Bush offers $500 billion bailout

WASHINGTON - The Bush administration, moving to prevent an economic cataclysm, urged Congress on Friday 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 Paulson said the upfront cost of the proposal could easily be $500 billion and experts predicted that it could reach $1 trillion. It would be the most sweeping government intervention in the markets since the Great Depression.

Millions of Americans could also benefit from other dramatic stopgap measures. Regulators announced efforts to stabilize the mortgage market; curb stock speculation; and insure money-market mutual funds with government money, seeking to protect ordinary investors and preserve a vital source of corporate finance.

The initiatives were precipitated in part by concern that scared investors would race to withdraw their holdings from money-market funds, which hold $3.5 trillion in investments, depleting a major source of corporations' short-term funding.

President Bush said it is a "pivotal moment for America's economy." In a speech remarkable for its grim language, Bush said: "This action does entail risk. But we expect that this money will eventually be paid back. ... The risk of not acting would be far higher."

Questions remained about whether the effort would work. Truth is, no one knows. The United States and its financial markets haven't been down this road before.

Paulson and Federal Reserve Chairman Ben Bernanke told lawmakers that the financial system had been perilously close to collapse and that failure to pass a broad rescue plan would lead to nothing short of disaster, said one participant in a call to House members.

Paulson acknowledged that the federal government's previous policy of addressing corporate failures on a case-by-case basis had not stemmed the accelerating crisis. He said the new comprehensive strategy has a better chance of calming the turmoil that froze critical segments of the credit markets and sent stock markets into a tailspin earlier this week.

House and Senate leaders pledged to work through the weekend to craft a bill -- with a goal for passage of the plan by the end of next week -- but they insisted that Paulson bring them a detailed plan, not just an outline. As of late Friday, Paulson had yet to deliver a formal plan.

Some lawmakers, including Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, have expressed concerns about the plan's cost and its chance of success. Said Rep. Jeb Hensarling, R-Texas: "We are being asked to go 'all in' with taxpayer dollars, and once our government and the taxpayer is on the hook, there is no fallback option."

However, news of the rescue plan sent investors storming back into the market, giving Wall Street another extraordinary rally Friday. The Dow Jones industrials soared about 370 points, giving them a gain of about 780 over two days. The Standard & Poor's 500-stock index, a broader measure, rose 4 percent Friday and actually posted a gain for the week.

Analysts said it was the first government response decisive enough to restore confidence in the markets. "Everything they had done had been a Band-Aid approach," said Jay Mueller, economist at Strong Capital Management. "Now we're dealing with the root problem."

However, the American Bankers Association urged the government to reconsider. "The program ... runs the risk in the long run of profoundly changing the nature of our financial system and, specifically, undermining the nation's banking system," wrote ABA President Edward Yingling.

The proposal capped a dizzying two weeks in which the government has seized the mortgage-finance giants Fannie Mae and Freddie Mac; allowed the 158-year-old Lehman Brothers to collapse; and taken over American International Group, the world's largest insurer.

Paulson identified the mortgage securities that the government would buy as the "underlying weakness in our financial system." Mortgage securities provide the financing for most U.S. home loans sold and were widely held by big financial firms and banks. When home values started dropping, traditional buyers of these securities ran for the exits, and the value of the securities also plummeted. Those left holding the bag -- mainly mortgage firms, big Wall Street banks and hedge funds -- started to suffer vast losses, and some collapsed.

People involved in the talks said Paulson did not want to create a new government agency to handle the rescue plan, instead preferring to hire professional investment managers to oversee the portfolio of securities.

Under the plan, the Treasury would offer to buy the troubled mortgages from U.S. financial institutions. While those securities are almost worthless now, Bush officials plan to hold them several years in the hopes that they will regain some, if not all, of the money the government spends.

But no one knows precisely how much money is tied up in those securities. Paulson estimated that the cost of buying them will be in the "hundreds of billions of dollars." Others said the cost could be $1 trillion. For comparison, the U.S. debt is estimated at about $10 trillion.

New York Times, Washington Post, McClatchy News Service and AP contributed to this report.