$700B financial rescue: Will it work?

As the federal government steps to the center of the financial crisis, crafting plans to take ownership of hundreds of billions of dollars worth of bad mortgages, two simple questions rise to the fore: Will this intervention be enough to restore order, and what will the grand rescue cost taxpayers?

The Treasury Department, as overseer of the financial system, has in recent weeks unleashed an astonishing array of initiatives in an effort to stave off catastrophe. It took over the country's largest mortgage-finance companies and put untold billions of taxpayer dollars on the line to prop up other lenders.

Now, although the details are being worked out, the government is dispensing with rescuing one company at a time and taking on a vast pile of bad debt in one gulp. If it comes to pass — if Uncle Sam becomes the repository for the radioactive leftovers of bad real-estate bets — will the crisis lift?

There is wide agreement that some kind of broad intervention is necessary.

"It goes a long way. It ameliorates it very substantially," said Alan Blinder, an economist at Princeton University and a former vice chairman of the board of governors at the Federal Reserve, who has said for months that the government must step in forcefully to buy mortgage-linked investments.

"We're deep into Alice in Wonderland's rabbit hole," he said.

But significant skepticism confronts the initiative. Under the proposal circulating Saturday, the Treasury could spend up to $700 billion to buy mortgage-linked investments and sell what it can as it works out the messy details of the loans. But no one knows what this complex web of finance will be worth, making the final price tag unknowable. One may just as well try to predict the weather three years from Tuesday.

Some questioned the prudence of adding to the nation's overall debt at a time when the Treasury relies on the largesse of foreigners to cover the bills. Most broadly, what are the longer-term costs of the government stepping in to restore order after so many wealthy financiers have become so much wealthier through what now seem like reckless bets on real estate, bets now covered by public dollars?

Also, what message does that send to the next investment bank caught up in the next speculative bubble and contemplating the risks of jumping in while wondering who is on the hook if things go awry?

Many economists said such questions are beside the point. The nation is gripped by the worst financial crisis since the Great Depression. Before Thursday night, when the Treasury secretary, the Federal Reserve chairman and leaders on Capitol Hill proclaimed their intentions to take over bad debts, the prognosis for the U.S. financial system was sliding from grim toward potentially apocalyptic.

"It looked like we might be falling into the abyss," economist Blinder said.

As details of the government's plans are hashed out, no hallelujah chorus is wafting across Washington, D.C., down Wall Street or through the glistening condos of the nation. Too many households are having trouble paying their mortgages. Too many people are out of work. Too many banks are bloodied.

Still, the prospect that the government is preparing to wade in deep — perhaps sparing families from foreclosure and banks from insolvency — has muted talk of the most dire possibilities: a severe shortage of credit that would crimp the availability of finance for many years, effectively halting economic growth.

"The risk of ending up like Japan, with 10 years of stagnation, is now much lessened," said Nouriel Roubini, an economist at the Stern School of Business at New York University. "The recession train has left the station, but it's going to be 18 months instead of five years."

If the plan works, it will attack the central cause of U.S. economic distress: the continued plunge in housing prices. If banks resumed lending more liberally, mortgages would become more readily available. That would give more people the wherewithal to buy homes, lifting housing prices or at least preventing them from falling further. This would prevent more mortgage-linked investments from going bad, further easing the strain on banks. As a result, the current downward spiral would end and start heading up.

Democrats vow to push for legislation that will help keep more homeowners from foreclosure, and some are pushing for a second stimulus plan along with the bailout package.

"It's easy to forget ... that the root cause of all this is declining house prices," Blinder said. "If you can reverse that, then people start coming out of their foxholes and start putting their money in places they have been too afraid to put it."

For many Americans, the events that have transfixed and horrified Wall Street in recent days — the disintegration of supposedly impregnable institutions, government bailouts with 11-figure price tags — have been less stunning than inscrutable. The headlines proclaim that the taxpayer now owns the mortgage-finance giants Fannie Mae and Freddie Mac, along with the liabilities of a colossus called the American Insurance Group, which, as it happens, insures against corporate defaults. These organs' existence was only dimly evident to many until the pain began.

And yet these institutions are deeply intertwined with the U.S. economy. When the financial system is in danger, it stops investing and lending, depriving ordinary people of financing for homes, cars and education. Businesses cannot borrow to launch and expand.

"Wall Street isn't this island to itself," said Jared Bernstein, senior economist at the labor-oriented Economic Policy Institute. "Even people with good credit histories are having a very hard time getting loans at terms that make sense. If that gets worse, we're going to be stuck in the doldrums for a very long time, because that directly blocks healthy economic activity."

Judge: Lehman can sell units to Barclays

NEW YORK — A bankruptcy judge decided early Saturday that Lehman Brothers can sell its investment-banking and trading businesses to Barclays, the first major step to wind down the nation's fourth-largest investment bank.

U.S. Bankruptcy Judge James Peck gave his decision in a courtroom packed with lawyers at the end of an eight-hour hearing.

The deal was said to be worth $1.75 billion earlier in the week, but it may now be worth closer to $1.35 billion, which includes the $960 million price tag on Lehman's Midtown Manhattan office tower.

Lehman Brothers Holdings filed the biggest bankruptcy in U.S. history Monday, after Barclays declined to buy the investment bank in its entirety.

The British bank will take control of Lehman units that employ about 9,000 people in the United States. "Not only is the sale a good match economically, but it will save the jobs of thousands of employees," said Lehman lawyer Harvey Miller, of Weil, Gotshal & Manges.

Barclays took on a potential liability of $2.5 billion to be paid as severance, in case it decides not to keep certain Lehman employees beyond the guaranteed 90 days. But observers have said Barclays' main reason for acquiring Lehman is to get its people and presence in North America.

The Associated Press and McClatchy Newspapers contributed to this report