updated 9/18/2008 4:38:11 PM ET 2008-09-18T20:38:11

Sen. Charles Schumer urged Congress Thursday to offer a financial lifeline to those banks that are willing to renegotiate mortgages for those on the brink of losing their homes.

Major Market Indices

The New York Democrat warned, however, against reviving something like a Resolution Trust Corp., which was formed in 1989 to dispose of the assets of failed savings and loans and then went out of business.

The Dow Jones industrials shot up more than 400 points Thursday after a TV report that the federal government is considering creation of a repository for banks’ bad debt.

CNBC said Treasury Secretary Henry Paulson is considering creation of an entity like the RTC.

Brookly McLaughlin, a spokeswoman at Treasury, would not comment on the report.

Schumer, who outlined his plan on the Senate floor, is an outspoken advocate for the financial industry, since so many of those workers are in his home state.

“Without a comprehensive solution that helps keep people in their homes, no amount of money advanced by Uncle Sam will restore the fundamental strengths of the American economy,” he said. “Unless we also solve our financial problem the economy will not recover and the housing problem will get worse, so we need to do both.”

Under Schumer’s model, the government would give capital infusions or loans to banks in return for an equity stake, similar to the deal struck with insurance giant American International Group, Inc. earlier this week.

In return, the banks would lift objections to legislation allowing loan modification for homeowners in bankruptcy. Currently, a person in bankruptcy cannot renegotiate the terms of their mortgage, unlike other kinds of debt.

By offering his plan, Schumer is specifically opposing another proposal being eyed by powerful members of Congress. House Financial Services Committee Chairman Barney Frank, D-Mass., said Wednesday such an entity might be needed in coming months to stabilize markets and prevent more implosions at major financial institutions.

“There have been a series of ad hoc interventions that have not worked,” Frank said. “Has the private market made so many mistakes and burdened itself with so much bad paper that there needs to be some public intervention?”

The idea has also won fresh support from Republican presidential candidate John McCain, who on Thursday called for a RTC-type entity that could “provide an orderly process through which to identify bad loans and eventually sell them.”

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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