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Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke told congressional leaders in an emergency meeting on Thursday night that they were working to create a government mechanism to purchase the bad assets of firms teetering near insolvency -- the latest dramatic step by the government to stem the economic crisis.

House and Senate leaders from both parties met in House Speaker Nancy Pelosi's office along with committee chairmen and ranking members from panels with jurisdiction over the banking and financial systems.

A Treasury spokesman said Paulson and Bernanke "began a discussion with them on a comprehensive approach to address the illiquid assets on bank balance sheets that are at the underlying source of the current stresses in our financial institutions and financial markets. They are exploring all options, legislative and administrative, and expect to work through the weekend with congressional leaders to finalize a way forward."

Treasury will send a proposal to Capitol Hill to address the illiquid assets, which will include mortgages and mortgage-backed securities.

There is no time frame for the proposal to be sent, though Senate Banking Chairman Christopher Dodd said he had instructed his staff to be ready through the weekend.

"I have been in the Senate 28 years, Congress 34. There has never been a moment as serious as this one," Dodd said. He will hold a hearing Tuesday, with Paulson slated to appear.

"We all understand the stakes; we have all committed to working with the administration, and we are all anxious to see their proposal within a matter of hours, not days," Senate Majority Leader Harry Reid, D-Nev., said in a statement.

House Financial Services Chairman Barney Frank, D-Mass., said there is wide-scale agreement to put something together. "It will be bipartisan, bicameral, bi-everything. We're going to do this before we [leave]," Frank said.

Republicans echoed the notion that there would be bipartisan consensus. Senate Minority Leader Mitch McConnell, R-Ky., said, "We reached a bipartisan agreement to work together to try to solve this problem, and to do it in an expeditious manner."

Senate Banking ranking member Richard Shelby, R-Ala., who has been very concerned about the extent to which taxpayers could be on the hook, predicted that "I don't think Congress will act irresponsibly. ... I think we heard some sobering news."

Senate Minority Whip Jon Kyl, R-Ariz., said: "We're trying to get everything done as quickly as possible. There's no time limit."

The meeting signaled an impetus to act before Congress leaves for its recess next week before fall elections, though Pelosi said Thursday night in a letter to President Bush that Congress was willing to work beyond its targeted adjournment date of Sept. 26 "to consider legislative proposals and conduct necessary investigations."

The hastily called meeting was another significant step in an unprecedented week in which Lehman Brothers Holdings filed for bankruptcy, Bank of America Corp. bought up Merrill Lynch & Co., and American International Group teetered near bankruptcy until the Fed stepped in late Tuesday night with an emergency line of credit of $85 billion. While before the meeting both sides had made political charges and countercharges, they were throwing up ideas with acronyms such as RTC, RFC and MFI.

One proposal under consideration is by Frank to create an agency to take over troubled assets of investment banks and others similar to Resolution Trust Corp, which was designed in the late 1980s to assume and liquidate the assets of failed savings-and-loan associations.

"I think we are talking about a good-bank, bad-bank problem. We have to decide what assets do you buy? What constraints do you put on if you buy from an ongoing operation?" Frank said before the meeting.

Sen. Charles Schumer, D-N.Y., chairman of the Joint Economic Committee, suggested another approach by using a model from the Great Depression: the Reconstruction Finance Corporation, which was established in 1932 to provide capital to struggling financial institutions in exchange for an equity stake.

Schumer would require banks who accept such federal aid to accept a major change in bankruptcy laws, allowing judges to reduce the principal of the mortgage to a home's current market value.

While conservatives earlier Thursday decried increasing government bailouts in the financial sector, the GOP presidential nominee, Sen. John McCain of Arizona, called for federal intervention, sensing the high economic anxiety among voters less than two months before Election Day. McCain called for a proposed Mortgage and Financial Institutions trust.

"The priorities of this trust will be to work with the private sector and regulators to identify institutions that are weak and take remedies to strengthen them before they become insolvent. For troubled institutions this will provide an orderly process through which to identify bad loans and eventually sell them," McCain said in a statement.

The Democratic presidential nominee, Sen. Barack Obama of Illinois, is scheduled to unveil his plan Friday.

At a rally Thursday in New Mexico, Obama announced plans to host a meeting with his top economic advisers in Florida on Friday. The meeting will include former Treasury secretaries Lawrence Summers, Robert Rubin and Paul O'Neill; Nobel Prize economist Joseph Stiglitz; former Fed Chairman Paul Volcker, and Warren Buffett.

Obama said he would call for the passage of a homeowner and financial support measure that "would establish a more stable and permanent solution than the daily improvisations that have characterized policy-making over the last year."

The meeting on Friday is designed to hammer out the details of the plan his campaign is calling "a major proposal," a collection of ideas he has been talking about or proposed over the last two years and others reached during conversations and conference calls with his advisers this week.

"The events of the past few days have made clear that we need to do more," Obama told the rally in Espanola, N.M. "We can't afford to lurch back and forth between positions depending on the latest news of the day when dealing with an economic crisis, the way John McCain has. We can't be lurching around. We need some clear and steady leadership and that's why I was ahead of the curve in calling for regulation."

Dan Friedman, Benjamin Schneider, Christian Bourge, Athena Jones and Adam Aigner-Treworgy contributed to this report.