Congressional leaders huddle on bailout deal

WASHINGTON (Reuters) - Congressional leaders locked themselves behind closed doors on Saturday with an urgent mission to reach a deal on a proposed $700 billion bailout of the financial industry amid the worst financial crisis since the Great Depression.

Pressed to act before Asian markets open on Monday, leaders from the Senate and House of Representatives pledged to hammer out an agreement on buying distressed debt from financial institutions that are staggering under the weight of failed mortgages.

Senate leader Mitch McConnell of Kentucky said "time is not our ally" and set a goal of holding a vote on a Monday.

House Speaker Nancy Pelosi said she hoped a deal would be clinched on Saturday so Congress could act on Sunday or Monday.

But House Republicans expressed reservations about the proposal by President George W. Bush, saying they wanted Wall Street to share more of the cost of cleaning up balance sheets and were less concerned about the deadline of Monday's opening bell.

"We're not moving on any kind of artificial time line. We're moving toward the very best solution in the shortest period of time we can get to the very best solution," said Republican Rep. Roy Blunt of Missouri.

Treasury Secretary Henry Paulson joined the talks as pressure increased to reach a deal following last week's white-knuckle ride on the financial markets.

Big, heavily indebted banks teetered, collapsed or refused to lend money to each other at low rates of interest threatening to grind the economy to a halt, after central banks injected liquidity into the markets to try to get them moving.

Meanwhile, further signs pointed to a recession with unemployment up, orders for durable goods down, and housing starts plunging to 17-year lows.

In the latest chapter in the transformation of Wall Street, regulators seized savings and loan Washington Mutual Inc on Thursday in the biggest bank failure in U.S. history, selling its assets to JPMorgan Chase & Co.

The Capitol Hill talks picked up after negotiators from both chambers, the White House and the Treasury Department worked through the night when much of the country paused to watch Friday's first debate between the presidential candidates, Democrat Barack Obama and Republican John McCain.

"The basic understanding is when we get in that room as principals, we're going to stay there until we reach an agreement or can't reach an agreement -- which hopefully won't happen," said New Hampshire Sen. Judd Gregg, chief negotiator for Senate Republicans.

"We will stay until we've done something that addresses this issue in a very comprehensive and effective way."

Gregg and Blunt were among four "principals" leading the talks along with Democratic Sen. Christopher Dodd of Connecticut and Democratic Rep. Barney Frank of Massachusetts.

FEAR OF CONTAGION

While Congress tried to stop the bleeding in America investors fretted about contagion into Europe, where Belgian-Dutch financial group Fortis NV fired its interim chief executive after liquidity concerns pushed shares down more than 20 percent to a 14-year low.

In London, regulators and politicians were in talks over the future of troubled lender Bradford & Bingley, raising the prospect that a second British bank could be nationalized.

IMF Managing Director Dominique Strauss-Kahn warned that the world faced a serious, long-lasting slowdown because of the crisis.

At the U.S. Capitol, House Republicans were standing in the was of an agreement and pressing for a more market-oriented solution that would have the government insure troubled Wall Street debts and keep them in private hands rather than have the Treasury buy it.

Sen. Charles Schumer, a New York Democrat, said Democrats added the insurance provision as an option out of respect to House Democrats but that it might never be used.

"Of course Secretary Paulson says it can't work. I don't understand how it works because if you insure all the bonds it's $7 trillion and make banks pay a premium -- you could bankrupt a whole lot of banks the premium would be so high," said Schumer, referring to Treasury Secretary Henry Paulson.

Blunt indicated House Republicans were firmly against a Democratic plan to recoup funds that the Treasury may recover from flipping the debt or holding it until maturity and using the money to fund affordable housing.

"We're not going to vote for things that fund big, political organizations, instead of putting money back into the Treasury," Blunt told ABC's Good Morning America.

As the majority in Congress, Democrats could have sought to force a bill through the House and Senate and onto the president's desk for signature into law, but leaders demanded a deal that would satisfy both parties.

"If there is the belief that there is a bipartisan agreement, it takes us a long way in terms of market reaction," said Sen. Richard Durbin, an Illinois Democrat.

With the entire House and one-third of the Senate facing re-election on November 4, some lawmakers were facing a popular backlash to the plan in their home districts.

Sen. Bob Corker, a Tennessee Republican who serves on the Senate Banking Committee, said lawmakers were encountering extraordinary voter anger.

Referring to his own Senate office, Corker said, "We had, I'm going to guess, 3,500 calls this week about this particular issue. I've had 95 calls in support of it if that gives you any indication."

(Writing by Daniel Trotta; editing by Chris Wilson. Additional reporting by Richard Cowan, Kevin Drawbaugh, Deborah Charles and David Lawder)