WASHINGTON — In what could be the biggest bailout since the Great Depression, top government officials and congressional leaders agreed late Thursday to quickly develop a comprehensive plan aimed at defusing the nation's roiling financial crisis.
The plan would relieve financial institutions of the mortgage-backed securities and other bad assets that are threatening the nation's economic health.
Under the proposal, details of which were not announced, Washington would buy the distressed assets, allowing banks to resume their usual borrowing and lending, according to people familiar with the plan. The approach could be similar to the formation of the Resolution Trust Corp. during the 1980s to resolve the savings and loan crisis.
In a meeting between lawmakers and Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke, the top officials suggested that once the financial system was rebooted in this fashion, the government would be able to sell off the assets to recover taxpayers' money and perhaps even turn a profit, according to the people privy to the plan, who spoke on condition of anonymity because they were not authorized to speak publicly.
The plan could be unveiled as early as today and voted on by Congress by next week.
News of the rescue plan sent Asian markets soaring this morning.
Lawmakers emerging from a 90-minute session in the offices of House Speaker Nancy Pelosi (D-San Francisco) said they expected a detailed proposal from Bernanke and Paulson overnight and to work through the weekend in an effort to pass it quickly into law.
The tone at the meeting was deadly serious, as Paulson and Bernanke stressed to lawmakers that the crisis could get far worse.
"I think we had some sobering news tonight," Sen. Richard Shelby (R-Ala.), top Republican on the Senate Banking committee, said as he left the meeting.
Members of both parties pledged in a brief news conference to work cooperatively.
"It's clear that even though we're just six weeks away from an election, our job is to put our partisan differences aside and to work to help solve this crisis," said House Minority Leader John A. Boehner (R-Ohio).
The meeting capped a day of high drama as government officials, lawmakers and traders sought to keep the financial contagion that staggered markets on Wednesday from resuming its destructive course. To ease the credit crisis, the Fed announced early Thursday that it would boost to nearly $250 billion the funds available for major foreign central banks. Meanwhile, the Securities and Exchange Commission signaled its intention to follow its British counterpart in issuing a temporary ban on short selling.
Short selling is a means of betting that a stock's price will fall by selling borrowed shares in hopes they can be repurchased at a lower price. The practice has been increasingly blamed for causing sudden drops in companies' stock values, frightening away lenders and leaving the firms financially beached.
SEC Chairman Christopher Cox was meeting with commissioners late Thursday. "We are likely to take additional steps in the days ahead that are more particularly addressed to this urgent situation," Cox said.
Early reports that a comprehensive rescue was in the works caused U.S. stock prices to reverse course from Wednesday.
Traders on the New York Stock Exchange broke into cheers Thursday as the bellwether Dow Jones industrial average switched from a 200-point loss to a rise of 410.03 points, or 3.9%, at 11,019.69. The Nasdaq composite index gained 100.25 points, or 4.8%, ending at 2,199.10, and the Standard & Poor's 500 Index climbed 50.12 points, or 4.3%, to close at 1,206.33, its largest one-day percentage gain in nearly six years.
Paulson and Bernanke acted on their new plan after two tumultuous weeks in which policymakers took ad hoc steps that failed to reassure panicky investors. They seized mortgage giants Fannie Mae and Freddie Mac as well as insurance behemoth American International Group Inc., and effectively pulled the plug on investment banks Lehman Bros. Holdings Co. and Merrill Lynch & Co. They also coaxed a group of 10 big financial institutions to kick into a $70-billion self-insurance pool and pumped out billions of dollars more to try to reverse a new and dangerous credit market freeze-up.
The full dimensions of Washington's intervention came into focus late Thursday when the Fed issued figures showing it had made nearly $100 billion in special loans to financial firms around the world in the last week alone.
Separately, Treasury announced that it would double to $200 billion the amount of government securities it would sell at special auctions to raise money to bolster the Fed's finances. The department had announced Wednesday the first $100 billion in auctions.
According to those familiar with Bernanke's and Paulson's thinking, both of these efforts would be dwarfed by the new plan -- the price of which could run into the hundreds of billions of dollars or more.