Thaw in credit may begin next week

President Bush thanked Treasury Secretary Henry Paulson yesterday as he left the Treasury Building. Paulson is expected to move quickly to start buying troubled investments. (Mike theiler/Reuters)

Congress rushed through a $700 billion program to bail out financial firms, but it will take at least a month before the government can make the deals for which the plan was designed: buying large holdings of risky, mortgage-backed securities from troubled financial companies.

Other benefits of the plan could come sooner, analysts said. The bailout could help thaw frozen credit markets as soon as next week if, as intended, the plan helps restore confidence among financial firms and credit begins flowing more freely. The credit system has become clogged, because financial institutions have stopped lending to one another over fears their counterparts are sitting on mortgage-backed investments. When banks don't lend to one another, there is less money for loans to individuals and businesses.

Lawmakers and analysts are looking to Treasury Secretary Henry M. Paulson Jr. to move quickly and start buying the troubled investments to shore up the financial system. Treasury has up to 45 days to figure out the details of the program. Transactions probably will take the form of reverse auctions, in which the government announces it is ready to buy a certain amount of mortgage-based assets. Companies that want to unload the devalued investments then compete to be included, offering their unwanted holdings to the Treasury Department, which buys at the cheapest prices.

Analysts expect the auctions to be up and running in about a month. "Hopefully, this helps calm markets now," said Mark Zandi, chief economist at Moody's Economy.com. "If the auctions go reasonably well, the panic will subside, and we'll feel like we're heading for normalcy."

Some analysts, however, are less optimistic about a quick improvement in either confidence or credit. Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis, noted that stocks fell sharply after the House approved the bailout package yesterday. The Dow Jones industrial average slid 157.47 points to 10,325.38.

"What Congress did today is helpful, but it's not going to be miraculous," Anderson said. "Banks are still hoarding cash, and we'll see if things ease up."

Getting the program up and running will not be easy, analysts said. First, Treasury has to borrow money to make the purchases, a process that could take several weeks.

Designing the auctions will be tricky, too, analysts said, as the government balances the need to get low prices to limit the risk to taxpayers, yet pay enough so financial institutions remain strong enough to resume lending. The nature of mortgage-backed securities makes buying and selling them complicated, analysts said. Such securities are often backed by different kinds of mortgages from different areas of the country, some of which are at a higher risk of default than others. The challenge is finding enough similar securities to attract a sufficient number of bidders.

"It's like a barrel of apples: Some are OK, some are bruised, and some are rotten," said Brian Bethune, economist at Global Insight, a Waltham forecasting firm. "You have to disentangle them."

Treasury plans to hire five to 10 asset-management firms to help design, implement, and run the program, Treasury officials said. The department will also add about 24 employees, including bankers, lawyers, accountants, and financial managers.

Analysts of financial companies said there are an unlimited number of potential sellers into the bailout fund. "It's all and everyone," said Gerard Cassidy, a banking analyst at RBC Capital Markets.

Some Boston area firms, including State Street Corp. and John Hancock Life Insurance Co., could be sellers, several analysts said. Hancock is the eighth-largest holder of mortgage-backed securities and related holdings among insurers, according to Thomson Reuters. Neither State Street nor Hancock would comment.

Bethune, the Global Insight economist, said the prospect of the government as buyer should take pressure off financial firms. Meanwhile, the Federal Reserve is expected to take additional action to ease the credit crunch, including a likely cut in interest rates.

"You can start to see there's a way out of this mess," Bethune said. "The pieces are starting to come into place."

Robert Gavin can be reached at rgavin@globe.com. Beth Healey of the Globe staff contributed to this report.