Bailout faces delays as Goldman gets boost

By Mark Egan

NEW YORK (Reuters) - Architects of a $700 billion bailout plan urged U.S. lawmakers to act swiftly or face dire economic consequences as global stock markets fell for a second day on growing concern the rescue may be delayed.

But financial markets got a shot in the arm late Tuesday when one of America's most-respected investors, Warren Buffett, bought a stake in Wall Street's most powerful firm, Goldman Sachs Group Inc. Berkshire Hathaway'ssurprise $5 billion deal for about 9 percent of Goldman helped U.S. stock futures pare losses.

Treasury Secretary Henry Paulson told lawmakers during five hours of grueling hearings on Tuesday that the bailout was "sad" and "embarrassing," but needed to stave off a deep recession and restore confidence in markets.

While he spoke, the U.S. Federal Reserve was forced to inject another $2 billion into the troubled financial system to help mutual funds scrambling to raise cash to meet heavy withdrawals by rattled customers.

After lawmakers scoffed at the proposed bailout's enormous size and the lack of details, U.S. stocks closed down about 1.5 percent on uncertainty over when and how Washington would act.

U.S. House Financial Services Committee Chairman Barney Frank warned the plan might not pass until Monday, adding that the Democrat-controlled Congress needed limits on compensation for executives of firms offloading bad assets.

"I just don't think the American public is sold," said David Dietze, chief investment officer at Point View Financial Services in Summit, New Jersey. "They are skeptical of the need, and they are fearful of the cost."

"The skepticism is that this is going to help the Wall Street financiers and do nothing for the little guy other than saddle them with a big tax bill," he said.

The financial crisis has become the No. 1 issue leading up to the November 4 presidential election, and many lawmakers seeking re-election to Congress want to appear vigilant.

The bailout, potentially the United States' biggest ever, could cost every American man, woman and child $2,300.

Even for the world's richest country, $700 billion would be a huge budget drain. Since 2003, the Iraq war has cost about $550 billion, or a little more than $100 billion annually.

Starting two days of hearings, Paulson and U.S. Federal Reserve Chairman Ben Bernanke said the plan might cost less once the government is able to resell toxic mortgage securities.

Paulson said the government would buy the securities in a reverse auction in which the roles of buyer and seller are reversed to ensure the lowest price is paid.

The transformation of global finance accelerated.

Once thought untouchable, Goldman was shaken last week by a sudden slide in its shares. It secured approval this week to become a commercial bank and Tuesday's transaction could help it forge an alliance with one of the banks partially owned by Buffett.