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During testimony before the House Budget Committee, Peter R. Orszag — Congress’s top bookkeeper — said the bailout could expose the way companies are stowing toxic assets on their books, leading to greater problems.

“Ironically, the intervention could even trigger additional failures of large institutions, because some institutions may be carrying troubled assets on their books at inflated values,” Orszag said in his testimony. “Establishing clearer prices might reveal those institutions to be insolvent.”

In an interview later yesterday, Orszag explained using the following example: Suppose a company has Asset X, whose value is recorded on the books as $100. Because of the current economic decline, Asset X’s real value has dropped to $50. If the company takes part in the government bailout and sells Asset X for $50, the company has to report a $50 loss on its books. On a scale of millions of dollars, such write-downs could ruin a company.

“It’s not going to be Armageddon,” says Mark Vaughan, an economist and assistant vice president for banking supervision and regulation at the Federal Reserve Bank of Richmond, Virginia. “But it’s going to be bad.”

FDIC’s Secret List

The FDIC knows which banks are at risk; it has a watch list with 117 institutions. The agency won’t disclose their names because doing so could cause depositors to panic and pull out all of their funds.

It won’t take many more failures before the FDIC itself runs out of money. The agency had $45.2 billion in its coffers as of June 30, far short of the $200 billion Whalen says it will need to pay claims by the end of next year. The U.S. Treasury will almost certainly come to the rescue.

Regardless of who wins control of the White House and Congress in November, no politician is likely to vote in favor of leaving federally insured depositors out in the cold.

The Hong Kong newspaper cited unidentified industry sources as saying the instruction from the China Banking Regulatory Commission (CBRC) applied to interbank lending of all currencies to U.S. banks but not to banks from other countries.

“The decree appears to be Beijing’s first attempt to erect defences against the deepening U.S. financial meltdown after the mainland’s major lenders reported billions of U.S. dollars in exposure to the credit crisis,” the SCMP said.

The company notified the stores’ general managers at 2 p.m. today, the source said, who spoke anonymously because he was not authorized to speak.

High fuel prices, cancelled floorplanning from GMAC Financial Services, a reliance on trucks and SUVs, a soft national economy and struggles in local markets had troubled the company, which on Sept. 12 closed its store in Scottsdale, Ariz.

In the end, the company could not raise operating capital and could not finance its floorplan, the source said. Company officials have discussed closing the company since Friday, the source said.

The rumours were categorically denied by the bank’s management, which nevertheless had to extend business hours by 30 minutes to cope with the queues of anxious customers.

The Bank of East Asia (BEA), owned by one of Hong Kong’s wealthiest families, blamed “malicious rumours” that it said had been circulating in the market since Monday and questioned the bank’s financial stability.

The bank, Hong Kong’s third-largest lender, said it had asked police to investigate. The shares fell 11pc.

“The management of BEA hereby states in the strongest possible terms that such rumours have no basis in fact,” BEA said in an e-mailed statement. “The bank’s financial position is sound and stable.”

Hong Kong’s central bank said it would provide liquidity to Bank of East Asia if necessary and reiterated that the bank and the city’s banking system were sound.

“I can confirm categorically that these rumours are unfounded,” Joseph Yam, Chief Executive of the Hong Kong Monetary Authority, told reporters, referring to rumours about Bank of East Asia’s financial stability.

“The banking system of Hong Kong is very robust,” he added.

The BEA’s statement said the bank had assets of more than $50bn (£27bn) in June and its capital adequacy ratio was 14.6pc – a level it described as “well above the international required level”.

It said the bank’s total exposure to the collapsed US investment bank Lehman Brothers and American International Group, the world’s largest insurer that was bailed out last week, was HK$422.8m (£29m) and HK49.9m, respectively.

The assurance did little to calm the bank’s customers, however, who feared the bank might be another casualty of the global credit crunch and flocked to its 130 city branches to withdraw money.

Bernanke’s comment was the first indication of how he and Treasury Secretary Henry Paulson are thinking about formulating the rescue plan’s medicine in a way that doesn’t kill the patients. Requiring banks and other financial institutions to sell troubled loans and other assets anywhere close to recent sales prices of only a few cents on the dollar could wipe out the net worth of many and lead to a new wave of bank failures.

The Fed chairman said he favors buying the assets based on their “hold-to-maturity” value, which would require an estimate to be made of what each security will eventually be worth as payments come in over the years.

Two law enforcement officials said Tuesday the FBI is looking at potential fraud by mortgage finance giants Fannie Mae and Freddie Mac, and insurer American International Group Inc. Additionally, a senior law enforcement official said Lehman Brothers Holdings Inc. also is under investigation.

The inquiries will focus on the financial institutions and the individuals that ran them, the senior law enforcement official said.

The law enforcement officials spoke on condition of anonymity because the investigations are ongoing and are in the very early stages.