NEW YORK (CNNMoney.com) -- The federal government, in what may be its most far-reaching attempt yet to contain the financial crisis, is poised to establish a program to let banks get rid of mortgage-related assets that have been hard to value and harder to trade.
Leaders from the House and the Senate were briefed on Thursday evening by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.
"The root cause of distress in capital markets is the real estate correction and what's going on in terms of the price declines in real estate," Paulson said at a press briefing after the meeting. "So we're coming together to work for an expeditious solution aimed right at the heart of this problem, which is illiquid assets on financial institutions' balance sheets."
House Speaker Nancy Pelosi, D-Calif., said lawmakers expected to get the proposal from Treasury in a matter of hours.
"We hope to move very quickly - time is of the essence," Pelosi said.
Paulson, Bernanke and other officials expect to work through the weekend with congressional leaders to finalize a plan, said Brookly McLaughlin, a Treasury spokeswoman.
Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said he believes legislation could be acted on next week.
The announcement is the latest stunning turn in an extraordinary six days that have rocked Wall Street. A widening banking crisis has toppled two major firms - Lehman Brothers and Merrill Lynch - and prompted an $85 billion government loan to stem the sudden collapse of insurance giant American International Group.
Meanwhile, mainstay financial institutions are scrambling to raise cash or find merger partners - because of a freeze-up in lending and sinking investor confidence stemming from a collapse of the home mortgage market.
Talk of plan energizes markets:
Speculation that the Bush administration was developing a comprehensive plan jolted Wall Street on Thursday and sent stocks higher. The Dow ended 410 points higher.
The Treasury has been talking about the concept of an agency to take on bad debts of financial institutions "for several months," a source with knowledge of discussions on the issue told CNN.
There's precedent for the federal government taking on troubled assets from the private sector. In the 1930s, the Home Owners Loan Corp. was set up to issue bonds to refinance borrowers. Then during the S&L crisis Congress set up the Resolution Trust Corp. to sell assets of failed banks.
One way the agency under discussion could work is by setting up bulk auctions to buy mortgage assets from financial institutions. The auctions would be for set dollar amount purchases. Companies that want to offload the hard-to-sell assets from their balance sheets bid to sell to the government at a huge discount. The company willing to sell at the lowest price wins.