Paulson eyes rescue plan backing

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Henry Paulson on the plan to rescue the US economy

US Treasury Secretary Henry Paulson has urged a key Congressional hearing not to delay a $700bn (£382bn) bail-out of the US banking system.

Mr Paulson told the Senate Banking Committee that the personal savings of US citizens are at risk if the rescue plan is not implemented.

The Treasury wants unlimited authority to buy back the bad debt that is clogging the financial markets.

Fed chairman Ben Bernanke has backed him by saying urgent action is needed.

Regulation call

During the almost five-hour hearing, both Mr Bernanke and Mr Paulson also said that once the immediate financial crisis was over, regulation of the markets needed an overhaul.

In his testimony to the committee, Securities and Exchange Commission chief Christopher Cox urged Congress to regulate credit default swaps, a type of corporate debt insurance that figured prominently in the US financial crisis.

"I urge you to provide in statute the authority to regulate these products to enhance investor protection and ensure the operation of fair and orderly markets," Mr Cox said.

Mr Paulson's leadership credentials are not in doubt Fresh challenge for Henry Paulson Q&A: US bail-out plan

Earlier - opening the hearing - Democrat chairman of the committee, Chris Dodd, said: "We all recognize the gravity of the situation."

He added that the "economic maelstrom" was caused by a combination of "private greed and public regulatory neglect".

Doubts over how soon the rescue plan can be applied have emerged over the past days from both the Democrats and Republicans.

Under the draft Treasury plans, financial institutions with "significant operations in the US" are eligible to sell or auction their bad debts to the Treasury fund.

That would mean a number of US -based British banks could sell their "toxic assets" to the Treasury-owned bank via an auction.

The fund will aim to sell off these mortgage-related debts in the future when, it says, their value may have risen.

'Mother of all bail-outs'

But senators from both parties have voiced concerns taxpayers would be paying the price of mistakes made by banks.

They also said it was crucial not to rush through the bail-out, without carefully considering how it would work.

BBC Business Editor Robert Peston said the US Treasury Secretary's proposal to buy bad mortgage debts from banks represented "the mother of all bail-outs".

He said that during the hearing Fed chairman Mr Bernanke disclosed that the Treasury would attempt to buy these debts from banks at close to their "hold-to-maturity" value, not the market value.

"In practice, it means banks who sell their debts to the Treasury would receive cash equivalent to something like twice the value in their books of these poisonous assets," our correspondent said.

"In other words they would book a profit from selling to taxpayers.

"It would represent a massive injection of new capital into the US banking system - for which taxpayers would receive nothing in return, except for the assurances from Mr Paulson and Chairman Bernanke that their banking system would not collapse," he added.

'Decisive action'

"We saw market turmoil reach a new level last week, and spill over into the rest of the economy," Mr Paulson said.

"We must now take further, decisive action to fundamentally and comprehensively address the root cause of this turmoil."

He added: "When the financial system doesn't work as it should, Americans' personal savings, and the ability of consumers and businesses to finance spending, investment and job creation are threatened."

Ben Bernanke's testimony followed Mr Paulson's.

He has defend the Federal Reserve's action to save insurer AIG from collapse.

"A disorderly failure of AIG would have severely threatened global financial stability and, consequently, the performance of the US economy," he said.

He then said that despite the efforts of the Federal Reserve, the Treasury, and other agencies, that global financial markets remain under extraordinary stress.

"Action by the Congress is urgently required to stabilise the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy," Mr Bernanke added.

'Great confidence'

President Bush has been closely involved with the proposed rescue plan.

"This is not a step that we have taken lightly. It's a very big plan. It was something we felt we had no choice but to do at this point," White House spokesman Tony Fratto said in a conference call with reporters.

"But we're going to move forward with it with great confidence that it will have the impact that we expect it to have and to allow growth to continue in this economy," he said.