Buffett bets on Wall Street revival

By Jason Szep

NEW YORK (Reuters) - Wall Street faced a second day of political wrangling over a proposed $700 billion bailout for troubled banks, as billionaire Warren Buffett gave the transformed fiscal landscape a vote of confidence with a $5 billion investment in embattled banking titan Goldman Sachs.

Federal Reserve Chairman Ben Bernanke offered his bleakest outlook since a credit crisis set in last year, saying global markets were under "extraordinary stress" and threatening an already weak U.S. economy.

"Action by Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy," he said on the second day of testimony aimed at persuading skeptical lawmakers of the need for the rescue plan.

The turmoil has become the top campaign issue in the November 4 U.S. presidential election. And with many members of Congress also fighting to retain their seats, lawmakers are reluctant to merely rubber-stamp the Bush administration's plan.

Bernanke ticked off areas of the economy that are struggling in a month of turbulence marked by the government's takeover of mortgage companies Fannie Mae (FNM.P) and Freddie Mac (FRE.P) and bailout of insurer American International Group Inc (AIG.N), and the bankruptcy of investment bank Lehman Brothers Holdings Inc (LEHMQ.PK).

But as Bernanke and the Bush administration ramped up their campaign to persuade the U.S. Congress to accept a rescue plan to steer the world's largest economy out of its worst crisis since the Great Depression, Buffett signaled continued concern, saying markets remained in a "dangerous situation."

"I am to some effect betting on the fact that the government will do the rational thing and act properly," Buffett, one of the world's richest men and preeminent stock-pickers, told CNBC.

U.S. Sen. Charles Schumer said top Democrats in Congress were committed to passing some sort of emergency measure before lawmakers adjourn in the next few days.

"The consensus is: A, people don't like it; B, it will have to change; and C, we have to do something," Schumer said on CNBC. "I certainly think we'll get it done before we adjourn. The odds are very high that it will happen."

BUFFETT STIRS CONFIDENCE

U.S. stocks prices opened higher, emboldened by Buffett's investment in Goldman Sachs Group Inc (GS.N), but then seesawed in later trading.

"When one of the highly respected value investors puts up that amount of money, it suggests, on the surface, that when Buffett jumps in the pool others may follow," said Andre Bakhos, president of Princeton Financial Group in Princeton, New Jersey. "That says to investors that all is not lost."

Other nations braced for fallout from the crisis. Business confidence weakened in Germany, France and Italy in September, surveys showed, stoking fears that the euro zone is sinking into recession as the effects of U.S. financial market turmoil spread.

But EU Economic and Monetary Affairs Commissioner Joaquin Almunia said the European Union does not need a U.S.-style plan to buy up toxic assets with public money to restore confidence. "The situation we face here in Europe is less acute," Almunia told the European Parliament.

U.S. lawmakers mulling the size and content of the bailout will consider an FBI investigation of potential mortgage fraud involving firms and senior executives at the heart of the financial crisis.