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Wednesday, 17 September 2008

US financial system 'sound'

WASHINGTON - TREASURY Secretary Henry Paulson said on Monday the American people can remain confident in the 'soundness and resilience in the American financial system.'

Briefing reporters at the White House, Mr Paulson said he 'never once' considered it would be appropriate to put taxpayer money at risk to resolve the problems at Lehman Brothers.

The fourth largest US investment bank filed for bankruptcy protection earlier on Monday.

Starting Friday, Mr Paulson participated in three tense days of negotiations at the New York Federal eserve Bank in which he held firm to the position that the federal government would not step in and supply any money to resolve the crisis at Lehman.

Faced with the prospect of no government help in dealing with Lehman's huge losses on its mortgage holdings, other financial firms lost interest in trying to buy the venerable firm.

That forced New York-based Lehman to file for bankruptcy protection, making it the largest bankruptcy in history in terms of assets, surpassing the failures at Worldcom and Enron earlier in the decade.

Mr Paulson explained his decision by telling White House reporters that any decision to put taxpayer money at risk to prop up a private company must be undertaken only after considering all alternatives.

'Moral hazard is something I don?t take lightly,' Mr Paulson said, referring to the belief that when the government steps in to rescue a private financial firm it encourages other firms to engage in risky behaviour.

'I never once considered that it was appropriate to put taxpayer money on the line in resolving Lehman Brothers,' Mr Paulson said.

The current credit crisis will not be resolved until the prolonged slump in housing comes to an end, he said.

'Until we stem the housing correction, until the biggest part of that is behind us and we have more stability in housing prices, we're going to continue to have turmoil in financial markets,' Mr Paulson said.

Mr Paulson, who was heavily involved in the decision last week for the government to take control of mortgage finance giants Fannie Mae and Freddie Mac, said if that action works as expected in helping to stabilise the mortgage markets, then housing should start to rebound.

'I'm not saying two or three months, but in months as opposed to ... years,' he said. -- AP

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