Scrutiny continues over $700bn plan
US federal reserve chairman says world markets under "extraordinary stress".
Last Modified: 25 Sep 2008 03:59 GMT

Bernanke urges congress to pass the bill or risk 'serious consequences' for the economy [AFP]

US legislators have continued to debate a $700bn plan to rescue the US economic system from a financial meltdown.

The proposed bail-out package has proved a hard sell both to American taxpayers, who have balked at having to foot the bill for Wall Street's bad decisions, and to US politicians, who are deeply sceptical about the plan's details.

The US Federal Bureau of Investigation (FBI) has also begun inquiries into possible criminal activity at dozens of US corporations, reportedly including four of the giants behind the recent turmoil in the markets.

US stocks opened modestly higher on Wednesday as congress continued to hear testimony from Ben Bernanke and Henry Paulson, the architects of the multi-billion dollar rescue package.

Bernanke, the US federal reserve chairman, told the congressional joint economic committee that world markets were under "extraordinary stress", which could impinge business growth.

"Action by 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," he said, urging legislators to approve the bail-out plan.

The proposed legislation put forward by the Bush administration would largely award Paulson, the US treasurer, broad power to buy the debt of any financial institution for the next two years and would increase US national debt from $10.6 trillion to $11.3 trillion.

Fraud inquiry

The economy has become a major campaign issue in this year's presidential election. Many congressional seats are also up for grabs and legislators are reluctant to back a plan from an outgoing administration.

Legislators will also have to consider FBI investigations into potential mortgage fraud by firms and senior executives at the heart of the financial crisis.

The FBI has said at least 24 "large corporations" may face allegations of misstated assets.

Fannie Mae, Freddie Mac, Lehman Brothers and AIG are the latest companies to be investigated for corporate mortgage fraud, according to US media reports.

Goldman investment

On Wall Street, markets reacted positively to news that Warren Buffett's Berkshire Hathaway group is investing $5bn in Goldman Sachs - one of the struggling investment banks.

"It's clearly a positive when Warren Buffett sees value in a company," Richard Sichel, chief investment officer of Philadelphia Trust Co, said.

"Buffett is so highly regarded as an intelligent value investor, if he's putting a lot of money into a company that's been beaten down, it sends a message to the market that maybe not every financial company should be ignored at this point."

The investment came two days after Goldman, along with Morgan Stanley, changed its status to a bank holding company, giving them greater access to credit but placing them under increased regulation.

US stocks opened higher on Wednesday but then seesawed in later trading.

There was also a mixed response to the news in Asia as Japan's Nikkei fell 1.2 per cent in the morning session but Australia's benchmark S&P/ASX 200 index rose 0.9 per cent and Hong Kong's Hang Seng was up 1.9 per cent.

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