Treasury, Urged to Act, Finds Few Tools

Treasury staff, particularly Robert Steel, undersecretary for domestic finance, and Anthony Ryan, assistant secretary for financial markets, have been brainstorming for ways to ease the crisis and acting as a clearinghouse of information between Wall Street and various government agencies involved in the response.

There has been no serious discussion, sources inside the administration and outside of it said, of any bailout of the subprime mortgage market, which could reward the irresponsible lending that created the current problems.

People outside the administration note a couple of things the Treasury Department might do to ease the short-term problems in the markets.

Dodd and other Democrats have advocated that the administration lift restrictions that Fannie Mae and Freddie Mac agreed to with their regulator limiting the volume of mortgages they can purchase. If the two companies could buy more mortgages, it might make more money available to home buyers.

Paulson has resisted such a step, most recently in an interview with CNBC yesterday, saying that changes to the restrictions should come about only from Congress. A bill changing regulation of the two companies has percolated on the Hill in recent months.

Another strategy the Treasury Department might take, said Wachovia global economist Jay Bryson, would be to auction a higher-than-usual volume of short-term Treasury bills, which are the asset that investors have most been bidding up, distorting debt markets.

There is nothing legally to prevent the department from doing that, but it would be a departure from the agency's long-standing practice of issuing debt according to a strategic plan that the department believes lowers the government's cost of borrowing money in the long run, rather than reacting to temporary blips in the bond market.

"The reality is the options of what Treasury can do to deal with the crisis are very, very limited," Bryson said.