Paulson Says He'll `Do What It Takes' to Calm Markets

Paulson Says He'll `Do What It Takes' to Calm Markets

March 16 (Bloomberg) -- Treasury Secretary Henry Paulson, defending the bailout of Bear Stearns Cos., said policy makers will do whatever is needed to prevent disruptions in financial markets from hurting the economy.

``The government is prepared to do what it takes to maintain the stability of our financial system,'' Paulson told the ``Fox News Sunday'' television program in Washington today. ``Our focus, our No. 1 priority, is the stability of our financial system.''

Paulson, 61, spoke two days after the Federal Reserve rescued Bear Stearns, the fifth-largest U.S. securities firm, with an emergency loan. The move failed to avert a crisis of confidence among Bear Stearns customers and shareholders, who drove the stock down a record 47 percent.

In three appearances today, the former chairman of Goldman Sachs Group Inc. several times said the Fed made ``the right decision'' and expressed ``great confidence'' in its chairman, Ben S. Bernanke. Paulson said that in the case of Bear Stearns, the risk to financial stability outweighed his concern about so- called moral hazard, in which investors come to expect government rescues.

``I'm as aware as anyone is of moral hazard,'' he said in a CNN interview. ``I'm also aware of the importance of keeping our economy strong, of orderly capital markets, of the stability of the financial system doing things that promote orderliness and minimize the disruption.''

Weekend Talks

Paulson said ``conversations are going on over the weekend'' about Bear Stearns. ``I'm very involved in those conversations.'' He declined to be specific about the future of the 85-year-old firm, the second-biggest underwriter of U.S. mortgage bonds, or to say whether any additional government steps are planned.

``There's always a decision to be made to say what's best for the stability of the marketplace, the orderliness of the marketplace,'' Paulson said. ``I think we made the right decision.''

The Treasury chief refused to say what a growing number of economists have concluded -- that the economy has entered a recession.

Economic Debate

``Economists are going to be debating that for months and months,'' he said. ``It's much less important what you call it than what you're doing about it.''

The Standard & Poor's 500 Index is down 12.3 percent this year, while the dollar is down 5 percent against a basket of currencies of major U.S. trading partners. Home foreclosures in January and February were up 58 percent from the first two months of 2007.

``I've got great confidence in our financial markets and our financial institutions,'' Paulson said. ``Our markets are resilient, are flexible. Our institutions -- our banks and investment banks -- are strong.''

Paulson repeated his support for a ``strong dollar,'' and said the long-term strength of the U.S. economy would be reflected in the country's currency.

President George W. Bush is scheduled to meet tomorrow with his Working Group on Financial Markets. Paulson chairs the group, which includes Bernanke and Securities and Exchange Commission Chairman Christopher Cox.

The Bush administration has resisted the use of government funds or guarantees to stem the surge in foreclosures. Paulson has brokered a series of voluntary accords among lenders to freeze interest rates on subprime loans and negotiated a one- month moratorium on foreclosures.

Plans in Congress

A credit crisis that began in August has left markets ``more fragile than we would like right now,'' Paulson said in a separate interview on ABC News's ``This Week'' program. ``My concern is to minimize the impact on the broader economy.''

Paulson said the administration doesn't support measures in Congress to help struggling homeowners.

House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Christopher Dodd offered a plan last week to let the Federal Housing Administration insure refinanced mortgages after lenders reduce principal to help struggling borrowers.

The two lawmakers are leading congressional efforts to tackle the surge in foreclosures, which reached record levels in the fourth quarter of 2007. Their plan goes beyond the Bush administration's approach that relies on voluntary agreements between lenders and loan servicers to modify mortgages for borrowers who can't make their monthly payments.

Weighing Response

``I'm looking very carefully at any proposal, but all the ones I've seen call for much more government intervention, raise more problems, do more harm than do good,'' Paulson said in the ABC interview.

In an interview on CNN, Paulson said there's ``no silver bullet'' to prevent home prices from falling and foreclosures from rising.

Paulson last week proposed that U.S. regulators heighten their scrutiny of lenders, mortgage brokers and debt-rating firms to prevent a reoccurrence of the credit crisis roiling capital markets. Writedowns from subprime securities will probably rise to $285 billion, Standard & Poor's said in a report March 13.

Schumer Attacks

``This has become the Bush recession,'' Senator Charles Schumer, a New York Democrat, said on the Fox News program. ``The president's hands-off attitude is reminiscent of Herbert Hoover,'' who led the country from 1929 to 1933.

Bush yesterday said he won't be stampeded into ``bad policy decisions'' that might harm the economy.

``The market now is in the process of correcting itself, and delaying that correction would only prolong the problem,'' he said in his weekly radio address. ``I believe the government can take sensible, focused action to help responsible homeowners weather this rough patch.''

BLOOMBERG