WASHINGTON - The Bush administration, moving to prevent an economic cataclysm, urged Congress yesterday to grant it far-reaching emergency powers to buy hundreds of billions of dollars of distressed mortgages despite many unknowns about how the plan would work.
Treasury Secretary Henry M. Paulson Jr. made it clear that the upfront cost of the rescue proposal could easily be $500 billion, and outside experts predicted that the bill could reach $1 trillion.
The outlines of the plan, described in conference calls to lawmakers yesterday, include buying only from U.S. financial institutions - but not hedge funds - and hiring outside advisers who would work for the Treasury, rather than creating a separate agency. Democratic leaders immediately pledged to work closely with Paulson to pass a plan in the next week, but they also demanded that the measure include relief for deeply indebted homeowners, and not just for the banks and Wall Street firms.
According to notes taken by one participant in a call to House members, Paulson said that the failure to pass a broad rescue plan would lead to nothing short of disaster. Bernanke said that Wall Street had plunged into a full-scale panic, and he warned lawmakers that their own constituents were in danger of losing money on holdings in conservative money market funds.
People involved in the discussions yesterday reported that Paulson said he did not want to create a new government agency to handle the rescue plan. Rather, he said, the Treasury Department would hire professional investment managers to oversee what could be an enormous portfolio of mortgage-backed securities.
He indicated that he wanted to buy securities from U.S. financial institutions, a decision that could anger the legions of foreign institutions that poured hundreds of billions of dollars into the American mortgage market during the housing boom, and that have customers located here.
No one knows how long the cleanup will take, or what surprises await as the housing crash runs its painful course. And no one can say whether intervening with the full faith and credit of the United States today will encourage reckless risk-taking in the future.
Much depends on the ability of the government to drive a hard bargain when it acquires the assets. "If they value these things at fire-sale prices, they could make the banks secure and make more money," said Douglas Diamond, professor at the University of Chicago's Graduate School of Business. "If they get snookered, they could lose a lot."
Scores of basic questions remained unanswered as of yesterday evening, including how much of the mortgage market the administration hoped to buy up. The broader economic questions were even more daunting. What were the dangers in letting the government borrow another $500 billion - which ultimately might have to come from foreign investors - at the same time the deficit was already skyrocketing?
Would this epic bailout lead to the same kind of runaway inflation that afflicted the United States throughout the 1970s?
But as the stock market zoomed for the second day in a row, mainly in response to hopes of a sweeping bailout plan from Washington, President Bush and lawmakers alike focused on how fast they could deliver as much government help as necessary.
"Given the precarious state of today's financial markets - and their vital importance to the daily lives of the American people - government intervention is not only warranted, it is essential," Bush said in a speech in the Rose Garden at the White House.
News of the giant rescue plan sent stock markets soaring around the world. The Dow Jones industrial average shot up 368 points, or 3.35 percent, yesterday, after having jumped 410 points Thursday on early rumors of the plan. The rally erased the losses from earlier in the week and allowed stock prices to end higher for the week.
Perhaps more important to Fed and Treasury officials, the credit markets showed signs of thawing as well. Yields on three-month Treasury bills had sunk to almost zero on Wednesday and on Thursday as investors fled from most debt securities and poured their money into the safest and shortest-term Treasuries. But yesterday, the yield on three-month Treasuries had edged up to .99 percent - still well below normal, but much closer to normal than before.
Meanwhile, the Federal Reserve and Treasury deployed additional tens of billions of dollars to prevent an investor panic and flight from the nation's money market funds. Such funds, totaling $3.4 trillion in assets, are held by tens of millions of individuals and traditionally considered as safe as bank deposits. But they had come under pressure in recent days as investors began to pull money out faster than the funds could sell assets.
While the stock market showed its euphoria, the political obstacles to resolving the financial crisis remained high. The first is simply a matter of time: Congress is set to adjourn at the end of next week, and it is being asked to approve a plan involving more money than any single program in history.
As of yesterday evening, Paulson had yet to deliver a formal plan to Congress. House and Senate leaders pledged to work through the weekend, but they insisted that Paulson bring them a detailed plan rather than just an outline.
An even bigger obstacle was the goal of the plan. Bush and Paulson made it clear that their primary, and perhaps only, goal was to stabilize the financial markets by removing hundreds of billions of dollars in "illiquid assets" from the balance sheets of banks and financial institutions.
"Confidence in our financial system and its institutions is essential to the smooth operation of our economy, and recently that confidence has been shaken," Bush said. "We must address the root cause behind much of the instability in our markets - the mortgage assets that have lost value during the housing decline and are now restricting the flow of credit."
But Democratic lawmakers insisted that any plan would also have to provide relief to millions of families that were poised to lose their homes to foreclosure.
The House Speaker, Nancy Pelosi of California, said she would insist that the plan "uphold key principles - insulating Main Street from Wall Street and keeping people in their homes by reducing mortgage foreclosures."
The Chicago Tribune contributed to this article.
bailout at a glance
Among federal plans announced yesterday to combat the financial meltdown:
* Crafting a taxpayer- backed plan to buy bad mortgages and other problem assets held by ailing banks and others in an action that could cost hundreds of billions of dollars.
* Treasury is tapping up to $50 billion from a Depression-era fund to protect the holdings of eligible money market mutual funds.
* The SEC took the unprecedented step of temporarily banning "short- selling," a practice of betting against stocks. It covers 799 financial stocks.
Ferris Clients can't withdraw money, make trades PG 8
Short-selling ban SEC seeks to halt decline in shares PG 9