By Jason Szep
NEW YORK (Reuters) - The White House's proposed $700 billion financial bailout met skepticism and anger from lawmakers on Wednesday, stoking fresh anxiety on Wall Street despite a $5 billion Wall Street investment by billionaire Warren Buffett that was hailed as a vote of confidence.
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 congressional testimony aimed at persuading the U.S. Congress of the need for a vast bailout.
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.
But lawmakers have made clear they would not approve the proposal without changes, including more protections for taxpayers and restrictions on the pay of executive at companies that unload their bad assets.
"I suspect it's true of every one of my colleagues. (They) are not just against this bailout, they're very angry," Rep. Lloyd Doggett, a Texas Democrat, told Bernanke.
As Bernanke spoke, new data showed existing home prices suffering a record drop in August, adding to concerns over a rising tide of home foreclosures and loan defaults that has spawned the worse financial crisis since the Great Depression of the 1930s.
But with many members of Congress up for re-election, lawmakers are reluctant to merely rubber-stamp the Bush administration's rescue plan at a time when the financial turmoil is the top campaign issue in the tight November 4 U.S. presidential and congressional races.
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
"Economic activity appears to have decelerated broadly," Bernanke warned. Labor markets are weak and unemployment is high, he said. Despite an easing of oil and gasoline, consumer spending is likely to be sluggish in the near term, he added.
The head of the Congressional Budget Office, Peter Orszag, warned lawmakers of possible "chaos" if Congress does nothing. "You would have a financial market meltdown that would cause very severe dislocations ... maybe on the magnitude of the Great Depression.
STOCKS SEE-SAW
The U.S. dollar fell and global stocks see-sawed as unease about the bailout kept investors on edge and boosted safe havens like short-term U.S. Treasuries.
"The resistance we're seeing in Washington is understandable but frightening at the same time. The longer this drags on and the more bickering we see, the more frightening it is," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.
Wrangling over the bailout overshadowed news of plans for Buffett's Berkshire Hathaway Inc
Japan's third-largest bank, Sumitomo Mitsui Financial Group Inc <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
Sumitomo has had a long relationship with Goldman.
"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 investors, told CNBC television.
But he added markets remained in a "dangerous situation."
Concern that banks remain reluctant to lend to one another triggered a surge in demand for U.S. Treasury bills, helping to drive the interest rate on one-month bills below zero. "There's a tremendous amount of anxiety whether this (bailout) bill will get passed," said Thomas di Galoma, head of U.S. government bonds at Jefferies & Co.
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 Wednesday.
(Reporting by James Vicini, Mark Felsenthal, Gertrude Chavez-Dreyfuss, Dan Burns, Richard Cowan and Steven C. Johnson, Editing by John Wallace/Jeffrey Benkoe)
