A man leaves the Lehman Brothers headquarters carrying a box Monday, September 15, in New York. Lehman Brothers, a 158-year-old investment bank choked by the credit crisis and falling real-estate values, filed for Chapter 11 bankruptcy protection from its creditors on Monday and said it was trying to sell off key business units. - AP

Half-trillion dollars to buy bad debts in Finsac-style rescue

Struggling to stave off financial catastrophe, the Bush administration on Friday laid out a radical bailout plan with a jawdropping price tag - a takeover of a half-trillion dollars or more in worthless mortgages and other bad debt held by tottering institutions.

Relieved investors sent stocks soaring on Wall Street and around the globe. The Dow-Jones industrials average rose 368 points after surging 410 points the day before on rumours the federal action was afoot.

A grim-faced President George W. Bush acknowledged risks to taxpayers in what would be the most sweeping government intervention to rescue failing financial institutions since the Great Depression. But he declared, "The risk of not acting would be far higher."

The administration is asking Congress for far-reaching new powers to take over troubled mortgages from banks and other companies, including purchasing sour mortgage-backed securities. Administration officials and congressional leaders are to work out details over the weekend.

Congressional officials said they expected a request for legal authority to buy up the bad loans, at a cost in excess of US$500 billion to the government.

middle-class assistance

Democrats were discussing whether to try to attach middle-class assistance to the legislation, despite a request from Bush to avoid adding controversial items that could delay action. An expansion of jobless benefits was one possibility.

In further major steps, the Treasury Department and Federal Reserve moved to give money-market mutual funds the same kind of federal protection, at least temporarily, that now applies to savings and checking accounts and certificates of deposit at banks. Money-market accounts sold through retail banks are already insured through a government programme.

The spreading global selling panic had started to threaten some money-market funds, usually thought of as rock-solid investments. Administration officials feared a run on these funds, held by millions of Americans.

"Every American should know that the federal government continues to enforce laws and regulations protecting your money," Bush said at the White House. The 75-year-old Federal Deposit Insurance Corporation now insures savings and checking accounts and certificates of deposit up to US$100,000.

Separately, the Securities and Exchange Commission acted to block short-selling in financial securities. That is a trading method that bets the value of stocks will go down. It has been blamed for accelerating the plunge in stock prices of banks and other financial institutions.

bold moves

"This is a pivotal moment for America's economy," Bush said. "In our nation's history, there have been moments that require us to come together across party lines to address major challenges. This is such a moment."

Congressional leaders of both parties welcomed the administration's bold moves, after a series of ad hoc rescues.

The talk on the presidential campaign trail, barely six weeks before the election, was of bipartisanship, too.

Democrat Barack Obama said it was critical that leaders in both parties work in concert. "Truly, we are all in this together," he said.

Republican candidate John McCain said leaders should put aside partisan differences and "any action should be designed to keep people in their homes and safeguard the life savings of all Americans".

The federal government already has pledged more than US$600 billion in the past year to bail out, or help bail out, some of the biggest names in American finance. That includes the rescue of investment bank Bear Stearns in March, the takeover of mortgage giants Fannie Mae and Freddie Mac earlier this month, and the takeover of the world's largest insurance company, American International Group, just this week.

But the contagion continued to spread, bringing political consensus that drastic and comprehensive federal action was needed.

There are precedents for such a federal takeover.

The government created the Resolution Trust Corporation in the late 1980s to tackle the savings-and-loan (S&L) crisis. It acquired the defaulted mortgages, fore-closed real estate and other assets of nearly a thousand failed S&Ls, restoring order and stability to the system. Resolving that crisis took six years and US$125 billion in taxpayer money - roughly equal to US$200 billion in today's dollars.

new programme structure

And there was the Reconstruction Finance Corporation, a Depression-era relief programme formed in 1932 by President Hoover that tried to revive the market by giving loans to banks and other businesses.

On Friday, Treasury Secretary Henry Paulson gave few details about the structure of the new programme. Asked about an overall price tag, he said, "hundreds of billions" of dollars.

Congressional leaders said they were ready to move quickly but still needed details of the administration plan. For instance, there was no indication of what the government would get in return from financial companies for the federal assistance.

Paulson said the new troubled-asset relief programme that he wants Congress to enact must be large enough to have the necessary impact while protecting taxpayers as much as possible.

"I am convinced that this bold