Congress balks at Bernanke’s dire warnings

“I’ve heard your comments on executive compensation. I share your frustrations. I feel those frustrations. Practices throughout America also upset me.”

But the Treasury chief said the heavy penalties, sought by Democrats, against executives and banks will discourage them from participating in the bailout program and will cause it to fail. The goal of the program is to create a market for the toxic securities, which currently are unsellable and clogging up the balance sheets of banks and Wall Street firms, making it harder for them to make new loans.

“The taxpayer is already on the hook and is going to suffer the consequences if things don’t work the way they should,” Mr. Paulson said. “So the best protection for the taxpayer is to have this work.”

Sen. Charles E. Schumer, New York Democrat, said the plan might be more palatable if Congress provides Treasury with borrowing authority in increments of $50 billion or $150 billion. Mr. Paulson dismissed that idea as unworkable and “a grave mistake.”

“We have to reduce the cost to taxpayers as significantly as possible by looking at passing only a first installment,” Mr. Schumer said.

Meanwhile, the Associated Press reported Tuesday that the FBI had begun investigating four institutions whose collapse helped trigger the financial crisis: mortgage giants Fannie Mae and Freddie Mac, investment bank Lehman Brothers Holdings Inc. and insurer American International Group Inc.

Jon Ward, David Sands, S.A. Miller and Sean Lengell contributed to this report.