FP top story 9/19

In what the New York Times says could become "the biggest bailout in United States history," Treasury Department and Federal Reserve officials are working on a plan to take bad mortgages and related securities off the balance sheets of financial institutions and stem a crisis that has, in the words of IMF No. 2 John Lipsky, "expanded suddenly to historic proportions."

Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke briefed "grim-faced" congressional leaders Thursday evening on the idea, which would need to pass Congress before it recesses next week. "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 after the meeting. He'll hold a press conference at 10 a.m. today to explain further.

"It sounds like there's going to be a giant dumpster for illiquid assets,'' Mirko Mikelic, a senior portfolio manager in Grand Rapids, Mich., told Bloomberg News. "This is a detox for banks, and will help cleanse themselves of the bad mortgage securities, loans and everything else that has hurt them," says Anthony Sabino, professor at St. John's University.

The details aren't yet clear, but the Washington Post's Steven Pearlstein contemplates what the new entity might look like. "As for funding levels," he writes, "you can figure it could be anywhere from $200 billion to $500 billion, on top of the money already committed for Fannie Mae, Freddie Mac, AIG and Bear Stearns."

The move comes after the Fed rained down financial "shock and awe" Wednesday, injecting nearly $300 billion into the credit markets with little discernable effect. The SEC also took action, banning the short-selling of nearly 800 financial stocks that could become a target for speculators.

World markets surged as news of the rescue plan trickled out.