Sept. 23 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson said it would be ``a grave mistake'' for Congress to delay or curtail the $700 billion he requested to buy troubled assets to stabilize the financial system.

Testifying before the Senate Banking Committee, Paulson said, ``that would be a grave mistake,'' when asked whether the Treasury can begin its plan with less money than requested. ``Give us the tools we need to make this work.''

The Treasury chief and Federal Reserve Chairman Ben S. Bernanke in a five-hour hearing urged lawmakers to enact the proposal after a slide in stocks last week wiped out about $1.9 trillion in market value from the MSCI World Index. U.S. policy makers are seeking to reverse falling investor confidence after the government takeover of three financial institutions and the bankruptcy of another.

Senator Charles Schumer, a Democrat from New York, said one possibility might be to have Congress approve funding in installments. ``Could you live with less?'' Schumer asked Paulson. ``People would feel better if we did this and could come back and reassess it.''

A White House official after the hearing said the debate was part of the usual legislative process.

``This is sausage-making,'' said Keith Hennessey, director of the White House's National Economic Council, in an interview on Bloomberg Television. ``It's always a little ugly up close, but we're doing work to answer Congress' legitimate questions.''

`On the Hook'

Paulson acknowledged the burden taxpayers would bear from bailing out banks, while arguing inaction would make things worse. His proposal calls for increasing the U.S. debt ceiling to $11.315 trillion from $10.615 trillion.

``You ask me about whether taxpayers being on the hook,'' he said. ``Guess what, they're already on the hook.''

The plan would allow the U.S. to purchase illiquid assets such as mortgage-related securities from banks. Last week, the government and Fed pledged to insure money-market funds, seized control of New York-based insurer American International Group Inc. and intervened in the markets for commercial paper and short-term debt for Fannie Mae, Freddie Mac and other agencies.

The Treasury needs as much flexibility as possible to buy distressed assets and the legislation shouldn't restrict federal options on those purchases, Paulson said.

``We've asked for broad authorities to deal with a variety of securities if we needed to,'' he said. ``The focus, the major focus, will be dealing with mortgage and mortgage-related'' assets.

Bankruptcy Changes

Paulson said he opposed a provision that would empower bankruptcy judges to ease terms of mortgages owned by bankrupt homeowners.

``I respectfully think that it is a mistake,'' he said.

In his opening statement, Paulson praised Congress for its previous actions, which gave the Treasury new powers to take over mortgage-finance companies Fannie Mae and Freddie Mac.

``To the comments made about Fannie and Freddie and a bazooka, you all can be darn glad you gave us the bazooka, because we needed it,'' Paulson said. In July, Paulson referred to the authority to take over Fannie and Freddie as having a ``bazooka'' to stabilize mortgage markets.

Paulson said the new powers he seeks are essential for the U.S. to deal with a housing crisis.

``We saw market turmoil reach a new level last week, and spill over into the rest of the economy,'' Paulson said in his testimony. ``We must now take further, decisive action to fundamentally and comprehensively address the root cause of this turmoil.''

Economic Rescue

Paulson called his troubled-asset purchase proposal the ``single most effective thing we can do to help homeowners'' and the overall economy.

Paulson said in his testimony that the steps so far had been on a ``case-by-case'' basis, which has been ``necessary but not sufficient'' to address the crisis. He said comprehensive action now is needed to stem the housing crisis and reassure financial markets.

``We must do so in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families' financial well-being, the viability of businesses both small and large, and the very health of our economy,'' Paulson said.

Paulson said there is not yet a consensus about what the U.S. financial regulatory system should look like. That's a long-term question that should be addressed once the current turmoil is over, he said.

He acknowledged that government needs to keep a closer eye on the financial system. ``We need oversight, we need protection, we need transparency,'' Paulson said.

To contact the reporters on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net; John Brinsley in Washington at jbrinsley@bloomberg.net

Last Updated: September 23, 2008 17:59 EDT