By Jeannine Aversa

WASHINGTON -- Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke waged a stout defense on Capitol Hill on Tuesday of their management of a $700 billion financial bailout just one week after the administration abandoned the original strategy behind the rescue.

Focusing the program on infusing billions into banks -- and possibly other types of companies -- to pump up their capital and bolster lending to customers was deemed a faster and more effective approach to stabilizing the financial system than buying rotten assets from financial institutions, the centerpiece of the original plan, Paulson said.

Buying those toxic debts would have required a "massive commitment" of the bailout money, Paulson said in testimony before the House Financial Services Committee. As economic and financial conditions quickly worsened, it became clear that the first installment of the money -- $350 billion -- for that purpose "simply isn't enough firepower," he said.

It is vital that the administration be nimble in assessing changing conditions and adapting the bailout strategy accordingly. "If we have learned anything throughout this year, we have learned that this financial crisis is unpredictable and difficult to counteract," Paulson said.

Treasury and the Federal Reserve are exploring using some of the bailout money to bankroll a new loan facility. The aim is to help companies that issue credit cards, make student loans and finance car purchases.

The idea behind the capital injection program is for banks to use the money to rebuild reserves and lend more freely to customers. However, banks do have the leeway to use the money for other things, such as buying other banks or paying dividends to investors. That has touched a nerve with some lawmakers.

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 or Ford , 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 -- 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.

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