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WASHINGTON — As the Bush administration has lurched from pillar to post in the financial crisis, some lawmakers and experts were considering a longer-term legislative solution that would create a new agency to dispose of the mortgage-related assets at the core of Wall Street’s woes.

Proponents of a more systematic government role to help relieve financial institutions of their toxic securities range from Lawrence H. Summers, the former Treasury secretary under President Clinton, to former Federal Reserve chairmen Paul A. Volcker and Alan Greenspan.

In Congress, the idea that is gaining traction centers on the creation of a new agency that would buy troubled assets from hobbled companies. The idea was floated on Tuesday by Barney Frank, Democrat of Massachusetts, who heads the House Financial Services Committee. Among those signaling that it merited serious consideration were Senate Majority Leader Harry Reid and the House speaker, Nancy Pelosi.

With seven weeks until the presidential elections, no one expects Congress or the White House to move quickly to create a new federal agency that puts taxpayers at risk for hundreds of billions of dollars in bad assets. Steny H. Hoyer, the House majority leader, said there was no time to consider any new proposals in the two weeks before Congress adjourns.

But in its ad hoc approach to the crisis, the Treasury Department and the Federal Reserve have, in effect, already embarked on a course similar to the proposals in Congress.

In the case of Bear Stearns, the Fed took $29 billion of the investment bank’s mortgage-related assets as collateral for a Fed loan to JPMorgan Chase, which then agreed to acquire Bear Stearns.

In the case of Fannie Mae and Freddie Mac, the Treasury Department placed the companies in a conservatorship and explicitly backed the $5.3 trillion of mortgages they own or guarantee.

Treasury also agreed to buy an unspecified amount of Fannie’s and Freddie’s mortgage-backed securities on the open market, starting with a $5 billion purchase this month. Those securities are to be managed and ultimately sold for the government by an investment house on Wall Street.

But federal officials remain concerned about the plight of other institutions, including Washington Mutual, the nation’s largest savings association. Experts estimate that a government bailout of Washington Mutual could cut in half the size of the federal deposit insurance fund, which protects bank depositors at thousands of banks and savings and loan institutions.

Mr. Frank was among the House and Senate leaders who were hastily called to a meeting Tuesday with the Federal Reserve chairman, Ben S. Bernanke and Treasury Secretary Henry M. Paulson Jr. to hear about the Fed’s latest rescue plan, this time of the American International Group.

Mr. Frank said that one of the issues discussed in the meeting was a potential need for broader, longer-term federal action in the marketplace.

"We have had a series of ad hoc interventions; this is one more ad hoc intervention," he said. "I do think, because you can’t be sure this is the last one, the question of a broader more systemic action in which the government tries to help resolve these things is very important."

In concept, the proposal would resemble the Resolution Trust Corporation, which disposed of bad assets held by hundreds of crippled savings institutions. Created in 1989, Resolution Trust closed or reorganized 747 institutions holding assets of nearly $400 billion. It did so by seizing the assets of troubled savings and loans and then reselling them to bargain-seeking investors.

By 1995, the S.& L. crisis 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.

But the parallels to Resolution Trust are inexact. The federal government, unlike now, had no choice but to acquire the assets from savings associations because they were backed by federal deposit insurance. The mortgages now at the heart of Wall Street’s woes are not backed by federally insured deposits.

Moreover, the mission of the corporation was to dispose of the assets as quickly as possible for maximum value. Its goal was to reduce taxpayer exposure.

In the current crisis, the goal is more debatable. Should the government be helping homeowners, housing or financial markets, or large companies in trouble? Moreover, policy makers already have been seeking ways to reduce the impact of hard-to-sell assets on the books of companies by encouraging healthier institutions to acquire troubled ones.

The issue is whether Congress, after the election, should create a more formal and accountable mechanism, such as a federal agency, that would provide a relief valve for the troubled assets now causing havoc on Wall Street.

“The question is, and it’s just a question, is, ‘Are we at the point where the private market has made so many bad decisions and is so depressed that it can’t get out from under?’ ” said Mr. Frank, who is planning to hold a hearing next week to explore whether Congress should create an agency to help the markets dispose of hard-to-sell assets.

“The question we have to address is, ‘Is it the case that market psychology has so depressed assets that no entity has capacity to buy and hold these assets except for the government?’ ”

Mr. Frank said it would be more appropriate for a new agency, rather than the central bank, to be relieving the markets of the troubled assets.

“It is not appropriate for the Federal Reserve either in a financial sense or in a democratic sense to take on this role,” Mr. Frank said in an interview.

But Senator Christopher J. Dodd of Connecticut, the chairman of the Senate banking committee, said at a news conference announcing hearings later this week on the crisis that he wondered whether such an agency was necessary if Treasury and the Fed were already performing such a function and had the authority to continue to do it.

“I’m not opposed to it,” he said of Mr. Frank’s proposal. “I’m anxious to hear what the administration would have to say about this.”

Administration officials said they had no plans to make such a proposal, and that they would leave it to the next administration.

Mr. Frank emphasized that any legislation creating a new agency would have to be accompanied by “tough new regulations” to discourage companies from making more risky investments. He acknowledged that the decision about such an agency would be in the hands of the next Congress and the next president.

In recent days, aides to the presidential campaigns of John McCain and Barack Obama have said it would be premature to consider creating a new agency. But after the election, the political imperatives could significantly change, particularly if the housing markets remain depressed and Wall Street continues to choke on the billions of dollars in mortgage-backed assets.

By STEPHEN LABATON

WASHINGTON — Fearing a financial crisis worldwide, the Federal Reserve reversed course on Tuesday and agreed to an $85 billion bailout that would give the government control of the troubled insurance giant American International Group.

The decision, only two weeks after the Treasury took over the federally chartered mortgage finance companies Fannie Mae and Freddie Mac, is the most radical intervention in private business in the central bank’s history.

With time running out after A.I.G. failed to get a bank loan to avoid bankruptcy, Treasury Secretary Henry M. Paulson Jr. and the Fed chairman Ben S. Bernanke convened a meeting with House and Senate leaders on Capitol Hill about 6:30 p.m. Tuesday to explain the rescue plan.

They emerged just after 7:30 p.m. with Mr. Paulson and Mr. Bernanke looking grim, but with top lawmakers generally expressing support for the plan. But the bailout is likely to prove controversial, because it effectively puts taxpayer money at risk while protecting bad investments made by A.I.G. and other institutions it does business with.

What frightened Fed and Treasury officials was not simply the prospect of another giant corporate bankruptcy, but A.I.G.’s role as an enormous provider of financial insurance to investors who bought complex debt securities. That effectively required A.I.G. to cover losses suffered by the buyers in the event the securities defaulted. It meant A.I.G. was potentially on the hook for billions of dollars worth of risky securities that were once considered safe.

If A.I.G. had collapsed — and been unable to pay all of its insurance claims — institutional investors around the world would have been instantly forced to reappraise the value of those securities, which in turn would have reduced their own capital and the value of their own debt.

“It would have been a chain reaction,” said Uwe Reinhardt, a professor of economics at Princeton University. “The spillover effects could have been incredible.”

Financial markets, which on Monday had plunged over worries about A.I.G.’s possible collapse, reacted with relief to the news of the bailout. In anticipation of a deal, stocks rose about 1 percent in the United States on Tuesday and were up about 2 percent in early trading in Asian markets Wednesday morning.

Still, the move will likely start an intense political debate during the presidential election campaign over who is to blame for the financial crisis that prompted the rescue.

Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said Mr. Paulson and Mr. Bernanke had not requested any new legislative authority for the bailout at Tuesday night’s meeting. “The secretary and the chairman of the Fed, two Bush appointees, came down here and said, ‘We’re from the government, we’re here to help them,’ ” Mr. Frank said. “I mean this is one more affirmation that the lack of regulation has caused serious problems. That the private market screwed itself up and they need the government to come help them unscrew it.”

The decision was a remarkable turnaround by the Bush administration and Mr. Paulson, who had flatly refused over the weekend to risk taxpayer money to prevent the collapse of Lehman Brothers or the distressed sale of Merrill Lynch to Bank of America. Earlier this year, the government bailed out another investment bank, Bear Stearns, by engineering a sale to JPMorgan Chase that left taxpayers on the hook for up to $29 billion of bad investments by Bear Stearns. The government hoped at the time that this unusual step would both calm markets and lead to a recovery by the financial system. But critics warned at the time that it would only encourage others to seek bailouts, and the eventual costs to the government would be staggering.

The decision to rescue A.I.G. came on the same day that the Fed decided to leave its benchmark interest rate unchanged at 2 percent, turning aside hopes by many on Wall Street that the Fed would try to shore up confidence by cutting rates once again.

Fed and Treasury officials initially had turned a cold shoulder to A.I.G., when company executives pleaded on Sunday night for the Fed to provide a $40 billion bridge loan to stave off a crippling downgrade of its credit ratings as a result of tens of billions of dollars of losses related to insurance investments that have turned sour.

But government officials reluctantly backed away from their tough-minded approach after a failed attempt to line up private financing with help from JPMorgan Chase and Goldman Sachs, which told federal officials they simply could not raise the money given both the general turmoil in credit markets and the specific fears of problems with A.I.G.

The complexity of A.I.G. ’s business, and the fact that it does business with thousands of companies around the globe, make its survival critical at a time when there is stress throughout the financial system worldwide.

“It’s the interconnectedness and the fear of the unknown, meaning the impact of a failure,” said Roger Altman, a former Treasury official under President Bill Clinton. “But size is a factor, you can’t ignore that. The prospect of world’s largest insurer failing, together with the interconnectedness and the uncertainty about the collateral damage — that’s why it’s scaring people so much.”

 Under the plan, the Fed will make a two-year loan to A.I.G. of up to $85 billion and, in return, will receive warrants that can be converted into common stock giving the government nearly 80 percent ownership of the insurer. All of the company’s assets are being pledged to secure the loan. Existing stockholders have already seen the value of their stock drop more than 90 percent in the last year. Now they will suffer even more, although they will not be totally wiped out.

The Fed said the loan would allow A.I.G. to sell “certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.”

Without help from the Fed, A.I.G. might have been forced to liquidate real estate and other assets at fire sale prices — a move that could drive property prices lower and force countless other companies to mark down the value of their own holdings.

A.I.G. is a sprawling empire built by Maurice R. Greenberg, who acquired hundreds of businesses all over the world until he was ousted amid an accounting scandal in 2005. Many of A.I.G.’s subsidiaries wrote insurance of various types. Others made home loans and leased aircraft. The diverse array of companies were more valuable under a single corporate parent like A.I.G., because their business cycles offset each other, giving A.I.G. a relatively smooth stream of revenue and income.

After Mr. Greenberg’s departure, A.I.G. restated its books over a five-year period and instituted conservative new accounting policies. But before the company could really rebuild itself, it became embroiled in the mortgage crisis. Some of its insurance companies ended up with mortgage-backed securities on their books, but the real trouble involved a new kind of insurance that its financial products unit offered investors for complex debt securities.

Its stock tumbled faster this year as first the debt securities lost value, and then the derivatives-based insurance contracts came under a cloud.

The Fed’s extraordinary rescue of A.I.G. underscores how much fear remains about the destructive potential of the complex financial instruments, like credit default swaps, that brought A.I.G. to its knees. The market for such instruments has exploded in recent years, but it is almost entirely unregulated. When A.I.G. began to teeter in the last few days, it became clear that if it defaulted on its commitments under the swaps, it could set off a devastating chain reaction through the financial system.

“We are witnessing a rather unique event in the history of the United States,” said Suresh Sundaresan, the Chase Manhattan Bank professor of economics and finance at Columbia University. He thought the near brush with catastrophe would bring about an acceleration of efforts within the Treasury and the Fed to put safety controls on the use of credit default swaps.

“They’re going to tighten the screws and say, ‘We want some safeguards on this market,’ ” he said of the Fed and the Treasury. “Contagion risk is very high.”

The swaps are not securities and are not regulated by the Securities and Exchange Commission. And while they perform the same function as an insurance policy they are not insurance in the conventional sense, so insurance regulators do not monitor them either.

That set the stage for deep losses for all the countless investors and other entities that had entered into A.I.G.’s swap contracts. Of the $441 billion in credit default swaps that A.I.G. listed at midyear, more than three-quarters were held by European banks.

Under the swaps contracts, A.I.G. committed itself to make the purchasers of debt securities whole in the event of a default. That made the debt securities more valuable to the investors who bought them.

But if A.I.G. suddenly became unable to honor its swap commitments, its counterparties would lose too, because the securities they were holding would no longer be insured, and thus lose value.

“Suddenly banks would be holding a lot of bondlike instruments that were no longer insured,” Mr. Sundaresan said. “They would have to mark them down. And when they marked them down, they would require more capital. And then they would have to go out and raise capital in these markets, which is very difficult.”

Mr. Sundaresan said for a new market arrangement to succeed, it would have to create a clearinghouse to track swaps trading, and daily requirements to post collateral, so that a huge counterparty would not suddenly find itself having to come up with billions of dollars overnight, the way A.I.G. did.

This article was reported by Edmund L. Andrews, Michael J. de la Merced and Mary Williams Walsh and written by Mr. Andrews.