White House, lawmakers plan new bailout deal

WASHINGTON - Hard-pressed U.S. consumers curbed their spending during August despite an unexpected jump in incomes, according to a government report on Monday that implied worry about the economy's direction was deepening.
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The Commerce Department said consumer spending was flat in August after barely edging up by a revised 0.1 percent in July, a much weaker outcome than forecast by Wall Street economists surveyed by Reuters who had a 0.2 percent spending rise.

Incomes from wages and salaries and all other sources rose by 0.5 percent in August, largely reversing July's revised 0.6 percent drop and well ahead of forecasts for a smaller 0.2 percent gain. Incomes had been boosted early in the year by payments made under an economic stimulus program but that has largely worn off.

"These payments are now winding down," the department said. Since about two-thirds of U.S. economic output is driven by consumer spending on goods and services and there has been a steady month-by-month loss of jobs in addition to the waning stimulus payments, prospects for spending in coming months are not promising.

"It looks like we are poised to see a real-term decline in personal consumption and that will likely result in a negative GDP number in the third quarter," said James O'Sullivan, economist at UBS Securities in Stamford, Connecticut.

The income and spending data had no impact on financial markets, which still were grappling with news of another U.S. bank merger and with details of the huge taxpayer-financed bailout program for U.S. financial firms.

Despite higher August incomes, consumers facing higher prices for gasoline and other items were unable to save more. The personal savings rate dropped to 1 percent from 1.9 percent in July.

Meanwhile, the report pointed to persistent inflation pressures. The personal consumption expenditures index on a year-over-year basis rose 4.5 percent in August, only barely below the 4.6 percent rise posted in July. Core prices that exclude food and energy were up 2.6 percent -- the highest rate since the beginning of 1995.

White House, lawmakers plan new bailout deal

WASHINGTON - Top congressional and White House officials, stunned when the House rejected a massive rescue plan for the nation's economy, scrambled to structure a new bailout proposal that would attract reluctant lawmakers and still soothe the unnerved financial markets.
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"Doing nothing is not an option," House Majority Leader Steny Hoyer, D-Md., said after seeing the $700 billion emergency package for the nation's financial systems fail 228-205 on Monday.

With the House not scheduled to meet again until Thursday, congressional leaders and Bush administration officials promptly sought to assess what types of changes could win over enough votes to guarantee success. President Bush planned to make a statement on the rescue plan at 8:45 a.m. EDT Tuesday.

The outcome of Monday's vote fed a huge sell-off in the stock market, sending the Dow Jones Industrial Average into its biggest single-day plunge, 777 points. The House vote and the market's terrified reaction shook Washington and New York centers of power — even overseas markets — but no immediate solution seemed at hand.

Democratic presidential candidate Barack Obama on Tuesday said in a statement that lawmakers should not start from scratch as they weigh their next move.

From the campaign trail, the Illinois senator proposed that one change would be to raise from $100,000 to $250,000 the amount of federal deposit insurance for bank accounts. He said that such a move would be a boost for small businesses and would make the U.S. banking system more secure as well as restore public confidence in the nation's financial system.

Obama also said further inaction would be catastrophic for the economy and for American families.

The bill's failure came despite furious personal lobbying by Bush and support from House leaders of both parties. But the legislation was highly unpopular with the public, ideological groups on the left and the right organized against it, and Bush no longer wielded the influence to leverage tough votes. Even pressure in favor of the bill from some of the biggest special interests in Washington, including the U.S. Chamber of Commerce and the National Association of Realtors, could not sway enough votes.

The legislation the administration promoted would have allowed the government to buy bad mortgages and other deficient assets held by troubled financial institutions. If successful, advocates of the plan believed it would help lift a major weight off the already sputtering national economy.

Treasury Secretary Henry Paulson emerged after the vote and warned of a credit crunch that would affect American businesses and said families would find it harder to get student loans and car loans.

"We need to work as quickly as possible," he said gravely. "We need to get something done."

The sense of urgency was not universal. Many opponents of the bill argued that the package amounted to a too-costly commitment of taxpayer money to bail out financial institutions for their own mistakes.

Rep. Dean Heller, R-Nev., offered a typical sentiment. "I cannot with good conscience put Nevada's taxpayers on the hook for the foolish excesses of Wall Street," he said. "Congress should pass legislation that protects the taxpayer, assists with bad assets and allows the market to correct itself."

Immediately following the vote, Republican leaders blamed their failure to secure more votes on the partisan tone of Speaker Nancy Pelosi's pre-vote speech on the House floor. "There were a dozen members who we thought ... we had a really good chances of getting on the floor," said Minority Leader John Boehner of Ohio. "And all that evaporated with that speech."

Rep. Barney Frank, D-Mass., the gruff but quick-witted chairman of the House banking committee, countered, "Give me the names of those 12 people and I'll go talk uncharacteristically nice to them."

Behind the bluster, lawmakers pledged to work again. Hoyer met with House Republican Whip Roy Blunt of Missouri, one of the lead GOP negotiators from the House.

Blunt, noting that the House would break for the Jewish holidays until Thursday, said, "We are going to have a couple days to see how the marketplace reacts to all this, and maybe that's a good thing."

House members weren't going home to campaign for re-election "until this is addressed," Hoyer vowed.

Both Blunt and Hoyer suggested that the Senate could vote first on a bill then send it to the House, but Senate leaders showed no inclination to take up a bill without being certain of its fate in the House.

"What would be wrong, I think, would be to act without some kind of clear indication from the House about how they're going to proceed," said Sen. Christopher Dodd, D-Conn., the chairman of the Senate Banking Committee. "We don't need to start all over."

The two men campaigning to replace Bush watched the situation closely — from afar — and demanded action.

In Iowa, Republican John McCain said that Obama and congressional Democrats "infused unnecessary partisanship into the process. Now is not the time to fix the blame; it's time to fix the problem."

Obama said, "Democrats, Republicans, step up to the plate, get it done."

The burden for votes fell more strongly on Republican leaders. About three out of five House Democrats voted for the legislation; only a third of Republicans backed it.

Republicans, already seeking possible votes, floated several ideas. One would double the $100,000 ceiling on federal deposit insurance. Another would end rules that require companies to devalue assets on their books to reflect the price they could get in the market. source

With deal's collapse, the McCain camp attacks

WEST DES MOINES, Iowa: Besides stockholders whose portfolios were ravaged Monday afternoon, the one person with the most riding on the bailout bill that collapsed in Congress may have been Senator John McCain.

McCain had announced last week that he was suspending his presidential campaign to work to ensure the legislation's passage, even at the risk of skipping the first presidential debate unless a deal was locked down. (He later relented, debating without a deal.) He had called for the high-level White House meeting that some participants later called unhelpful. And after some initial hesitation, he had allowed himself to be identified with a bill that he thought necessary even if unpopular.

So when the deal fell apart on the House floor Monday, in no small measure because most of the chamber's Republicans balked at voting for it, the McCain campaign worked to contain the potential for damage. The first defense was to go on the offense.

Douglas Holtz-Eakin, a senior McCain adviser, said "partisan attacks" by Senator Barack Obama and his Democratic allies in Congress had caused some Republicans uncertain about the legislation to turn against it and so had "put at risk the homes, livelihoods and savings of millions of American families." The Obama campaign immediately dismissed that response as "angry and hyperpartisan."

Then, after Obama had urged Americans and the financial markets to "stay calm" in the wake of the rescue plan's collapse, while prodding Congress to "get this done," McCain hastily called a news conference here in which he, too, seemed to place some blame on Obama.
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"Senator Obama and his allies in Congress infused unnecessary partisanship into the process," McCain said, before adding in almost the same breath: "Now is not the time to fix the blame. It's time to fix the problem."

Both campaigns pledged to support efforts to resolve the situation, though they were short on details. McCain's campaign said he would continue to monitor developments closely to see whether more House Republicans could now be persuaded to vote for the bill, or whether it had to be amended to address their concerns. But his aides said there did not appear to be a need to return to Washington immediately, since Congress had recessed for Rosh Hashana.

Holtz-Eakin, the campaign's senior economic adviser, told reporters that "we don't have a specific proposal that we believe is the magic bullet."

"Having failed to have that bill passed through the House," he said, "I think it's time to regroup and see whether it's the content, whether it's the nature of the debate that went on on the floor of the House today, or whether people really just need to take one look around the financial markets and have a wake-up call and do the right thing."

Obama had said he was inclined to support the bill that failed Monday. But it remains an open question how much political capital he will seek to expend, or how invested he wants to become, in helping Democratic leaders win passage of a bill.

The failure of the measure took both camps by surprise. Obama, who was campaigning Monday in Colorado, had already sent reporters the advance text of a speech he planned to give lauding the agreement. And McCain, at a rally in Columbus, Ohio, seemed to be taking some credit for the bill.

Democrats had said all along that by inserting himself into negotiations, McCain had brought presidential politics to a delicate situation and could wind up hurting more than helping. After the House vote, his aides bristled at the suggestion that his involvement had in fact been a drawback, saying he had been instrumental in getting House Republicans a seat at the negotiating table and helping bring in more of their votes.

Holtz-Eakin said McCain had made "dozens of calls" on the bill, some to House Republicans who opposed it.

Aides to Obama said he had not directly reached out to try to sway any House Democrats who opposed the measure. But where McCain had accused Obama of taking a hands-off approach to the financial crisis, Democratic advisers said they believed that McCain now had a role in the legislation's failure.

As aides to both campaigns pointed fingers, Obama sought to stay above the fray and maintain a steady demeanor that advisers maintain has set him apart throughout the financial turmoil.

"One of the messages that I have to Congress is, Get this done," he said in Colorado after the House vote. "Democrats, Republicans, step up to the plate and get this done. Understand even as you get it done to stabilize the markets, we have more work to do to make sure that Main Street is getting the same kind of help that Wall Street is getting. We cannot forget who this is for. This is for the American people. This shouldn't be for a few insiders."

source

Bailout vote begins

The House, following four hours of heated and emotional debate, started to vote Monday on a sweeping $700 bailout of the nation's financial system.

The debate included impassioned pleas for and against the measure from Democrats and Republicans alike. Even some of those arguing the legislation must be approved were quick to point out problems with it.

But in the end, the vote began with both Democratic and Republican leadership telling their members the only way to protect the economy from a spreading credit crunch was to vote for the difficult to swallow measure.

"Our time has run out," said Rep. Spencer Bachus, the ranking Republican on the House Financial Services Committee. "We're going make a decision. There are no other choices, no other alternatives."

The vote comes after lawmakers and the Bush administration finalized legislation following a weekend of high-stakes negotiations over the controversial measure, which is designed to get battered U.S. credit markets working normally again.

"Today is the decision day," said Barney Frank, D-Mass., on the House floor. "If we defeat this bill today, it will be a very bad day for the financial sector of the American economy and the people who will feel the pain are not the top bankers and top corporate executives but average Americans."

House Minority Leader John Boehner told his members, many of whom objected the measure, that the had accept something he and many of them found distasteful.

"If I didn't think we were on the brink of an economic disaster it would be the easiest thing to say no to this," Boehner said. But he said lawmakers needed to do what was in the best interest of the country.

Leading House Republicans signed on to the proposal on Sunday after expressing earlier reservations. Senate Majority Leader Harry Reid said Sunday he hoped for a vote in that chamber by Wednesday at the latest.

Earlier on Monday, President Bush and Federal Reserve Chairman Ben Bernanke hailed the measure and urged Congress to move quickly to pass it.

Bush, speaking at the White House, called the proposed measure "an extraordinary agreement to deal with an extraordinary problem." He said he is confident the measure will win bipartisan support.

"With this strong and decisive legislation, we will help restart the flow of credit so American families can meet their daily needs and American businesses can make purchases, ship goods and meet their payrolls," Bush said.

Bush acknowledged that many voters were opposed to helping out Wall Street with tax dollars, but said there is little choice to move forward with the plan. He said most if not all of the tax money spent to buy distressed mortgage-backed securities should be recouped when the Treasury sells them in the coming years.

"Every member of Congress and every American should keep in mind - a vote for this bill is a vote to prevent economic damage to you and your community," Bush said.

Bernanke, who had spent hours before Congress last week testifying in favor of the measure, issued a brief statement promising that it would restore the flow of credit to households and businesses. "I look forward to swift passage of the legislation," he said.
Buying troubled assets

The core of the bill is based on Treasury Secretary Henry Paulson's request for authority to purchase troubled assets from financial institutions so banks can resume lending and so the credit markets, now virtually frozen, can begin to operate more normally.

But Democrats and Republicans - concerned about the potential cost - have added several conditions and restrictions to protect taxpayers on the down side and give them a chance at some of the potential upside if the companies benefit from the plan.

Key negotiators for the financial rescue plan were e busy trying to line up votes on Capitol Hill on Sunday. House Majority Leader Steny Hoyer, D-Md., told CNN he believes a majority of representatives on both sides of the aisle can and will support the bill.

On Sunday evening, the House Republican working group, which stringently opposed earlier drafts of the plan and offered a counterproposal, indicated it would support the bill, and its members are encouraging other Republicans in the House to do the same.

"Nobody wants to have to support this bill, but it's a bill that we believe will avert the crisis that's out there," House Minority Leader John Boehner, R-Ohio, told reporters.

But the bill did draw some opposition during the morning debate.

Rep. John Culberson, R-Texas, said the measure would leave a huge burden on taxpayers. "This legislation is giving us a choice between bankrupting our children and bankrupting a few of these big financial institutions on Wall Street that made bad decisions," he said.

Other conservative Republicans argued the bill would be a blow against economic freedom.

Thaddeus McCotter, R-Mich., said the bill posed a choice between the loss of prosperity in the short term or economic freedom in the long term. He said once the federal government enters the financial market place, it will not leave. "The choice is stark," he said.

But there were also Democrats who opposed the bill for not doing enough to help those who taxpayers facing foreclosure or needing unemployment benefits extended, or taxing Wall Street to pay for the rescue package.

"Like the Iraq war and patriot act, this bill is fueled by fear and haste," said Lloyd Doggett, D-Texas.
The crisis and a proposed fix

Banks and Wall Street firms, worried about both their own needs for cash and the condition of other institutions, essentially stopped loaning money to one another in recent weeks. That choked off the money being made available on Main Street in the form of mortgage loans, business loans and other consumer borrowing.

The crisis stems from problems in mortgage-backed securities, which saw their value plunge as home prices have gone into their worst slide since the Great Depression and foreclosures have soared to record levels. In turn, the market for trillion of dollars worth of those securities held by major firms evaporated, sending them down to fire sale prices and raising the risk of widespread failures among the nation's major financial firms.

Under the plan, Treasury will buy the mortgage backed securities, either directly from the firms or through an auction process. It may also arrange to provide guarantees for the securities up to their original values in return for premiums they would charge current holders of the securities.

To make the legislation more politically palatable, the bill calls for the government, as an owner of a large number of mortgage securities, to exert influence on loan servicers to modify more troubled loans to help prevent additional foreclosures. It also provides that the government will take equity in the firms that sell the securities to the government, and limits pay packages for top executives.

The legislation comes amid great upheaval in the nation's financial system. On Monday morning, the Federal Deposit Insurance Corp., which insures deposits at failed banks, arranged for the sale of the banking assets of Wachovia (WB, Fortune 500), the nation's No. 4 bank holding company, to Citigroup (C, Fortune 500) for $2.2 billion in stock.

That follows three weeks of other shocks: the Treasury Department's seizure of mortgage finance firms Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500); Wall Street firm Lehman Brothers' bankruptcy filing; rival Merrill Lynch (MER, Fortune 500) purchase by Bank of America (BAC, Fortune 500).

In addition, the Fed bailed out insurance giant American International Group (AIG, Fortune 500), loaning it $85 billion in return for a nearly 80% stake. while Washington Mutual (WM, Fortune 500), the nation's largest savings and loan, became the largest bank failure in history. To top of page..source

Obama, McCain give measured support for bailout

Democrat Barack Obama and Republican John McCain on gingerly embraced a newly negotiated congressional deal for a $700 billion bailout of the hobbled financial industry.
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"This is something that all of us will swallow hard and go forward with. The option of doing nothing is simply not an acceptable option," McCain said. Obama said he was inclined to back it "because I think Main Street is now at stake."

True to form after a week of posturing, both campaigns sought to take at least partial credit for the outcome. Obama said McCain did not deserve any pats on the back.

"Here are the facts: For two weeks I was on the phone everyday with (Treasury) Secretary (Henry) Paulson and the congressional leaders making sure that the principles that have been ultimately adopted were incorporated in the bill," Obama said in an interview on "Face the Nation" on CBS.

McCain said the latest version of the plan meets his insistence of an oversight body to monitor the treasury secretary and limits the compensation of executives of financial institutions applying for loans.

"Let's get this deal done, signed by the president, and get moving, because the real effect of this is going to restore some confidence, and get some credit out there, and get the economic system moving again, which is basically in gridlock today," McCain told "This Week" on ABC.

The measure would allow the government to buy defaulted mortgages and other distressed housing-related assets, many of them held by Wall Street banks, in an effort to keep the worst financial crisis since the Great Depression from spreading throughout the entire economy.

Obama predicted quick passage of the measure, which he said contained important consumer-friendly provisions he had supported. "Today, thanks to the hard work of Democrats and Republicans, it looks like we have a rescue plan that includes these taxpayer protections," Obama said in remarks prepared for a Detroit rally. "And it looks like we will pass that plan very soon."

McCain made a show on Wednesday of "suspending" his campaign to return to Washington to help negotiate terms of a bailout agreement. He initially suggested that Friday's presidential debate be postponed if no deal was struck. But his campaign ads continued to air and McCain attended the debate even though there was no deal.

While McCain is not on a Senate committee involved with the financial crisis, he said Sunday he rushed back to Washington because he was not going to "phone in" his advice.

"I'm a Teddy Roosevelt Republican. I've got to get in the arena when America needs it," McCain said.

Republicans generally have said his participation helped prod the agreement. Democrats countered that his presence had little effect on the outcome and may have even delayed a deal.

"Whether I helped or hurt, I'll be glad to accept the judgment of history," McCain said.

McCain said he planned to return to full-time campaigning Monday.

He also said he probably would have voted for legislation to keep the government running even though it contained thousands of the type of pork barrel projects he strongly opposes.

The $634 billion measure passed the Senate on Saturday. It also includes $25 billion in taxpayer-subsidized loans for automakers.

Like McCain, Obama spent parts of several days in Washington because of the bailout talks. But he has returned to the trail and on Sunday he and running mate Joe Biden planned to attend a rally in Detroit, the home of the nation's auto industry. Michigan is a key battleground in the November.

Obama said in his television interview that he was inclined to support the bailout because it includes increased oversight, relief for homeowners facing foreclosure and limits on executive compensation for chief executives of firms that receive government help.

"None of those were in the president's provisions. They are identical to the things I called for the day that Secretary Paulson released his package," Obama said. "That I think is an indication of the degree to which when it comes to protecting taxpayers, I was pushing very hard and involved in shaping those provisions."

The safeguards were supported by many in Congress, including Democrats and Republicans.

Congressional leaders continued to work through the weekend on the bailout package and hoped to have a vote on the measure Monday in the House, with a vote in the Senate coming later.

The Republican vice presidential candidate, Alaska Gov. Sarah Palin, credited McCain with helping to ensure that the bailout plan protected taxpayers. Reporters were kept at a distance when she made a campaign stop in Philadelphia, although Palin took one question about the $700 bailout agreement.

"I'm thankful that John McCain is able to have some of those provisions implemented in that Paulson proposal," she said. "I'm glad that John McCain's voice was heard."

Paulson Must Make $700 Billion Rescue for Banks Work

Treasury Secretary Henry Paulson and congressional Democrats hammered out a consensus on spending up to $700 billion to rescue the financial industry. There isn't consensus on whether it would work.

Lawmakers reached agreement yesterday as House Republican leaders backed away from opposition to the proposal after it included plans to create insurance for mortgage-backed securities. The House and Senate are scheduled to vote on the bill early this week, although it wasn't clear last night that it has sufficient votes to pass the House.

Giving the Treasury authority to buy so many distressed securities from lenders is without precedent, and it's unclear how the government will pay prices that strike a balance between protecting taxpayers and preventing more bank failures. source

``This has a reasonable chance of pulling back from the brink and having some success, but it's far from certain that will be the case,'' said former Fed Governor Laurence Meyer, now vice chairman of consultant Macroeconomic Advisers LLC in Washington.

Stocks tumbled around the world after the worsening credit crisis threatened to topple more banks. In Europe, governments have been forced to rescue Fortis, Belgium's largest financial- services company, and three other institutions in the past two days alone.

Market Drop

The region's Dow Jones Stoxx 600 Index dropped 3.5 percent and futures on the Standard & Poor's 500 Index declined 1.8 percent. While the dollar strengthened against the euro and the pound, the cost of borrowing the U.S. currency for three months rose to 3.88 percent, the highest level since January. That's up from 2.81 percent a month ago.

``You're not resolving the two fundamental issues: You still have to recapitalize the banking system, and household debt is going to stay high,'' said Nouriel Roubini, chairman of Roubini Global Economics and economics professor at New York University.

The bill gives Paulson $250 billion at the start to buy assets, increasing the amount to $350 billion upon ``written certification'' from the president that the secretary is ``exercising the authority'' to buy assets. The Treasury chief, or whoever succeeds him, may use the remaining $350 billion if Congress fails to reject a request for it within 15 days.

Buying Assets

The proposed law lets Paulson buy assets ``at the lowest price that the Secretary determines to be consistent with the purposes of this Act.'' The bill doesn't require any specific method for the purchases beyond saying mechanisms such as auctions or reverse auctions should be used ``when appropriate.'' Treasury officials declined to discuss how the plan will be implemented.

Democratic and Republican leaders trust that Paulson can avert a collapse after Lehman Brothers Holdings Inc. filed for bankruptcy and the government was forced to take over American International Group Inc. Success hinges on whether he can help banks raise capital after $556 billion in writedowns and losses, and get credit flowing through the economy.

``We have clearly seen a run of failures of financial institutions not like anything we've seen since the Great Depression,'' House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, told reporters yesterday. ``If we didn't do this, there would be far worse pain in the sense of the lending freezing up.''

`Fragile Situation'

The plan, which foreign banks with U.S. operations can also tap, failed to staunch concerns across global markets about the health of the banking system. Governments have been forced to rescue Belgium's Fortis, Iceland's Glitnir Bank hf, U.K. mortgage lender Bradford & Bingley Plc and Germany's Hypo Real Estate Holding AG in the past two days.

``It's a fragile situation,'' Paulson said in an interview on CBS television's ``60 Minutes'' program broadcast yesterday. ``It's gotta do it, and we're going to make this work.''

The draft legislation was posted on the House Financial Services Committee's Web site yesterday. It includes a provision to give taxpayers equity stakes in the companies that benefit from the plan.

The bill has a section aimed at limiting the pay of executives at companies that take advantage of assistance by prohibiting tax deductions for officials that exceed $500,000, which is half the normal deductible limit. It also allows ``clawbacks'' of money already paid to executives at troubled companies and forbids so-called golden parachutes.

Community Banks

The legislation takes steps to let some 800 community banks that held preferred stock in Fannie Mae and Freddie Mac before the mortgage giants were taken over by the federal government on Sept. 7, make better use of losses for tax purposes than they would otherwise be allowed.

House Republicans offered early resistance to the Paulson plan. They complained that it put the country on the road to socialism and instead argued that elimination of the capital gains tax would spur a wave of investment that would render the bailout plan unnecessary.

House Minority Leader John Boehner of Ohio commissioned Virginia Representative Eric Cantor to draft a rival plan without telling Democrats or Paulson. The plan, which depended on self-funded insurance premiums, was abandoned after Democrats lashed out at Republicans at a White House meeting Sept. 25.

Limited Insurance

Ultimately, Republicans got none of the tax breaks they sought, though the bill includes a limited self-funded insurance program for companies that benefit from the bailout. Last night Boehner, the top House Republican, urged his colleagues to support the bailout plan.

Some House Republicans, such as Representative Mike Pence of Indiana, are still holding out. ``We now have a deal that promises to bring near-term stability to our financial turmoil, but at what price?'' Pence said in a letter to colleagues.

Pence called the plan ``the largest corporate bailout in American history'' and that it would ``nationalize almost every bad mortgage in America.''

Paulson, the 62-year-old former Goldman Sachs Group Inc. chairman, said such a strategy is necessary to stabilize financial markets. ``We will have turbulence and turmoil in our financial system for some time, but I believe that this is going to work,'' he said on ``60 Minutes.''

`Some Doubts'

Yet as members of Congress and their staffs worked late nights over the past week negotiating and writing compromise legislation, money markets failed to improve. ``It just raised some doubts in my mind whether this was going to be sufficient,'' said Meyer, who was on the Fed board when the Asian financial crisis struck in 1997.

Should the plan fail, ``there may have to be a more substantial participation by the federal government to buy mortgages,'' Frank said last night. Any alternative proposal would involve ``significant purchases directly of the foreclosed mortgages.''

Paulson and Federal Reserve Chairman Ben S. Bernanke, who will be on a five-member oversight board for the program, have signaled that their priority is shoring up the nation's banks even if it means they don't get taxpayers the cheapest prices for the devalued assets the government buys.

The proposal also sets the stage for an overhaul of financial regulation next year, something Frank is already planning. The draft bill requires the Treasury secretary to report to Congress and make recommendations by April 30 on whether to regulate additional participants in the financial markets.

``It'll give us some temporary respite from the earlier pressures,'' said Joseph Mason, a Louisiana State University finance professor who formerly worked in the bank-research division of the Office of the Comptroller of the Currency. ``If we don't use that respite to design more permanent policy, we will find ourselves back in the same place.''

What's All This Stuff Worth?

What would you pay, sight unseen, for a house that nobody wants, on a hard-luck street where no houses are selling?

That question is easy compared to the one confronting the Treasury Department as Washington works toward a vast bailout of financial institutions. Treasury Secretary Henry M. Paulson Jr. is proposing to spend up to $700 billion to buy troubled investments that even Wall Street is struggling to put a price on.

A big concern in Washington — and among many ordinary Americans — is that the difficulty in valuing these assets could result in the government's buying them for more than they will ever be worth, a step that would benefit financial institutions at taxpayers' expense.

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Anyone who has tried to buy or sell a house when the market is falling, as it is now, knows how difficult it can be to agree on a price. But valuing the securities that the Treasury aims to buy will be far more difficult. Each one of these investments is tied to thousands of individual mortgages, and many of those loans are going bad as the housing market worsens.

"The reality is that we are not going to know what the right price is for years," said Andrew Feltus, a bond portfolio manager at Pioneer Investments, a mutual fund firm based in Boston. "It might be 20 cents on the dollar or 60 cents on the dollar, but we won't know for years."

While prices of most stocks are no mystery — they flicker across PCs and televisions all day — the troubled investments are not traded on any exchange. The market for them is opaque: traders do business over the telephone, and days can go by without a single trade.

Not only that, many of these instruments are extremely complex. Consider the Bear Stearns Alt-A Trust 2006-7, a $1.3 billion drop in the sea of risky loans. Here's how it worked:

As the credit bubble grew in 2006, Bear Stearns, then one of the leading mortgage traders on Wall Street, bought 2,871 mortgages from lenders like the Countrywide Financial Corporation.

The mortgages, with an average size of about $450,000, were Alt-A loans — the kind often referred to as liar loans, because lenders made them without the usual documentation to verify borrowers' incomes or savings. Nearly 60 percent of the loans were made in California, Florida and Arizona, where home prices rose — and subsequently fell — faster than almost anywhere else in the country.

Bear Stearns bundled the loans into 37 different kinds of bonds, ranked by varying levels of risk, for sale to investment banks, hedge funds and insurance companies.

If any of the mortgages went bad — and, it turned out, many did — the bonds at the bottom of the pecking order would suffer losses first, followed by the next lowest, and so on up the chain. By one measure, the Bear Stearns Alt-A Trust 2006-7 has performed well: It has suffered losses of about 1.6 percent. Of those loans, 778 have been paid off or moved through the foreclosure process.

But by many other measures, it's a toxic portfolio. Of the 2,093 loans that remain, 23 percent are delinquent or in foreclosure, according to Bloomberg News data. Initially rated triple-A, the most senior of the securities were downgraded to near junk bond status last week. Valuing mortgage bonds, even the safest variety, requires guesstimates: How many homeowners will fall behind on their mortgages? If the bank forecloses, what will the homes sell for? Investments like the Bear Stearns securities are almost certain to lose value as long as home prices keep falling.

"Under the current circumstances it's likely that you are going to take a loss on these loans," said Chandrajit Bhattacharya, a mortgage strategist at Credit Suisse, the investment bank.

The Bear Stearns bonds are just one example of the kind of assets the government could buy, and they are by no means the most complicated of the lot. Wall Street took bonds like those of Bear Stearns and bundled and rebundled them into even trickier investments known as collateralized debt obligations, or C.D.O.'s

"No two pieces of paper are the same,"said Mr. Feltus of Pioneer Investments.

On Wall Street, many of these C.D.O.'s have been selling for pennies on the dollar, if they are selling at all. In July, Merrill Lynch, struggling to bolster its finances, sold $31 billion of tricky mortgage-linked investments for 22 cents on the dollar. Last November, Citadel, a large hedge fund in Chicago, bought $3 billion of mortgage securities and other investments for 27 cents on the dollar.

But Citigroup, the financial giant, values similar investments on its books at 61 cents on the dollar. Citigroup says its C.D.O.'s are relatively high quality because they were created before lending standards weakened in 2006.

A big challenge for Treasury officials will be deciding whether to buy the troubled investments near the values at which the banks hold them on their books. That would help minimize losses for financial institutions. Driving a hard bargain, however, would protect taxpayers.

"Many are tempted by a strategy of trying to do both things at once," said Lawrence H. Summers, a former Treasury secretary in the Clinton administration. As a hypothetical example, Mr. Summers suggested that an institution could have securities on its books at $60, but the current market price might only be $30. In that case, the government might be tempted to come in at about $55.

Many financial institutions are so weak that they must sell their troubled assets at prices near the value on their books, Carlos Mendez, a senior managing director at ICP Capital, an investment firm that specializes in credit markets. Anything less would eat into their capital.

"Depending on your perspective on the economy, foreclosure rates and home prices, the market may eventually reflect that price. But most buyers are not willing to make that bet right now," he said. "And that's why we have these low prices."

Ben S. Bernanke, the chairman of the Federal Reserve, told Congress on Tuesday that the government should avoid paying a fire-sale price, and pay what he called the "hold-to-maturity price," or the price that investors would bid if they expected to keep the bond till it was paid off.

The government would buy the troubled investments with the intention of eventually selling them back to the market when prices recover.

The Treasury has suggested it might conduct reverse auctions to determine the price for securities that are not trading in the market.

Unlike in a traditional auction in which would-be buyers submit bids to the seller, in a reverse auction the buyer solicits bids from would-be sellers. Often, the buyer agrees to pay the second-highest bid submitted to encourage sellers to compete by lowering their bids for all the assets submitted. The buyer often also sets a reserve price and refuses to pay any more than that price.

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But Mr. Paulson told Congress on Tuesday that the government would use many other means in addition to auctions, suggesting that it would exercise wide discretion over the final prices to be paid.

Financial institutions will have an incentive to sell their worst assets to the government, a risk that the Treasury will have to guard against, said Robert G. Hansen, senior associate dean at the Tuck School of Business at Dartmouth College. more

"I am worried that the people who are going to offer the securities to the government will be the ones that have the absolute worst toxic waste," Professor Hansen said. Even so, he added, the government could actually make a profit on its purchases — provided the Treasury buys at the right prices. Richard C. Breeden, a former chairman of the Securities and Exchange Commission, said the auctions could thaw parts of the markets that have been frozen since late last year.

"One of the problems that many institutions are having is finding any bid for some of these assets, even though they are not without value," said Mr. Breeden, who is chairman and chief executive of Breeden Capital Management, an investment firm in Greenwich, Conn.

"What are these assets worth?" asked Mr. Breeden. "Sometimes, because of fear or extreme uncertainty in the markets, you get in a situation in which there are no bids at all, or at least no realistic bids."

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