WASHINGTON The stock market finally found reason to rally Thursday, and Congress promised quick action as the Bush administration prepared a plan to rescue banks from the bad debt at the heart of the worst crisis on Wall Street since the Great Depression.
Details of the plan were still being worked out, but Treasury Secretary Henry Paulson emerged from a nighttime meeting on Capitol Hill to say he hoped to have a solution "aimed right at the heart of this problem."
As word of a government plan began to reach Wall Street earlier in the day, the Dow Jones industrial average jumped 410 points, its biggest percentage gain in nearly six years.
The rebound also came after an infusion of billions of dollars by the Federal Reserve and world governments aimed at getting nervous banks to stop hoarding money and lend again.
Stocks had fluctuated throughout the day, without severe swings in either direction, until CNBC reported the administration might back a new agency to take bad assets off the books of struggling financial institutions, much like it did in the aftermath of the savings and loan crisis of the 1980s.
After the discussions Thursday night, Paulson said the goal was to come up with a "comprehensive approach that will require legislation" to deal with the bad debts, or illiquid assets, on bank's balance sheets. He did not provide any details, but the plan taking shape called for Congress to give the administration the power to buy distressed bank assets.
Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said that probably would not mean creating a new government agency.
"It will be the power it may not be a new entity. It will be the power to buy up illiquid assets," Frank said. "There is this concern that if you had to wait to set up an entity, it could take too long."
Frank said his committee could begin drafting legislation as early as Wednesday.
Paulson, Fed Chairman Ben Bernanke and other officials planned to work through the weekend on a solution. House Speaker Nancy Pelosi said that once the administration had presented its proposal, "we hope to move very quickly" to come to an agreement.
There was no immediate word how much the rescue plan might cost but the New York Times reported it could become the biggest bailout in U.S. history.
The banks still standing are staggering under the weight of billions of dollars of bad loans and mortgage debt arising from the wave of home foreclosures in the United States, and lending has tightened around the world in response.
Before the sun rose on Wall Street on Thursday, the Fed said it would boost by as much as $180 billion the amount of cash it would supply to foreign counterparts that are short on dollars. For banks in the United States, the Fed supplied $105 billion in short-term loans later in the day.
But, at least initially, those efforts did little to unfreeze the global credit markets. Banks remained extremely reluctant to lend money.
The No. 2 official at the International Monetary Fund, John Lipsky, said the past few days were "searing manifestations of a financial crisis that has expanded to historic proportions." He predicted the turbulence would continue for "some time to come."
British financial regulators also banned short-selling the stock of financial companies listed on the London Stock Exchange. U.S. regulators tightened rules on short-selling Wednesday.
Christopher Cox, chairman of the securities and Exchange Commission, told lawmakers the SEC may put in a temporary emergency ban on all short-selling not just the aggressive forms it already has targeted, according to a person familiar with the matter, speaking on condition of anonymity because no final decision had been made.
The ban might apply to stocks of selected financial companies, to all financial companies or even possibly to all public companies. Short-selling, which has been practiced on Wall Street for decades, is not illegal per se.
The Fed said it had authorized the expansion of swap lines, the process by which it supplies reserves to other central banks, to include amounts up to $110 billion for the European Central Bank and up to $27 billion for the Swiss National Bank.
The Fed also said new swap facilities had been authorized with the Bank of Japan for as much as $60 billion, $40 billion for the Bank of England and $10 billion for the Bank of Canada.
For more than a year, investors around the world have watched with growing alarm as the U.S. economy, the world's largest, has struggled to right itself amid massive home foreclosures, many of them from mortgages issued to homeowners with bad credit.
The turmoil has swallowed some of the most storied names on Wall Street. Three of its five major investment banks Bear Stearns, Lehman Brothers and Merrill Lynch have either gone out of business or been driven into the arms of another bank.
The Dow's gain of nearly 4 percent on Thursday sent the average back above 11,000 and nearly erased its losses from a day before.
But as the uncertainty wore on, investors continued to flock to Treasury securities, considered a haven in times of crisis, and the price of gold rose yet again. And worries about even the safest investments intensified as Putnam Investments abruptly closed a $15 billion money market fund because institutional investors had pulled their cash.
Bush canceled out-of-town fundraising trips to Alabama and Florida to stay in Washington and huddle with Paulson and the heads of the Fed and the Securities and Exchange Commission.
In an appearance earlier in the day, the president acknowledged "serious challenges" in the markets and said: "The American people can be sure we will continue to act to strengthen and stabilize our financial markets and improve investor confidence."
The credit troubles reverberated around the globe. Asian stocks closed lower. European stocks rose but struggled to hold on to the gains. Russia closed its stock exchanges for a second day, and President Dmitry Medvedev pledged a $20 billion injection into financial markets.
In the United States, investors worried for another day about the health of the banks still standing. Earlier in the week, venerable Lehman Brothers was forced into bankruptcy, and Merrill Lynch was driven into the arms of Bank of America.
On Thursday, Morgan Stanley scrambled to strike a major deal or raise more cash that will reassure investors and prevent more damage to its battered stock. Its CEO, John Mack, reached out to China's Citic Group overnight about a possible investment, according to a person familiar with the talks.
Morgan Stanley is also considering a combination with retail bank Wachovia Corp. and an investment from Singapore Investment Corp., one of the world's biggest sovereign wealth funds, said the person, who spoke on the condition of anonymity because the discussions were still ongoing.
On Capitol Hill, lawmakers in both parties became increasingly vocal about their concerns with the Bush administration's handling of the current crisis.
Administration officials refused to attend a closed-door briefing with House Republicans this morning, leaving their congressional allies in the dark about the government's $85 billion emergency loan to insurer American International Group, House GOP leader John A. Boehner said.
And Sen. Chris Dodd, D-Conn., the Banking Committee chairman, was irritated that Paulson twice canceled appearances he was to have made before the panel this week.