Senators balk at quick bailout bid for markets

Chairman of the Senate Committee on Banking, Housing and Urban Affairs Senator Christopher Dodd (D-CT) speaks about the mortgage crisis on Capitol Hill in Washington September 16, 2008.

WASHINGTON (Reuters) - The Bush administration's push for quick congressional approval of a $700 billion bailout for financial firms hit a wall of opposition on Tuesday among senators who said the plan puts taxpayers at excessive risk.

"What they have sent us is not acceptable," Senate Banking Committee Chairman Christopher Dodd said after a five-hour hearing on the plan. His Republican counterpart, Sen. Richard Shelby, also vowed not to "rubberstamp" the proposal.

U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke both warned that financial market turmoil has grown in severity and posed a threat to the broader economy that won't ease until confidence is restored.

"I feel a great urgency. I believe it's got to be done this week or before you leave," Paulson told the committee, referring to Congress' hoped-for adjournment on Friday, that increasingly looked to be slipping.

Bernanke warned that a failure to act could doom the economy to a recession. "This is a precondition for a good, healthy recovery by our economy," he said.

U.S. stock markets held up well through most of the day, but sank in the afternoon on investor worry that the bailout bid might be in jeopardy. The blue-chip Dow Jones industrial average fell nearly 1.5 percent, after shedding 3.3 percent on Monday.

"Financial markets are in a quite fragile condition and I think absent a plan, they will certainly get worse," Bernanke said.

The most severe U.S. housing slump since the Great Depression has sent home foreclosures soaring, saddling the global financial system with a mountain of bad debt that has threatened to choke off the economy's needed supply of credit.

WHO'S IN CHARGE?

But Republican Sen. George Voinovich of Ohio said Congress won't rush to judgment and needs to ask more questions before approving legislation that would give the Treasury secretary nearly unfettered authority to buy up bad debts from financial firms.

"Are we going to let the stock market, going up and down, control what we do here?" Voinovich told reporters.

On Capitol Hill, Democrats and Republicans alike are worried Americans are going to get saddled with a huge bill for bad mortgage-related debts and have called for more taxpayer protections, as well as greater oversight for the program.

In addition, Democrats want any plan to include measures to slow the pace of home foreclosures and to limit executive pay at companies that offload bad assets.

Senate Majority Leader Harry Reid said Democrats were working hard to come up with acceptable alternatives, but said a bill was not likely to move without more Republican support.

"This is a Republican proposal," Reid said. "We need some Republican votes and they've got to start lining those up."

In a mark of the urgency the administration attaches to the bailout, Vice President Dick Cheney traveled to Capitol Hill to urge Republican lawmakers to back the plan.

House of Representatives Speaker Nancy Pelosi has vowed to move quickly and on Tuesday said progress was being made.

"We are moving forward," the California Democrat said.

LEAST COSTLY OPTION

At the Senate hearing, Paulson showed exasperation when the issue of taxpayer protections was raised, saying he was also angry a bailout was needed, but that Americans already were at risk from unstable financial markets.

"They're already on the hook, OK?" Paulson said.

Democrats on the Senate Banking Committee have proposed having the government claim equity stakes in companies disposing of their toxic debt as a way to lower the cost to taxpayers, an idea Paulson rejected.

"If we have companies grant equity stakes, grant options, that would render this ineffective" because it would discourage companies from participating, he said.

If the Treasury tapped its full authority, the bailout would put every man, woman and child in the United States on the hook for more than $2,000. After a series of other actions, a $700 billion fund would push the total pledged to combat the credit crisis to $1.8 trillion, or $15,000 per U.S. household.

But prior steps have failed to stem a deepening loss of confidence in financial markets, and U.S. authorities say they must now try to save the system as a whole.

DETAILS UNCLEAR

Exactly how they would go about buying the debt is still uncertain. Paulson said so-called "reverse auctions" in which companies offer their bad debt to the government would be only one of the means Treasury would employ to sop up the assets.

U.S. President George W. Bush said there were many ideas that deserved to be heard on how to structure the taxpayer-funded program, but he told other world leaders at the United Nations that he expected swift action.

"I'm confident we will act in the urgent time frame required," Bush said.

While Paulson was cool to many of the counterproposals floated on Capitol Hill, he welcomed calls for outside oversight of the proposed asset-purchase program.

"We need to have transparency here. We clearly need protections. There has to be oversight and we're going to work with you on that," Paulson said, but added: "We can't get slowed down to the point we can't do the job."