Top Senators Skeptical Of Bailout Plan

Senate Banking Committee Chairman Sen. Christopher Dodd, D-Conn., left, and Sen. Richard Shelby, R-Ala., the committee's ranking Republican right, question the witness panel of Federal Reserve Chairman Ben Bernanke, right, Treasury Secretary Henry Paulson, not pictured, Security and Exchange Commission (SEC) Chairman Christopher Cox, left, and Federal Housing Finance Agency Director James Lockhart, not pictured, Tuesday, Sept. 23, 2008, on Capitol Hill in Washington during the committee's hearing.
AP Photo/Charles Dharapak
Federal Reserve Chairman Ben Bernanke bluntly warned reluctant lawmakers Tuesday they risk a recession with higher unemployment and increased home foreclosures unless they act on the Bush administration's $700 billion plan to bail out the financial industry.

Despite the warning, influential lawmakers in both parties demanded changes in the White House-backed proposal, and conservative Republicans recoiled at the prospect of federal intervention into private capital markets.

Sen. Chris Dodd, a Connecticut Democrat, said on Tuesday, "What they have sent us is not acceptable."

Sen. Richard Shelby, an Alabama Republican, said, "We have got to look at some alternatives."

Democrats want to limit the multi-million dollar salaries and severance of top executives from any companies which take the government's life line, reports CBS News correspondent Bob Orr.

The other sticking point is relief for bankrupt homeowners and those on the brink of foreclosure, adds Orr.

Six weeks before the elections, both major party presidential contenders also insisted on alterations in the administration's prescription for the worst financial crisis in decades.

Bernanke's remarks about the risk of recession came in response to a question from Dodd, who seemed eager to hear a strong rationale for lawmakers 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."

GDP is a measure of growth, and a decline correlates with a recession.

Meanwhile, financial markets extended their declines Tuesday as investors worried that lawmakers were beginning to doubt the necessity of the bailout as a way to revive ailing credit markets. The Dow Jones industrials, which had been higher for the first half of the session ended at the lows of the day, tacking a 161-point loss onto a steep drop from Monday.

Separately, law enforcement officials said the FBI had begun investigating four institutions whose collapse helped trigger the financial crisis.

The FBI is looking at potential fraud by mortgage giants Fannie Mae and Freddie Mac, Lehman Brothers Holdings Inc. and insurer American International Group Inc., said two officials, speaking on condition of anonymity because of the sensitivity of the investigations. The inquiries, still in preliminary stages, will focus on the financial institutions and the people who ran them, one senior law enforcement official said.

The legislation that the administration is seeking would allow the government to buy bad mortgages and other troubled assets held by endangered banks and financial institutions.

Getting those debts off their books should bolster the institutions' balance sheets, making them more inclined to lend and easing one of the biggest choke points in the credit crisis. If the plan works, it could help lift a major weight off the sputtering national economy.

The government has to be careful. They can't pay too much for this distressed debt or taxpayers will have a tough time getting their money back. But they can't pay too little or the banks won't get the financial help they need to survive, reports CBS News correspondent Anthony Mason.

The White House and key lawmakers have been in negotiations since the weekend on terms of the legislation. It was not clear what impact the new congressional complaints would have on the discussions.

"Nobody is happy" about the bailout request, said House Majority Leader Steny Hoyer, D-Md., although he spoke of possible passage of legislation by the weekend.

"Nobody wants to have to do this," agreed Rep. John Boehner of Ohio, the Republican leader. He said he was hopeful of a quick agreement.

Presidential politics have become part of the debate.

Sen. Barack Obama, the Democratic presidential candidate, called a news conference to urge changes in what he called the administration's "stubborn inflexibility."

He said Wall Street executives must not be allowed to walk away from the mess with multimillion-dollar severance packages, taxpayers who are bearing the risk of the bailout must benefit if it succeeds and homeowners should be able to get relief from unaffordable mortgages.

Obama's Republican opponent, Sen. John McCain, has also said he wants steps to limit the compensation of CEOs who leave financially wrecked firms.

The stakes were unmistakable.

"I understand speed is important, but I'm far more interested in whether or not we get this right," Dodd said at the hearing.

Later, he told reporters he hopes for legislation soon.

"But it is not going to be a blank check or a simple signing on to a bill that sends a blank check to this secretary or any other secretary." He noted that either Obama or McCain would probably be appointing a new treasury secretary after he takes over in the White House.