Possible U.S. bailout plan grips Washington, Wall St.

By Kevin Drawbaugh and Jeremy Pelofsky

WASHINGTON (Reuters) - The possibility of a massive, U.S. taxpayer-funded bailout to attack the mortgage crisis and calm financial markets gripped Washington and Wall Street on Thursday on signs a Bush administration plan was in the works.

Responding to the week's upheaval of the financial system, the Treasury Department has been shopping a proposal for a government fund to absorb bad mortgage debts with congressional leaders, according to two sources.

Treasury Secretary Henry Paulson was to meet with congressional leaders at 7 p.m. to discuss current market conditions.

One congressional aide said the topic was expected to be "how to get us out of this financial mess."

Word of a possible solution to the debt that has poisoned the balance sheets of major financial firms sent stocks soaring to give Wall Street its best day in six years.

The market had been battered by Monday's bankruptcy filing by investment bank Lehman Brothers Holdings and Tuesday's $85 billion government rescue of insurer American International Group.

President George W. Bush had delivered a brief statement from the White House earlier on Thursday, saying he was prepared to take further measures to stabilize and strengthen the markets.

Bush then met in the afternoon with Paulson, Federal Reserve Chairman Ben Bernanke and Securities and Exchange Commission Chairman Christopher Cox.

"They discussed the very serious challenges in our financial markets," said White House spokeswoman Dana Perino.

With only a few days left before Congress adjourns to head out on the campaign trail, House of Representatives Speaker Nancy Pelosi left open the possibility of tackling financial industry reform legislation this year. Congress could come back after the November 4 elections for a lame-duck session.

"If we work together with the administration to do something before January, before the elections, all the better," she told reporters at a press conference.

TIME IS SHORT

But sources said many Republican and Democratic lawmakers were reluctant to take up such a complex and potentially historic project under such tight time constraints.

Policy-makers are eyeing various possible models for federal intervention. One is the Resolution Trust Corp (RTC) of the 1980s and 1990s, which liquidated almost $400 billion in assets from more than 700 insolvent savings and loans.

Others are the Depression-era Reconstruction Finance Corp, which pumped federal money into private companies, as well as the Home Owners' Loan Corp, which refinanced mortgage to prevent foreclosures and prop up the mortgage market.