U.S. lawmakers aim to nail down bailout

By Kevin Drawbaugh and Richard Cowan

WASHINGTON (Reuters) - U.S. congressional leaders locked themselves behind closed doors on Saturday with the aim of nailing down a deal on a $700 billion (380 billion pound) bank bailout and halting a downward spiral in the worst financial crisis since the Great Depression.

Leading lawmakers, who huddled with U.S. Treasury Secretary Henry Paulson, said they hoped to reach an agreement to create a massive government fund to buy up distressed debt from financial institutions staggered by failed mortgages.

House of Representatives Speaker Nancy Pelosi said she hoped a deal would be clinched on Saturday so Congress could act as early as Sunday with the goal of preventing a repeat of last week's white-knuckle ride in the financial markets.

But House Republicans, who had thrown talks into disarray on Thursday, said they still wanted to see Wall Street pay more of the cost and were less concerned about reaching a deal before Monday's opening bell.

"We're not moving on any kind of artificial timeline. We're moving towards the very best solution in the shortest period of time we can get to the very best solution," said Rep. Roy Blunt of Missouri, the chief negotiator for House Republicans.

The urgent background to the debate remained fear-wracked financial markets after big banks teetered, collapsed or refused to lend money to each other. Central banks have been forced to pump liquidity into the markets to try to prevent them from seizing up and bringing the economy to a halt.

Regulators seized savings and loan Washington Mutual Inc on Thursday in the biggest bank failure in U.S. history, selling its assets to JPMorgan Chase. In a reflection of the latest Wall Street shakeout, Washington Mutual filed for bankruptcy in a Delaware court on Saturday.

Meanwhile, published reports said Wachovia Corp, the sixth-largest U.S. bank, began merger talks with potential partners after a 27-percent drop in its shares on Friday.

The rush to forge a bailout package also overshadowed the presidential campaign and Friday's debate between Democrat Barack Obama and Republican John McCain.

Obama accused McCain on Saturday of playing politics with the financial crisis, while his Republican rival tried to show leadership by returning to Washington, where an aide said he was working the phones behind the scenes.

FEAR OF CONTAGION

While Congress tried to find a way to stop the bleeding in America, investors fretted about contagion into Europe, where Belgian-Dutch financial group Fortis NV fired its interim chief executive after liquidity concerns pushed its shares to a 14-year low.

In London, regulators and politicians were in talks over the future of troubled lender Bradford & Bingley, raising the prospect that a second British bank could be nationalised.

IMF Managing Director Dominique Strauss-Kahn warned that the world faced a serious, long-lasting slowdown because of the crisis.

At the U.S. Capitol, House Republicans were pressing for a form of bad loan insurance that banks would pay for, as an alternative to putting taxpayers on the hook for buying up toxic assets.

Sen. Charles Schumer, a New York Democrat, said Democrats were willing to allow that insurance provision as an option in the bailout but did not see how it could solve the crisis since it would further strain balance sheets.

Democrats said they were considering a proposal to institute a fee on financial firms if taxpayers lost money from the government's asset purchases.

Among other still-open issues for congressional dealmakers was how much of the bad loan package would be available from the start. "We are dealing with that right now," said Illinois Rep. Rahm Emanuel, a member of the Democratic leadership.

Democrats have pushed for the money to be made available in tranches in order to create a legislative check on the program.