Lehman Brothers Holdings Inc. (fka LEHMQ)

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Paulson,Bernanke Brief US Lawmakers On Bank Asset PlanLast update: 9/18/2008 8:32:15 PMBy Maya Jackson Randall Of DOW JONES NEWSWIRES WASHINGTON (Dow Jones)--U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, in a meeting late Thursday, briefed lawmakers on a plan to ease ongoing financial market troubles by addressing sour assets on banks' balance sheets. The two officials held the Capitol Hill meeting with Republicans and Democrats from both chambers of Congress to discuss the bank debt plan as well as current market conditions in general. A Treasury spokeswoman said they discussed "a comprehensive approach to address the illiquid assets on bank balance sheets that are at the underlying source of the current stresses in our financial institutions and financial markets." She added that Paulson and Bernanke "are exploring all options - legislative and administrative - and expect to work through the weekend with congressional leaders to finalize a way forward." The meeting marks Bernanke and Paulson's second trip in a week to Capitol Hill to brief lawmakers. On Tuesday night they made a surprise trip to Senate Majority Leader Harry Reid's, D-Nev., office to inform senior congressional figures the Fed was planning an $85 billion bail-out of American International Group Inc. (AIG). This time the meeting was held in Speaker of the House Nancy Pelosi's, D-Calif., office. Earlier Thursday, it was reported that Paulson had been mulling a plan to create a Resolution Trust Corporation style entity that would buy up some of the distressed mortgage debt from lenders, investment banks and other financial institutions holding the toxic debt on their books. The news boosted the U.S. markets, sending the Dow Jones Industrial Index up 410 points in Thursday's trading session. The U.S. commercial-paper market, where companies go for short-term funding, broke down Thursday as credit fears paralyzed investors. Fears about money-market funds, in particular, have grown in wake of news this week that Reserve Management Corp.'s Primary Fund is losing money, marking the first time in 14 years that these funds, generally regarded as super safe, have faced a loss. Additionally, Reserve Management this week said two more if its funds had dropped below the $1-per-share level as a result of exposure to defaulted Lehman Brothers Holding Inc. (LEH) commercial paper. With the financial market turmoil apparently deepening this week, the idea of an RTC-like group had already been floated on Congress and seemed to be attracting support. The RTC was created in the midst of the savings-and-loan crisis of the 1980s and 1990s. Setting up an entity similar to the RTC "would go a long ways to help resolve" the financial market turmoil, said Deutsche Bank chief economist Peter Hooper on a conference call with reporters earlier Thursday. Still, the Wall Street Journal reported Thursday that any eventual plan isn't expected to mirror the Resolution Trust Corp. Instead, it could be a new entity that might purchase assets at a steep discount from solvent financial institutions and then eventually sell them back into the market. In an opinion piece in the Wall Street Journal, the idea of some RTC-style entity was championed by three former federal officials, including former Federal Reserve Chairman Paul Volker. "The financial system needs basic, long-term reform, but right now it is clogged with enormous amounts of toxic real-estate paper that will not repay according to its terms. This paper, in turn, is unable to support huge quantities of structured financial instruments, levered as much as 30 times," they wrote. "Until there is a new mechanism to remove this decaying tissue from the system, the infection will spread, confidence will deteriorate further, and we will have to live through the mother of all credit contractions." They said the problem could be resolved by setting up a new temporary resolution system such as the Resolution Trust Corp of the late 1980s and 1990s and the Home Owners Loan Corporation of the 1930s. In a recent report, Goldman Sachs economists noted that there are various ways officials could set up the new bank debt plan, but they would all likely require congressional action. And that will be the challenge, they said, noting that the presidential election is only weeks away and Congress is expected to adjourn soon. "Enacting such a program before the election will be a challenge," said the economists. "However, without any government action, the risk of further deterioration in the financial system is real." Still, "if conditions deteriorate further, enactment before the election is a possibility." -By Maya Randall, Dow Jones Newswires; 202-862-9255; [e-mail] (Corey Boles, Patrick Yoest and Anusha Shrivastava also contributed to this article.)