With the announcement that the Treasury Department and the Federal Reserve were in discussion to rescue banks from billions of dollars in bad debt by purchasing illiquid assets - a effort Treasury Secretary Henry Paulson said would entail "hundreds of billions" of taxpayer dollars.
Add that to the taxpayer's tab: with the failure of Bear Stearns, housing loans, the government takeover of Fannie Mae, Freddie Mac and AIG, and loans to troubled banks, the government has already put up more than $800 billion, reports CBS News correspondent Anthony Mason.
The problem is banks have stopped lending, even to each other, because they don't trust they'll be paid back, Mason reports. By buying up the banks' bad mortgage loans, the government hopes to restore confidence again so the banks resume lending - to each other and to us. The government's challenge will then be to find buyers for these toxic mortgages.
Bush said that such costly government action was necessary.
"Our system of free enterprise rests on the conviction that the federal government should interfere in the marketplace only when necessary," said Bush, speaking from the White House Rose Garden this morning. "Given the precarious state of today's financial markets and their vital importance to the daily lives of the American people, government intervention is not only warranted, it is essential.
In recent weeks the administration has taken drastic measures to help stabilize troubled companies, including the takeover of Fannie Mae and Freddie Mac, and a loan of up to $85 billion to insurance company AIG.
Bush said there an "urgent need" for Congress to pass legislation which would allow the federal government to purchase the illiquid assets (such as troubled mortgages) of banks and other troubled financial institutions.
"This is a decisive step that will address underlying problems in our financial system. It will help take pressure off the balance sheets of banks and other financial institutions. It will allow them to resume lending and get our financial system moving again.
"These measures will act as grease for the gears of our financial system which were at risk of grinding to a halt."
Bush admitted that the moves require putting a significant amount of taxpayer dollars at risk, "but we expect that this money will eventually be paid back."
"The other thing some have pointed out to me is that the debt we are talking about here in this crisis is, in fact, significantly worse than the savings and loan debt was. It may be harder to get rid of."
At a press conference this morning, Paulson said he plans to work through the weekend with congressional leaders to reach agreement on a plan that would address the root problems of the financial crisis. He gave few details of how the plan would be structured.
"The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing," he said.
But Paulson said immediate actions taken will provide relief.
"First, to provide critical additional funding to our mortgage markets, the GSEs (government sponsored enterprises), Fannie Mae and Freddie Mac will increase their purchases of mortgage-backed securities," he said. "These two enterprises must carry out their mission to support the mortgage market.
"Second, to increase the availability of capital for new home loans, Treasury will expand the NBS purchase program we announced earlier this month. This will complement the capital provided by the GSEs, [to] help facilitate mortgage availability and affordability.
"This crisis demonstrates in vivid terms that our financial regulatory structure is suboptimal, duplicative and outdated. I have put forward my ideas for a modernized financial oversight structure that matches our modern economy and more closely links the regulatory structure to the reasons why we regulate. This is a critical debate for another day. Right now our focus is on restoring the strength of our financial system so that it can again finance economic growth."
The news as investors storm back into the market, relieved that the government plans to rescue banks from billions of dollars in bad debt.
The bullish activity follows a meeting Thursday evening between Treasury and Federal Reserve officials and congressional leaders, as the Bush administration develops plans to bailout struggling banks and shore up the credit system.
The government's urgency was apparent, as the chairman of the Senate Banking Committee announced that the U.S. economy may be "days away from a complete meltdown," a day after Bush asked lawmakers for the power to rescue banks by buying distressed assets that lie at the heart of the financial system's crisis.
Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, said Congress is working quickly to prevent an economic collapse, noting that Democrats and Republicans on the Hill are coming together to support the Bush administration's developing plan to buy up bad debt from financial institutions.
The ranking Republican on the Banking Committee, Senator Richard Shelby, predicts the new bailout plan will cost at least half a trillion dollars.
Shelby says the nation has "been lurching from one crisis to another." Both veteran lawmakers say this is the most serious financial crisis they've seen during their years in Congress.
Meanwhile, the Treasury Department said it will tap into a Depression-era fund to provide guarantees for U.S. money market mutual funds.
The Department said Friday that for the next year the U.S. Treasury will insure the holdings of eligible money market mutual funds.
The money to insure the mutual funds will come from the Treasury Department's Exchange Stabilization Fund which was created in 1934 to provide support for the dollar.
Treasury took the action to stabilize the giant money market mutual fund industry after fears were raised about their investments earlier this week when Primary Fund announced that the value of its fund's assets had dropped to 97 cents for each $1 put in by investors, exposing them to losses.
This instance of "breaking the buck" marked only the second time since money market mutual funds were begun in the United States in 1970 that a fund couldn't assure clients of the full value of their investments.
Bush has authorized Paulson to use up to $50 billion from the Exchange Stabilization Fund to provide the guarantees, the Treasury said in a statement.
The plan is aimed at rescuing banks from 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 Thursday nighttime meeting on Capitol Hill to say he hoped to have a solution "aimed right at the heart of this problem."
Paulson said the rescue plan will need congressional approval.
If such a plan is put in place to help the banking industry, it could help alleviate the uncertainty that has been sending the markets into tumult over the past week. Lending has ground to a virtual standstill in the wake of the bankruptcy of Lehman Brothers Holdings Inc.
In another development, the Securities and Exchange Commission announced early Friday . Short-selling is the common practice of betting against company stocks by borrowing its shares, selling them, and pocketing the difference when they fall.
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, 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.
The Candidates Speak Out
Speaking in Green Bay, Wisc., Republican presidential candidate Sen. John McCain said Friday that .
The Republican presidential hopeful said the U.S. central bank must get back to "its core business of responsibly managing our money supply and inflation." He laid out several recommendations for stabilizing markets in the financial crisis that has rocked Wall Street and taken over the presidential campaign.
McCain renewed his call for tighter regulation of financial markets, even though he has generally championed deregulation throughout his career in the Senate and as chairman of the influential Commerce Committee.
Democratic presidential nominee Barack Obama said , but said he's not spelling out details of his own plans to avoid roiling the markets.
Obama said at a Florida news conference that given the gravity of the situation, he will refrain for now from presenting a more detailed blueprint. He said any recovery plan should be guided by not rewarding reckless business leaders.
"What we have to do is make sure taxpayer money is not being used to bail out bad decisions," he said. He refused to put a pricetag on a bailout he could support, but said it would not bar him from pushing for middle-class tax cuts that have been central to his campaign.
"I think now more than ever we have to have the broad-based middle-class tax cuts," Obama said.