Bailout debate mulls making Wall Street pay

By Mark Egan

NEW YORK (Reuters) - The planned $700 billion bailout to shore up the battered U.S. financial system looked set to drag into next week as Washington lawmakers haggled over how exactly they could make Wall Street pay for its rescue.

Stocks and the U.S. dollar tumbled on Monday as emerging details of the plan left many players skeptical that the rescue, which would give powers to the U.S. Treasury Department to buy up toxic mortgage-related debt from financial groups, would work.

"The big detail we want to know is how is the government going to buy these securities, and what they will pay, how that reverse auction will work," said Giri Cherukuri, head trader at OakBrook Investments LLC in Lisle, Illinois. "And the big question is, 'Will this bring us out of the woods?'"

A day after America's last two big investment banks, Goldman Sachs and Morgan Stanley, ended Wall Street's swashbuckling era by securing Federal Reserve approval to become commercial banks, all eyes shifted to Washington.

U.S. lawmakers and Bush administration officials were hammering out details of a deal they hope will end the worst U.S. financial crisis since the Great Depression.

U.S. Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke start two-days of congressional hearings on Tuesday to hasten approval of the bailout.

With the economy the No. 1 issue in a U.S. presidential election that is about six weeks away, lawmakers want a plan in place quickly, fearing delay could send markets reeling again.

But with one-third of the U.S. Senate and the entire U.S. House of Representatives up for re-election on November 4, lawmakers will want to sound tough on such hot-button issues as the pay of reckless executives.

"We are not sending a blank check to Wall Street," House Speaker Nancy Pelosi said after holding bipartisan talks.

With so many ideas being floated in Washington on Monday, one congressional aide who asked not to be identified likened the scene to a "Turkish bazaar of public policy ideas."

The crisis has unsettled world markets, and Group of Seven finance ministers and central bank heads promised "heightened close cooperation" to safeguard the global economy.

The latest jitters came after the deal late Sunday scrapped the investment bank model synonymous with Wall Street, ensuring Goldman Sachs Group Inc and Morgan Stanley will avoid the fate of rivals that collapsed or were bought in the brutal meltdown of recent weeks.

Morgan Stanley went a step further, striking a deal with Japan's largest bank, Mitsubishi UFJ Financial Group Inc, on Monday to spend as much as $8.5 billion for about one-fifth of the prestigious 73-year-old investment bank, sending Morgan's shares higher before closing down.

ANGER AT BAILOUT

After Monday's talks, U.S. Rep. Barney Frank, a top Democrat, said the U.S. government would take equity in the companies seeking a bailout. But the U.S. Treasury is against that idea, sources close to Treasury told Reuters.