Vast Bailout by U.S. Proposed in Bid to Stem Financial Crisis WASHINGTON - The head of the Treasury and the Federal Reserve began discussions on Thursday with Congressional leaders on what could become the biggest bailout in United States history. While details remain to be worked out, the plan is likely to authorize the government to buy distressed mortgages at deep discounts from banks and other institutions. The proposal could result in the most direct commitment of taxpayer funds so far in the financial crisis that Fed and Treasury officials say is the worst they have ever seen. Senior aides and lawmakers said the goal was to complete the legislation by the end of next week, when Congress is scheduled to adjourn. The legislation would grant new authority to the administration and require what several officials said would be a substantial appropriation of federal dollars, though no figures were disclosed in the meeting. Democrats, having their own desire for a second round of economic aid for struggling Americans, see the administration's request as a way to win White House approval of new spending to help stimulate the economy in exchange for support for the Treasury request. Democrats also say they will push for relief for homeowners faced with foreclosure in return for supporting any broad bailout of struggling financial institutions. "What we are working on now is an approach to deal with systemic risks and stresses in our capital markets," said Henry M. Paulson Jr., the Treasury secretary. "And we talked about a comprehensive approach that would require legislation to deal with the illiquid assets on financial institutions" balance sheets," he added. One model for the proposal could be the Resolution Trust Corporation, which bought up and eventually sold hundreds of billions of dollars" worth of real estate in the 1990s from failed savings-and-loan companies. In this case, however, the government is expected to take over only distressed assets, not entire institutions. And it is not clear that a new agency would be created to manage and dispose of the assets, or whether the Federal Reserve or Treasury Department would do so. The bailout discussions came on a day when the Federal Reserve poured almost $300 billion into global credit markets and barely put a dent in the level of alarm. Hoping to shore up confidence with a show of financial shock and awe, the Federal Reserve stunned investors before dawn on Thursday by announcing a plan to provide $180 billion to financial markets through lending programs operated by the European Central Bank and the central banks of Canada, Japan, Britain and Switzerland. But after an initial sense of relief swept markets in Asia and Europe, the fear quickly returned. Tensions remained so high that the Federal Reserve had to inject an extra $100 billion, in two waves of $50 billion each, just to keep the benchmark federal funds rate at the Fed's target of 2 percent. None of those actions, however, brought much catharsis or relief, with banks around the world remaining too frightened to lend to each other, much less to their customers. This forced Mr. Paulson and Ben S. Bernanke, the Fed chairman, to think the unthinkable: committing taxpayer money to buy hundreds of billions of dollars in distressed assets from struggling institutions. Rumors about the Bush administration's new stance swept through the stock markets Thursday afternoon. By the end of trading, the Dow Jones industrial average shot up 617 points from its low point in midafternoon, the biggest surge in six years, and ended the day with a gain of 410 points or 3.9 percent. The rally continued in early trading in Asia. The Australian market was up 3.5 percent by mid-day there and the Nikkei 225 Index was up 2.9 percent in Tokyo. "The markets voted, and they liked the proposal," said Laurence H. Meyer, vice chairman of Macroeconomic Advisers. The stock surge began after Senator Charles E. Schumer, Democrat of New York, announced his own proposal for a government rescue on the Senate floor and declared that both the Treasury and the Federal Reserve were open to all ideas. "The Federal Reserve and the Treasury are realizing that we need a more comprehensive solution," Mr. Schumer said. I've been talking to them about it. Still, the evening discussions took most of Washington by surprise, especially since Congress had been trying to finish up its business and head home to campaign for re-election. The scale and complexity of the project are almost certain to create huge philosophical differences among the parties, which could make negotiations difficult to say the least. Still, lawmakers said the goal was to work through the coming weekend and to have both the House and Senate vote on a measure by the end of next week. As they exited the session, grim-faced lawmakers said they would await proposals from the Treasury Department. The Senate majority leader, Harry Reid, said he expected to see a proposal within hours, not days. "What we agreed to do is sit down together on a bipartisan basis and work together to solve the problem," said Senator Mitch McConnell of Kentucky, the Republican leader, who said no specific approach was advocated by the administration officials. President Bush and his top advisers have adamantly opposed bailouts, but the mortgage crisis has already forced the Treasury and the Fed to bail out four of the country's most prominent financial institutions - Bear Stearns in March; Fannie Mae and Freddie Mac earlier this month; and American International Group, the insurance conglomerate, just this week. Created in 1989, the Resolution Trust Corporation disposed of bad assets held by hundreds of crippled savings institutions. The agency closed or reorganized 747 institutions holding assets of nearly $400 billion. It did so by seizing the assets of troubled savings and loans, then reselling them to bargain-seeking investors. By 1995, the S.& L. crisis had abated and the agency was folded into the Federal Deposit Insurance Corporation, which Congress created during the Great Depression to regulate banks and protect the accounts of customers when they fail. By any reckoning, Mr. Paulson and Mr. Bernanke were desperate for a way to stem the crisis once and for all by Thursday evening. Over the previous 10 days, they had allowed one Wall Street firm, Lehman Brothers, to collapse; and an even bigger Wall Street firm, Merrill Lynch, to be sold to Bank of America. Then, on Tuesday, the Federal Reserve abruptly took over the nation's biggest insurance conglomerate, the American International Group, and began bailing it out with an $85 billion loan. The meeting in the Capitol, which began around 7 p.m., came after Congressional leaders had initially appeared unclear about what role they would play in the rapid-fire decisions being made. Leaders of both parties had complained about a lack of hard information flowing from the administration. House Republicans even canceled a closed-door party session Thursday morning after the administration refused to provide an official to brief them on the administration's emerging policies. But as Thursday progressed, Congressional leaders sought to reassert themselves on the crisis, scheduling oversight hearings, calling for a legislative response to the market turmoil and offering to put off an adjournment scheduled to start at the end of next week if the administration and Congress could find common ground on a solution. Nancy Pelosi, the House speaker, in a letter sent Thursday evening to President Bush, reiterated that view. "We stand ready beyond the targeted adjournment date of September 26 to permit Congress to consider legislative proposals and conduct necessary investigations," Ms. Pelosi said in the letter, which said "the worsening crisis in our financial markets demands strong solutions and decisive leadership." But whether a legislative consensus could be found remained an open question, and members of Mr. Bush's own party were among those who were most critical of the increasing federal intervention in private markets. At the meeting Thursday night, where officials said the atmosphere was tense, Senator Richard Shelby of Alabama, the senior Republican on the banking committee, was notably skeptical. A spokesman for the senator, Jonathan Graffeo, said later: "Senator Shelby believes it's his responsibility to be skeptical on behalf of taxpayers. He believes our goal must be to minimize taxpayer exposure while maximizing the benefit to the economy.  Earlier in the day, Representative John A. Boehner of Ohio, the House Republican leader, had expressed similar wariness about the risk to taxpayers" funds. And Representative Jeb Hensarling, a Texas Republican who heads a coalition of House conservatives, was circulating a letter to the administration demanding that it not engage in any further bailouts. Even before the Thursday night session with Mr. Paulson - the second for top Congressional leaders this week - the House had scheduled new oversight hearings. The Financial Services Committee set a session for next week, with Mr. Paulson and Mr. Bernanke as witnesses. The Oversight and Government Reform Committee set hearings for early October to examine developments that led to the collapse of Lehman Brothers and the bailout of A.I.G., even though Congress is to be in recess. Ms. Pelosi, suggesting the public was probably not of a mind to wait until 2009 for a Congressional fix, said lawmakers first had to explore the causes of the problems and potential solutions in hearings. "Let's hear from the Bernankes and the Paulsons and the rest what their view of it is," she said. Let's hear from the private sector. How these captains of the financial world could make millions of dollars in salary, and yet their companies fail and then we have to step in to bail them out. Mr. Paulson and Mr. Bernanke have been studying an array of new and sometimes radical approaches to fight what current and former Fed officials describe as the worst financial crisis they have ever seen. The Fed has already stretched itself very thin by introducing new emergency lending programs for banks, Wall Street firms and, this week, a giant insurance company. With the Fed running short of unencumbered reserves, the Treasury Department had begun raising fresh cash for the central bank by selling new Treasury bills at an unprecedented pace - $200 billion this week alone - and parking it at the Fed for whatever use it wanted.