Paulson defends U.S. rescue of Bear Stearns

WASHINGTON Mon Mar 17, 2008 4:09pm EDT

Secretary of Treasury Henry Paulson speaks after attending the President's Working Group on Financial Markets at the White House in Washington March 17, 2008. REUTERS/Larry Downing

Secretary of Treasury Henry Paulson speaks after attending the President's Working Group on Financial Markets at the White House in Washington March 17, 2008.

Credit: Reuters/Larry Downing

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson on Monday defended government moves to rescue Bear Stearns Cos Inc BSC.N from bankruptcy, saying it was important to ensure the orderly function of financial markets.

Speaking to reporters following a White House meeting between President George W. Bush and his economic advisers, Paulson said those worried about the government rescue creating a "moral hazard" should keep in mind that Bear Stearns BSC.N shareholders face considerable losses with the sale of the investment firm to JPMorgan Chase (JPM.N) for $2 a share.

Moral hazard is the concept that investors might take greater risks on the belief that government policy would protect them from suffering losses.

The $236 million value of the Bear buyout deal represents less than 90 percent of the company's value as of Friday at its closing share price of $30.85.

To facilitate the deal, the U.S. Federal Reserve committed to fund up to $30 billion of Bear Stearns' less liquid assets. The problems faced by the New York investment firm underscored a loss of investor confidence in the health of the U.S. financial system.

Paulson said the orderly function of U.S. financial markets was a priority and it was better to arrange the takeover of Bear Stearns than to have the investment firm, the fifth largest in the United States, file for bankruptcy.

He also said mortgage finance giants Fannie Mae FNM.N and Freddie Mac FRE.N needed to raise capital, and urged Congress to enact reform measures for the Federal Housing Administration to help beef up the slumping housing market.

Paulson declined to answer a question about the weakening dollar and whether the U.S. government would intervene in currency markets to support it.

"I'm not going to speculate on hypotheticals about intervention," Paulson said. "I will just again say to you what you've heard me say before: We have a strong-dollar policy. It's very much in our nation's interest. Our economy has ups and downs."

(Reporting by Donna Smith; Editing by Leslie Adler)

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