US senators dug in their heels against dire warnings from the government's top economic officials of recession, lay-offs and lost homes if Congress does not quickly approve the Bush administration's emergency $US700 billion ($840 billion) financial bailout plan.
Congressional leaders still predicted passage, with significant changes, but Wall Street's nerves were hardly soothed. The Dow Jones Industrials Average sank 161 points yesterday and is now off more than 500 this week after initially surging on the bailout announcement last week.
Deepening market trouble was just one piece of the economic havoc that Federal Reserve chairman Ben Bernanke and Treasury Secretary Henry Paulson told senators would ensue if Congress should lag in acting on the administration's proposal to rescue tottering financial institutions.
"I share the outrage that people have,'' Paulson said. "It's embarrassing to look at this. I think it's embarrassing to the United States of America. There is a lot of blame to go around.''
But without the bailout plan, Paulson and Bernanke sketched a dire scenario for senators at a contentious daylong hearing: neither businesses nor consumers would be able to borrow money, and the world's largest economy would grind to a virtual halt.
In public and in private meetings, both Democrats and Republicans said big changes were needed, presaging a difficult road ahead for the measure.
The legislation the administration is promoting would allow the US government to buy bad mortgages and other rotten assets held by troubled banks and financial institutions.
Getting those debts off their books should bolster those companies' balance sheets, making them more inclined to lend and easing one of the biggest chokepoints in the credit crisis. If the plan works, it should help lift a major weight off the national economy that is already sputtering.
One Wall Street firm got a boost yesterday after Warren Buffett's Berkshire Hathaway said it is investing at least $US5 billion in Goldman Sachs. It was a huge vote of confidence for one of the survivors of the credit crisis that felled two of its investment banking peers.
The news sent shares of Goldman Sachs and stock index futures soaring in electronic trading, after the Dow Jones suffered declines.
Democrats want concessions
Democrats were determined to wrest concessions from the administration on domestic spending and middle-class economic aid.
They said Republicans had to share in the politically tricky task of pushing through a financial bailout six weeks before the elections at a time when millions of everyday Americans are economically strapped.
"It's their problem. It's their bill. And they're going to have to figure out if they can support it,'' House of Representatives Speaker Nancy Pelosi said of Republicans.
"Nobody wants to have to do this,'' agreed John Boehner of Ohio, the Republican leader in the House. He said he was hopeful of a quick agreement, despite withering criticism from conservatives in his party who recoiled at the prospect of federal intervention.
Republican senator Jim Bunning said, "This massive bailout is not a solution. It is financial socialism, and it's un-American.''
Both parties' presidential candidates also insisted on alterations in the administration's drastic prescription.
Democrats and Republicans alike demanded that the bailout limit pay packages for executives of companies helped by the rescue.
"Clipping executive compensation is easy right now; everybody wants it,'' said Republican Rep. Jack Kingston.
Democrats were also pushing proposals to let the government take some type of stake in the companies that it helps. The administration has baulked at that, fearing it would discourage financial companies from getting the help they need through the bailout, thereby blunting the plan's effectiveness.
Democrats also want to let judges rewrite mortgages to lower bankrupt homeowners' monthly payments, another demand the administration is resisting.
Both senators Chris Dodd, a Democrat, chairman of the Banking Committee, and the panel's top-ranking Republican, Richard Shelby, said significant changes were needed before the rescue plan can be passed.
Bernanke's remarks about the risk of recession came in response to a question from Dodd, who seemed eager to hear a strong rationale to act swiftly on the administration's unprecedented request.
"The financial markets are in quite fragile condition, and I think absent a plan they will get worse,'' Bernanke said.
Ominously, he added, "I believe if the credit markets are not functioning, that jobs will be lost, that our credit rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way.''
Republicans unconvinced
Across the Capitol complex, Vice-President Dick Cheney and President Bush's top advisers met privately with restive House Republicans, some of whom emerged from the session unconvinced.
"Just because God created the world in seven days doesn't mean we have to pass this bill in seven days,'' said Republican Rep Joe Barton.
Paulson was asked repeatedly why taxpayers should accept the burdens of a bailout.
"You worry about taxpayers being on the hook?'' he replied at one point. "Guess what: they're already on the hook.''
Paulson suggested the fallout from the credit crisis would hit almost everyone in the pocketbook unless forceful action was taken. Moreover, the flawed and outdated regulatory system, which did not catch abuses, needs to be overhauled, he said.
One of the tricky issues confronting policymakers is how to price the distressed assets that the government would ultimately buy.
Bernanke suggested buying the assets at a "hold-to-maturity'' price, which would be based on an estimate of what the securities would eventually be worth as payments came in over the years.
AP