A Wall Street bailout proposal was greeted with bipartisan skepticism in Congress, signaling that the $700 billion measure faces an uphill battle and possibly significant changes.
Federal Reserve Chairman Ben Bernanke bluntly warned reluctant lawmakers Tuesday that they risk a recession with higher unemployment and increased home foreclosures unless they act on the bailout.
But 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.
Bernanke was joined by Treasury Secretary Henry Paulson, who also tried to head off opposition to the bailout, warning of dire consequences for failing to approve the measure quickly.
The dollar moved higher, while oil prices eased.
Bernanke is set to deliver a second round of testimony on the bailout at 2:30 pm on Wednesday. He will also deliver separate testimony on the economic outlook before the congressional Joint Economic Committee at 10 am.
Bernanke's remarks about the risk of recession came in response to a question from Sen. Chris Dodd, D-Conn., 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."
Dodd later spoke disparagingly of the administration's proposal.
"What they have sent us is not acceptable," he told reporters after presiding over a lengthy Senate Banking Committee hearing at which Bernanke and Treasury Secretary Henry Paulson urged swift action by Congress.
- Congress Has Already Passed Homeowner Bailout
- Details of the Democratic Proposal
- What the Treasury Plan Will Cost
- Protect Your Portfolio: Money Guide
- Video Roundup: Paulson's Tumultuous Year
Sen. Richard Shelby of Alabama, the panel's senior Republican, added, "We have got to look at some alternatives" to the administration's plan.
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.
On the Democrats' wish list: assistance to homeowners struggling to pay their mortgages, curbs on executive pay at companies that use the program to unload toxic assets, and the government taking equity stakes in banks that use the program.
Markets suspect the debate could drag into next week.
"I just don't think the American public is sold," said David Dietze, chief investment officer of Point View Financial Services in New Jersey. "I think they are skeptical of the need and they are fearful of the cost."
Separately, SEC Chairman Christopher Cox told the Senate hearings that Congress needs to pass laws to regulate the $58 trillion credit default swap (CDS) market, which has been blamed for contributing to the financial crisis
Japanese firms, meanwhile, are leading the rush to acquire U.S. investment banking assets, though other foreign companies and sovereign funds are looking for opportunities as well.
Japan's top bank, , said Monday it would buy up to 20 percent of Morgan Stanley for as much as $8.5 billion, and Nomura Holdings bought Lehman's franchise in Japan and Australia, with some 3,000 employees.
Lehman's investment banking operations in Europe, which employ about 6,000 people mostly in London, are next on the block, and sources familiar with the situation said Nomura is in talks to buy them, with a deal seen coming as early as Tuesday.
PricewaterhouseCoopers, administrators for the sale, said on Monday it was negotiating with just one bidder.
Insurance giant American International Group should have a list of assets it wants to sell by next week, new Chief Executive Edward Liddy said Monday.
Canada's Toronto-Dominion Bank was among those weighing a bid for Washington Mutual , sources told Reuters.
Singapore sovereign fund GIC said it still has plenty of cash after investing nearly $18 billion in UBS and Citigroup and would eye opportunities to invest in distressed assets in the United States.
Kuwait Investment Authority, the Gulf Arab state's sovereign wealth fund with stakes in Merrill Lynch and Citigroup, said it was eyeing investment opportunities abroad but was not in the business of bailing out struggling foreign banks.
"Disasters in the United States, some European countries or Asian countries create investment opportunities in the real estate sector, the financial industry or other sectors," KIA Managing Director Bader al-Saad told Al Arabiya Television.
—AP and Reuters contributed to this report.