Congress Demands More Time to Scrutinise $700bn Rescue Plan

The Bush administration's proposed $700bn bailout of cash-strapped Wall Street banks received a rancorous hearing in Congress today as lawmakers demand safeguards, extra details and more time to scrutinize the way the Treasury intends to spend the money.

Under questioning by the senate banking committee on Capitol Hill, treasury secretary Henry Paulson clashed repeatedly with questioners as he admitted that he only had a rough idea of how his department would price and purchase troubled mortgage-backed securities.

Paulson, appearing alongside the Federal Reserve's chairman Ben Bernanke, resisted calls to crack own on excessive Wall Street pay packages but gave ground on providing aid to homeowners and on allowing an independent board to scrutinize the planned fund's investments.

Describing this summer's financial crisis as "embarrassing for the United States of America", Paulson said "thousands" of banks would be eligible to sell assets to the government.

"This is all about the American taxpayer - that's all we care about," said Paulson. "This is not something I ever wanted to ask for but it's better than the alternative."

At one point, his comments were jeered by protesters who held up signs saying "no Paulson plunder" and "no blank check". But Paulson's words were echoed by Bernanke, who gave a blunt warning that the US faces a prolonged recession unless the government acts: "If the credit markets are not functioning, jobs will be lost, unemployment will rise, more homes will be foreclosed upon and GDP will contract."

"The secretary and the [Bush] administration need to know what they have sent to us is not acceptable. This is not going to work," Chris Dodd, Democratic chairman of the banking committee, told reporters after Paulson's appearance. "And they're going to have to come back and work with us."

Dodd's Republican counterpart, conservative senator Richard Shelby, appeared to concur. "I think we've got to look at some alternatives," he said. "I think the secretary now realizes that what he sent up is not going to be just rubber-stamped."

Legislators have pointed out that they initially only received a three-page summary of how the government's intervention will work. They questioned how the Treasury intends to determine the price it will pay for obscure mortgage-backed derivatives which have been all but abandoned by the financial markets.

Paulson said he anticipated some form of "reverse auction" whereby banks will compete to sell their unwanted securities for the lowest price. But he admitted the process would require "experimentation" and promised the Treasury would recruit a roster of experts to help.

"This is not a situation where we can come and say 'this is what we want to do, this is how we're going to price it and this is how the reverse auctions are going to work.", Paulson told the committee. "We've said upfront we're going to need some experimentation."

This explanation left many senators dissatisfied. Bob Menendez, a Democrat from New Jersey, said: "You're flying by the seat of your pants. You want the capital to be there but you're not quite sure what you're going to do with it."A Republican, Mike Enzi, asked: "Shouldn't we have the process designed before we have to do a $700bn experiment?"

The pricing mechanism is widely considered to be critical. If the Treasury pays too little for troubled securities, it will fail to help staggering banks which could still collapse. But if it pays too much, the government will be unable to sell them on, landing taxpayers with huge liabilities.

After initially asking for virtually unchecked power, Paulson has agreed in principle to the creation of a board which will oversee investments. He has also suggested that he is open to some form of aid for struggling homeowners as part of the package.

But the administration continues to baulk at introducing any legislative curbs on Wall Street salaries. Paulson, who earned up to $30m annually in his previous job heading Goldman Sachs, said compensation was an issue which ought to be dealt with separately.

"I've heard your concerns on executive compensation and I share those frustrations," he said, adding that he was equally "upset" by certain examples of excess.

The emergency package has prompted vigorous reactions around the world. The Venezuelan president, Hugo Chavez, pointed out this week that the bail-out will cost four times the amount his nation produces in a year,. He described the financial turmoil as a sign that his "21st century socialism" was the way forward.

In Congress, Democrats have proposed allowing the government to take equity stakes in return for aid to troubled banks. There have suggested that money pledged to the program should be phased, rather than provided all at once.

Christopher Dodd, the Democratic chairman of the banking committee, said he remained deeply concerned about the precedent set by the package: "I can only conclude that it's not only our economy that's at risk but out constitution as well."