Lawmakers Left On the Sidelines As Fed, Treasury Take Swift Action

"No one knows what to do," Reid told reporters. "We are in new territory here. This is a different game." Even Bernanke and Paulson aren't sure how to fix the system, he said, "but they are trying to come up with ideas."

One idea that's rapidly gaining currency is the creation of a new federal entity that would acquire "toxic" mortgage-backed assets from failing firms and hold them until the housing market improves. Economists including former Fed chairman Paul Volcker and former Treasury secretary Lawrence Summers have endorsed the idea. Summers, who served in the Clinton administration, is scheduled to speak to Senate Democrats at a luncheon today.

Setting up such an entity also would give lawmakers a chance to determine the parameters of future bailouts, as opposed to leaving the decision in Bernanke's hands. While most lawmakers said they trust Bernanke's judgment, Frank said he was troubled to learn in the meeting Tuesday that Bernanke has legal authority to use the central bank's reserves, which total $888 billion, to make loans to any entity under any terms he deems economically justified.

"No one in this democracy -- unelected -- should have $800 billion to dispense as he sees fit," Frank said. "It may be that there is so much bad debt out there clogging our system that we may have to have some intervention. But it shouldn't be the unilateral decision of the chairman of the Federal Reserve with the backing of the secretary of the Treasury."

Pressed by lawmakers at the Tuesday meeting to justify the AIG rescue, Bernanke argued that the insurance giant was deserving of government help because of its broad reach into global financial markets. But several lawmakers said it was not clear to them how Bernanke and Paulson were deciding which firms would be allowed to fail and which would be saved.

"They made very clear that they could give us no assurance that there wouldn't be other shoes that would drop," said Sen. Kent Conrad (D-N.D.), chairman of the Senate Budget Committee. "They also did not draw any bright line distinction in how they would handle things going forward."

Conrad said Paulson and Bernanke also could not say what the effect might be on the federal budget, which is already running up near-record deficits. Nor could they say what the ultimate cost to taxpayers might be.

"These massive amounts, it is deeply troubling," said Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee. "You start by taking $29 billion for Bear Stearns, $200 billion with Fannie and Freddie. Not to mention the discount window stuff. It is mounting. And it is deeply troubling."

If Bernanke and Paulson have a coherent strategy, many Republican lawmakers say they do not understand it, either. Rep. Adam H. Putnam (R-Fla.), chairman of the House Republican Conference, yesterday urged the administration to send an "envoy" to Capitol Hill to explain their decisions, as well as "the nature of the events that are unfolding in front of us" at this "historic moment."

"There's a great deal of confidence in Bernanke, but that reservoir is not limitless," Putnam told reporters. "People need to understand what the guiding principles are behind this ad-hoc strategy and how you decide that AIG is worthy of a bailout and that Lehman is not and that Bear Stearns is and Fannie. There has to be some better understanding of that."