Congressional leaders, who last week seemed both in shock and in tune with the necessity of passing a financial rescue package urged by the Treasury secretary and Federal Reserve chairman, are now flexing muscles to use leverage of their own: In the same bill that would allow for spending some $700 billion to buy up bad debt, they want the Treasury to incorporate limits on executive compensation. Moreover, both presidential candidates favor some sort of compensation limits as part of the massive package.

David Rogers and Patrick O’Connor of Politico explain part of the emerging split:

“As markets reopen Monday, the issue is a surprising flashpoint between Treasury Secretary Henry Paulson and House Democrats, who have drafted a bill giving Paulson much of what he wants but requiring that Treasury also demand ‘appropriate standards for executive compensation.’

“Treasury argues that the requirements will make it harder to convince companies to sell their troubled assets to the government. But Democrats, who otherwise admire Paulson, say that the former Goldman Sachs chairman is blind to the politics of the situation and the huge divide between the average taxpayer and the financial world now seeking relief from bad debts that have clogged the credit system — and threaten the entire economy.”

That isn’t the only split. The Financial Times lays out another fault line between Paulson and congressional leadership:

“A high stakes game of political poker was under way in Washington on Sunday as Congress prepared to vote this week on a plan to create a $700bn fund to buy toxic assets from banks and thereby ease the credit squeeze.

“Democratic legislators pressed for a housing component to be added to the bill and demanded assurances that President George W. Bush would not veto a subsequent second stimulus bill.”

Still others question the wisdom of the package itself. Economist Paul Krugman writes in the New York Times, ” … the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.

“That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.) But Mr. Paulson insists that he wants a ‘clean’ plan. ‘Clean,’ in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing?”

Federal Reserve chief Ben Bernanke and Treasury Secretary Henry Paulson will testify before Congress on Tuesday; members of Congress hope to wrap up the package before an election recess scheduled to begin at the end of the week.

Here are several articles that explore the emerging dynamics as the week begins:

U.S. News Political Bulletin: “Split emerging over financial bailout”

Politico: “CEO pay emerges as bailout barrier”

Financial times: “Tensions mount over bail-out”

New York Times: “Democrats set terms as bailout debate begins”

Los Angeles Times: “McCain and Obama trade accusations on the economy”

New York Times: “Big financiers start lobbying for wider aid”

MarketWatch: “Treasuries retreat as weight of rescue plan emerges”