Government crafting a financial rescue plan

— -- Treasury Secretary Henry Paulson on Friday sketched the outlines of a bold approach to confront the nation's financial crisis. "We're talking hundreds of billions" of dollars, he said.

Paulson said he would work through the weekend with congressional leaders to reach agreement on a plan that would address the root problems of the financial crisis gripping the country.

He, lawmakers and other top government officials already met Thursday night on Capitol Hill and pledged to act quickly to find a solution to the financial sector's woes.

Paulson and Federal Reserve Chairman Ben Bernanke met with Republican and Democratic lawmakers to discuss market conditions and address ways to stem the crisis. In a statement, they said they would search through the weekend for a solution.

"This needs to be big enough to make a real difference and get to the heart of the problem," Paulson told reporters at the Treasury Department on Friday.

Wall Street, desperate for a way out of a deepening financial crisis that has wiped out $3 trillion in stock value this year, appears to be betting that the government will ride to the rescue with a major new bailout plan.

Stocks surged Friday and held on to their gains after Paulson's press conference.

Paulson said that the new troubled-asset relief program that he wants Congress to enact must be large enough to have the necessary effect while protecting taxpayers as much as possible.

"I am convinced that this bold approach will cost American families far less than the alternative — a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," Paulson said.

"The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing," Paulson said.

Among the steps outlined:

• Mortgage giants Fannie Mae and Freddie Mac will step up their purchases of mortgage-backed securities to help provide support to the crippled housing market.

• The Treasury Department will expand a program, announced earlier this month, to buy mortgage-backed securities, which have been badly hurt by the housing and credit crisis.

Wall Street is hoping that the government will create an entity similar to the Resolution Trust Corp., created in 1989 to dispose of assets of hundreds of failed savings-and-loan institutions. Such an entity could take the bad assets off the books of troubled banks.

Regulators have been criticized for dealing with each crisis differently. The government, for example, refused to bail out Lehman Bros. last weekend, a decision that caused it to file for bankruptcy-court protection. But two days later the Fed put up $85 billion to keep giant insurer American International Group from failing.

Richard Yamarone, director of economic research at Argus Research, says the plan is likely to boost confidence. "There is a general acceptance that the government's plan will finally cage the wild beast," he says, referring to a credit crunch that is threatening the foundation of the financial system.

Hope for a thawing of the credit crunch comes amid a tumultuous week. The Dow suffered drops of more than 500 points Monday and 450 points Wednesday. Credit markets seized up to the point where bank-to-bank lending nearly ceased. There were growing fears that the two remaining investment banks, Goldman Sachs and Morgan Stanley, were in danger of failing and might need to partner with other big banks to survive. Regulators also took aim at investors who profit when stocks fall.

Sung Won Sohn, professor at California State University, says it's a positive sign that a framework for dealing with credit problems is underway. "If it is done in an orderly way and the markets know what to expect, it leads to less confusion and uncertainty."

Contributing: Adam Shell and Barbara Hagenbaugh, USA TODAY; Associated Press