Lawmakers aim to nail down bailout deal

WASHINGTON (Reuters) - Congressional leaders locked themselves behind closed doors on Saturday with the aim of nailing down a deal on a $700 billion bank bailout and halting a downward spiral in the worst financial crisis since the Great Depression.

Leading lawmakers, who huddled with U.S. Treasury Secretary Henry Paulson, said they hoped to reach an agreement to create a massive government fund to buy up distressed debt from financial institutions staggered by failed mortgages.

House of Representatives Speaker Nancy Pelosi said she hoped a deal would be clinched on Saturday so Congress could act as early as Sunday with the goal of preventing a repeat of last week's white-knuckle ride in the financial markets.

But House Republicans, who had thrown talks into disarray on Thursday, said they still wanted to see Wall Street pay more of the cost and were less concerned about reaching a deal before Monday's opening bell.

"We're not moving on any kind of artificial timeline. We're moving toward the very best solution in the shortest period of time we can get to the very best solution," said Rep. Roy Blunt of Missouri, the chief negotiator for House Republicans.

The urgent background to the debate remained fear-wracked financial markets after big banks teetered, collapsed or refused to lend money to each other. Central banks have been forced to pump liquidity into the markets to try to prevent them from seizing up and bringing the economy to a halt.

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. In a reflection of the latest Wall Street shakeout, Washington Mutual filed for bankruptcy in a Delaware court on Saturday.

Meanwhile, published reports said Wachovia Corp, the sixth-largest U.S. bank, began merger talks with potential partners after a 27-percent drop in its shares on Friday.

The rush to forge a bailout package also overshadowed the presidential campaign and Friday's debate between Democrat Barack Obama and Republican John McCain.

Obama accused McCain on Saturday of playing politics with the financial crisis, while his Republican rival tried to show leadership by returning to Washington, where an aide said he was working the phones behind the scenes.

FEAR OF CONTAGION

While Congress tried to find a way 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 its shares 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 pressing for a form of bad loan insurance that banks would pay for, as an alternative to putting taxpayers on the hook for buying up toxic assets.

Sen. Charles Schumer, a New York Democrat, said Democrats were willing to allow that insurance provision as an option in the bailout but did not see how it could solve the crisis since it would further strain balance sheets.

Democrats said they were considering a proposal to institute a fee on financial firms if taxpayers lost money from the government's asset purchases.

Among other still-open issues for congressional dealmakers was how much of the bad loan package would be available from the start. "We are dealing with that right now," said Illinois Rep. Rahm Emanuel, a member of the Democratic leadership.

Democrats have pushed for the money to be made available in tranches in order to create a legislative check on the program.

Paulson, by contrast, had wanted to have the full $700 billion at his disposal from the start, arguing any package had to be big enough to instill confidence in shaky markets.

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 said they were facing a grass-roots backlash to a plan seen as providing a safety net for powerful banks.

In New York, dozens of noisy protesters marched from Times Square hoisting a banner that read "No Money for Wall Street, No Money for War, Bailout the Workers and the Poor."

"The feeling is of outrage against this bailout because the average person has not been bailed out of anything," said activist Sara Flounders, 60.

President George W. Bush acknowledged the public anger over the bailout package in his weekly radio address. "If it were possible to let every irresponsible firm on Wall Street fail without affecting you and your family, I would do it. But that is not possible," Bush said.

(Writing by Kevin Krolicki; Additional reporting by Donna Smith, Deborah Charles and David Lawder; Editing by Vicki Allen)