House Democrat looking at market rescue plan

The turmoil on Wall Street is prompting a key congressional Democrat to consider a broad federal market rescue that could include creating a new government entity to take over collapsed financial institutions and sell off their assets, as lawmakers did during the 1980s savings and loan crisis.

Rep. Barney Frank, D-Mass., the House Financial Services Committee chairman, said a body like the Resolution Trust Corp. — the largely taxpayer-financed company that seized and liquidated the savings and loans — might be needed in coming months to stabilize markets and prevent more implosions at major financial institutions.

His panel plans a hearing Tuesday to hear from economists and others "to begin the process of thinking about" the idea.

"There have been a series of ad hoc interventions that have not worked," Frank said. "Has the private market made so many mistakes and burdened itself with so much bad paper that there needs to be some public intervention?"

In a more immediate step designed to help regulators deal with the credit crisis, Democrats said they have agreed to give the Federal Reserve authority to pay interest on commercial bank reserves, a move that could give the central bank better control over interest rates. The measure, which Frank said would cost $300 million over the next two years, is likely to become part of the final spending package Congress passes this month before adjourning.

Senate Banking Committee Chairman Chris Dodd, D-Conn., said he backs the idea, but it should come with new requirements that banks help more homeowners avoid foreclosure.

A broader debate about whether government intervention is needed to help dispose of mortgages and other distressed debt will begin this month and unfold next year.

Frank said many banks' assets are so undervalued — in large part because of the psychological impact of the lingering housing, credit and financial crises — that "the private market won't even go to a fire sale."

The RTC was created in 1989 to deal with the aftermath of the savings and loan crisis, when hundreds of the institutions failed and led to a massive taxpayer bailout. The corporation disposed of the associations' assets and then went out of business.

Former Federal Reserve Chairman Alan Greenspan advocates creating a similar entity in a new epilogue to the paperback edition of his memoir, "The Age of Turbulence: Adventures in a New World," which came out last week. It would be an alternative to turning the Fed into an uber-cop responsible for policing financial market stability, a step that Treasury Secretary Henry Paulson has recommended.

Instead, Greenspan envisions formation of a group akin to the RTC that could step in, take a troubled company into conservatorship, wipe out the equity, impose some charge or "haircut" on its debts before guaranteeing them and then selling its assets.

Several private economists have also called for broad government intervention to stop the cascading crises that have battered Wall Street and the economy.

Dodd said a new RTC-like entity is "an interesting idea," but added that the Fed is already serving a similar function.

"I'm not opposed to it. I'd like to know more about it," Dodd said.

Congressional leaders also said the notion needs more study.

"This idea will have to be discussed with the administration, (and) will have to be thoughtfully considered," said Rep. Steny H. Hoyer, D-Md., the House majority leader. "It is unclear now exactly where Chairman Frank wants to go on that."

Instead of adjourning as scheduled at the end of the month, Dodd said the Senate should stay on call this fall — after lawmakers have left Washington to campaign for re-election — in case more financial turmoil demands a government response.

Otherwise, the administration could set in motion "what could amount to the largest bailout in the history of the United States" without any congressional oversight, Dodd said.

His panel is calling Paulson and James Lockhart, head of the Federal Housing Finance Agency, to testify Thursday on last weekend's government takeover of mortgage giants Fannie Mae and Freddie Mac.

Frank is to hold a similar session with Paulson, Lockhart and Fed Chairman Ben Bernanke next week.

Dodd also announced his panel will hear Tuesday from Bernanke and Chris Cox, head of the Securities and Exchange Commission, on the latest Wall Street woes, including the collapse of Lehman Brothers and forced sale of Merrill Lynch to Bank of America.

The senior Republican on Dodd's committee said Paulson is sending a "mixed message" on bailouts after declining last weekend to extend a lifeline to newly bankrupt Lehman Brothers when in March the Federal Reserve provided financial backing for a takeover of Bear Stearns by JPMorgan Chase.

Alabama Sen. Richard Shelby said that after talking with Paulson he fears the government is planning a rescue package for insurance giant American International Group Inc., the world's largest insurer. "I was not satisfied with his answers," Shelby said. "I said, 'Mr. Secretary ... you're picking and choosing. You have to have a set policy.'"

Several hours later, in a bid to save the economy from further meltdown, the government announced it would provide an emergency loan of $85 billion to rescue AIG. The Federal Reserve said in a statement it determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.

Separately, Rep. Henry Waxman, D-Calif., chairman of the House Oversight and Government Reform Committee, wrote Lehman CEO Richard Fuld asking him to testify Sept. 25 at a hearing "to examine the regulatory mistakes and financial excesses that led to" the firm's bankruptcy filing Monday.

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Associated Press writer Ben Evans contributed to this report.

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