As Congress mulls bailout, markets fall

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.

Treasury Secretary Henry Paulson told lawmakers during five hours of grueling hearings on Tuesday that the bailout was "embarrassing" but needed to stave off a deep recession and restore confidence in markets. The U.S. Federal Reserve was forced to inject another $2 billion in cash into the troubled financial system.

After lawmakers scoffed at the size, lack of details and the speed the bailout they were being asked to approve, U.S. stocks closed down about 1.5 percent on the lack of certainty 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 he doubted it would clear the Democrat-controlled Congress without limits on compensation for executives of firms offloading bad assets.

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

"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.

"I think they are skeptical of the need, and they are fearful of the cost," he said. "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."

At the start of two days of hearings, Paulson and Federal Reserve Chairman Ben Bernanke urged the U.S. Congress to act quickly or face recession, rising unemployment and more Americans losing their homes.

Meanwhile, the transformation of global finance pressed ahead as Japan's largest brokerage agreed to buy bankrupt investment bank Lehman Brothers' European arm.

U.S. Securities and Exchange Commission Chairman Christopher Cox urged Congress to plug a regulatory hole in the $58 trillion market for credit default swaps, insurance-like products that many say pose a systemic risk.

President George W. Bush promised in his last speech to the United Nations that markets would stabilize but faced criticism over the excesses of what some have described as a culture of greed.

'SHARE THE OUTRAGE'

At Tuesday's often testy hearings, Paulson, a former Goldman Sachs boss reportedly worth about $700 million, remained calm despite sharp questioning.

"I share the outrage that people have," Paulson said of the bailout, which would give him sweeping authority to buy the toxic mortgages that have brought global lending markets to a near-halt. "It's embarrassing for the United States of America ... There is a lot of blame to go around."

Sen. Charles Schumer, a New York Democrat associated with Wall Street's interests, pressed Paulson on if he could take the money in installments, starting with $150 billion.

Paulson replied bluntly, "We need the full authority."

"What this is about is market confidence," he said. "It's a sad story, but the American taxpayer is already on the hook."

Congress and the Bush administration are under growing pressure to act following a rising tide of U.S. home foreclosures and loan defaults, the failure of American investment banks as well as the world's largest insurance company.

Some analysts and investors doubted whether Paulson and Bernanke can steer the world's largest economy out of its worst crisis of confidence since the Great Depression of the 1930s.

"(The) two (men) have been wrong about nearly everything since this crisis began years ago," said Barry Ritholtz, director of research at New York investment firm Fusion IQ. "Why should we trust (their) judgment on the largest bailout in American history?"

Paulson said market turmoil was already spilling into the broader U.S. economy.

Lawmakers pushed back. Christopher Dodd, the Democratic chairman of the Senate Committee on Banking, Housing and Urban Affairs, said Congress must limit executive pay for companies unloading bad assets or risk the wrath of voters.

Just weeks before the November 4 elections, when Americans will chose a new president and re-elect one-third of U.S. senators as well as the entire House of Representatives, executive pay and golden parachutes are hot-button issues.

Goldman Sachs Group Inc paid Chief Executive Lloyd Blankfein about $54 million last year. Wall Street's last two independent banks, Goldman and Morgan Stanley, got approval days ago to convert to banks to shelter them from the crisis.

Merrill Lynch & Co Inc boss John Thain was paid $15 million to join the company last year. He could get another $10 million when Merrill's sale to Bank of America Corp goes through -- a sale prompted by Merrill's troubles.

American International Group Inc , the world's largest insurer, paid boss Martin Sullivan $14 million last year. AIG was rescued one week ago with an $85 billion loan from the Fed.

Some analysts were optimistic. "It does seem like both sides are coming together and want to get a deal done quickly that will inject a lot of capital into the economy and free up lending," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco.

Democratic presidential nominee Barack Obama, in a tightening White House race, said the bailout's high cost could force him to delay some campaign spending promises, such as an overhaul of the U.S. health-care system.

SNAPPING UP ASSETS

Meanwhile, Japanese firms are snapping up U.S. investment banking assets. Nomura Holdings Inc <8604.T> agreed to buy bankrupt Lehman Brothers Holdings Inc's Europe and Middle East operations.

That came on the heels of Japan's top bank, Mitsubishi UFJ Financial Group Inc <8306.T>, agreeing to buy up to 20 percent of Morgan Stanley and Nomura planning to buy Lehman's franchise in Japan and Australia, with some 3,000 employees.

Speculation is growing that Goldman Sachs Group Inc , which like Morgan Stanley is transforming itself into a commercial bank, might turn to Sumitomo Mitsui Financial Group Inc <8316.T>, Japan's No. 3 bank, with which it has a long relationship.

Embattled insurance giant AIG said it should have a list of assets it wants to sell by next week and hopes to emerge from its federal bailout as a leaner, stronger company. Its stock jumped as much as 21 percent after Credit Suisse analysts put AIG's salable value at $82 billion. AIG closed up 5.9 percent.

Singapore sovereign fund GIC said it still has plenty of cash after investing nearly $18 billion in UBS AG and Citigroup Inc , and would consider investing in U.S. distressed assets.

(Writing by Mark Egan; Reporting by Jason Neely, Glenn Somerville, John Poirier, Donna Smith, Patrick Worsnip and Matt Spetalnick; editing by John Wallace/Jeffrey Benkoe)