Henry Paulson has urged Congress to move quickly to pass a $700bn (£382bn) package to tackle the worst financial crisis for decades.

The US Treasury Secretary plans to set up a fund to buy back much of the bad debt held by banks and financial institutions around the world.

Speaking on US television, Mr Paulson said the financial market turmoil was a “humbling experience”.

He also urged other countries to adopt similar schemes to shore up confidence.

“I wouldn’t bet against the American people and I wouldn’t bet against the long-term fundamentals of this country.

“But this is a humbling experience to see such fragility in capital markets and to ask how did we ever get here,” Mr Paulson told NBC’s Meet the Press.

Congressional and Treasury officials have been meeting over the weekend to try to get the package signed into law within a matter of days.

International rescue

Under the draft Treasury plans, financial institutions with “significant operations in the US” are eligible to sell or auction their bad debts to Treasury fund.

“Banks eligible to sell to this Treasury-owned bank would be banks with significant operations in the US – so, for example, Royal Bank of Scotland and Barclays would be able to dump their toxic mortgage-related investments on the Treasury”

The fund would aim to sell off these mortgage-related debts in the future.

That would mean a number of British banks could sell their soured assets to the Treasury-owned bank – via an auction – according to the BBC’s business editor, Robert Peston.

On Saturday, US President George Bush defended the plan, saying the cost to taxpayers of shoring up markets was better than the alternative of job losses and diminished pensions.

“I’m convinced that this bold approach will cost American families far less than the alternative,” he said.

“Further stress on our financial markets would cause massive job losses, devastate retirement accounts, further erode housing values, and dry up new loans for homes, cars and college tuitions.”

Regulations overhaul

The Treasury has revealed little detail of its ambitious package, other than the estimated cost of buying these bad debts and who is eligible for the scheme.

… the world is changing very fast, but the governance of the global financial system has not caught up with it and that’s what’s got to change

Gordon Brown

Mr Paulson has asked for congressional approval to raise the amount the government can borrow to $11.3 trillion (from $10.6 trillion) to cover that cost.

Analysts say the devil was in the detail, for example, how much the Treasury will pay for the banks’ toxic assets.

Some members of Congress are uneasy at the thought of the taxpayer taking on hundreds of billions of dollars of currently worthless debt, the BBC’s North America editor Justin Webb says.

But the leader of the Democrats in the House of Representatives, Steney Hoyer, has said he expects quick action.

After a week of turmoil, stock markets around the world rallied on news of the rescue plan, with the UK’s FTSE 100 closing on Friday with its biggest one-day gain.

The US Treasury Secretary also said that the government would be stepping up action to increase the availability of capital for new home loans.

Once this difficult period was over, Mr Paulson said, the government’s next task would be to overhaul bank regulations.

‘New economy’

The UK prime minister said on Sunday that one of the lessons from the global financial crisis is the need for international regulation to be brought up to date.

Gordon Brown told the BBC: “We’re in a new economy, a global financial economy, the world is changing very fast, but the governance of the global financial system has not caught up with it and that’s what’s got to change.”

Mounting fears that the credit crisis is beginning to spread out through the financial system have rocked shares and companies recently.

Investment giant Lehman Brothers collapsed last Monday, rival Merrill Lynch was bought out by Bank of America, and the US government has bailed out insurer AIG with an $85bn rescue package and state-backed mortgage lenders Fannie Mae and Freddie Mac.

News reported by The BBC

Shares in US mortgage firms Freddie Mac and Fannie Mae dropped by as much as 50% in rollercoaster trading on Friday amid concerns for their future.

Investors are concerned that the government may have to step in to rescue the two firms.

But the US Treasury said it would back them in their current form, helping their shares to recover some ground.

The companies are behind half of all US mortgages and have been hard hit by the slowdown in the US housing market.

The two companies play an important role in the financial markets in providing funding for home loans by buying up mortgages and packaging them as investments.

As mortgage backers, the companies have had to pay out when homeowners have defaulted on their loans.

Both firms defended their finances, saying they had enough capital to weather the housing slump.

‘Important mission’

Shares in the two firms trimmed losses after US Treasury Secretary Henry Paulson signalled he was not on the verge of taking Fannie Mae and Freddie Mac into public hands.

President Bush reflects on tough times for the US economy - “Our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,” he said.

President George W Bush was briefed on Fannie Mae and Freddie Mac earlier on Friday.

Mr Bush said Mr Paulson assured him that he and Federal Reserve Chairman Ben Bernanke “will be working this issue very hard”.

After a volatile trading session, Freddie Mac shares closed down 3.1% at $7.75.

The stock had plunged as much as 51% shortly after the market opened and briefly vaulted into positive territory at one point.

Shares of Fannie Mae ended the day down 22.4% at $10.25 after sliding as much as 49% to a 19-year low of $6.68.

US Senator Christopher Dodd said the Federal Reserve was considering allowing Fannie Mae and Freddie Mac to borrow directly from the central bank, which also helped the shares to recover.

Lenders falter

Meanwhile, a California-based mortgage lender IndyMac was taken over by US regulators on Friday.

Earlier this week, the bank said that it would stop most lending, leading depositors to withdraw cash.

The US Office of Thrift Supervision said it had transferred IndyMac’s operations to the Federal Deposit Insurance Corporation after determining that is unlikely to meet its depositors demands.

IndyMac had been struggling to raise funds and stay in business in one of the states worst hit by the US housing market slump.

‘Unthinkable’

There has been a sense of unfolding crisis surrounding the companies this week according to the BBC’s New York business correspondent, Greg Wood.

“Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission” Treasury Secretary Henry Paulson

He added that it would be unthinkable that they could be allowed to fail.

While no longer government owned, Fannie Mae and Freddie Mac are government chartered, leading many to suggest that the Bush administration will be forced to step in.

‘Important mission’

Mr Paulson responded to media reports that the Treasury was planning some kind of government-led rescue.

He said the Treasury was “maintaining a dialogue with regulators and with the companies”.

He stressed that their regulator continued to work with them “as they take the steps necessary to allow them to continue to perform their important public mission”.

Analysts said his comments suggested that there would be no sweeping bail-out of the two firms.

“While Mr Paulson is making supportive comments… there was no suggestion of any imminent bail-out – nor enough specifics to the support they would give,” said Bret Barker, portfolio manager at Metropolitan West Asset Management in Los Angeles.

“The markets were looking for more from Mr Paulson.”

Earlier this week, Freddie Mac and Fannie Mae’s regulator stressed that the firms were “adequately capitalised”.

This sentiment was also echoed by Mr Paulson and Mr Bernanke in testimony to the US Congress on Thursday.

The Office of Federal Housing Enterprise Oversight said they had large liquidity portfolios, access to the debt market and over $1.5 trillion in unpledged assets.

News reported by BBC