Buffett bets on Wall St. revival

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 and Freddie Mac and bailout of insurer American International Group Inc , and the bankruptcy of investment bank Lehman Brothers Holdings Inc .

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.

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 , 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.

The FBI is investigating Fannie Mae, Freddie Mac, Lehman and AIG, expanding its inquiry into corporate mortgage fraud, law enforcement officials said on Wednesday.

Buffett's Berkshire Hathaway will buy $5 billion of Goldman perpetual preferred stock. It also will receive warrants to buy $5 billion of common stock, or 43.5 million shares, at $115 per share, within five years, which could give the United States' second-richest man and his investment vehicle roughly 9 percent of Goldman.

Shares of Goldman, which also sold $5 billion of common stock in a public offering, rose 4.4 percent.

Japan's third-largest bank, Sumitomo Mitsui Financial Group <8316.T>, also plans to invest in Goldman, Japanese media reported. Already this week, Japanese financial firms have bought Lehman assets and a stake in Morgan Stanley as they take advantage of global upheaval to expand abroad.

Sumitomo has had a long relationship with Goldman.

While billions of dollars have poured in to buy up operations and stakes on Wall Street this week, political debate rages over the extent to which the U.S. government should help financial firms stranded with toxic assets.

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

A Washington Post-ABC News poll showed that Democrat Barack Obama has opened a 9-percentage point lead over Republican John McCain in the presidential race amid the tumult in the financial system and growing pessimism about the economy.

Wall Street's woes are having far-reaching impact, with investors' nerves frayed by two weeks of unprecedented market turmoil.

(Additional reporting by James Vicini and Mark Felsenthal, Editing by John Wallace)