July 15 (Bloomberg) -- Lawmakers balked at giving Treasury Secretary Henry Paulson unprecedented power to use government funds to rescue Fannie Mae and Freddie Mac, the U.S. mortgage- finance companies grappling with a collapse of confidence.

``I'm uneasy about giving this blanket authority without having any kind of checks,'' Senate Banking Committee Chairman Christopher Dodd said in a Bloomberg Television interview after a hearing his panel held today. Senator Richard Shelby, the committee's top Republican, told reporters ``I've never known Congress'' to give ``an open-ended blank check for somebody to fill in.''

The skepticism forced Paulson to stress he would protect taxpayer funds and assert his authority over Fannie and Freddie, the biggest sources of U.S. home financing, in case of a government intervention. Federal Reserve Chairman Ben S. Bernanke said Paulson would have the right to overhaul the companies' management under the Bush administration's proposals.

Today's hearing indicates Congress may not approve a plan to provide a backstop for the companies this week, as Paulson had counted on when he announced his rescue package July 13. Shares of the companies dropped and bondholders demanded higher premiums on their debt.

Drop in Stocks

Fannie Mae slid 27 percent, its biggest drop since at least 1980, to $7.07 in New York Stock Exchange composite trading, bringing its slump in the past week to 60 percent. Freddie Mac fell 26 percent to $5.26, and is down 61 percent from a week ago.

Paulson repeatedly said he had no intention of using the authority to buy unlimited equity in Fannie Mae and Freddie Mac, and the proposal was aimed instead at bolstering confidence in the firms so such emergency action wouldn't be needed.

``When you're dealing with the taxpayer's money I don't think ambiguity has a place,'' Shelby, of Alabama, told reporters after the hearing, which featured Paulson, Bernanke and Securities and Exchange Commission Chairman Christopher Cox. ``We are potentially layering taxpayer resources on top of massive systemic risk,'' Shelby said at the hearing.

Dodd's reaction was a sharp contrast with that of his counterpart in the House, who yesterday said he was comfortable with giving Paulson power to use unlimited funds.

Not a `Teenager'

``I trust him,'' Democratic Representative Barney Frank of Massachusetts, the chairman of the House Financial Services Committee, said in an interview with Bloomberg Television yesterday. ``This is not some irresponsible teenager.''

Republicans in the House today said they want to postpone consideration of the proposals because they haven't had enough time to vet them.

House Minority Leader John Boehner, along with No. 2 Republican Roy Blunt, said in a joint statement today that Democrats ought to hold hearings on the plan so lawmakers can get a better understanding of how it would work and how much it would cost.

``There is little question that action is necessary, but there are also important questions that must be answered,'' they said. ``It would be irresponsible for Congress to provide the proposed new authority without due diligence on the mechanics of the Treasury proposal and its potential implications for taxpayers.''

Bipartisan Reaction

In the Senate today, Paulson found skepticism on both sides of the aisle.

Democratic Senator Jon Tester of Montana demanded that Paulson detail in writing the consequences for the economy if Congress doesn't act to help Fannie Mae and Freddie Mac.

``It could be a trillion bucks'' that Paulson could appropriate under his proposed authority, Tester said.

Paulson, appointed by Republican President George W. Bush, received the most hostile reception from other Republicans.

``The taxpayers have reacted and the market has reacted to your plan by driving down Fannie Mae shares 26 percent today, right now,'' said Senator Jim Bunning, a Kentucky Republican. ``Freddie Mac's are down 29 percent at this moment, just in case you are interested in how the markets are reacting to your wonderful plan.''

Bunning pledged to oppose the measure, indicating the Senate may need 60 votes to enact it, rather than a simple majority. A single senator can block legislation unless 60 other members vote to stop his so-called filibuster.

`Essential' Role

Bernanke told lawmakers it's ``important'' for Fannie Mae and Freddie Mac bonds and stocks to rise so they can keep raising capital and aid the mortgage market. Paulson said the two companies are ``essential'' because they represent the only ``functioning'' part of the home loan market. The firms own or guarantee about half of the $12 trillion in U.S. mortgages.

The extra yield investors demand to buy Fannie Mae's five- year debt over U.S. Treasuries with a similar maturity rose 5.2 basis points to 85.2 basis points today, compared with 64 basis points two months ago, according to Bloomberg data. Spreads on five-year Freddie Mac notes widened to 85.3 basis points, from 66 basis points in mid-May.

The Treasury chief's proposals also included unlimited lines of credit for the companies and bringing the Fed into a ``consultative'' role over the firms' capital.

Dodd, a Connecticut Democrat, said he was ``uneasy about what we're trying to achieve here'' by bringing the Fed into some supervisory role.

Dodd said he planned to work with other lawmakers on the committee in coming days on some sort of measure, because ``inaction is not an option.'' He said some plan would probably be attached to an existing bill that's aimed at stemming foreclosures and setting up a stronger regulator for Fannie Mae and Freddie Mac.

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net; Craig Torres in Washington at ctorres3@bloomberg.net

Last Updated: July 15, 2008 16:54 EDT