Treasury to work with homeowners in bailout

Mr. Paulson stressed that he will not purchase loans from hedge funds under the plan.

But Mr. Rosner said the Treasury must take responsibility for bad loans made in the U.S. by foreign banks or risk a boycott by foreign banks and lenders that would hurt U.S. consumers and businesses in the future.

“By bailing out these domestic companies, as opposed to letting the markets resolve, the government is accepting product liability and will almost certainly be forced to buy foreign held assets … or be punished with significantly higher Treasury rates and a significantly weaker dollar,” he said.

The price of bailing out foreign banks will be large, Mr. Rosner said: “The size and scope of the bailout will almost certainly grow in the future.”

The move by Goldman Sachs and Morgan Stanley to become bank holding companies was aimed at staving off further difficulties in the markets that have driven down the values of their stocks while limiting their once-ready access to credit.

“While accelerated by market sentiment, our decision to be regulated by the Federal Reserve is based on the recognition that such regulation provides its members with full prudential supervision and access to permanent liquidity and funding,” said Lloyd C. Blankfein, chairman of Goldman Sachs.

“We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet.”