Paulson, Bernanke Defend $700 Billion Bailout

Locked-up lending is a prime reason why the U.S. is suffering through the worst financial crisis since the 1930s. All the fallout from the housing, credit and financial crises have badly hurt the economy, which is almost certainly in recession, analysts say.

In an interview published Tuesday in Washington Post, Paulson said he was also working on a proposal that would allow the government to take over a wide range of financial institutions -- not just banks -- that are in danger of collapse.

The administration, however, has remained opposed to using some of the bailout money to help troubled U.S. automakers such as General Motors (GM Quote) or Ford (F Quote), or to provide guarantees for mortgages at risk of falling into foreclosure, another huge source of distress for the economy.

Rep. Barney Frank (D., Mass), chairman of the panel, has been tapped by House Speaker Nancy Pelosi to draft an aid package for Detroit. The auto companies are seeking $25 billion for emergency loans.

In a break with the administration stance, Sheila Bair, chairman of the Federal Deposit Insurance Corp., who also will testify Tuesday, recently proposed using $24 billion of the bailout money to help some American households avoid foreclosure.

So far, the Treasury Department has pledged $250 billion for banks and has agreed to devote $40 billion to troubled insurer American International Group (AIG Quote) -- its first slice of funds going to a company other than a bank. That leaves just $60 billion available from Congress' first bailout installment of $350 billion.

Congressional officials said Paulson indicated he is unlikely to tap the remaining $350 billion before the administration leaves office on Jan. 20. That would mean the incoming Obama administration would decide whether and how the money should be spent. The congressional officials spoke on condition of anonymity, saying they were not authorized to disclose the developments.