A plan to stop the bleeding

Federal authority would buy troubled mortgages, securities; Support in Congress likely

Congressional leaders and the Bush administration were moving last night toward creating a federal authority to buy troubled mortgages and mortgage-backed securities in the hope of ending the worst financial crisis since the Great Depression.

Representative Barney Frank, the Newton Democrat who chairs the House Financial Services Committee, said the Bush administration promised to quickly send to Congress its plan, which generally has the support of Democratic and Republican leaders. Frank said he expects the House to act on legislation next week, with the Senate to follow soon after.

The Bush administration is still putting together the details of the plan, but Treasury Secretary Henry M. Paulson Jr., in remarks after briefing congressional leaders, suggested it would combine elements of the Resolution Trust Corp., which bought and sold troubled real estate holdings to clean up the savings and loan crisis of the 1980s, and the Home Owners Loan Corp., which refinanced and restruc tured troubled mortgages during the Depression to make them more affordable and stop the flood of foreclosures.

Paulson said the plan would address the two main causes of the crisis: the inability of financial institutions to sell mortgage-backed securities and rising home foreclosures. Paulson said the goal was to devise an "expedited solution aimed right at the heart of the problem."

Frank, who earlier this week suggested that Congress needed to consider a Resolution Trust Corp. approach to the crisis, said Paulson and Federal Reserve chairman Ben Bernanke approached Democratic leaders about creating a new federal authority to buy up troubled mortgage-backed securities. They agreed.

It's unclear how much the proposal would cost, although the government could recover at least some money by selling the securities it buys once financial markets return to normal.

Whatever the cost, said Scott Anderson, senior economist at Wells Fargo amp; Co. in Minneapolis, it would likely be less than the alternative: a deep, prolonged downturn. "We have a Great Depression-style financial crisis," he said, "we might need Great Depression-style solution."

Earlier yesterday President Bush canceled fund-raising trips and met with Paulson, Bernanke, and Securities and Exchange Commission chairman Christopher Cox on the financial crisis. In a brief appearance in the morning, Bush acknowledged "serious challenges" facing the financial system, but added, "The American people can be sure we will continue to act to strengthen and stabilize our financial markets and improve investor confidence."

Investors liked the idea. After another roller coaster day on the markets, stocks surged late yesterday as reports surfaced that the administration was considering creating a federal authority to rescue troubled companies and homeowners. The Dow Jones industrial average jumped more than 400 points to close at 11,019.69. The broader Standard Poor's 500 index and technology-heavy Nasdaq Composite also posted strong gains.

On the campaign trail yesterday, presidential candidates Barack Obama and John McCain each made similar proposals to end the crisis. Democratic nominee Obama, in New Mexico, called for the passage of a Homeowner and Financial Support Act to help keep markets operating and families to get out from under onerous mortgages. He pledged to release more details today. Republican nominee McCain, in Iowa, called for creating a trust to review mortgage and financial institutions, to identify weaker ones and strengthen them before they fail. The Bush administration plan to buy troubled assets would culminate a series of extraordinary actions by the federal government to try to stem a crisis that has at times threatened to collapse the global financial system. The government has taken over insurance giant American International Group and mortgage giants Fannie Mae and Freddie Mac to keep them from sliding into insolvency. In March, the Fed engineered the sale of investment firm Bear Stearns Cos. by guaranteeing some $30 billion of its assets. The Fed, working with central banks around the world, has also pumped tens of billions of dollars into the financial system to keep credit flowing and markets from grinding to a halt. Just yesterday, the Fed and other central banks made available $180 billion to keep credit markets operating.

Economists said last night that government needed to come up with a systemic solution to the crisis, instead of reacting case by case to events with the potential to plunge the US and global economies into deep downturn. That became clear after the AIG bailout late Tuesday, which was followed by panic across global markets.

Banks stopped lending to one another, and credit nearly froze. The Dow Jones industrial average plunged more than 400 points on Wednesday. Panicked investors began pulling funds out of money market mutual funds, once regarded as safe as cash, highlighting how spooked they've become by the crisis. Putnam Investments yesterday said it closed a $12.3 billion money market fund after the companies and institutions that invest in it inundated the firm with requests for their money. On Wednesday, investors pulled nearly $90 billion out of money market mutual funds - among the largest single-day withdrawals in industry history.

Nariman Behravesh, chief economist at Global Insight, a Waltham forecasting firm, said creating an authority to buy up troubled securities and clean up the balance sheets of financial institutions "puts in place a permanent solution" to the crisis.

"This gets them out of the firefighting mode," said Behravesh, "At some point, you have to stop fighting fires, and start preventing them."

Robert Gavin can be reached at rgavin@globe.com. Material from Globe wire services was used in this report.