WASHINGTON — Treasury Secretary Paulson says the government is crafting a plan to rescue banks from bad debts that are at the heart of Wall Street’s worst financial crisis in decades.

Mr. Paulson said late today the plan will need congressional approval. He and the Federal Reserve chairman, Ben Bernanke, briefed lawmakers on the options they are considering.

Senate Majority Leader Harry Reid, Democrat of Nevada, said he expected the administration and the Fed to have a proposal to lawmakers in a matter of hours, rather than days.

Mr. Paulson, Mr. Bernanke, and Securities and Exchange Commission chair, Christopher Cox, asked lawmakers at the session to pass legislation giving the government power to buy distressed assets.

“It will be the power — it may not be a new entity — it will be the power to buy up illiquid assets,” Rep. Barney Frank, Democrat of Massachusetts, said.

Mr. Frank said there was “virtually unanimous agreement” among lawmakers in attendance that such legislation was needed.

Stocks rallied more than 400 points late yesterday after a report that the Bush administration was working on a new plan to alleviate fallout from the housing and credit crises. Those debacles have badly bruised the economy and pushed unemployment to a five-year high.

“What we are working on now is an approach to deal with the systemic risk and the stresses in our capital markets,” Mr. Paulson said. “As we’ve said for some time, the root cause of the stress in the capital markets is the real estate correction. So again we’re coming together to work for an expeditious solution which is aimed right at the heart of this problem.” And, that is bad debts— or “illiquid assets” — on financial institutions’ balance sheets, he said.

Mr. Bernanke said he looked forward to working closely with Congress to “resolve this financial crisis and get our economy moving again.”

President Bush canceled an out-of-town trip today to stay at Washington and meet for 40 minutes with Mr. Bernanke, Mr. Paulson and Mr. Cox, along with White House and Treasury Department aides.

Mr. Paulson, Mr. Cox, and Mr. Bernanke briefed congressional leaders in House Speaker Nancy Pelosi’s office this evening.

At the top of the meeting, Ms. Pelosi, a Democrat of California, made clear that any potential action must protect taxpayers who are already on the hook for potentially billions of dollars in bailouts to financial firms taken down by the financial crisis. “We are here to work together for solutions … in a way that insulates taxpayers, consumers, Main Street from the crisis on Wall Street,” she said.

Ms. Pelosi wrote to Mr. Bush today saying Congress would meet beyond its planned Sept. 26 adjournment, if necessary, “to consider legislative proposals and conduct necessary investigations” related to the financial crisis.

“We stand ready to work with you and your administration to consider constructive solutions that stabilize our financial markets and balance accountability to the U.S. taxpayer with protecting American families from the crisis’ fallout,” Ms. Pelosi wrote.

Mr. Frank said “the timetable has been greatly sped up” for Congress to consider ways of dealing with the financial meltdown. Asked whether a hearing he’s planning next week on broad government intervention to address the crisis could morph into a legislative drafting session, Mr. Frank did not reject the suggestion.

Senator Schumer would not comment on reports that Mr. Paulson was considering creating an entity like the Resolution Trust Corp., which was formed in 1989 to dispose of the assets of failed savings and loans and then went out of business.

But, Mr. Schumer said: “Everyone realizes this ad hoc situation can’t last and we need a comprehensive plan. … I think the administration knows that.”

Mr. Schumer presented his own proposal for federal intervention, in which the government would lend struggling banks money in exchange for an equity stake. He said it would be conditioned on the banks agreeing to legislation that would let homeowners who have declared bankruptcy renegotiate their mortgages so they could keep their homes.

An outspoken advocate for the financial industry, Mr. Schumer his idea was a better alternative to an RTC-like entity, which could find it difficult or impossible to sell off complex mortgage-related investments.

Separately, two days after declaring no more bailouts, Senator McCain called for a RTC-type entity that could “provide an orderly process through which to identify bad loans and eventually sell them.”

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Associated Press writers Andrew Taylor and Julie Hirschfeld Davis contributed to this report.