Paulson and Bernanke warn of costs of bailout delay

By John Poirier and Glenn Somerville

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke on Tuesday urged Congress to act swiftly to put in place a $700 billion financial system bailout, warning delay would put the economy at risk.

Testifying before a sometimes-skeptical Senate Banking Committee, they said financial markets were in serious stress and needed to be stabilized quickly by cleansing them of illiquid assets.

Paulson wants lawmakers to approve a massive war chest, funded by taxpayers, to buy distressed debt from financial institutions to try to keep credit markets from choking up.

Lawmakers have vowed to move without delay, but also are insisting on changes. These include more protections for taxpayers and limits on compensation for executives of firms that would be offloading their bad assets onto the government.

"Action by Congress is urgently required to stabilize the situation and avert what could otherwise be very serious consequences for our financial markets and our economy," Bernanke said.

A rising tide of U.S. home foreclosures and loan defaults has spawned the greatest financial crisis since the Great Depression and, after a series of emergency actions to bolster individual financial firms, U.S. authorities say they must now try to save the system as a whole.

CONGRESSIONAL CRITICS

While congressional leaders have made clear they intend to move quickly, the Treasury's proposed plan drew some stiff criticism from lawmakers.

Sen. Richard Shelby of Alabama, the top Republican on the committee, said the plan "only codifies Treasury's ad hoc approach" to long-festering issues that have beset financial markets and said he feared it would waste taxpayers' money.

Committee Chairman Christopher Dodd of Connecticut called the Treasury proposal "stunning and unprecedented in its scope and lack of detail." Like many of his fellow Democrats, Dodd said it needed work, like more protections for taxpayers.

In a highly charged atmosphere at the hearing, there were occasional catcalls and clapping from spectators that led Dodd to warn the room would be cleared if it did not stop.

Paulson said the broader economy was under threat and said it was essential to move decisively beyond the case-by-case approach followed in the government takeover of mortgage finance companies Fannie Mae and Freddie Mac and the bailout of insurer AIG.

"We saw market turmoil reach a new level last week, and spill over into the rest of the economy," Paulson said. "We must now take further, decisive action to fundamentally and comprehensively address the root cause of this turmoil."

BUSH LENDS HAND TO BAILOUT PUSH

President George W. Bush tried to lend a hand to a hard-pressed Paulson and Bernanke, saying he understood lawmakers had questions but that speed was needed.