of relief swept markets in Asia and Europe, the fear quickly returned. The anxiety remained so high that the Federal Reserve had to inject an extra $100 billion, in two waves of $50 billion each, just to keep the benchmark federal funds rate at the Fed's target of 2 percent.

None of those actions, however, brought much catharsis or relief, with banks around the world remaining too frightened to lend to each other, much less to their customers. This forced Paulson and Bernanke to think the unthinkable - committing taxpayer money to buy hundreds of billions of dollars in distressed assets from struggling institutions.

A growing number of Democratic leaders, as well as many banking executives, have been pushing for a sweeping bargain in which the government would buy up billions of dollars in bad mortgages. As part of the bargain, lenders would negotiate easier loan terms with distressed homeowners.

The scale and complexity of the project are almost certain to create huge philosophical differences between the parties that could make negotiations difficult.

President Bush and his top advisers have adamantly opposed bailouts, but the mortgage meltdown has already forced the Treasury and the Fed to bail out four of the country's most prominent financial institutions: Bear Stearns in March; Fannie Mae and Freddie Mac earlier this month; and American International Group, the insurance conglomerate, this week.

On Thursday, the Dow Jones industrial average shot up 617 points from its low point in midafternoon, its biggest surge in six years, and ended the day with a gain of 410 points, or 3.9 percent.

"The markets voted, and they liked the proposal," said Laurence Meyer, vice chairman of Macroeconomic Advisers. "That leaves us an open question, politically, about whether that is a feasible direction to go in, in the absence of legislation from Congress."

The stock surge began after Sen. Charles Schumer, D-N.Y., announced his own proposal for a government rescue on the Senate floor and declared that both the Treasury and the Federal Reserve were open to all ideas.

"The Federal Reserve and the Treasury are realizing that we need a more comprehensive solution," Schumer said. "I've been talking to them about it."

The meeting in the Capitol, which began about 7 p.m., came after congressional leaders had initially appeared unclear about what role they would play in the rapid-fire decisions being made.

Leaders of both parties had complained about a lack of hard information flowing from the administration. House Republicans even canceled a closed-door party session on Thursday morning after the administration refused to provide an official to brief them on the administration's emerging policies.

As Thursday progressed, congressional leaders sought to reassert themselves on the crisis, scheduling oversight hearings, calling for a legislative response to the market turmoil and offering to put off an adjournment scheduled to start at the end of next week if the administration and Congress could find common ground on a solution.

Pelosi, in a letter sent Thursday evening to President Bush, reiterated that view.

"We stand ready beyond the targeted adjournment date of September 26 to permit Congress to consider legislative proposals and conduct necessary investigations," Pelosi said in the letter, which said "the worsening crisis in our financial markets demands strong solutions and decisive leadership."

Whether a legislative consensus could be found remained an open question, and members of President Bush's own party were among those who had been most critical of the increasing federal intervention in the private markets.

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