US Financial Chiefs Struggle to Sell $700bn Bail-out Plan

The Bush administration is facing an uphill struggle to persuade Americans of the virtues of its $700bn (£380bn) banking bail-out plan as Congress bristles against swift action and polls show that the public are unenthusiastic.

Facing mounting skepticism, senior officials delivered dire warnings yesterday of the consequences of inactivity. The Federal Reserve chairman, Ben Bernanke, said that action was "urgently required". The White House announced that President George Bush would address the nation on the crisis.

The head of the Congressional budget office, Peter Orszag, warned of "chaos" of similar magnitude to the Great Depression unless Congress acts: "You would have a financial meltdown that would cause very severe dislocations."

But a poll released by the Los Angeles Times and Bloomberg showed that 55% of Americans oppose government aid to failing financial firms, in a sign that treasury secretary Henry Paulson is struggling to sell the scheme successfully.

Former president Jimmy Carter derided the idea of buying up distressed debt from struggling Wall Street institutions, describing it as "extremely faulty" and argued that Paulson's proposal lacks checks and balances: "It's only three pages in outline. It gives him dictatorial power with no supervision."

On Wall Street, there was increasing concern that the plan may be delayed or watered down. Tobias Levkovich, chief US equity strategist at Citigroup, said "bailout fatigue" was setting in.

"A real sense of crisis has eluded many members [of Congress] who may not fully grasp the linkage between financial markets and their impact on the people of Main Street who elect their representatives in government," said Levkovich.

Shares in Morgan Stanley slumped 4.8% and Citigroup slipped 3.2% by lunchtime in New York as investors suffered fresh nerves about the banking industry's future without urgent government aid.

For a second day, top officials fielded hostile questions on Capitol Hill where legislators want curbs on executive pay, aid for homeowners and independent scrutiny of the bail-out.

Wall Street's culture of huge salaries and bonuses became a particular point of contention. The Treasury is reluctant to force banks to change their ways. Yet even the US Chamber of Commerce has joined Democrats in accepting that some "limitations" are appropriate.

Lloyd Doggett, a Democratic congressman from Texas, said Bush was on target with his July comment that Wall Street was experiencing "a hangover".

"The problem is that the people getting asked to clean up the broken furniture didn't get invited to the party," said Doggett.

The Los Angeles Times's poll was not the only attempt to read the US public's pulse on the financial crisis. CNN found that 62% of Americans support government involvement in the markets, but 65% believe that any bail-out would be unfair to taxpayers. Perhaps the most telling number in CNN's poll was the 88% of respondents who described themselves as concerned or scared by the Wall Street tumult.

A sense of anger over Wall Street's role in prompting the meltdown was fueled by news that the FBI is investigating the possibility of fraud at four troubled firms caught up in the turmoil: AIG, Fannie Mae, Freddie Mac and Lehman Brothers.

The White House is keen to avert criticism that Bush has been a peripheral figure in managing the situation. Bernanke revealed to Congress that he and Paulson did not inform the president about the severity of the downturn until Thursday afternoon, hours before the alarm was sounded in Congress. "Where's the president here?" asked Chris Dodd, the Democratic chairman of the Senate banking committee. "Normally you'd have a fireside chat ... where someone would ... explain why we need to do this."

Some top congressional figures have suggested phasing in the bail-out by authorizing only $150bn with further tranches to follow if the scheme works. Bernanke was pressed on whether this would be sufficient to shore up confidence.

"You're asking my opinion as an economist," the Fed chief replied to the joint economic committee of Congress. "Unfortunately, this is a matter for psychologists."